<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1997
REGISTRATION NO. 333-33295
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SONIC AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5511 56-2010790
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
5401 EAST INDEPENDENCE BOULEVARD
P.O. BOX 18747
CHARLOTTE, NORTH CAROLINA 28218
TELEPHONE (704) 532-3301
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
MR. O. BRUTON SMITH
CHIEF EXECUTIVE OFFICER
SONIC AUTOMOTIVE, INC.
5401 EAST INDEPENDENCE BOULEVARD
P.O. BOX 18747
CHARLOTTE, NORTH CAROLINA 28218
TELEPHONE (704) 532-3301
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
COPIES TO:
<TABLE>
<S> <C>
GARY C. IVEY, ESQ. STUART H. GELFOND, ESQ.
PARKER, POE, ADAMS & BERNSTEIN L.L.P. FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
2500 CHARLOTTE PLAZA ONE NEW YORK PLAZA
CHARLOTTE, NORTH CAROLINA 28244 NEW YORK, NEW YORK 10004
TELEPHONE (704) 372-9000 TELEPHONE (212) 859-8000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ].
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ].
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 17, 1997
PROSPECTUS
5,000,000 SHARES
(Sonic Automotive logo appears here)
CLASS A COMMON STOCK
All of the 5,000,000 shares of Class A Common Stock, par value $.01 per
share (the "Class A Common Stock"), offered hereby are being sold by Sonic
Automotive, Inc. ("Sonic" or the "Company").
Each share of Class A Common Stock entitles its holder to one vote per
share. Each share of Class B Common Stock, par value $.01 per share (the "Class
B Common Stock," and together with the Class A Common Stock, the "Common
Stock"), entitles the holder to ten votes per share, except in certain limited
circumstances. All of the shares of Class B Common Stock are held by the members
of the Smith Group (as defined herein), who are all of the stockholders of the
Company prior to the consummation of the Offering. After consummation of the
Offering, the Smith Group will beneficially own shares representing
approximately 92.6% of the combined voting power of the Company's Common Stock
(approximately 91.6% if the Underwriters' over-allotment option is exercised in
full). See "Description of Capital Stock -- Common Stock."
Prior to the Offering, there has been no public market for the Class A
Common Stock. It is currently estimated that the initial public offering price
will be between $12.00 and $14.00 per share. For a discussion of factors to be
considered in determining the initial public offering price, see "Underwriting."
The Class A Common Stock has been approved for listing on the New York
Stock Exchange, subject to official notice of issuance, under the symbol "SAH."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
[CAPTION]
<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share........................................... $ $ $
Total (3)........................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $2,000,000.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 750,000
additional shares of Class A Common Stock solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Class A Common Stock are being offered by the several
Underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the shares of Class A Common Stock will be made
in New York, New York on or about , 1997.
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES, INC.
WHEAT FIRST BUTCHER SINGER
The date of this Prospectus is , 1997.
<PAGE>
(Sonic Automotive logo and Map of
the United States appears here)
FORT MILL CHRYSLER
PLYMOUTH DODGE
FORT MILL FORD
FRONTIER OLDSMOBILE
CADILLAC
LAKE NORMAN CHRYSLER-
PLYMOUTH-JEEP-EAGLE
LAKE NORMAN DODGE
LONE STAR FORD
DODGE OF CHATTANOOGA
INFINITI OF CHATTANOOGA
JAGUAR OF CHATTANOOGA
DYER AND DYER VOLVO
KEN MARKS FORD
KIA AND VOLKSWAGEN
OF CHATTANOOGA
CLEVELAND VILLAGE HONDA
CLEVELAND CHRYSLER-
PLYMOUTH-JEEP-EAGLE
NELSON BOWERS FORD
BMW AND VOLVO
OF CHATTANOOGA
BMW AND VOLKSWAGEN
OF NASHVILLE
TOWN AND COUNTRY FORD
TOWN AND COUNTRY TOYOTA
TOWN AND COUNTRY
CHRYSLER-PLYMOUTH-JEEP
OF ROCK HILL
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and will make available copies of its quarterly reports for the first three
quarters of each year.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF CLASS A COMMON
STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
____________
This Prospectus includes statistical data regarding the retail automotive
industry. Unless otherwise indicated herein, such data is taken or derived
from information published by a division of Intertec Publishing Corp. in its
"Ward's Dealer Business," Crain's Communications, Inc. in its "Automotive News"
and "1997 Market Data Book" and the Industry Analysis Division of the National
Automobile Dealers Association ("NADA") in its "Industry Analysis and Outlook"
and "Automotive Executive Magazine" publications.
No Manufacturer (as defined in this Prospectus) has been involved, directly or
indirectly, in the preparation of this Prospectus or in the Offering being made
hereby. Although, as described in this Prospectus, Manufacturers will have
granted consents for various of the Acquisitions (as defined herein) and for
this Offering, no Manufacturer has made any statements or representations for
the purpose of such statements or representations being included in this
Prospectus, and no Manufacturer has any responsibility for the accuracy or
completeness of this Prospectus.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES
IN THIS PROSPECTUS TO "SONIC" OR THE "COMPANY" (I) ARE TO SONIC AUTOMOTIVE, INC.
AND, UNLESS THE CONTEXT INDICATES OTHERWISE, ITS CONSOLIDATED SUBSIDIARIES AND
THEIR RESPECTIVE PREDECESSORS, (II) GIVE EFFECT TO A RECENTLY COMPLETED
REORGANIZATION (AS DEFINED BELOW) OF THE COMPANY, AND (III) ASSUME THAT THE
COMPANY HAS CONSUMMATED THE ACQUISITION OF THE ASSETS OR ALL THE CAPITAL STOCK
OF SIX ADDITIONAL DEALERSHIPS OR DEALERSHIP GROUPS, AS DESCRIBED HEREIN, IN
NORTH CAROLINA, TENNESSEE, FLORIDA, GEORGIA AND SOUTH CAROLINA (THE
"ACQUISITIONS"). SEE "THE ACQUISITIONS." REFERENCES TO THE "OFFERING" ARE TO THE
OFFERING OF CLASS A COMMON STOCK MADE HEREBY. UNLESS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS (A) GIVES RETROACTIVE EFFECT TO A 625-FOR-1 STOCK
SPLIT (EFFECTED IN THE FORM OF A STOCK DIVIDEND) OF THE COMPANY'S CLASS B COMMON
STOCK TO BE CONSUMMATED PRIOR TO THE CONSUMMATION OF THE OFFERING (THE "STOCK
SPLIT") AND (B) ASSUMES THAT THE UNDERWRITERS'OVER-ALLOTMENT OPTION IS NOT
EXERCISED. THE ACQUISITIONS WILL BE CONSUMMATED ON OR BEFORE THE CLOSING OF THE
OFFERING.
THE COMPANY
The Company is one of the leading automotive retailers in the United
States, operating 23 dealership franchises, four standalone used vehicle
facilities and seven collision repair centers in the southeastern and
southwestern United States. Sonic sells new and used cars and light trucks,
sells replacement parts, provides vehicle maintenance, warranty, paint and
repair services and arranges related financing and insurance ("F&I") for its
automotive customers. The Company's business is geographically diverse, with
dealership operations in the Charlotte, Chattanooga, Nashville,
Tampa-Clearwater, Houston and Atlanta markets, each of which the Company
believes is experiencing favorable demographic trends. Sonic sells 15 domestic
and foreign brands, which consist of BMW, Cadillac, Chrysler, Dodge, Ford,
Honda, Infiniti, Jaguar, Jeep, KIA, Oldsmobile, Plymouth, Toyota, Volkswagen and
Volvo. In several of its markets, the Company has a significant market share for
new cars and light trucks, including 13.7% in Charlotte and 9.1% in Chattanooga
in 1996. Pro forma for the Acquisitions, the Company had revenues of $899.6
million and retail unit sales of 24,206 new and 13,475 used vehicles in 1996.
The Company believes that in 1996, based on pro forma retail unit sales, it
would have been one of the ten largest dealer groups out of a total of more than
15,000 dealer groups in the United States.
The Company's founder and Chief Executive Officer, O. Bruton Smith, has
over 30 years of automotive retailing experience. In addition, the Company's
other executive officers, regional vice presidents and executive managers have
on average 18 years of automotive retailing experience. The Company's
dealerships have won the highest attainable awards from various manufacturers
measuring quality and customer satisfaction. These awards include the Five Star
Award from Chrysler, the Chairman's Award from Ford, the President's Award from
BMW and the President's Circle Award from Infiniti. In addition, the Company was
named to Ford's Top 100 Club, which consists of Ford's top 100 retailers based
on retail volume and consumer satisfaction.
The Company intends to pursue an acquisition growth strategy led by a
management team that has experience in the consolidation of automotive retailing
as well as motorsports businesses. Bruton Smith, who is also the Chief Executive
Officer of Speedway Motorsports, Inc., the owner and operator of several
motorsports facilities, first entered the automotive retailing business in the
mid-1960's. Mr. Smith will devote approximately 50% of his business time to the
Company. Since 1990, Mr. Smith has successfully acquired three dealerships and
increased his dealerships' revenues from $199.4 million in 1992 to $376.6
million in 1996, without giving effect to the Acquisitions. In the Tennessee
market, Nelson E. Bowers, II, the Company's Executive Vice President, has
acquired or opened eight dealerships since 1992 and increased revenues
(primarily through acquisitions) of the dealership group to be acquired by the
Company from $13.2 million in 1992 to $101.5 million in 1996. No assurance can
be given that Messrs. Smith and Bowers will be successful in acquiring or
opening new dealerships for the Company or increasing the Company's revenues.
The Company believes the competitive advantages which differentiate it from
its local competitors include the reputation of the Company's management in the
automotive retailing industry, regional and national economies of scale, brand
and geographic diversity, and the established customer base and local name
recognition of the Company's dealerships. The Company has developed and
implemented several growth strategies to capitalize on these competitive
advantages. One of these is to continue to expand its operations in the
Southeast and Southwest by acquiring additional dealerships both within its
current markets and in new markets. The Company also is seeking additional
growth from the increased sale of higher margin products and services such as
wholesale parts, after-market products, collision repair services and F&I.
The Company believes that an opportunity exists for dealership groups with
significant equity capital and experience in identifying, acquiring and
professionally managing dealerships, to acquire additional dealerships and
capitalize on changes in the automotive retailing industry. With approximately
$640 billion in 1996 sales, automotive retailing is the largest consumer retail
market in the United States. The industry today is highly fragmented, with the
largest 100 dealer groups generating less than 10% of total sales revenues and
controlling less than 5% of all new vehicle dealerships. The Company believes
that
3
<PAGE>
these factors, together with increasing capital costs of operating automobile
dealerships, the lack of alternative exit strategies (especially for larger
dealerships) and the aging of many dealership owners provide attractive
consolidation opportunities.
Automobile retailing is highly competitive. The Company's competition
includes franchised automobile dealerships, some with greater resources than the
Company, selling the same or similar makes of vehicles offered by the Company.
Other competitors include other franchised dealers, private market buyers and
sellers of used vehicles, used vehicle dealers, service center chains and
independent service and repair shops. Primarily as a result of competitive
pressures, gross profit margins on new vehicle sales have been declining since
1986. The Company has also experienced gross profit margin pressure on used
vehicle sales over the last 18 months. For further discussion of competition
affecting the Company's business, see "Risk Factors -- Competition" and
"Business -- Competition."
GROWTH STRATEGY
(Bullet) ACQUIRE DEALERSHIPS. The Company plans to implement a "hub and spoke"
acquisition program primarily by pursuing (i) well-managed dealerships
in new metropolitan and growing suburban geographic markets, and (ii)
dealerships that will allow the Company to capitalize on regional
economies of scale, offer a greater breadth of products and services in
any of its markets or increase brand diversity.
NEW MARKETS. The Company looks to acquire well-managed dealerships in
geographic markets it does not currently serve, principally in the
Southeast and Southwest regions of the United States. Generally, the
Company will seek to retain the acquired dealerships' operational and
financial management, and thereby benefit from their market knowledge, name
recognition and local reputation.
EXISTING MARKETS. The Company seeks growth in its operations within
existing markets by acquiring dealerships that increase the brands,
products and services offered in those markets. These acquisitions should
produce opportunities for additional operating efficiencies, promote
increased name recognition and provide the Company with better
opportunities for repeat and referral business.
(Bullet) PURSUE OPPORTUNITIES IN ANCILLARY PRODUCTS AND SERVICES. The Company
intends to pursue opportunities to increase its sales of higher-margin
products and services by expanding its collision repair centers and its
wholesale parts and after-market products businesses, which, other than
after-market products, are not directly related to the new vehicle
cycle.
COLLISION REPAIR CENTERS. The Company's collision repair business
provides favorable margins and is not significantly affected by economic
cycles or consumer spending habits. The Company believes that because of
the high capital investment required for collision repair shops and the
cost of complying with environmental and worker safety regulations, large
volume body shops will be more successful in the future than smaller volume
shops. The Company believes that this industry will consolidate and that it
will be able to expand its collision repair business. The Company currently
has seven collision repair centers accounting for approximately $8.9
million in pro forma revenue for the year ended 1996.
WHOLESALE PARTS. Over time, the Company plans to capitalize on its
growing representation of numerous manufacturers in order to increase its
sales of factory authorized parts to wholesale buyers such as independent
mechanical and body repair garages and rental and commercial fleet
operators.
AFTER-MARKET PRODUCTS. The Company intends to expand its offerings of
after-market products in many of its dealership locations. After-market
products, such as custom wheels, performance parts, telephones and other
accessories, enable the dealership to capture incremental revenue on new
and used vehicle sales.
(Bullet) ENHANCE PROFIT OPPORTUNITIES IN FINANCE AND INSURANCE. The Company
offers its customers a wide range of financing and leasing alternatives
for the purchase of vehicles, as well as credit life, accident and
health and disability insurance and extended service contracts. As a
result of its size and scale, the Company believes it will be able to
negotiate with the lending institutions that purchase its financing
contracts to increase the Company's revenues. Likewise, the Company
expects to negotiate to increase the commissions it earns on extended
service and insurance products.
(Bullet) INCREASE USED VEHICLE SALES. The Company believes that there will be
opportunities to improve the used vehicle departments at several of its
dealerships. The Company currently operates four standalone used
vehicle facilities. In 1998, the Company intends to convert part of an
existing facility in Nashville to a used vehicle facility. It also
intends to develop used vehicle facilities in other markets where
management believes opportunities exist.
4
<PAGE>
OPERATING STRATEGY
(Bullet) OPERATE MULTIPLE DEALERSHIPS IN GEOGRAPHICALLY DIVERSE MARKETS. The
Company operates dealerships in Charlotte, Chattanooga, Nashville,
Tampa-Clearwater, Houston and Atlanta. By operating in several
locations throughout the United States, the Company believes it will be
better able to insulate its earnings from local economic downturns. In
addition, the Company believes that by establishing a significant
market presence in its operating regions, it will be able to provide
superior customer service through a market-specific sales, service,
marketing and inventory strategy.
(Bullet) ACHIEVE HIGH LEVELS OF CUSTOMER SATISFACTION. Customer satisfaction has
been and will continue to be a focus of the Company. The Company's
personalized sales process is intended to satisfy customers by
providing high-quality vehicles in a positive, "consumer friendly"
buying environment. Some Manufacturers offer specific performance
incentives, on a per vehicle basis, if certain customer satisfaction
index ("CSI") levels (which vary by Manufacturer) are achieved by a
dealer. Manufacturers can withhold approval of acquisitions if a dealer
fails to maintain a minimum CSI score. Historically, the Company has
not been denied Manufacturer approval of acquisitions based on CSI
scores. To keep management focused on customer satisfaction, the
Company includes CSI results as a component of its incentive
compensation program.
(Bullet) TRAIN AND DEVELOP QUALIFIED MANAGEMENT. Sonic requires all of its
employees, from service technicians to regional vice presidents, to
participate in in-house training programs. The Company leverages the
experience of senior management, along with third party trainers from
manufacturers, industry affiliates and vendors, to formally train all
employees. This training is also a convenient and effective way to
share best practices among the Company's employees at all levels of the
various dealerships. The Company believes that its comprehensive
training of all employees at every level of their career path offers
the Company a competitive advantage over other dealership groups in the
development and retention of its workforce.
(Bullet) OFFER A DIVERSE RANGE OF AUTOMOTIVE PRODUCTS AND SERVICES. Sonic offers
a broad range of automotive products and services, including a wide
selection of new and used vehicles, vehicle financing and insurance
programs, replacement parts and maintenance and repair programs.
Offering numerous new vehicle brands enables the Company to satisfy a
variety of customers, reduces dependence on any one Manufacturer and
reduces exposure to supply problems and product cycles.
(Bullet) CAPITALIZE ON EFFICIENCIES IN OPERATIONS. Because management
compensation is based primarily on dealership performance, expense
reduction and operating efficiencies are a significant management
focus. As the Company pursues its acquisition strategy, the Company's
size and market presence should provide it with an opportunity to
negotiate favorable contracts on such expense items as advertising,
purchasing, bank financings, employee benefit plans and other vendor
contracts.
(Bullet) UTILIZE PROFESSIONAL MANAGEMENT PRACTICES AND INCENTIVE BASED
COMPENSATION PROGRAMS. As a result of Sonic's size and geographic
dispersion, the Company's senior management has instituted a
multi-tiered management structure to supervise effectively its
dealership operations. In an effort to align management's interest with
that of stockholders, a portion of the incentive compensation program
for each officer, vice president and executive manager is provided in
the form of Company stock options, with additional incentives based on
the performance of individual profit centers. Sonic believes that this
organizational structure, with room for advancement and the opportunity
for equity participation, serves as a strong motivation for its
employees.
(Bullet) APPLY TECHNOLOGY THROUGHOUT OPERATIONS. The Company believes that, with
the customized technology it has introduced in certain markets, it has
been able to improve its operations over time by integrating its
systems into all aspects of its business. In these markets the Company
uses computer-based technology to monitor its dealerships' operating
performance and quickly adjust to market changes and to integrate
computer systems into its sales, F&I and parts and service operations.
The Company intends to expand this computer system into more of its
dealerships and markets as existing contracts for computer systems
expire.
THE REORGANIZATION
The Company was recently incorporated and capitalized with the stock of the
automobile dealerships that have been under the control of Bruton Smith
comprised of Town & Country Ford, Town & Country Toyota, Lone Star Ford, Fort
Mill Ford and Frontier Oldsmobile-Cadillac (the "Sonic Dealerships"). As of June
30, 1997, the Company effected a reorganization (the "Reorganization") pursuant
to which: (i) the Company acquired all of the capital stock or limited liability
company interests of the Sonic Dealerships (the "Dealership Securities"); and
(ii) the Company issued Class B Common Stock to the Smith Group in exchange for
the Dealership Securities. In connection with the Reorganization and the
Offering, the Company will convert from the last-in-first-out method (the "LIFO
Method") of inventory accounting to the first-in-first-out method (the "FIFO
Method") of inventory accounting (the "FIFO Conversion"), conditioned upon the
closing of the Offering. In connection with the FIFO Conversion, and in
accordance with generally accepted accounting principles, the accompanying
financial information of the Company has been retroactively restated to reflect
the FIFO Conversion. See "The Reorganization."
5
<PAGE>
THE ACQUISITIONS
In the past four months, the Company has consummated or signed definitive
agreements to purchase six dealerships or dealership groups for an aggregate
purchase price of approximately $94.8 million. These acquisitions consist of Ken
Marks Ford located in Clearwater, Florida (the "Ken Marks Acquisition")
(consummated on October 15, 1997), seven dealerships controlled by the Bowers
Transportation Group in Chattanooga, Tennessee and one dealership in Nashville,
Tennessee (the "Bowers Acquisition"), Lake Norman Dodge and Lake Norman
Chrysler-Plymouth-Jeep-Eagle located in Cornelius, North Carolina (the "Lake
Norman Acquisition") (consummated on September 29, 1997), Dyer & Dyer Volvo
located in Atlanta, Georgia (the "Dyer Acquisition"), the acquisition of the
assets of Jeff Boyd Chrysler-Plymouth-Dodge located in Fort Mill, South
Carolina, by the Company's subsidiary, Fort Mill Chrysler-Plymouth-Dodge Inc.
(the "Fort Mill Acquisition") (consummated on June 3, 1997), and the acquisition
of the assets of Williams Motors located in Rock Hill, South Carolina, by the
Company's subsidiary, Town and Country Chrysler-Plymouth-Jeep of Rock Hill, Inc.
(the "Williams Acquisition") (consummated on October 10, 1997) (collectively,
the "Acquisitions"). The dealerships underlying the Acquisitions had aggregate
total revenues of approximately $490.1 million in 1996 and enhance the Company's
market presence in the Southeast. See "The Acquisitions."
The Company's principal executive office is located at 5401 East
Independence Boulevard, Charlotte, North Carolina. Its mailing address is P.O.
Box 18747, Charlotte, North Carolina 28218, and its telephone number is (704)
532-3301.
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock Offered by the Company........... 5,000,000 shares (1)
Common Stock to be outstanding after the Offering:
Class A Common Stock................................ 5,000,000 shares (1)(2)
Class B Common Stock................................ 6,250,000 shares
Total.......................................... 11,250,000 shares
Voting Rights......................................... The Class A Common Stock and Class B Common Stock vote as a single
class on all matters, except as otherwise required by law, with each
share of Class A Common Stock entitling its holders to one vote and
each share of Class B Common Stock entitling its holder to ten votes
except with respect to certain limited matters. See "Description of
Capital Stock."
Use of proceeds....................................... The net proceeds of the Offering will be used to fund the
Acquisitions, including repaying certain indebtedness incurred by the
Company in connection with the Acquisitions already consummated. See
"The Acquisitions" and "Use of Proceeds."
Listing............................................... The Class A Common Stock has been approved for listing on the New
York Stock Exchange (the "NYSE"), subject to offical notice of
issuance, under the symbol "SAH."
</TABLE>
(1) Does not include up to an aggregate of 750,000 shares of Class A Common
Stock that may be sold by the Company upon exercise of the over-allotment
option granted to the Underwriters. See "Underwriting."
(2) Excludes (i) 1,125,000 shares of Class A Common Stock reserved for future
issuance to Company employees under the Company's Stock Option Plan (as
defined herein) (including up to 587,509 shares of Class A Common Stock
reserved for issuance upon exercise of options to be granted on or before
the consummation of the Offering pursuant to the Stock Option Plan), (ii)
150,000 shares of Class A Common Stock reserved for issuance to eligible
Company employees under the Company's ESPP (as defined herein) and (iii)
42,187 shares of Class A Common Stock (45,000 shares if the Underwriters'
over-allotment option is exercised) reserved for issuance under the Dyer
Warrant (defined herein). See "The Acquisitions -- The Dyer Acquisition" and
"Management -- Stock Option Plan."
RISK FACTORS
The Company's ability to make acquisitions in the future may be limited to
some extent by the Manufacturers. The Company is required to obtain Manufacturer
approval for any acquisition in accordance with industry practice. Moreover,
pursuant to Manufacturer policies currently in effect or their approvals of the
transactions contemplated hereby, the Company could acquire no more than ten
Chrysler dealerships in the United States, no more than the lesser of (i) 15
Ford and 15 Lincoln Mercury dealerships or (ii) that number of Ford and Lincoln
Mercury dealerships accounting for 2% of the preceding year's retail sales of
those brands in the United States, six additional Toyota dealerships, three
Lexus dealerships, six additional Honda dealerships, three Acura dealerships and
five additional GM dealerships (within the next two years, subject to increase
under certain conditions). For additional information concerning these and other
limitations on acquisitions imposed by the Manufacturers, see "Risk
Factors -- Risks Associated with Acquisitions," "--Stock Ownership/Issuance
Limits; Limitation on Ability to Issue Additional Equity" and
" -- Manufacturers' Restrictions on Acquisitions."
See "Risk Factors" beginning on page 9 for a discussion of other factors
that should be considered by prospective purchasers of the Class A Common Stock
offered hereby.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL DATA
The following Summary Historical and Pro Forma Combined and Consolidated
Financial Data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Combined and
Consolidated Financial Statements of the Company and the related notes and "Pro
Forma Combined and Consolidated Financial Data" included elsewhere in this
Prospectus. The Company acquired Fort Mill Ford, Inc. and Fort Mill
Chrysler-Plymouth-Dodge in February 1996 and in June 1997, respectively. Both of
these acquisitions were accounted for using the purchase method of accounting.
As a result the Summary Historical Combined and Consolidated Financial Data
below does not include the results of operations of these dealerships prior to
the date they were acquired by the Company. Accordingly, the actual historical
data for the periods after the acquisition may not be comparable to data
presented for periods prior to the acquisitions of Fort Mill Ford and Fort Mill
Chrysler-Plymouth-Dodge. Additionally, the Summary Historical and Pro Forma
Combined and Consolidated Financial Data below is not necessarily indicative of
the results of operations or financial position which would have resulted had
the Reorganization, the Acquisitions and the Offering occurred during the
periods presented. In connection with the FIFO Conversion, and in accordance
with generally accepted accounting principles, the Summary Historical and Pro
Forma Combined and Consolidated Financial Data has been retroactively restated
to reflect the FIFO Conversion.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
PRO
ACTUAL FORMA ACTUAL
1992 1993 1994 1995 1996(1) 1996(2) 1996(1) 1997(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND VEHICLES UNIT DATA)
COMBINED AND CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Vehicle sales...................... $171,065 $203,630 $227,960 $267,308 $326,842 $788,255 $164,333 $185,077
Parts, service and collision
repair........................... 24,543 30,337 33,984 35,860 42,644 94,912 21,005 22,907
Finance and insurance.............. 3,743 3,711 5,181 7,813 7,118 16,471 4,277 4,763
Total revenues................... 199,351 237,678 267,125 310,981 376,604 899,638 189,615 212,747
Cost of sales........................ 174,713 208,445 233,011 270,878 331,047 786,129 167,191 188,422
Gross profit......................... 24,638 29,233 34,114 40,103 45,557 113,509 22,424 24,325
Selling, general and administrative
expenses........................... 20,251 22,738 24,632 29,343 33,677 85,856 16,590 18,413
Depreciation and amortization........ 682 788 838 832 1,076 3,510 360 396
Operating income..................... 3,705 5,707 8,644 9,928 10,804 24,143 5,474 5,516
Interest expense floor plan.......... 2,215 2,743 3,001 4,505 5,968 9,342 2,801 3,018
Interest expense, other.............. 290 263 443 436 433 3,171 184 269
Other income......................... 1,360 613 609 449 618 2,222 369 274
Income before income taxes and
minority interest.................. 2,560 3,314 5,809 5,436 5,021 13,852 2,858 2,503
Provision for income taxes........... 27 723 2,118 2,176 1,924 5,517 1,093 916
Income before minority interest...... 2,533 2,591 3,691 3,260 3,097 8,335 1,765 1,587
Minority interest in earnings (loss)
of subsidiary...................... (31) (22) 15 22 114 -- 41 47
Net income........................... $ 2,564 $ 2,613 $ 3,676 $ 3,238 $ 2,983 $ 8,335 $ 1,724 $ 1,540
Net income per share (4)............. $ 0.74
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
PRO
FORMA
1997(2)
<S> <C>
COMBINED AND CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Vehicle sales...................... $418,624
Parts, service and collision
repair........................... 49,881
Finance and insurance.............. 9,410
Total revenues................... 477,915
Cost of sales........................ 419,492
Gross profit......................... 58,423
Selling, general and administrative
expenses........................... 43,574
Depreciation and amortization........ 1,662
Operating income..................... 13,187
Interest expense floor plan.......... 5,241
Interest expense, other.............. 1,674
Other income......................... 1,247
Income before income taxes and
minority interest.................. 7,519
Provision for income taxes........... 2,815
Income before minority interest...... 4,704
Minority interest in earnings (loss)
of subsidiary...................... --
Net income........................... $ 4,704
Net income per share (4)............. $ 0.42
</TABLE>
OTHER COMBINED AND
CONSOLIDATED OPERATING DATA:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New vehicle units sold............... 8,060 9,429 9,686 10,273 11,693 24,206 6,027 6,553
Used vehicle units sold -- retail
(5)................................ 3,892 4,104 4,374 5,172 5,488 13,475 2,836 2,638
New vehicle sales revenues........... $126,230 $152,525 $164,361 $186,517 $233,146 $540,505 $115,721 $137,069
Used vehicle sales revenues -- retail
(5)................................ 33,636 37,742 47,537 60,766 68,054 181,787 35,200 32,666
Parts, service and collision repair
sales revenues..................... 24,543 30,337 33,984 35,860 42,644 94,912 21,005 22,906
Gross profit margin.................. 12.4% 12.3% 12.8% 12.9% 12.1% 12.6% 11.8% 11.4%
New vehicle gross margin............. 6.7% 6.9% 7.0% 7.3% 7.4% 7.4% 6.6% 6.5%
Used vehicle gross margin (retail)
(5)................................ 10.7% 10.5% 10.9% 9.5% 8.4% 9.2% 8.4% 8.5%
Parts, service and collision repair
gross margin....................... 36.3% 36.4% 35.9% 36.1% 36.5% 42.3% 35.8% 35.4%
<CAPTION>
New vehicle units sold............... 12,596
<S> <C>
Used vehicle units sold -- retail
(5)................................ 7,043
New vehicle sales revenues........... $285,143
Used vehicle sales revenues -- retail
(5)................................ 96,249
Parts, service and collision repair
sales revenues..................... 49,881
Gross profit margin.................. 12.2%
New vehicle gross margin............. 7.3%
Used vehicle gross margin (retail)
(5)................................ 8.9%
Parts, service and collision repair
gross margin....................... 42.3%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30, 1997
1996 ACTUAL PRO FORMA
<S> <C> <C> <C>
COMBINED AND CONSOLIDATED BALANCE SHEET DATA:
Working capital.............................................................. $ 19,780 $ 16,899 $ 41,382
Total assets................................................................. 110,976 120,384 295,139
Long-term debt............................................................... 5,286 5,137 36,980
Total liabilities............................................................ 84,367 91,978 208,242
Minority interest............................................................ 314 -- --
Stockholders' equity......................................................... 26,295 28,406 86,897
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
7
<PAGE>
(1) The actual statement of operations data for the year ended December 31, 1996
includes the results of Fort Mill Ford, Inc. from the date of acquisition,
February 1, 1996.
(2) For information regarding the pro forma adjustments made to the Company's
historical financial data, which give effect to the Reorganization, the
Acquisitions, and the Offering, see "Pro Forma Combined and Consolidated
Financial Data."
(3) The actual statement of operations data for the six months ended June 30,
1997 include the results of Fort Mill Chrysler-Plymouth-Dodge, Inc. from the
date of acquisition June 3, 1997.
(4) Historical net income per share is not presented, as the historical capital
structure of the Company prior to the Offering is not comparable with the
capital structure that will exist after the Offering.
(5) The term "retail" describes sales to consumers as compared to sales to
wholesalers.
8
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF THE
INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING THE PRINCIPAL RISK FACTORS
SET FORTH BELOW.
DEPENDENCE ON AUTOMOBILE MANUFACTURERS
Each of the Company's dealerships operates pursuant to a franchise
agreement between the applicable automobile manufacturer (or authorized
distributor thereof) (the "Manufacturer") and the subsidiary of the Company that
operates such dealership. The Company is dependent to a significant extent on
its relationship with such Manufacturers.
After giving effect to the Reorganization and the Acquisitions, vehicles
manufactured by Ford Motor Company ("Ford"), Chrysler Corporation ("Chrysler"),
Volvo Motors ("Volvo") and Toyota Motor Sales (U.S.A.) ("Toyota") accounted for
approximately 64.5%, 17.9%, 6.0% and 5.8%, respectively, of the Company's 1996
pro forma unit sales of new vehicles. No other Manufacturer accounted for more
than 5% of the new vehicle sales of the Company during 1996. See "Business --
New Vehicle Sales," and " -- Relationships with Manufacturers." Accordingly, a
significant decline in the sale of Ford, Chrysler, Toyota, or Volvo new cars
could have a material adverse effect on the Company. Manufacturers exercise a
great degree of control over the operations of the Company's dealerships. Each
of the franchise agreements provides for termination or non-renewal for a
variety of causes, including any unapproved change of ownership or management
and other material breaches of the franchise agreements. The Company believes
that it is in compliance in all material respects with all its franchise
agreements. The Company has no reason to believe that it will not be able to
renew all of its franchise agreements upon expiration, but there can be no
assurance that any of such agreements will be renewed or that the terms and
conditions of such renewals will be favorable to the Company. If a Manufacturer
terminates or declines to renew one or more of the Company's significant
franchise agreements, such action could have a material adverse effect on the
Company and its business. Actions taken by Manufacturers to exploit their
superior bargaining position in negotiating the terms of such renewals or
otherwise could also have a material adverse effect on the Company. See
"Business -- Relationships with Manufacturers."
The Company also depends on the Manufacturers to provide it with a
desirable mix of popular new vehicles that produce the highest profit margins
and which may be the most difficult to obtain from the Manufacturers. If the
Company is unable to obtain a sufficient allocation of the most popular
vehicles, its profitability may be materially adversely affected. In some
instances, in order to obtain additional allocations of these vehicles, the
Company purchases a larger number of less desirable models than it would
otherwise purchase and its profitability may be materially adversely affected
thereby. The Company's dealerships depend on the Manufacturers for certain sales
incentives and other programs that are intended to promote dealership sales or
support dealership profitability. Manufacturers have historically made many
changes to their incentive programs during each year. A reduction or
discontinuation of a Manufacturer's incentive programs may materially adversely
affect the profitability of the Company.
The success of each of the Company's dealerships depends to a great extent
on the financial condition, marketing, vehicle design, production capabilities
and management of the Manufacturers which the Company represents. Events such as
strikes and other labor actions by unions, or negative publicity concerning a
particular Manufacturer or vehicle model, may materially and adversely affect
the Company. Similarly, the delivery of vehicles from Manufacturers later than
scheduled, which may occur particularly during periods when new products are
being introduced, can lead to reduced sales. Although, the Company has attempted
to lessen its dependence on any one Manufacturer by establishing dealer
relationships with a number of different domestic and foreign automobile
Manufacturers, adverse conditions affecting Ford, Chrysler, Toyota and Volvo in
particular, could have a material adverse affect on the Company. For instance,
workers at a Chrysler engine plant went on strike in April 1997 for 29 days. The
strike by the United Auto Workers caused Chrysler's vehicle production to drop
during the Spring of 1997, especially for production of its most popular truck
and van models. This strike materially affected the Company due to Chrysler's
inability to provide the Company with a sufficient supply of new vehicles and
parts during such period. In the event of another such strike, the Company may
need to purchase inventory from other automobile dealers at prices higher than
it would be required to pay to the Manufacturers in order to carry an adequate
level and mix of inventory. Consequently, such events could materially adversely
affect the financial results of the Company. See "Business -- New Vehicle Sales"
and " -- Relationship with Manufacturers."
Many Manufacturers attempt to measure customers' satisfaction with their
sales and warranty service experiences through systems which vary from
Manufacturer to Manufacturer but which are generally known as CSI. These
Manufacturers may use a dealership's CSI scores as a factor in evaluating
applications for additional dealership acquisitions and other matters such as
vehicle inventory allocations. The components of CSI have been modified from
time to time in the past, and there is no assurance that such components will
not be further modified or replaced by different systems in the future. To date,
the Company has not been adversely affected by these standards and has not been
denied approval of any acquisition based on low CSI scores. However, there can
be no assurance that the Company will be able to comply with such standards
9
<PAGE>
in the future. Failure of the Company's dealerships to comply with the standards
imposed by Manufacturers at any given time may have a material adverse effect on
the Company.
The Company must also obtain approvals by the applicable Manufacturer for
any of its acquisitions. See " -- Risks Associated with Acquisitions."
COMPETITION
Automobile retailing is a highly competitive business with over 22,000
franchised automobile dealerships in the United States at the beginning of 1996.
The Company's competition includes franchised automobile dealerships selling the
same or similar makes of new and used vehicles offered by the Company in the
same markets as the Company and sometimes at lower prices than those of the
Company. These dealer competitors may be larger and have greater financial and
marketing resources than the Company. Other competitors include other franchised
dealers, private market buyers and sellers of used vehicles, used vehicle
dealers, service center chains and independent service and repair shops. Gross
profit margins on sales of new vehicles have been declining since 1986. The
Company has also had margin pressure on its used vehicle sales over the last 18
months. The used car market faces increasing competition from non-traditional
outlets such as used-car "superstores," which use sales techniques such as one
price shopping, and the Internet. Several groups have begun to establish
nationwide networks of used vehicle superstores. In Charlotte and Atlanta, where
the Company has significant operations, CarMax Superstores operate in
competition with the Company. In addition, car superstores operate in many of
the Company's other markets. "No negotiation" sales methods are also being tried
for new cars by at least one of these superstores and by dealers for Saturn and
other dealerships. Some recent market entrants may be capable of operating on
smaller gross margins compared to the Company, and may have greater financial,
marketing and personnel resources than the Company. In addition, certain
Manufacturers, such as Ford, have publicly announced that they may directly
enter the retail market in the future, which could have a material adverse
effect on the Company. The increased popularity of short-term vehicle leasing
also has resulted, as these leases expire, in a large increase in the number of
late model vehicles available in the market, which puts added pressure on
margins. As the Company seeks to acquire dealerships in new markets, it may face
increasingly significant competition (including from other large dealer groups
and dealer groups that have publicly-traded equity) as it strives to gain market
share through acquisitions or otherwise.
The Company's franchise agreements do not give the Company the exclusive
right to sell a Manufacturer's product within a given geographic area. The
Company could be materially adversely affected if any of its Manufacturers award
franchises to others in the same markets where the Company is operating. A
similar adverse affect could occur if existing competing franchised dealers
increase their market share in the Company's markets. The Company's gross
margins may decline over time as it expands into markets where it does not have
a leading position. These and other competitive pressures could materially
adversely affect the Company's results of operations. See
"Business -- Competition."
OPERATING CONDITION OF ACQUIRED BUSINESSES
Although the Company has conducted what it believes to be a prudent level
of investigation regarding the operating condition of the assets to be purchased
in the Acquisitions in light of the circumstances of each transaction, certain
unavoidable levels of risk remain regarding the actual operating condition of
these assets. Until the Company actually assumes operating control of such
assets, it will not be able to ascertain their actual value and, therefore, will
be unable to ascertain whether the price paid for the Acquisitions represented a
fair valuation. The same risk regarding the actual operating condition of
businesses to be acquired will also apply to future acquisitions by the Company.
RISKS OF CONSOLIDATING OPERATIONS AS A RESULT OF THE ACQUISITIONS
In connection with the Acquisitions, Sonic is acquiring six dealerships or
dealership groups. Each of these dealerships or groups has been operated and
managed as a separate independent entity to date, and the Company's future
operating results will depend on its ability to integrate the operations of
these businesses and manage the combined enterprise. The Company's management
group has been expanded in connection with these Acquisitions. There can be no
assurance that the management group will be able to effectively and profitably
integrate in a timely manner each of the dealerships included in the
Acquisitions or any future acquisitions, or to manage the combined entity
without substantial costs, delays or other operational or financial problems.
The inability of the Company to do so could have a material adverse effect on
the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS
The retail automobile industry is considered a mature industry in which
minimal growth is expected in unit sales of new vehicles. Accordingly, the
Company's future growth will depend in large part on its ability to acquire
additional dealerships as well as on its ability to manage expansion, control
costs in its operations and consolidate dealership acquisitions, including the
Acquisitions, into existing operations. In pursuing a strategy of acquiring
other dealerships, including the Acquisitions,
10
<PAGE>
the Company faces risks commonly encountered with growth through acquisitions.
These risks include, but are not limited to, incurring significantly higher
capital expenditures and operating expenses, failing to assimilate the
operations and personnel of the acquired dealerships, disrupting the Company's
ongoing business, dissipating the Company's limited management resources,
failing to maintain uniform standards, controls and policies, impairing
relationships with employees and customers as a result of changes in management
and causing increased expenses for accounting and computer systems, as well as
integration difficulties. Installing new computer systems has in the past
disrupted existing operations as management and salespersons adjust to new
technologies. In addition, as contracts with existing suppliers of the Company's
computer systems expire, the Company's strategy may be to install new systems at
its existing dealerships. The Company expects that it will take one to two years
to fully integrate an acquired dealership into the Company's operations and
realize the full benefit of the Company's strategies and systems. There can be
no assurance that the Company will be successful in overcoming these risks or
any other problems encountered with such acquisitions, including in connection
with the Acquisitions. Acquisitions may also result in significant goodwill and
other intangible assets that are amortized in future years and reduce future
stated earnings. See "The Acquisitions," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Growth
Strategy."
Although there are many potential acquisition candidates that fit the
Company's acquisition criteria, there can be no assurance that the Company will
be able to consummate any such transactions in the future or identify those
candidates that would result in the most successful combinations, or that future
acquisitions will be able to be consummated at acceptable prices and terms. In
addition, increased competition for acquisition candidates could result in fewer
acquisition opportunities for the Company and higher acquisition prices. The
magnitude, timing and nature of future acquisitions will depend upon various
factors, including the availability of suitable acquisition candidates,
competition with other dealer groups for suitable acquisitions, the negotiation
of acceptable terms, the Company's financial capabilities, the availability of
skilled employees to manage the acquired companies and general economic and
business conditions.
In addition, the Company's future growth as a result of its acquisition of
automobile dealerships will depend on its ability to obtain the requisite
Manufacturer approvals. There can be no assurance that it will be able to obtain
such consents in the future. See " -- Manufacturers' Restrictions on
Acquisitions" and "Business -- Relationships with Manufacturers."
In certain cases, the Company may be required to file applications and
obtain clearances under applicable federal antitrust laws before consummation of
an acquisition. These regulatory requirements may restrict or delay the
Company's acquisitions, and may increase the cost of completing such
transactions.
LIMITATIONS ON FINANCIAL RESOURCES AVAILABLE FOR ACQUISITIONS; ABILITY TO
REFINANCE EXISTING DEBT
The Company intends to finance acquisitions with cash on hand, through
issuances of equity or debt securities and through borrowings under credit
arrangements. The Company anticipates the borrowing limit under its long-term
credit arrangements will be increased following consummation of the Offering,
although no assurance can be given that any such increase will occur or that
such increase will adequately meet the Company's future financing needs.
Similarly, there is no assurance that the Company will be able to obtain
additional debt or equity securities financing. Using cash to complete
acquisitions could substantially limit the Company's operating or financial
flexibility. Using stock to consummate acquisitions may result in significant
dilution of stockholders' percentage interest in the Company, which dilution may
be prohibited by the Company's franchise agreements with Manufacturers. See
" -- Stock Ownership/Issuance Limits." If the Company is unable to obtain
financing on acceptable terms, the Company may be required to reduce
significantly the scope of its presently anticipated expansion, which could
materially adversely affect the Company's business. See "The Acquisitions,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources" and "Business -- Growth Strategy."
In addition, the Company is dependent to a significant extent on its
ability to finance the purchase of inventory, which in the automotive retail
industry involves significant sums of money in the form of floor plan financing.
As of June 30, 1997 on a pro forma basis for the Acquisitions, the Company had
approximately $142.2 million of floor plan indebtedness. Substantially all the
assets of the Company's dealerships are pledged to secure such indebtedness,
which may impede the Company's ability to borrow from other sources. Many floor
plan lenders are associated with Manufacturers with whom the Company has
franchise agreements. Consequently, deterioration of the Company's relationship
with a Manufacturer could adversely affect its relationship with the affiliated
floor plan lender and vice-versa. In addition, the Company must obtain new floor
plan financing or obtain consents to assume such financing in connection with
its acquisition of dealerships. See " -- Dependence on Automobile
Manufacturers."
The Company's obligations under the Six-Month Facility (as defined herein)
are guaranteed by Bruton Smith, the Company's Chairman and Chief Executive
Officer, which guarantee is secured by a pledge of shares of Speedway
Motorsports, Inc. common stock owned by Bruton Smith. The Company's obligations
under the Revolving Facility (as defined herein) are guaranteed by Bruton Smith
and are secured by, among other things, a pledge of shares of Speedway
Motorsports, Inc.
11
<PAGE>
common stock owned by Sonic Financial Corporation ("Sonic Financial"). The
Company currently intends to re-finance the Six-Month Facility (to the extent
not repaid through proceeds of the Offering) with additional borrowings under
the Revolving Facility, which the Company anticipates will be expanded from its
current limit of $26.0 million to $75.0 million following the consummation of
the Offering. (If net proceeds of the Offering to the Company are $70 million or
greater, the guarantee of the Revolving Facility by Bruton Smith and the pledge
of shares of Speedway Motorsports, Inc. common stock owned by Sonic Financial,
will be released pursuant to the terms of the Revolving Facility. If net
proceeds of the Offering to the Company are less than $70 million, Sonic
Financial will be required to provide continued credit support for the Revolving
Facility in the form of a pledge of shares of Speedway Motorsports, Inc. common
stock owned by Sonic Financial equal in value to three times the amount of the
shortfall between $70 million and the actual net proceeds of the Offering to the
Company.) When the Company will need to refinance the Revolving Facility, there
can be no assurance that Mr. Smith will agree to guarantee such debt or that the
assets of Mr. Smith or Sonic Financial will be available to provide additional
security under a new credit agreement, or that a new credit agreement could be
arranged on terms as favorable as the terms of the Six-Month Facility or the
Revolving Facility without a guarantee by, or pledge of the assets of, Mr. Smith
or Sonic Financial.
STOCK OWNERSHIP/ISSUANCE LIMITS; LIMITATION ON ABILITY TO ISSUE ADDITIONAL
EQUITY
Standard automobile franchise agreements prohibit transfers of any
ownership interests of a dealership and its parent, such as Sonic, and,
therefore, often do not by their terms accommodate public trading of the capital
stock of a dealership or its parent. While, prior to the Offering and as a
condition thereto, all of the Manufacturers of which Company subsidiaries are
franchisees will have agreed to permit the Offering and trading in the Class A
Common Stock (except as described under " -- No Consent From Jaguar or KIA"), a
number of Manufacturers will continue to impose restrictions upon the
transferability of the Common Stock. Ford may cause the Company to sell or
resign from one or more of its Ford franchises if any person or entity (other
than members of the Smith Group) acquires 15% or more of the Company's voting
securities. Likewise, General Motors, Toyota and Nissan Motor Corporation In
U.S.A. ("Infiniti") may force the sale of their respective franchises if 20% of
more of the Company's voting securities are so acquired. American Honda Co.,
Inc. ("Honda") may force the sale of the Company's Honda franchise if any person
or entity, excluding members of the Smith Group, acquires 5% of the Common Stock
(10% if such entity is an institutional investor), and Honda deems such person
or entity to be unsatisfactory. Volkswagen of America, Inc. ("Volkswagen") has
approved of the public sale of only 25% of the voting control of the Company and
requires prior approval of any change in control or management of the Company
that would affect the Company's control or management of its Volkswagen
franchise subsidiaries. Chrysler also has approved of the public sale of only
50% of the Common Stock and requires prior approval of any future sales that
would result in a change in voting or managerial control of the Company. Honda's
approval of the Offering is subject to the Smith Group plus Nelson Bowers owning
51% of the shares of Common Stock on a fully-diluted basis. Upon consummation of
the Offering, 48.9% of the Common Stock (on a fully diluted basis after giving
effect to the options to be issued at the time of the Offering under the Stock
Option Plan) will be owned by persons other than the Smith Group or Nelson
Bowers (assuming full exercise of the Underwriters' over-allotment option).
Accordingly, the Company will not be able to issue additional shares of Common
Stock (in connection with an acquisition or otherwise) or options without the
consent of Honda and Chrysler or being in violation of such dealership
agreement. See "Business -- Relationships with Manufacturers." In a similar
manner, the lending arrangements the Company has recently obtained require that
voting control over the Company be maintained by the Smith Group. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Any transfer of shares of the
Company's Common Stock, including a transfer by members of the Smith Group, will
be outside the control of the Company and, if such transfer results in a change
in control of the Company, could result in the termination or non-renewal of one
or more of its franchise agreements and in a default under its credit
arrangements. Moreover, these issuance limitations may impede the Company's
ability to raise capital through additional equity offerings or to issue Common
Stock as consideration for, and therefore, to consummate, future acquisitions.
Such restrictions also may prevent or deter prospective acquirors from acquiring
control of the Company and, therefore, may adversely impact the Company's equity
value. See " -- Limitations on Financial Resources Available for Acquisitions;
Ability to Refinance Existing Debt."
The Company has contractual obligations to provide "piggyback" registration
rights to holders of Class B Common Stock to register their shares under the
Securities Act under certain circumstances. Additionally, such shares will
become in the future, eligible for sale pursuant to the terms of Rule 144
promulgated under the Securities Act ("Rule 144"). See "Certain
Transactions -- Registration Rights Agreement" and "Shares Eligible for Future
Sale." The Company will also issue certain stock options prior to consummation
of the Offering. See "Management -- Stock Option Plan."
MANUFACTURERS' RESTRICTIONS ON ACQUISITIONS
The Company is required to obtain the consent of the applicable
Manufacturer prior to the acquisition of any additional dealership franchises.
There can be no assurance that Manufacturers will grant such approvals.
Obtaining the consent of the Manufacturers for acquisitions of dealerships could
also take a significant amount of time. Obtaining the approvals of the
Manufacturers for the Acquisitions has taken approximately five months. Although
no assurances can be given, the Company
12
<PAGE>
believes that Manufacturer approvals of subsequent acquisitions from
Manufacturers with which the Company has previously completed applications and
agreements may take less time. The Company has received the approval of all of
the applicable Manufacturers in connection with the Acquisitions except Jaguar
Cars, a division of Ford ("Jaguar") and Kia Motors America, Inc. ("KIA"). If the
Company experiences delays in obtaining, or fails to obtain, approvals of the
Manufacturers for acquisitions of dealerships, the Company's growth strategy
could be materially adversely affected. In determining whether to approve an
acquisition, the Manufacturers may consider many factors, including the moral
character, business experience, financial condition, ownership structure and CSI
scores of the Company and its management. In addition, under an applicable
franchise agreement or under state law a Manufacturer may have a right of first
refusal to acquire a dealership in the event the Company seeks to acquire a
dealership franchise.
In addition, a Manufacturer may limit the number of such Manufacturers'
dealerships that may be owned by the Company or the number that may be owned in
a particular geographic area. For example, Ford currently limits the Company to
no more than the lesser of (i) 15 Ford and 15 Lincoln Mercury dealerships or
(ii) that number of Ford and Lincoln Mercury dealerships accounting for 2% of
the preceding year's retail sales of those brands in the United States. It also
limits the Company to owning only one Ford dealership in any market area, as
defined by Ford, having three or less Ford dealerships in it and no more than
25% of the Ford dealerships in a market area having four or more Ford
dealerships. Chrysler has asked the Company to defer any further acquisitions of
Chrysler or Chrysler division dealerships until it has established a proven
performance record with the Chrysler dealerships it owns or is acquiring in the
Acquisitions. BMW has made a similar request. Moreover, Chrysler has recently
announced its general policy of limiting ownership to ten Chrysler dealerships
in the United States, six Chrysler dealerships in the same sales zone, as
determined by Chrysler, and two dealerships in the same market (but no more than
one like vehicle line brand in the same market). Toyota currently limits the
number of dealerships which may be owned by any one group to seven Toyota and
three Lexus dealerships nationally and restricts the number of dealerships that
may be owned to (i) the greater of one dealership, or 20% of the Toyota dealer
count in a "Metro" market (as defined by Toyota), (ii) the lesser of five
dealerships or 5% of the Toyota dealerships in any Toyota region (currently 12
geographic regions), and (iii) two Lexus dealerships in any one of the four
Lexus geographic areas. Toyota further requires that at least nine months elapse
between acquisitions. Similarly, it is currently the policy of Honda to restrict
any company from holding more than seven Honda or more than three Acura
franchises nationally and to restrict the number of franchises to (i) one Honda
dealership in a "Metro" market (a metropolitan market represented by two or more
Honda dealers) with two to 10 Honda dealership points, (ii) two Honda
dealerships in a Metro market with 11 to 20 Honda dealership points, (iii) three
Honda dealerships in a Metro market with 21 or more Honda dealership points,
(iv) no more than 4% of the Honda dealerships in any one of the 10 Honda
geographic zones, (v) one Acura dealership in a Metro market (a metropolitan
market with two or more Acura dealership points), and (vi) two Acura dealerships
in any one of the six Acura geographic zones. Toyota and Honda also prohibit
ownership of contiguous dealerships and the coupling of a franchise with any
other brand without their consent. General Motors Corporation ("GM" or "General
Motors") has limited the number of GM dealerships that the Company may acquire
during the next two years to five additional GM dealership locations, which
number may be increased on a case-by-case basis. In addition, GM limits the
maximum number of GM dealerships that the Company may acquire to 50% of the GM
dealerships, by franchise line, in a GM-defined geographic market area having
multiple GM dealers.
As a condition to granting their consent to the Acquisitions, a number of
Manufacturers have also imposed certain other restrictions on the Company. In
addition to the restrictions under " -- Stock Ownership/Issuance Limits;
Limitation on Ability to Issue Additional Equity" below, these restrictions
principally consist of restrictions on (i) certain material changes in the
Company or extraordinary corporate transactions such as a merger, sale of a
material amount of assets or change in the Board of Directors or management of
the Company which could have a material adverse effect on the Manufacturer's
image or reputation or could be materially incompatible with the Manufacturer's
interests; (ii) the removal of a dealership general manager without the consent
of the Manufacturer; and (iii) the use of dealership facilities to sell or
service new vehicles of other manufacturers. If the Company is unable to comply
with these restrictions, the Company generally must (i) sell the assets of the
dealerships to the Manufacturer or to a third party acceptable to the
Manufacturer, or (ii) terminate the dealership agreements with the Manufacturer.
Other manufacturers may impose other and more stringent restrictions in
connection with future acquisitions.
The Company owns, after giving effect to the Reorganization and the
Acquisitions, five Ford dealerships, six Chrysler dealerships, two BMW
dealerships, two Volvo dealerships, two Volkswagen dealerships and one
dealership each of GM, Toyota, Honda, Jaguar, Infiniti and KIA.
NO CONSENT FROM JAGUAR OR KIA
The Company has not entered into any agreement with respect to the approval
by (a) Jaguar of the proposed acquisition of the assets of the Jaguar of
Chattanooga dealership (the "Jaguar Dealership") or (b) KIA of the proposed
acquisition of the assets of the KIA of Chattanooga dealership (the "KIA
Dealership") by the Company as a part of the Bowers Acquisition. The Company and
each of Jaguar and KIA are continuing to negotiate with respect to this matter,
although no assurance can
13
<PAGE>
be given that such negotiations will result in an arrangement that is favorable
to the Company. If Jaguar or KIA refuses to give its approval to the Company,
the Company may not be able to acquire the Jaguar Dealership or the KIA
Dealership, as the case may be. The Jaguar Dealership and the KIA Dealership
each accounted for less than 1% of the Company's 1996 pro forma revenues and
profits, respectively.
POTENTIAL CONFLICTS OF INTEREST
Bruton Smith, the Chairman and Chief Executive Officer of the Company, will
continue to serve as the Chairman and Chief Executive Officer of Speedway
Motorsports. Accordingly, the Company will compete with Speedway Motorsports for
the management time of Mr. Smith. Under his employment agreement with the
Company, Mr. Smith is required to devote approximately 50% of his business time
to the affairs of the Company. The remainder of his business time may be devoted
to other entities including Speedway Motorsports.
The Company has in the past and will likely in the future enter into
transactions with entities controlled by either Mr. Smith, Nelson Bowers or Ken
Marks or other affiliates of the Company. The Company believes that all of these
arrangements are favorable to the Company and were entered into on terms that,
taken as a whole, reflect arms'-length negotiations, although certain lease
provisions included in such transactions may be at below-market rates. Since no
independent appraisals evaluating these business transactions were obtained,
there can be no assurance that such transactions are on terms no less favorable
than could have been obtained from unaffiliated third parties. Certain of the
existing arrangements will continue after the Offering. Potential conflicts of
interest could also arise in the future between the Company and these affiliated
parties in connection with the enforcement, amendment or termination of these
arrangements. See "Certain Transactions." The Company anticipates renegotiating
its leases with all related parties at lease expiration at fair market rentals,
which may be higher than current rents. For further discussion of these related
party leases, see "Certain Transactions -- Certain Dealership Leases."
In addition to his interest and responsibilities with the Company, Nelson
Bowers has ownership interests in several non-Company entities, including a
Toyota dealership in Cleveland, Tennessee, an auto body shop in Chattanooga,
Tennessee a used-car auction house and a Saturn dealership in Chattanooga,
Tennessee which he may negotiate to sell back to the manufacturer. These
enterprises are involved in businesses that are related to, and that compete
with, the businesses of the Company. Pursuant to his employment agreement, Mr.
Bowers is not permitted to participate actively in the operation of those
businesses (other than the Saturn dealership) and is only permitted to maintain
a passive investment in these enterprises.
Under the General Corporation Law of Delaware ("Delaware Law") generally, a
corporate insider is precluded from acting on a business opportunity in his
individual capacity if that opportunity is one which the corporation is
financially able to undertake, is in the line of the corporation's business, is
of practical advantage to the corporation and is one in which the corporation
has an interest or reasonable expectancy. Accordingly, corporate insiders are
generally required to engage in new business opportunities of the Company only
through the Company unless a majority of the Company's disinterested directors
decide under the standards discussed above that it is not in the best interest
of the Company to pursue such opportunities.
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") contains provisions providing that transactions between the
Company and its affiliates must be no less favorable to the Company than would
be available in corporate transactions in arms'-length dealing with an unrelated
third party. Moreover, any such transactions involving aggregate payments in
excess of $500,000 must be approved by a majority of the Company's directors and
a majority of the Company's independent directors. Otherwise, the Company must
obtain an opinion as to the financial fairness of the transaction to be issued
by an investment banking or appraisal firm of national standing.
LACK OF INDEPENDENT DIRECTORS
As of the date hereof, all of the members of the Company's Board of
Directors are employees and/or majority shareholders of the Company or
affiliates thereof. Although the Company intends to appoint at least two
independent directors following completion of the Offering, such directors will
not constitute a majority of the Board, and the Company's Board may not have a
majority of independent directors in the future. In the absence of a majority of
independent directors, the Company's executive officers, who also are principal
stockholders and directors, could establish policies and enter into transactions
without independent review and approval thereof, subject to certain restrictions
under the Certificate. In addition, although the Company intends to establish
audit and compensation committees which will consist entirely of outside
directors, until those committees are established, audit and compensation
policies could be approved without independent review. These and other
transactions could present the potential for a conflict of interest between the
Company and its stockholders generally and the controlling officers,
stockholders or directors. See "Management."
14
<PAGE>
DEPENDENCE ON KEY PERSONNEL AND LIMITED MANAGEMENT AND PERSONNEL RESOURCES
The Company's success depends to a significant degree upon the continued
contributions of its management team (particularly its senior management) and
service and sales personnel. Additionally, Manufacturer franchise agreements
require the prior approval of the applicable Manufacturer before any change is
made in franchise general managers. For instance, Volvo has required that Nelson
Bowers and Richard Dyer maintain a 20% interest in, and be the general managers
of, the Company's Volvo dealerships formerly owned by them. Consequently, the
loss of the services of one or more of these key employees could have a material
adverse effect on the Company. Although the Company has employment agreements
with Bruton Smith, Bryan Scott Smith, Nelson Bowers, Theodore M. Wright, O. Ken
Marks, Jr. and Jeffrey C. Rachor, the Company will not have employment
agreements in place with other key personnel. In addition, as the Company
expands it may need to hire additional managers and will likely be dependent on
the senior management of any businesses acquired. The market for qualified
employees in the industry and in the regions in which the Company operates,
particularly for general managers and sales and service personnel, is highly
competitive and may subject the Company to increased labor costs in periods of
low unemployment. The loss of the services of key employees or the inability to
attract additional qualified managers could have a material adverse effect on
the Company. In addition, the lack of qualified management or employees employed
by the Company's potential acquisition candidates may limit the Company's
ability to consummate future acquisitions. See "Business -- Growth Strategy,"
"Business -- Competition" and "Management."
MATURE INDUSTRY; CYCLICAL AND LOCAL NATURE OF AUTOMOBILE SALES
The United States automobile dealership industry generally is considered a
mature industry in which minimal growth is expected in unit sales of new
vehicles. As a consequence, growth in the Company's revenues and earnings are
likely to be significantly affected by the Company's success in acquiring and
integrating dealerships and the pace and size of such acquisitions. See
" -- Risks Associated with Acquisitions" and "Business -- Growth Strategy."
The automobile industry is cyclical and historically has experienced
periodic downturns characterized by oversupply and weak demand. Many factors
affect the industry, including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
credit availability. For the six months ended June 30, 1997, industry retail
sales were down 2% as a result of retail car sales declines of 5.3% and retail
truck sales gains of 2.4% from the same period in 1996. Future recessions may
have a material adverse effect on the Company's business.
Local economic, competitive and other conditions also affect the
performance of dealerships. The Sonic Dealerships are located in the Charlotte
and Houston markets. Pursuant to the Acquisitions, the Company is acquiring
dealerships in the metropolitan areas of Charlotte, Chattanooga, Nashville,
Tampa-Clearwater and Atlanta. While the Company intends to pursue acquisitions
outside of these markets, the Company expects that the majority of its
operations will continue to be concentrated in these areas for the foreseeable
future. As a result, the Company's results of operations will depend
substantially on general economic conditions and consumer spending habits in the
Southeast and, to a lesser extent, in the Houston market, as well as various
other factors, such as tax rates and state and local regulations, specific to
North Carolina, Tennessee, Florida, Texas, Georgia and South Carolina. There can
be no assurance that the Company will be able to expand geographically, or that
any such expansion will adequately insulate it from the adverse effects of local
or regional economic conditions. See "Business -- Growth Strategy."
SEASONALITY
The Company's business is seasonal, with a disproportionate amount of
revenues occurring in the second, third and fourth fiscal quarters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
IMPORTED PRODUCT RESTRICTIONS AND FOREIGN TRADE RISKS
Certain motor vehicles retailed by the Company, as well as certain major
components of vehicles retailed by the Company, are of foreign origin.
Accordingly, the Company is subject to the import and export restrictions of
various jurisdictions and is dependent to some extent upon general economic
conditions in and political relations with a number of foreign countries,
particularly Japan and Sweden. Additionally, fluctuations in currency exchange
rates may adversely affect the Company's sales of vehicles produced by foreign
manufacturers. Imports into the United States may also be adversely affected by
increased transportation costs and tariffs, quotas or duties.
ADVERSE EFFECT OF GOVERNMENTAL REGULATION; ENVIRONMENTAL REGULATION COMPLIANCE
COSTS
The Company is subject to a wide range of federal, state and local laws and
regulations, such as local licensing requirements, and consumer protection laws.
The violation of these laws and regulations can result in civil and criminal
penalties being levied against the Company or in a cease and desist order
against Company operations that are not in compliance. Future acquisitions by
the Company may also be subject to regulation, including antitrust reviews. The
Company believes
15
<PAGE>
that it complies in all material respects with all laws and regulations
applicable to its business, but future regulations may be more stringent and
require the Company to incur significant additional costs.
The Company's facilities and operations are also subject to federal, state
and local laws and regulations relating to environmental protection and human
health and safety, including those governing wastewater discharges, air
emissions, the operation and removal of underground storage tanks, the use,
storage, treatment, transportation and disposal of solid and hazardous materials
and the remediation of contamination associated with such disposal. Certain of
these laws and regulations may impose joint and several liability on certain
statutory classes of persons for the costs of investigation or remediation of
contaminated properties, regardless of fault or the legality of the original
disposal. These persons include the present or former owner or operator of a
contaminated property and companies that generated, disposed of or arranged for
the disposal of hazardous substances found at the property.
Past and present business operations of the Company subject to such laws
and regulations include the use, storage handling and contracting for recycling
or disposal of hazardous or toxic substances or wastes, including
environmentally sensitive materials such as motor oil, waste motor oil and
filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner,
batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels.
The Company is subject to other laws and regulations as a result of the past or
present existence of underground storage tanks at many of the Company's
properties. The Company, like many of its competitors, has incurred, and will
continue to incur, capital and operating expenditures and other costs in
complying with such laws and regulations. In addition, soil and groundwater
contamination exist at certain of the Company's properties, and there can be no
assurance that other properties have not been contaminated by any leakage from
underground storage tanks or by any spillage or other releases of hazardous or
toxic substances or wastes.
Certain laws and regulations, including those governing air emissions and
underground storage tanks, have been amended so as to require compliance with
new or more stringent standards as of future dates. The Company cannot predict
what other environmental legislation or regulations will be enacted in the
future, how existing or future laws or regulations will be administered or
interpreted or what environmental conditions may be found to exist in the
future. Compliance with new or more stringent laws or regulations, stricter
interpretation of existing laws or the future discovery of environmental
conditions may require additional expenditures by the Company, some of which may
be material. See "Business -- Governmental Regulations and Environmental
Matters."
CONCENTRATION OF VOTING POWER AND ANTI-TAKEOVER PROVISIONS
The Common Stock is divided into two classes with different voting rights,
which allows for the maintenance of control of the Company by the holders of the
Class B Common Stock. Holders of Class A Common Stock are entitled to one vote
per share on all matters submitted to a vote of the stockholders of the Company.
Holders of Class B Common Stock are entitled to ten votes per share on all
matters, except that the Class B Common Stock is entitled to only one vote per
share with respect to any transaction proposed or approved by the Company's
Board of Directors, proposed by or on behalf of the holders of the Class B
Common Stock or their affiliates or as to which any members of the Smith Group
or any affiliate thereof has a material financial interest (other than as a then
existing stockholder of the Company) constituting a (a) "going private"
transaction (as defined herein), (b) disposition of substantially all of the
Company's assets, (c) transfer resulting in a change in the nature of the
Company's business, or (d) merger or consolidation in which current holders of
Common Stock would own less than 50% of the Common Stock following such
transaction. The two classes vote together as a single class on all matters,
except where class voting is required by Delaware Law, which exception would
apply, among other situations, to a vote on any proposal to modify the voting
rights of the Class A Common Stock. See "Description of Capital Stock." Upon
completion of this Offering (assuming the Underwriters' over-allotment option is
not exercised), the existing holders of Class B Common Stock will have
approximately 92.6% of the combined voting power of the Common Stock (in those
circumstances in which the Class B Common Stock has ten votes per share) and
55.6% of the outstanding Common Stock. Accordingly such holders of Class B
Common Stock will effectively have the ability to elect all of the directors of
the Company and to control all other matters requiring the approval of the
Company's stockholders. In addition, the Company may issue additional shares of
Class B Common Stock to members of the Smith Group in the future for fair market
value. See "Principal Stockholders."
The disproportionate voting rights of the Class B Common Stock under the
above-mentioned circumstances could have a material adverse effect on the market
price of the Class A Common Stock. Such disproportionate voting rights may make
the Company a less attractive target for a takeover than it otherwise might be,
or render more difficult or discourage a merger proposal, a tender offer or a
proxy contest, even if such actions were favored by a majority of the holders of
the Class A Common Stock.
16
<PAGE>
Certain provisions of the Certificate and the Company's Bylaws make it more
difficult for stockholders of the Company to effect certain corporate actions.
See "Description of Capital Stock -- Delaware Law, Certain Charter and Bylaw
Provisions and Certain Franchise Agreement Provisions." Under the Company's
Stock Option Plan, options outstanding thereunder become immediately exercisable
upon a change in control of the Company. See "Management -- Employment
Agreements" and " -- Stock Option Plan." The agreements, corporate documents and
laws described above, as well as provisions of the Company's franchise
agreements described in " -- Dependence on Automobile Manufacturers" and
" -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue Additional
Equity" above (permitting Manufacturers to terminate such agreements upon a
change of control) and provisions of the Company's lending arrangements
described in " -- Stock Ownership/Issuance Limits; Limitation on Ability to
Issue Additional Equity" above (creating an event of default thereunder upon a
change in control), may have the effect of delaying or preventing a change in
control of the Company or preventing stockholders from realizing a premium on
the sale of their shares of Class A Common Stock upon an acquisition of the
Company.
The Certificate authorizes the Board of Directors of the Company to issue
three million shares of "blank check" preferred stock with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights or preferences that could adversely affect the voting
power or other rights of the holders of the Class A Common Stock. In the event
of issuance, the preferred stock could be utilized, under certain circumstances,
as a method of discouraging, delaying, or preventing a change in control of the
Company. The issuance of preferred stock could also prevent stockholders from
realizing a premium upon the sale of their shares of Class A Common Stock upon
an acquisition of the Company. Although the Company has no present intention to
issue any shares of its preferred stock, there can be no assurance that the
Company will not do so in the future. See "Description of Capital Stock."
Additionally, the Company's Bylaws provide: (i) for a Board of Directors
divided into three classes serving staggered terms; (ii) that special meetings
of stockholders may be called only by the Chairman or by the Company's Secretary
or Assistant Secretary at the request in writing of a majority of the Board of
Directors; (iii) that no stockholder action may be taken by written consent; and
(iv) that stockholders seeking to bring business before an annual meeting of
stockholders, or to nominate candidates for election as directors at an annual
or a special meeting of stockholders, must provide timely notice thereof in
writing. These provisions will impair the stockholders' ability to influence or
control the Company or to effect a change in control of the Company, and may
prevent stockholders from realizing a premium on the sale of their shares of
Class A Common Stock upon an acquisition of the Company. See "Description of
Capital Stock."
NO PRIOR PUBLIC MARKET FOR CLASS A COMMON STOCK AND POSSIBLE VOLATILITY OF STOCK
PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock. The Class A Common Stock has been approved for listing on the
NYSE, subject to official notice of issuance. The initial public offering price
of the Class A Common Stock will be determined by negotiations among the Company
and representatives of the Underwriters. See "Underwriting." There can be no
assurance that the market price of the Class A Common Stock prevailing at any
time after this Offering will equal or exceed the initial public offering price
or that an active trading market will be developed after the Offering or, if
developed, that it will be sustained. Quarterly and annual operating results of
the Company, variations between such results and the results expected by
investors and analysts, changes in local or general economic conditions or
developments affecting the automobile industry, the Company or its competitors
could cause the market price of the Class A Common Stock to fluctuate
substantially. As a result of these factors, as well as other factors common to
initial public offerings, the market price could fluctuate substantially from
the initial offering price. In addition, the stock market has, from time to
time, experienced extreme price and volume fluctuations, which could adversely
effect the market price for the Class A Common Stock without regard to the
financial performance of the Company.
DILUTION
Purchasers of Class A Common Stock in the Offering will experience
immediate and substantial dilution in the amount of $11.59 per share in net
tangible book value per share from the initial offering price. See "Dilution."
POTENTIAL ADVERSE MARKET PRICE EFFECT OF ADDITIONAL SHARES ELIGIBLE FOR FUTURE
SALE
The 6,250,000 shares of Class B Common Stock owned beneficially by existing
stockholders of the Company, the 587,509 shares of Class A Common Stock
underlying options to be granted by the Company under the Stock Option Plan on
or before the consummation of the Offering and the 42,187 shares of Class A
Common Stock (45,000 shares if the Underwriter's over-allotment option is
exercised in full) underlying the Dyer Warrant (as defined herein), are
"restricted securities" as defined in Rule 144 under the Securities Act, and may
in the future be resold in compliance with Rule 144. See "Management -- Stock
Option Plan" and "The Acquisitions -- The Dyer Acquisition." In addition,
6,250,000 shares of Common Stock constituting restricted securities are subject
to certain piggyback registration rights. See "Certain Transactions --
Registration Rights Agreements." No prediction can be made as to the effect that
resale of shares of Common Stock, or the
17
<PAGE>
availability of shares of Common Stock for resale, will have on the market price
of the Class A Common Stock prevailing from time to time. The resale of
substantial amounts of Common Stock, or the perception that such resales may
occur, could materially and adversely affect prevailing market prices for the
Common Stock and the ability of the Company to raise equity capital in the
future. The Company has agreed, subject to certain exceptions, not to issue, and
all executive officers of the Company and all owners of the Class B Common Stock
have agreed not to resell, any shares of Common Stock or other equity securities
of the Company for 180 days after the date of this Prospectus without the prior
written consent of the representatives of the Underwriters. See
"Management -- Stock Option Plan," "Shares Eligible for Future Sale" and
"Underwriting."
18
<PAGE>
THE REORGANIZATION
The Company was incorporated in 1997 and capitalized with the stock of the
Sonic Dealerships, which have been under the control of Bruton Smith and which
are comprised of Town & Country Ford, Town & Country Toyota, Lone Star Ford,
Fort Mill Ford and Frontier Oldsmobile-Cadillac. As of June 30, 1997, the
Company effected the Reorganization pursuant to which: (i) the Company acquired
all of the Dealership Securities; and (ii) the Company issued Class B Common
Stock in exchange for the Dealership Securities. See "Certain
Transactions -- Other Transactions." Subsequent to the Reorganization, the
Company will convert from the LIFO Method of inventory accounting to the
industry standard FIFO Method of inventory accounting, conditioned upon the
closing of the Offering. In connection with the FIFO Conversion, and in
accordance with generally accepted accounting principles, the accompanying
financial information of the Company has been retroactively restated to reflect
the FIFO Conversion. As a result of the Reorganization, the historical combined
financial information included in this Prospectus is not necessarily indicative
of the results of operations, financial position and cash flows of the Company
in the future or of those which would have resulted had the Reorganization been
in effect during the periods presented in the Company's Combined and
Consolidated Financial Statements included elsewhere in this Prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
THE ACQUISITIONS
In the last four months, the Company has consummated or signed definitive
agreements to purchase six additional dealerships or dealership groups for an
aggregate purchase price of approximately $94.8 million. These acquisitions
consist of the Ken Marks Acquisition (consummated on October 15, 1997), the
Bowers Acquisition, the Lake Norman Acquisition (consummated on September 29,
1997), the Dyer Acquisition, the Fort Mill Acquisition (consummated on June 3,
1997) and the Williams Acquisition (consummated on October 10, 1997).
The closing of the Offering is contingent upon the Company consummating the
remaining Acquisitions. The Company intends to use the proceeds from the
Offering to pay the purchase prices of the remaining Acquisitions and to repay
certain of the indebtedness incurred in connection with the consummated
Acquisitions. See "Use of Proceeds." In addition, the Company intends to
refinance all of the floor plan indebtedness of the dealerships being acquired
in the Acquisitions.
The following table sets forth the sources and uses of funds for financing
of the Acquisitions after giving effect to the Offering:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Sources of funds:
The Six-Month Facility(a).................................................. $ 3.3
The Revolving Facility..................................................... 26.0
The Bowers Note (as defined below)......................................... 4.0
Class A Common Stock offered hereby(b)..................................... 58.5
Existing escrows(c)........................................................ 3.0
Total................................................................... $ 94.8
Uses of funds:
The Ken Marks Acquisition(d)............................................... $ 25.5
The Bowers Acquisition..................................................... 27.6
The Lake Norman Acquisition(e)............................................. 18.2
The Dyer Acquisition(f).................................................... 18.0
The Fort Mill Acquisition(g)............................................... 3.7
The Williams Acquisition................................................... 1.8
Total................................................................... $ 94.8
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
19
<PAGE>
(a) The Company initially borrowed $20 million under this facility to fund the
Lake Norman Acquisition and the Williams Acquisition, approximately $16.7
million of which is anticipated to be repaid with the proceeds of the
Offering assuming the shares are sold at the mid-point of the range set
forth on the front cover of this Prospectus.
(b) Represents net proceeds assuming Class A Common Stock is sold at the
mid-point of the range set forth on the front cover of this Prospectus. To
the extent the Class A Common Stock is sold below such mid-point, borrowings
under the Revolving Facility or the Six-Month Facility will be adjusted.
(c) Pursuant to the Ken Marks Acquisition, the Bowers Acquisition, the Lake
Norman Acquisition, and the Dyer Acquisition, $0.5 million, $0.5 million,
$1.0 million and $1.0 million, respectively, has been deposited by Sonic
into escrow accounts.
(d) The Ken Marks Acquisition was financed with the proceeds of the Company's
initial borrowing under the Revolving Facility.
(e) The Lake Norman Acquisition was financed with the proceeds of the Six-Month
Facility.
(f) Does not include the Dyer Warrant. See footnote 2 to the Pro Forma Combined
and Consolidated Balance Sheet as of June 30, 1997.
(g) $3.5 million of the purchase price for the Fort Mill Acquisition was
initially funded from the proceeds of a loan from Bruton Smith. This loan
will be repaid from the proceeds of the Offering.
THE KEN MARKS ACQUISITION. Ken Marks Ford is located in Clearwater,
Florida. Ken Marks, Jr., together with the other stockholders of Ken Marks Ford,
and the Company entered into a definitive stock purchase agreement in July 1997,
providing for the acquisition by the Company of all of the outstanding stock of
Ken Marks Ford. Ken Marks Ford had retail sales of approximately 4,369 new and
1,764 used vehicles, had aggregate revenues of approximately $148.4 million in
1996, and, based on revenues, is one of the 20 largest Ford dealerships in the
United States. This acquisition further implements the Company's growth strategy
by adding a well-managed dealership with significant presence in a new market.
Ken Marks, Jr., with over 13 years of automotive retailing experience in central
Florida, will continue to serve as the Executive Manager of Ken Marks Ford and
will join the senior management team of the Company as the Regional Vice
President for Florida.
In the Ken Marks Acquisition, consummated on October 15, 1997, the Company
purchased all of the outstanding capital stock of Ken Marks Ford for a total of
approximately $25.5 million. At closing, the Company paid the stockholders of
Ken Marks Ford the sum of approximately $25.5 million (of which $0.5 million
will be paid to certain employees of Ken Marks Ford in the form of stay
bonuses), less $0.5 million which was deposited into escrow for certain
contingencies. The $25.5 million sum will be adjusted downward to the extent
that the net book value of Ken Marks Ford as of the closing is ultimately
determined to be less than approximately $5.1 million. Ken Marks Ford will
continue to lease its facilities from an affiliate of the original stockholders
of Ken Marks Ford. See "Business -- Facilities" and "Certain
Transactions -- Certain Dealership Leases."
THE BOWERS ACQUISITION. European Motors of Nashville (a BMW and Volkswagen
dealership), European Motors (a BMW and Volvo dealership), Jaguar of Chattanooga
(a Jaguar and Infiniti dealership), Cleveland Chrysler-Plymouth-Jeep-Eagle,
Nelson Bowers Dodge, Cleveland Village Imports (a Honda dealership), Nelson
Bowers Ford, L.P. and KIA of Chattanooga (a KIA and Volkswagen dealership)
(collectively, the "Bowers Dealerships") and the Company, as well as the persons
and entities controlling the Bowers Dealerships, have entered into a definitive
asset purchase agreement dated as of June 24, 1997. The Bowers Dealerships are
located in the Chattanooga, Tennessee metropolitan area, with the exception of
European Motors of Nashville, which is located in Nashville, Tennessee. The
Bowers Dealerships had retail sales of approximately 2,331 new and 1,777 used
vehicles, and had aggregate revenues of approximately $101.5 million in 1996.
The Bowers Dealerships estimate that their combined market share of total new
vehicle unit sales in the Chattanooga metropolitan market was approximately 9.1%
for 1996. This acquisition serves the Company's growth strategy by adding a
group of well-managed dealerships with a substantial portion of its sales in
luxury vehicles. Nelson Bowers, the Bowers Dealerships' chief executive, and
Jeffrey Rachor, their chief operating officer, have over 20 and 10 years of
experience in the automotive industry, respectively. Mr. Bowers will join the
Company's senior management team as Executive Vice President. Mr. Rachor will be
the Company's Regional Vice President for the Mid-South region, which includes
Tennessee, Georgia, Kentucky and Alabama.
The Company will acquire substantially all the Bowers Dealerships' assets,
excluding real property, and assume substantially all the liabilities associated
with the purchased assets. For the Bowers Acquisition, the Company agreed to pay
up to $27.6 million. At closing, the Company will pay $22.6 million in cash to
the sellers and will deposit $1.0 million into an escrow account, all subject to
certain potential downward adjustments based on the net book value of the
purchased assets and assumed liabilities as of the closing. The balance (up to
$4.0 million) of the purchase price will be evidenced by the
20
<PAGE>
Company's promissory notes that will be payable in 28 equal quarterly
installments and will bear interest at NationsBank's prime rate less 0.5% (the
"Bowers Note"). The sellers or their affiliates will retain ownership of certain
real property underlying some of the dealerships and will lease such property to
the Company. See "Business -- Facilities" and "Certain Transactions -- Certain
Dealership Leases." In the event the Company fails to close the Bowers
Acquisition by November 21, 1997, it has agreed to pay a termination fee.
Volvo's consent to the Company's acquisition of the European Motors' Volvo
franchise assets requires that Mr. Bowers maintain a 20% interest in, and serve
as the manager of, the Company's Volvo franchisee subsidiary operating the
European Motors' Volvo assets. See "Certain Transactions -- The Bowers Note."
THE LAKE NORMAN ACQUISITION. Lake Norman Chrysler-Plymouth-Jeep-Eagle and
Lake Norman Dodge (collectively, the "Lake Norman Dealerships") are both located
in Cornelius, North Carolina approximately 20 miles north of Charlotte. The Lake
Norman Dealerships had retail sales of approximately 3,572 new and 2,320 used
vehicles, and had aggregate revenues of approximately $137.7 million in 1996.
The existing management of the Lake Norman Dealerships will continue with the
Company.
On September 29, 1997, the Company acquired substantially all the Lake
Norman Dealerships' assets, excluding real property, and assume substantially
all of the sellers' liabilities. For the Lake Norman Acquisition, the Company
agreed to pay up to $18.2 million. At closing, the Company paid $17.7 million in
cash to the sellers and deposited $0.5 million into an escrow account. The
purchase price will be adjusted downward based on the net book value of the
purchased assets and assumed liabilities as of the closing date, to be
determined after the closing. The sellers of the assets retained ownership of
the three tracts of real property underlying the dealerships and lease such
property to the Company. See "Business -- Facilities."
THE DYER ACQUISITION. Dyer & Dyer, Inc. ("Dyer Volvo"), which is located in
Atlanta, Georgia, is the largest Volvo dealership in the United States in terms
of retail unit sales. For 1996, Dyer Volvo had retail sales of approximately
1,284 new and 1,493 used vehicles, and had aggregate revenues of approximately
$72.6 million. This acquisition is a significant step in the Company's growth
strategy in that it adds a large, well-managed dealership in a new geographic
market and increases the Company's presence in the luxury car market. Richard
Dyer, who has over 25 years in the automotive retailing industry, will continue
as the Company's Executive Manager of Dyer Volvo.
The Company will acquire all of the operating assets of Dyer Volvo for
$18.0 million plus assumption of substantially all of Dyer Volvo's existing
recorded liabilities and obligations. The $18.0 million purchase price is
subject to adjustment in the event that net book value of the purchased assets,
less assumed liabilities, is more or less than $10.5 million as of the date of
the closing. At the closing, the Company will pay $17.0 million in cash to the
seller and deposit $1.0 million into an escrow account. In addition, the Company
will issue a warrant to Richard Dyer to purchase 0.375% of the Company's
outstanding shares of Common Stock (in the form of Class A Common Stock) after
consummation of the Offering (45,000 shares if the Underwriters' over-allotment
option is exercised in full) pursuant to his employment agreement with the
Company at a per share exercise price equal to the initial public offering per
share price (the "Dyer Warrant"). The Dyer Warrant is exercisable immediately
and will expire five years after the consummation of the Dyer Acquisition. The
Dyer Warrant is in addition to stock options that are to be granted to Richard
Dyer under the Company's Stock Option Plan. Dyer Volvo leases its dealership
premises and the Company will assume Dyer Volvo's obligations under the leases
at the closing. See "Business -- Facilities." The closing of the Dyer
acquisition will occur no later than November 21, 1997. If the Company fails to
perform its obligation to close by that date, it has agreed to pay a termination
fee.
Volvo's consent to the Dyer Acquisition requires that Richard Dyer maintain
a 20% interest in, and serve as the manager of, the Company's Volvo franchisee
subsidiary operating the Dyer Volvo dealership.
THE FORT MILL ACQUISITION. Fort Mill Chrysler-Plymouth-Dodge is located in
Fort Mill, South Carolina, which is a part of the Charlotte market. In 1996,
Jeff Boyd Chrysler-Plymouth-Dodge (the predecessor to Fort Mill
Chrysler-Plymouth-Dodge) had retail sales of approximately 632 new and 842 used
vehicles, and had total revenues of $20.3 million.
As of June 3, 1997, the Company consummated the acquisition of certain
dealership assets, excluding real property, of Jeff Boyd Chrysler-Plymouth-Dodge
for a total purchase price of approximately $3.7 million in cash and assumed the
floor plan liabilities of the sellers. Of the $3.7 million purchase price paid,
$3.5 million was advanced to the Company by Bruton Smith and is to be repaid
with proceeds from the Offering. See "Certain Transactions -- The Smith
Advance." An affiliate of Jeff Boyd Chrysler-Plymouth-Dodge retained ownership
of the real property underlying the dealership and leased the property to the
Company. See "Business -- Facilities."
THE WILLIAMS ACQUISITION. Town and Country Chrysler-Plymouth-Jeep of Rock
Hill is located in Rock Hill, South Carolina, approximately 35 miles south of
Charlotte. In 1996, Williams Motors, Inc. (the predecessor to Town and Country
21
<PAGE>
Chrysler-Plymouth-Jeep of Rock Hill) had retail sales of approximately 248 new
and 280 used vehicles, and had total revenues of $9.6 million.
As of October 10, 1997, the Company acquired substantially all of the
operating assets of Williams Motors (excluding primarily used car inventory and
real estate) for $1.8 million plus assumption of floor plan indebtedness to
Chrysler Credit Corporation. The Company leases the dealership premises from the
sellers for one to five years, at the Company's option. See
"Business -- Facilities."
FUTURE ACQUISITIONS. The Company intends to pursue acquisitions in the
future that will be financed with cash or debt or equity financing or a
combination thereof. Any acquisitions using equity financing would require the
consent of Chrysler and Honda under the dealership agreements with such
Manufacturers. Although the Company has identified and has held preliminary
discussions with several potential acquisition candidates, at this time the
Company has no agreements to effect any such acquisitions other than the
Acquisitions. There is no assurance that the Company will consummate any future
acquisition, that they will be on favorable terms to the Company or that
financing for such acquisitions will be available. All future acquisitions by
the Company will be contingent upon the consent of the applicable manufacturer.
No assurance can be given that any such consents will be obtained. The Company
is currently negotiating with Ford Motor Credit Company ("Ford Motor Credit") to
increase the Revolving Facility (as defined herein) from $26.0 million to $75.0
million in order to finance future acquisitions and for general corporate
purposes, although there can be no assurance that the Company will obtain any
such financing. After giving pro forma effect to the Acquisitions and the
financing thereof, the Company will have approximately $45.7 million available
under the Revolving Facility (assuming (i) the Revolving Facility is increased
from $26.0 million to $75.0 million, (ii) no exercise of the Underwriters'
over-allotment option, (iii) that the shares of Class A Common Stock offered
hereby are sold at the mid-point of the range of the initial public offering
price set forth on the front cover of this Prospectus and (iv) that at the time
the Revolving Facility is increased it is used to refinance the remaining
balance under the Six-Month Facility). See "Risk Factors -- Risks Associated
with Acquisitions" and " -- Limitations on Financial Resources Available for
Acquisitions; Ability to Refinance Existing Debt" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
22
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 5,000,000 shares of Class
A Common Stock offered hereby are estimated to be approximately $58.5 million
($67.5 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $13.00 per share (the midpoint of
the range of the initial public offering price set forth on the cover page of
this Prospectus) and after deducting the underwriting discount and estimated
expenses of the Offering. The net proceeds will be used to pay a portion of the
purchase price for the Acquisitions, to repay a loan of approximately $3.5
million advanced by Bruton Smith in connection with the Acquisitions, which
bears interest at 3.83% per annum and to repay approximately $16.7 million of
the Six-Month Facility, which was used to finance the Lake Norman Acquisition
and bears interest at 7.75% per annum. See "The Acquisitions" and "Certain
Transactions -- The Smith Advance."
DIVIDEND POLICY
The Company intends to retain all of its earnings to finance the growth and
development of its business, including future acquisitions, and does not
anticipate paying any cash dividends on its Common Stock for the foreseeable
future. Any future change in the Company's dividend policy will be made at the
discretion of the Board of Directors of the Company and will depend upon the
Company's operating results, financial condition, capital requirements, general
business conditions and such other factors as the Board of Directors deems
relevant. Furthermore, the Company's existing credit arrangements include
covenants which preclude the payment of dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of Capital Stock."
23
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1997, the capitalization of
the Company (a) on an actual basis, including the Reorganization which is
effective as of June 30, 1997, and (b) on a pro forma basis, as adjusted to
reflect the Acquisitions, the financing thereof, the Offering and the
application of the estimated net proceeds thereof to be received by the Company.
See "The Acquisitions" and "Use of Proceeds." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the unaudited Pro Forma Combined and Consolidated
Financial Statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
PRO FORMA
FOR THE
ACQUISITIONS
AND THE
ACTUAL OFFERING(1)
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Short-term debt:
Notes payable -- floor plan......................................................................... $67,856 $142,191
Notes payable -- other.............................................................................. -- 3,713
Current maturities of long-term debt................................................................ 487 1,343
Total short-term debt............................................................................ $68,343 $147,247
Long-term debt........................................................................................ $ 5,137 $ 36,980
Stockholders' equity:
Preferred Stock, $.10 par value, 3,000,000 shares authorized; no shares issued and outstanding...... -- --
Class A Common Stock, $.01 par value, 50,000,000 shares authorized; no shares issued and
outstanding, actual; 5,000,000 shares issued and outstanding, as adjusted (2).................... -- 50
Class B Common Stock, $.01 par value, 15,000,000 shares authorized; 10,000 shares issued and
outstanding, actual; 6,250,000 shares issued and outstanding, as adjusted (3).................... 62 62
Additional paid-in capital.......................................................................... 14,418 72,818
Retained earnings and members' and partners' equity................................................. 14,023 14,064
Unrealized loss on marketable equity securities..................................................... (97) (97)
Total stockholders' equity....................................................................... 28,406 86,897
Total capitalization........................................................................... $33,543 $123,877
</TABLE>
(1) Adjusted to give pro forma effect to the Acquisitions (including the
financing thereof) and the Offering (and the application of the net proceeds
thereof). See "Pro Forma Combined and Consolidated Financial Data."
(2) 5,750,000 shares if the Underwriters' overallotment option is exercised in
full. Excludes 1,125,000 shares of Class A Common Stock reserved for future
issuance under the Company's Stock Option Plan (including up to 587,509
shares of Class A Common Stock reserved for issuance upon exercise of
options to be granted on or before the consummation of the Offering pursuant
to the Stock Option Plan) and 150,000 shares of Class A Common Stock
reserved for future issuance under the Company's ESPP, and excludes 42,187
shares of Class A Common Stock (45,000 shares if the Underwriters'
over-allotment option is exercised in full) reserved for issuance under the
Dyer Warrant. See "The Acquisitions -- The Dyer Acquisition" and
"Management -- Stock Option Plan."
(3) Actual shares of Class B Common Stock include the effect of the Stock Split
(which will be effected in the form of a stock dividend).
24
<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of the Company (after
giving effect to the Acquisitions) as of June 30, 1997 was $(6.81) per share of
Common Stock. Pro forma net tangible book value (deficit) per share is
determined by dividing the pro forma tangible net worth of the Company (pro
forma total assets less goodwill less pro forma total liabilities) by the total
number of outstanding shares of Common Stock. After giving effect to the sale of
the 5,000,000 shares of Class A Common Stock offered hereby and the receipt of
an assumed $58.5 million of net proceeds from the Offering (based on an assumed
initial public offering price of $13.00 per share and net of the underwriting
discounts and estimated offering expenses), pro forma net tangible book value of
the Company at June 30, 1997 would have been $1.41 per share. This represents an
immediate increase in pro forma net tangible book value of $8.22 per share to
existing stockholders and an immediate dilution of $11.59 per share to the new
investors purchasing Class A Common Stock in the Offering. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................................... $13.00
Pro forma net tangible book value (deficit) per share before giving effect to the
Offering......................................................................... (6.81)
Increase in pro forma net tangible book value per share attributable to the
Offering......................................................................... 8.22
Pro forma net tangible book value per share after giving effect to the Offering....... 1.41
Dilution per share to new investors................................................... $11.59
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid to the
Company by existing stockholders and new investors purchasing shares from the
Company in the Offering (before deducting underwriting discounts and commissions
and estimated offering expenses):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).......................................... 6,250,000 55.6% $16,604,170 20.3% $ 2.66
New investors (2).................................................. 5,000,000 44.4 65,000,000 79.7 13.00
Total......................................................... 11,250,000 100.0% $81,604,170 100.0% $ 7.25
</TABLE>
(1) Does not reflect the possible exercise of options to purchase 1,125,000
shares of Class A Common Stock reserved for issuance under the Company's
Stock Option Plan, including options to purchase 587,509 shares of Class A
Common Stock that will be granted immediately before the completion of the
Offering with an exercise price equal to the initial public offering price,
the possible issuance of 150,000 shares of Class A Common Stock reserved for
issuance under the Company's ESPP, and the possible exercise of the Dyer
Warrant to purchase 42,187 shares of Class A Common Stock (45,000 shares if
the Underwriters' over-allotment option is exercised in full) at an exercise
price equal to the initial public offering price pursuant to the Offering.
See "Management -- Stock Option Plan" and "Certain Transactions."
(2) Assumes that the Underwriters' over-allotment option is not exercised. Sales
pursuant to the full exercise by the Underwriters of the over-allotment
option will cause the total number of shares purchased by new investors,
total consideration paid by new investors, percent of total consideration
paid by new investors and average price per share for all investors to
increase to 5,750,000, $74.8 million, 81.8% and $7.25, respectively.
25
<PAGE>
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
The selected combined and consolidated statement of operations data for the
years ended December 31, 1994, 1995 and 1996 and the selected combined balance
sheet data as of December 31, 1995 and 1996 are derived from the Company's
audited financial statements, which are included elsewhere in this Prospectus.
The selected combined and consolidated statement of operations data for the
years ended December 31, 1992 and 1993 and the selected combined and
consolidated balance sheet data as of December 31, 1992, 1993 and 1994 are
derived from the Company's unaudited financial statements, which are not
included in this Prospectus. The selected combined and consolidated results of
operations data for the six months ended June 30, 1996 and 1997, and the
selected combined and consolidated balance sheet data at June 30, 1997, are
derived from the unaudited financial statements of the Company, which are
included elsewhere in this Prospectus. In the opinion of management, these
unaudited financial statements reflect all adjustments necessary for a fair
presentation of its results of operations and financial condition. All such
adjustments are of a normal recurring nature. The results of operations for an
interim period are not necessarily indicative of results that may be expected
for a full year or any other interim period. In connection with the FIFO
Conversion, and in accordance with generally accepted accounting principles, the
selected combined and consolidated financial data has been retroactively
restated to reflect the FIFO Conversion. This selected combined and consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Combined and
Consolidated Financial Statements and related notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1992 1993 1994 1995 1996(1)(2) 1996(1)(2) 1997(3)(2)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
COMBINED AND CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Vehicle sales......................... $171,065 $203,630 $227,960 $267,308 $326,842 $164,333 $185,077
Parts, service and collision
repair............................. 24,543 30,337 33,984 35,860 42,644 21,005 22,907
Finance and insurance................. 3,743 3,711 5,181 7,813 7,118 4,277 4,763
Total revenues..................... 199,351 237,678 267,125 310,981 376,604 189,615 212,747
Cost of sales........................... 174,713 208,445 233,011 270,878 331,047 167,191 188,422
Gross profit............................ 24,638 29,233 34,114 40,103 45,557 22,424 24,325
Selling, general and administrative
expenses.............................. 20,251 22,738 24,632 29,343 33,677 16,590 18,413
Depreciation and amortization........... 682 788 838 832 1,076 360 396
Operating income........................ 3,705 5,707 8,644 9,928 10,804 5,474 5,516
Interest expense, floor plan............ 2,215 2,743 3,001 4,505 5,968 2,801 3,018
Interest expense, other................. 290 263 443 436 433 184 269
Other income............................ 1,360 613 609 449 618 369 274
Income before income taxes and minority
interest.............................. 2,560 3,314 5,809 5,436 5,021 2,858 2,503
Provision for income taxes.............. 27 723 2,118 2,176 1,924 1,093 916
Income before minority interest......... 2,533 2,591 3,691 3,260 3,097 1,765 1,587
Minority interest in earnings (loss) of
subsidiary............................ (31) (22) 15 22 114 41 47
Net income(4)........................... $ 2,564 $ 2,613 $ 3,676 $ 3,238 $ 2,983 $ 1,724 $ 1,540
COMBINED AND CONSOLIDATED BALANCE SHEET
DATA:
Working capital......................... $ 5,883 $ 9,629 $ 13,246 $ 18,140 $ 19,780 $ 20,625 $ 16,899
Total assets............................ 48,524 54,917 69,061 79,462 110,976 99,456 120,384
Long-term debt.......................... 3,904 4,142 3,773 3,561 5,286 4,825 5,137
Total liabilities....................... 43,336 46,822 57,274 62,956 84,367 73,695 91,978
Minority interest....................... 139 161 177 200 314 240 --
Stockholders' equity.................... 5,049 7,934 11,610 16,306 26,295 25,521 28,406
</TABLE>
(1) The statement of operations data includes the results of Fort Mill Ford,
Inc. from the date of acquisition, February 1, 1996.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
26
<PAGE>
(2) The Company acquired Fort Mill Ford, Inc. and Fort Mill
Chrysler-Plymouth-Dodge in February 1996 and in June 1997,
respectively. Both of these acquisitions were accounted for using the
purchase method of accounting. As a result, the Selected Combined and
Consolidated Financial Data below does not include the results of
operations of these dealerships prior to the date they were acquired by
the Company. Accordingly, the actual historical data for periods after
the acquisition may not be comparable to data presented for periods
prior to the acquisition of Fort Mill Ford and Fort Mill
Chrysler-Plymouth-Dodge.
(3) The statement of operations data for the six months ended June 30, 1997
includes the results of Fort Mill Chrysler-Plymouth-Dodge, Inc. from
the date of acquisition, June 3, 1997.
(4) Historical net income per share is not presented, as the historical
capital structure of the Company prior to the Offering is not
comparable with the capital structure that will exist after the
Offering.
27
<PAGE>
PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma combined and consolidated statements of
operations for the year ended December 31, 1996 and for the six months ended
June 30, 1997 reflect the historical accounts of the Company for those periods,
adjusted to give pro forma effect to the Reorganization, the Acquisitions and
the Offering, as if these events had occurred at January 1, 1996. The following
unaudited pro forma consolidated balance sheet as of June 30, 1997 reflects the
historical accounts of the Company as of that date adjusted to give pro forma
effect to the Acquisitions and the Offering as if these events had occurred on
June 30, 1997. The Acquisitions will be consummated on or before the closing of
the Offering and are conditions precedent to the closing of the Offering. The
Company will convert to the FIFO Method of inventory accounting conditioned and
effective upon the closing of the Offering. In connection with the FIFO
Conversion, and in accordance with generally accepted accounting principles, the
accompanying financial information of the Company has been retroactively
restated to reflect the FIFO Conversion. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
The pro forma combined and consolidated financial data and accompanying
notes should be read in conjunction with the Combined and Consolidated Financial
Statements and related notes of the Company as well as the financial statements
and related notes of the Bowers Dealerships, the Lake Norman Dealerships, Ken
Marks Ford and Dyer Volvo, all of which are included elsewhere in this
Prospectus. Such pro forma data and accompanying notes do not give effect to the
Fort Mill Acquisition, the Williams Acquisition or the financing thereof because
management does not believe such acquisitions or financings are material. The
Company believes that the assumptions used in the following statements provide a
reasonable basis on which to present the pro forma financial data. The pro forma
combined financial data is provided for informational purposes only and should
not be construed to be indicative of the Company's financial condition or
results of operations had the transactions and events described above been
consummated on the dates assumed, and are not intended to project the Company's
financial condition on any future date or its results of operation for any
future period.
28
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMPANY THE ACQUISITIONS
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS FOR
FOR THE BOWERS THE
REORGANI- DEALERSHIPS LAKE NORMAN KEN MARKS DYER ACQUISITIONS
ACTUAL (1) ZATION PRO FORMA (2) DEALERSHIPS FORD (3) VOLVO (4)(5)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Vehicle sales............... $ 326,842 $ $ 144,177 $ 124,539 $ 131,826 $60,871 $
Parts, service and collision
repair.................... 42,644 17,338 9,543 14,224 11,163
Finance and insurance....... 7,118 2,877 3,617 2,317 542
Total revenues............ 376,604 164,392 137,699 148,367 72,576
Cost of sales................. 331,047 142,424 121,806 128,850 62,547 (545)(11)
Gross profit.................. 45,557 21,968 15,893 19,517 10,029 545
Selling, general and
administrative expenses..... 33,677 18,977 14,215 16,190 6,997 (1,299)(12)
(3,351)(13)
249(14)
Depreciation and
amortization................ 1,076 75(8) 733 89 94 126 (193)(15)
1,539(16)
(29)(14)
Operating income.............. 10,804 (75) 2,258 1,589 3,233 2,906 3,629
Interest expense, floor
plan........................ 5,968 1,522 1,552 2,054 373 (2,127)(10)
Interest expense, other(6).... 433 199 50 315(17)
(108)(14)
2,282(6)
Other income.................. 618 797 258 97 452
Income before income taxes and
minority interest........... 5,021 (75) 1,334 245 1,276 2,985 3,267
Provision for income taxes.... 1,924 (30)(9) 61 546 955 1,390(18)
1,627(19)
79(20)
(955)(21)
Income before minority
interest.................... 3,097 (45) 1,273 245 730 2,030 1,126
Minority interest in earnings
of subsidiary............... 114 (114)(8)
Net income.................... $ 2,983 $ 69 $ 1,273 $ 245 $ 730 $ 2,030 $ 1,126
Pro forma net income per
share(7)....................
Weighted average shares
outstanding (000's).........
<CAPTION>
PRO FORMA
FOR THE
REORGANI-
PRO FORMA ZATION, THE
ADJUSTMENTS ACQUISITIONS
FOR THE AND THE
OFFERING OFFERING
<S> <C> <C>
Revenues:
Vehicle sales............... $ $788,255
Parts, service and collision
repair.................... 94,912
Finance and insurance....... 16,471
Total revenues............ 899,638
Cost of sales................. 786,129
Gross profit.................. 113,509
Selling, general and
administrative expenses..... 201(22) 85,856
Depreciation and
amortization................ 3,510
Operating income.............. (201) 24,143
Interest expense, floor
plan........................ 9,342
Interest expense, other(6).... 3,171
Other income.................. 2,222
Income before income taxes and
minority interest........... (201) 13,852
Provision for income taxes.... (80)(23) 5,517
Income before minority
interest.................... (121) 8,335
Minority interest in earnings
of subsidiary...............
Net income.................... $ (121) $ 8,335
Pro forma net income per
share(7).................... $ 0.74
Weighted average shares
outstanding (000's)......... 11,250
</TABLE>
29
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
THE ACQUISITIONS
COMPANY PRO FORMA
PRO FORMA ADJUSTMENTS
ADJUSTMENTS BOWERS KEN FOR THE
FOR THE DEALERSHIPS LAKE NORMAN MARKS DYER ACQUISITIONS
ACTUAL(1) REORGANIZATION PRO FORMA (2) DEALERSHIPS FORD (3) VOLVO (4)(5)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Vehicle sales.............. $ 185,077 $ $67,219 $69,798 $65,157 $31,373 $
Parts, service and
collision repair......... 22,907 9,694 5,321 5,999 5,960
Finance and insurance...... 4,763 1,539 1,950 1,029 129
Total revenues........... 212,747 78,452 77,069 72,185 37,462
Cost of sales................ 188,422 67,390 68,272 63,402 32,377 (371)(11)
Gross profit................. 24,325 11,062 8,797 8,783 5,085 371
Selling, general and
administrative expenses.... 18,413 8,744 6,937 7,547 3,498 (923)(12)
(1,004)(13)
191(14)
Depreciation and
amortization............... 396 36(8) 338 47 47 151 (100)(15)
769(16)
(22)(14)
Operating income............. 5,516 (36) 1,980 1,813 1,189 1,436 1,460
Interest expense, floor
plan....................... 3,018 885 1,185 925 276 (1,048)(10)
Interest expense, other
(6)........................ 269 118 68 1,141(6)
158(17)
(80)(14)
Other income................. 274 459 176 91 247
Income before income taxes
and minority interest...... 2,503 (36) 1,436 736 355 1,407 1,289
Provision for income taxes... 916 (15)(9) 31 147 436(18)
1,285(19)
83(20)
Income before minority
interest................... 1,587 (21) 1,405 736 208 1,407 (515)
Minority interest in earnings
of subsidiary.............. 47 (47)(8)
Net income................... $ 1,540 $ 26 $ 1,405 $ 736 $ 208 $1,407 $ (515)
Pro forma net income per
share (7)..................
Weighted average shares
outstanding (000's)........
<CAPTION>
PRO FORMA PRO FORMA FOR THE
ADJUSTMENTS REORGANIZATION,
FOR THE THE ACQUISITIONS
OFFERING AND THE OFFERING
<S> <C> <C>
Revenues:
Vehicle sales.............. $ $ 418,624
Parts, service and
collision repair......... 49,881
Finance and insurance...... 9,410
Total revenues........... 477,915
Cost of sales................ 419,492
Gross profit................. 58,423
Selling, general and
administrative expenses.... 43,574
171(22)
Depreciation and
amortization............... 1,662
Operating income............. (171) 13,187
Interest expense, floor
plan....................... 5,241
Interest expense, other
(6)........................ 1,674
Other income................. 1,247
Income before income taxes
and minority interest...... (171) 7,519
Provision for income taxes... (68) (23) 2,815
Income before minority
interest................... (103) 4,704
Minority interest in earnings
of subsidiary..............
Net income................... $ (103) $ 4,704
Pro forma net income per
share (7).................. $ 0.42
Weighted average shares
outstanding (000's)........ 11,250
</TABLE>
(1) The actual combined statement of operations data for the Company includes
the results of Fort Mill Ford from February 1, 1996, the effective date of
its acquisition. Pro forma adjustments have not been presented to include
the results of operations for Fort Mill Ford for the one month period ended
February 1, 1996 because management believes such results are not material.
The actual consolidated statement of operations data for the six months
ended June 30, 1997 include the results of Fort Mill Chrysler-Plymouth-
Dodge from June 3, 1997, the date of its acquisition.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
30
<PAGE>
(2) During 1996 and 1997, Nelson Bowers acquired three automobile
dealerships whose operating results, from their respective dates of
acquistion, are included in the historical combined and consolidated
statement of operations in the table below. The following table
adjusts the historical combined and consolidated statements of
operations to include the acquirees as if the acquisitions had
occurred on January 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
BOWERS EUROPEAN EUROPEAN NELSON BOWERS
DEALERSHIPS(A) MOTORS OF MOTORS OF BOWERS PRO FORMA DEALERSHIPS
(HISTORICAL) CHATTANOOGA(E) NASHVILLE(B) DODGE(B) ADJUSTMENTS (PRO FORMA)
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Vehicle sales............................... $ 91,183 $6,940 $ 21,827 $24,227 $ $144,177
Parts, service and collision repair......... 7,970 1,194 4,740 3,434 17,338
Finance and insurance....................... 2,337 199 341 2,877
Total revenues............................ 101,490 8,134 26,766 28,002 164,392
Cost of sales................................. 87,757 7,130 23,054 24,483 142,424
Gross profit.................................. 13,733 1,004 3,712 3,519 21,968
Selling, general and administrative
expenses...................................... 11,807 926 3,401 2,843 18,977
Depreciation and amortization................. 365 37 86 106 139(d) 733
Operating income.............................. 1,561 41 225 570 (139) 2,258
Interest expense, floor plan.................. 1,178 87 208 49 1,522
Interest expense, other....................... 196 3 199
Other income.................................. 121 92 166 418 797
Income before income taxes.................... 308 46 183 936 (139) 1,334
Provision for income taxes.................... 61 61
Net Income.................................... $ 247 $ 46 $ 183 $ 936 $ (139) $ 1,273
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
BOWERS NELSON BOWERS
DEALERSHIPS(A) BOWERS PRO FORMA DEALERSHIPS
(HISTORICAL) DODGE(C) ADJUSTMENTS (PRO FORMA)
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Vehicle sales.......................................................... $ 63,950 $ 3,269 $ $ 67,219
Parts, service and collision repair.................................... 9,107 587 9,694
Finance and insurance.................................................. 1,497 42 1,539
Total revenues....................................................... 74,554 3,898 78,452
Cost of sales............................................................ 63,945 3,445 67,390
Gross profit............................................................. 10,609 453 11,062
Selling, general and administrative expenses............................. 8,294 450 8,744
Depreciation and amortization............................................ 309 14 15(d) 338
Operating income (loss).................................................. 2,006 (11 ) (15) 1,980
Interest expense, floor plan............................................. 881 4 885
Interest expense, other.................................................. 118 118
Other income............................................................. 422 37 459
Income before income taxes............................................... 1,429 22 (15) 1,436
Provision for income taxes............................................... 31 31
Net Income............................................................... $ 1,398 $ 22 $ (15) $ 1,405
</TABLE>
(a) The historical statement of operations data for the Bowers
Dealerships includes the results of Nelson Bowers Dodge from
March 1, 1997, the date of its acquisition by the owners of the
Bowers Dealerships. Such statement also includes the results of
European Motors of Nashville and European Motors of Chattanooga
from October 1, 1996 and May 1, 1996, respectively, which were
acquired by the owners of the Bowers Dealerships on those dates.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
31
<PAGE>
(b) Reflects the results of operations of (i) Nelson Bowers Dodge for
the year ended December 31, 1996; and (ii) European Motors of
Nashville for the period from January 1, 1996 to October 1, 1996,
the date of its acquisition by the owners of the Bowers
Dealerships. Such data was obtained from monthly financial
statements prepared by the dealership as required by the
manufacturers.
(c) Reflects the results of operations of Nelson Bowers Dodge for the
period from January 1, 1997 to March 1, 1997, the date of its
acquisition by the owners of the Bowers Dealerships. Such data
was obtained from monthly financial statements prepared by the
dealership as required by the manufacturers.
(d) Reflects the amortization of goodwill resulting from the
acquisition of Nelson Bowers Dodge, European Motors of Nashville
and European Motors of Chattanooga over an assumed amortization
period of 40 years for the period not included in the historical
financial statements, assuming that such acquisitions were
consummated on January 1, 1996.
(e) Reflects the results of operations of European Motors of
Chattanooga for the period from January 1, 1996 to April 30,
1996, the date of its acquisition by the owners of the Bowers
Dealerships. Such data was obtained from monthly financial
statements prepared by the dealership as required by the
Manufacturer.
(3) Ken Marks Ford's fiscal year ends on April 30 of each year.
Accordingly, the Statement of Operations data for Ken Marks Ford for
the year ended December 31, 1996 was derived by adjusting the data for
the year ended April 30, 1997 to include results from January 1, 1996
through April 30, 1996, and exclude results from January 1, 1997
through April 30, 1997. The Statement of Operations data for the six
months ended June 30, 1997 was similarly derived by adjusting the
historical financial statements for the year ended April 30, 1997 to
include results from May 1, 1997 through June 30, 1997, and excludes
results from May 1, 1996 through December 31, 1996.
(4) The Company has excluded (i) the results of operations of Fort Mill
Chrysler-Plymouth-Dodge for the year ended December 31, 1996 and the
period ended June 3, 1997 and (ii) the historical results of
operations and related pro forma adjustments related to the Williams
Acquisition because management believes such results and adjustments
are not material to the Pro Forma Combined and Consolidated Statement
of Operations.
(5) Prior to the Company's acquisition of the Lake Norman Dealerships, its
former owners directed $550,000 and $150,000 in contributions to
charitable organizations during the year ended December 31, 1996 and
the six months ended June 30, 1997, respectively. It is the Company's
intention not to maintain the level of charitable contributions
already reflected in the Company's historical combined financial
statements. Although no pro forma adjustment to eliminate this expense
has been included in the accompanying Pro Forma Combined and
Consolidated Statements of Operations, the Company believes disclosure
and consideration of the Lake Norman Dealerships contributions is
appropriate to understand the continuing impact on the Company's
results of operations of the acquisition of the Lake Norman
Dealerships.
(6) Reflects the increase in interest expense associated with the assumed
borrowings made under the Company's new credit arrangements of $26.9
million to provide a portion of the funds necessary for consummation
of the Acquisitions. The effective interest rate used in the pro forma
calculation was 8.5%. This assumed borrowing level was calculated
based upon a per share price of the Offering of $13.00, which is the
midpoint of the range of the initial public offering price shown on
the cover page of this Prospectus. Should the actual per share price
of the Offering be different, the actual amount borrowed to provide a
portion of the funds necessary for the consummation of the
Acquisitions and the related interest expense would be different than
the amounts assumed here.
(7) Pro forma net income per share is based upon the assumption that
11,250,000 shares of Common Stock are outstanding after the Offering.
This amount represents 5,000,000 shares of Class A Common Stock to be
issued in the Offering and 6,250,000 shares of Class B Common Stock
owned by the Company's stockholders immediately following the
Reorganization and the Acquisitions and giving effect to the Stock
Split. See "Principal Stockholders" and Note 1 to the Company's
Combined and Consolidated Financial Statements included elsewhere in
this Prospectus.
(8) Reflects the elimination of minority interest in earnings as a result
of the acquisition of the 31% minority ownership interest in Town &
Country Toyota, Inc. for $3.2 million of Class B Common Stock in
connection with the Reorganization, and the amortization of
approximately $3.0 million in related goodwill over 40 years arising
from such acquisition.
(9) Reflects the net increase in the provision for income taxes due to the
amortization of goodwill related to the acquisition of the minority
interest pursuant to the Reorganization, calculated at the effective
rate of 39.9%.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
32
<PAGE>
(10) Reflects the decrease in interest expense, floor plan resulting from
the refinancing of the floor plan notes payable arrangements of the
Company and the dealerships being acquired in the Acquisitions under
one master agreement. The aggregate balance of floor plan notes
payable arrangements of the Company and the dealerships being acquired
in the Acquisitions was $136.2 million and $142.2 million at December
31, 1996 and June 30, 1997, respectively. The average interest expense
under this new agreement is approximately 7.6% compared to historical
interest rates ranging from 7.75% to 10.25%.
(11) Adjustment reflects the conversion from the LIFO Method of inventory
accounting to the FIFO Method of inventory accounting at the Lake
Norman Dealerships, Ken Marks Ford and Dyer Volvo in the amount of
$169,000, $260,000 and $116,000, respectively for the year ended
December 31, 1996 and $324,000 at the Lake Norman Dealerships and
$47,000 at Ken Marks Ford for the six months ended June 30, 1997
(there being no significant amount for Dyer Volvo during this period).
The Company will convert to the FIFO Method conditioned upon the
closing of the Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
(12) Reflects the net decrease in selling, general and administrative
expenses related to the net reduction in salaries and fringe benefits
of owners and officers of the acquired dealerships who will become
employees of the Company after the Offering, consistent with reduced
salaries pursuant to employment agreements with the Company, effective
upon consummation of the Offering.
(13) The decrease in selling, general and administrative expenses reflects
the elimination of salaries paid to owners of certain dealerships
acquired in the Acquisitions whose positions and salaries will be
eliminated in conjunction with the Offering.
(14) Reflects the Company's estimate of the increase in rent expense
related to lease agreements entered into with the sellers of the
Bowers Dealerships for the dealerships' real property with a net
carrying value of $2.3 million that will not be acquired by the
Company, and decreases in depreciation expense (based on useful lives
ranging from 31.5 to 39 years) and interest expense related to
mortgage indebtedness encumbering such property. The related mortgage
indebtedness was approximately $1.8 million with interest charged at
8.9% annually. The increase in rent expense and decreases in
depreciation expense and interest expense are based on the terms of
the asset purchase agreement pertaining to the Bowers Dealerships.
(15) Reflects the elimination of amortization expense related to goodwill
that arose in previous acquisitions in the Bowers Dealerships,
assuming that each of the acquisitions giving rise to goodwill was
consummated on January 1, 1996. See Note (2) above.
(16) Reflects the amortization over an assumed amortization period of 40
years of approximately $61.6 million in intangible assets, which
consist primarily of goodwill, resulting from the Acquisitions which
were assumed to occur on January 1, 1996. See "The Acquisitions" and
"Pro Forma Combined and Consolidated Balance Sheet."
(17) In connection with the Bowers Acquisition, the Company will issue a
promissory note of up to $4.0 million that will bear interest at
NationsBank's prime rate less 0.5%. This adjustment reflects an
increase in interest expense related to the promissory note assuming a
prime rate of 8.5%.
(18) Reflects the net increase in provision for income taxes resulting from
adjustments (6) and (11) through (17) above, computed using effective
income tax rates ranging from 38.5% to 42.8%.
(19) Certain of the Bowers Dealerships, the Lake Norman Dealerships, and
Dyer Volvo were not subject to federal and state income taxes because
they were either S corporations, partnerships, or limited liability
companies during the period indicated. This adjustment reflects an
increase in the federal and state income tax provision as if these
entities had been taxable at the combined statutory income tax rate of
approximately 39%. Upon completion of the Acquisitions, these
businesses that have historically not been subject to corporate income
tax will thereafter be subject to federal and state income tax as C
corporations.
(20) Reflects an increase from the Company's historical effective tax rate
resulting from a higher statutory tax rate used due to an increase in
taxable income for the pro forma combined entity and from an
additional pro forma permanent difference for non-taxable goodwill
amortization.
(21) Reflects the elimination of federal and state tax expense which were
assessed on the recapture of the LIFO inventory reserve which was
required by tax law pursuant to the conversion of Dyer Volvo from a C
corporation to an S corporation effective January 1, 1996. The
liability associated with this tax assessment was not a liability
assumed by the Company in its purchase of the net assets of Dyer
Volvo.
(22) Reflects the increase in salaries of existing and new officers who
have entered into employment agreements with the Company, effective
upon consummation of the Offering.
(23) Reflects the net decrease in provision for income taxes resulting from
adjustment (22) above, computed using an effective income tax rate of
39.9%.
33
<PAGE>
PRO FORMA COMBINED AND CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
THE ACQUISITIONS
PRO FORMA
ACTUAL BOWERS LAKE NORMAN KEN MARKS ADJUSTMENTS FOR
ASSETS (1) DEALERSHIPS DEALERSHIPS FORD DYER VOLVO THE ACQUISITIONS
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Current Assets:
Cash and cash equivalents.............. $ 9,238 $ 4,766 $ 3,467 $ 2,491 $ 173 $ (85,300)(2)
26,850(9)
Marketable equity securities........... 769
Receivables............................ 12,897 2,649 2,535 2,347 2,535
Inventories............................ 73,410 30,948 22,778 14,802 11,129 6,817(3)
Deferred income taxes.................. 256 96
Other current assets................... 818 2,779 244 679 32
Total current assets............... 97,388 41,142 29,024 20,415 13,869 (51,633)
Property and equipment, net.............. 13,270 4,106 567 489 1,156 (2,311)(4)
Goodwill, net............................ 9,463 8,286 61,550(2)
(8,286)(5)
Other assets............................. 263 658(2) 462 14 297
Total assets....................... $120,384 $54,192 $30,053 $20,918 $ 15,322 $ (680)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable-floor plan............... $ 67,856 $26,771 $25,865 $16,165 $ 5,534 $
Notes payable-other.................... 3,685 28
Trade accounts payable................. 3,848 1,190 1,352 622
Accrued interest....................... 491 178
Other accrued liabilities.............. 3,394 1,424 472 1,648 512
Taxes payable.......................... 913(10) 67 239 176(6)
Payable to Company's Chairman.......... 3,500
Current maturities of long-term debt... 487 428 71 357(2)
Total current liabilities.......... 80,489 33,676 27,788 18,502 6,285 533
Long-term debt........................... 5,137 2,332 786 (1,768)(4)
3,643(2)
26,850(9)
Payable to affiliated companies.......... 855
Deferred income taxes.................... 931 17 882(6)
Income tax payable....................... 4,566(10)
Other long-term liabilities.............. 238
Stockholders' Equity:
Common Stock of combined companies..... 300 75 1 153 (529)(2)
Class A Common Stock...................
Class B Common Stock................... 62
Paid-in capital........................ 14,418 600 424 28 (1,052)(2)
Treasury stock......................... (4,976) 4,976(2)
Retained earnings and members' and 14,023 17,884 804 1,974 13,594
partners' equity..................... 6,817(3)
(1,058)(6)
(543)(4)
(31,145)(2)
(8,286)(5)
Unrealized loss on marketable (97)
equity securities....................
Total stockholders' equity......... 28,406 18,184 1,479 2,399 8,799 (30,820)
Total liabilities and stockholders' $120,384 $54,192 $30,053 $20,918 $ 15,322 $ (680)
equity..................................
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR
ASSETS THE OFFERING TOTAL
<S> <C> <C>
Current Assets:
Cash and cash equivalents.............. $ 58,450(7) $ 16,635
(3,500)(8)
Marketable equity securities........... 769
Receivables............................ 22,963
Inventories............................ 159,884
Deferred income taxes.................. 352
Other current assets................... 4,552
Total current assets............... 54,950 205,155
Property and equipment, net.............. 17,277
Goodwill, net............................ 71,013
Other assets............................. 1,694
Total assets....................... $ 54,950 $295,139
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable-floor plan............... $ $142,191
Notes payable-other.................... 3,713
Trade accounts payable................. 7,012
Accrued interest....................... 669
Other accrued liabilities.............. 7,450
Taxes payable.......................... 1,395
Payable to Company's Chairman.......... (3,500)(8)
Current maturities of long-term debt... 1,343
Total current liabilities.......... (3,500) 163,773
Long-term debt........................... 36,980
Payable to affiliated companies.......... 855
Deferred income taxes.................... 1,830
Income tax payable....................... 4,566
Other long-term liabilities.............. 238
Stockholders' Equity:
Common Stock of combined companies.....
Class A Common Stock................... 50(7) 50
Class B Common Stock................... 62
Paid-in capital........................ 58,400(7) 72,818
Treasury stock.........................
Retained earnings and members' and 14,064
partners' equity.....................
Unrealized loss on marketable (97)
equity securities....................
Total stockholders' equity......... 58,450 86,897
Total liabilities and stockholders' $ 54,950 $295,139
equity..................................
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
34
<PAGE>
(1) The Reorganization, including the acquisition of the 31% minority interest
in Town & Country Toyota for $3.2 million in Class B Common Stock in
exchange therefor, was effective as of June 30, 1997 and is therefore
reflected in the actual balance sheet as of that date. The acquisition of
the minority interest resulted in the recognition of $3.0 million of
additional goodwill.
(2) Reflects the preliminary allocation of the aggregate purchase price of the
Acquisitions based on the estimated fair value of the net assets acquired.
Because the carrying amount of the net assets acquired, which primarily
consist of accounts receivable, inventory, equipment, and floor plan
indebtedness, approximates their fair value, management believes the
application of purchase accounting will not result in an adjustment to the
carrying amount of those net assets. Under the acquisition agreements, the
negotiated purchase prices for the Acquisitions will be adjusted downward
to the extent that the fair value of the tangible net assets as of the
closing is less than an agreed upon amount. The amount of goodwill and the
corresponding amortization actually recorded may ultimately be different
from the amounts estimated here, depending upon the actual fair value of
tangible net assets acquired at closing of the Acquisitions. The estimated
purchase price allocation consists of the following:
<TABLE>
<CAPTION>
BOWERS DEALERSHIPS KEN MARKS FORD LAKE NORMAN DEALERSHIPS DYER VOLVO TOTAL
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Estimated total consideration:
Cash.............................. $ 23,600 $ 25,500 $18,200 $ 18,000 $85,300
Promissory note issued............ 4,000 -- -- -- 4,000
Total......................... 27,600 25,500 18,200 18,000 89,300
Less negotiated minimum fair value
of tangible net assets acquired... 9,200 5,050 3,000 10,500 27,750
Excess of purchase price over fair
value of net tangible assets
acquired.......................... $ 18,400 $ 20,450 $15,200 $ 7,500 $61,550
</TABLE>
In connection with the acquisition of Dyer Volvo, the Company will issue a
warrant that will entitle the holder to acquire 42,187 shares of Class A
Common Stock, representing a 0.375% ownership interest in the Company at an
exercise price per share equal to the price offered in the Offering. The
Pro Forma Combined and Consolidated Balance Sheet does not give effect to
the issuance of this warrant because management believes the effect on the
Company's pro forma financial position and results of operations would not
be materially different from that which is presented. The difference
between the purchase price and the fair market value of the net tangible
assets acquired will be allocated to intangible assets, primarily goodwill
and amortized over 40 years.
Volvo's consent to the acquisition of European Motors' Volvo franchise as
part of the Bowers Acquisition and the acquisition of Dyer Volvo requires
that each former owner maintain a 20% voting interest in, and serve as the
manager of, these respective dealerships. Company management believes that
the effect of these arrangements, as currently structured, on the Company's
pro forma financial positions and results of operations would not be
materially different from that presented above.
(3) Reflects the conversion from the LIFO Method of inventory accounting to the
FIFO Method of inventory accounting at the Lake Norman Dealerships, Ken
Marks Ford and Dyer Volvo in the amounts of $1.6 million, $2.8 million and
$2.5 million, respectively. The Company intends to convert to the FIFO
Method conditioned upon the closing of the Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
(4) Reflects the distribution of real property of the Bowers Dealerships with a
net depreciated cost of approximately $2.3 million, which are not being
acquired in the Acquisitions, and the related mortgage indebtedness in the
amount of approximately $1.8 million. See "Certain Transactions."
(5) Reflects the elimination of goodwill that arose in previous acquisitions of
the Bowers Dealerships.
(6) Reflects the amount of taxes payable that will result from the FIFO
conversion at Ken Marks Ford in the amount of $1.1 million.
(7) Reflects the issuance of Class A Common Stock in the Offering assuming a
per share price of $13.00, which is the midpoint of the range of the
initial public offering price set forth on the cover page of this
Prospectus, and the Stock Split pertaining to the Class B Common Stock. See
"Use of Proceeds" and "Prospectus Summary."
(8) Reflects the repayment of the Payable to the Company's Chairman. See "Use
of Proceeds."
(9) Reflects borrowings made under the Company's new credit arrangements to
provide a portion of the funds necessary for consummation of the
Acquisitions. These borrowings are payable in full two years from
establishment, and have been shown as a non-current liability in the
accompanying pro forma combined and consolidated balance sheet. Should the
actual per share price of the Offering be different than $13.00, the net
proceeds of the Offering and the actual amount borrowed to provide a
portion of the funds necessary for the consummation of the Acquisitions
would be different than amounts assumed here (excluding funds borrowed to
finance the Fort Mill Acquisition and the Williams Acquisition). See "Use
of Proceeds."
(10) In connection with the Reorganization and the Offering, the Company will
convert from the last-in, first-out (LIFO) method of inventory accounting
to the first-in, first-out (FIFO) method of inventory accounting. The
accompanying pro forma combined and consolidated balance sheet includes
$5.5 million representing an additional tax liability which will result
from this conversion. This liability will be payable over a six-year
period.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition should be read in conjunction with (i) the Sonic Automotive, Inc. and
Affiliated Companies Combined and Consolidated Financial Statements and the
related notes thereto included elsewhere in this Prospectus, (ii) the financial
statements of certain of the entities being acquired in the "Acquisitions" and
the related notes thereto and (iii) the Pro Forma Financial Statements and the
related notes thereto, all included elsewhere in this Prospectus.
OVERVIEW
Sonic Automotive, Inc. is one of the leading automotive retailers in the
United States, operating 23 dealership franchises, four standalone used vehicle
facilities and seven collision repair centers in the southeastern and
southwestern United States. Sonic sells new and used cars and light trucks,
sells replacement parts, provides vehicle maintenance, warranty, paint and
repair services and arranges related F&I for its automotive customers. The
Company's business is geographically diverse, with dealership operations in the
Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta
markets, each of which the Company believes is experiencing favorable
demographic trends. Sonic sells 15 domestic and foreign brands, which consist of
BMW, Cadillac, Chrysler, Dodge, Ford, Honda, Infiniti, Jaguar, Jeep, KIA,
Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo. In several of its markets,
the Company has a significant market share for new cars and light trucks,
including 13.7% in Charlotte and 9.1% in Chattanooga in 1996. Pro forma for the
Acquisitions, the Company had revenues of $899.6 million and retail unit sales
of 24,206 new and 13,475 used vehicles in 1996. The Company believes that in
1996, based on pro forma retail unit sales it would have been one of the ten
largest dealer groups out of a total of more than 15,000 dealer groups in the
United States and, based on pro forma revenues, it would have had three of the
top 100 individual dealerships locations in the United States.
The Company intends to pursue an acquisition growth strategy led by a
management team that has experience in the consolidation of automotive retailing
as well as motorsports businesses. Bruton Smith, who is also the Chief Executive
Officer of Speedway Motorsports, Inc., the owner and operator of several
motorsports facilities, first entered the automotive retailing business in the
mid-1960's. Mr. Smith will devote approximately 50% of his business time to the
Company. Since 1990, Mr. Smith has successfully acquired three dealerships and
increased revenues from his dealerships from $199.4 million in 1992 to $376.6
million in 1996, without giving effect to the Acquisitions. In the Tennessee
market, Mr. Bowers has acquired or opened eight dealerships since 1992 and
increased revenues (primarily through acquisitions) of the Bowers Dealerships
from $13.2 million in 1992 to $101.5 million in 1996. No assurance can be given
that Messrs. Smith and Bowers will be successful in acquiring or opening new
dealerships for the Company or increasing the Company's revenues.
New vehicle revenues include the sale and lease of new vehicles. Used
vehicle revenues include amounts received for used vehicles sold to retail
customers, other dealers and wholesalers. Other operating revenues include parts
and services revenues, fees and commissions for arranging F&I and sales of third
party extended warranties for vehicles (collectively, "F&I transactions"). In
connection with vehicle financing contracts, the Company receives a fee (a
"finance fee") from the lender for originating the loan. If, within 90 days of
origination, the customer pays off the loans through refinancing or
selling/trading in the vehicle or defaults on the loan, the finance company will
assess a charge (a "chargeback") for a portion of the original commission. The
amount of the chargeback depends on how long the related loan was outstanding.
As a result, the Company has established reserves based on its historical
chargeback experience. The Company also sells warranties provided by third-party
vendors, and recognizes a commission at the time of sale.
While the automotive retailing business is cyclical, Sonic sells several
products and services that are not closely tied to the sale of new and used
vehicles. Such products and services include the Company's parts and service and
collision repair businesses, both of which are not dependent upon near-term new
vehicle sales volume. One measure of cyclical exposure in the automotive
retailing business is based on the dealerships' ability to cover fixed costs
with gross profit from revenues independent of vehicle sales. According to this
measurement of "fixed coverage," a higher percentage of non-vehicle sales
revenue to fixed costs indicates a lower exposure to economic cycles. Each
manufacturer requires its dealerships to report fixed coverage according to a
specific method, and the methods used vary widely among the manufacturers and
are not comparable.
The Company's cost of sales and profitability are also affected by the
allocations of new vehicles which its dealerships receive from Manufacturers.
When the Company does not receive allocations of new vehicle models adequate to
meet customer demand, it purchases additional vehicles from other dealers at a
premium to the manufacturer's invoice, reducing the gross margin realized on the
sales of such vehicles. In addition, the Company follows a disciplined approach
in selling
36
<PAGE>
vehicles to other dealers and wholesalers when the vehicles have been in the
Company's inventory longer than the guidelines set by the Company. Such sales
are frequently at or below cost and, therefore, affect the Company's overall
gross margin on vehicle sales. The Company's salary expense, employee benefits
costs and advertising expenses comprise the majority of its selling, general and
administrative ("SG&A") expenses. The Company's interest expense fluctuates
based primarily on the level of the inventory of new vehicles held at its
dealerships, substantially all of which is financed (such financing being called
"floor plan financing").
The Company has historically accounted for all of its dealership
acquisitions using the purchase method of accounting and, as a result, does not
include in its financial statements the results of operations of these
dealerships prior to the date they were acquired by the Company. The Combined
and Consolidated Financial Statements of the Company discussed below reflect the
results of operations, financial position and cash flows of each of the
Company's dealerships acquired prior to June 30, 1997. As a result of the
effects of the Reorganization, as well as the effects of the Acquisitions and
the Offering, the historical combined and consolidated financial information
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," is not necessarily indicative of the results of
operations, financial position and cash flows of the Company in the future or
the results of operations, financial position and cash flows which would have
resulted had the Reorganization and Acquisitions occurred at the beginning of
the periods presented in the Combined and Consolidated Financial Statements.
The Company's total revenues have increased from $199.4 million in 1992 to
$376.6 million in 1996, for a compound annual growth rate of 17.2% (primarily as
a result of acquisitions). Operating income during this period experienced
faster growth, with operating income increasing from $3.7 million in 1992 to
$10.8 million in 1996, for a 30.7%, compound annual growth rate (primarily as a
result of acquisitions). Income before income taxes and minority interest,
however, has only increased at a compound annual growth rate of 18.3% primarily
because interest expense on floor plan obligations has increased from 1.1% of
total revenues in 1992 to 1.6% of total revenues in 1996. Inventory and floor
plan balances increased during 1995 and 1996 to support the Company's strategy
of increasing market share. In early 1997, the Company instituted additional
inventory controls in order to reduce interest costs to levels typical of the
industry. Interest expense on floor plan obligations as a percentage of total
revenues has improved from 1.5% for the six months ended June 30, 1996 to 1.4%
for the six months ended June 30, 1997.
As of June 30, 1997, the Company effected the Reorganization pursuant to
which the Company (i) acquired all of the capital stock of the Sonic Dealerships
and (ii) issued Class B Common Stock in exchange for the Dealership Securities.
The Company will acquire these minority interests in purchase transactions at a
price in excess of their book value by approximately $2.5 million. This excess
will be capitalized as goodwill and amortized over forty years. From May through
October 1997, the Company consummated or signed definitive agreements to
purchase six additional dealerships or dealership groups for an aggregate
purchase price of $94.8 million. The Company intends to use the proceeds from
the Offering, along with borrowings under the Six-Month Facility (as defined
herein), the initial borrowing under the Revolving Facility, and the Bowers Note
to pay the purchase price of the Acquisitions. In connection with the
Acquisitions, the Company will book approximately $61.6 million of goodwill
which will be amortized over forty years.
The automobile industry is cyclical and historically has experienced
periodic downturns, characterized by oversupply and weak demand. Many factors
affect the industry including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
available credit. During the five years ended December 31, 1996, the automobile
industry was generally in a growth period with new vehicles sales growing at a
compound rate of 10.5% as a result of price increases of 6.2% and unit sales
increases of 4.0%. During the first six months of 1997, however, industry sales
of new cars declined by 2.0%, although the Company's new car and light truck
unit sales increased by 7.0% during the period. During these periods, interest
rates were relatively stable.
37
<PAGE>
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
statement of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES FOR
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales........................................................ 61.5 % 60.0 % 61.9 % 61.0 % 64.4 %
Used vehicle sales....................................................... 23.9 % 26.0 % 24.9 % 25.6 % 22.6 %
Parts, service and collision repair...................................... 12.7 % 11.5 % 11.3 % 11.1 % 10.8 %
Finance and insurance.................................................... 1.9 % 2.5 % 1.9 % 2.3 % 2.2 %
Total revenues........................................................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales............................................................ 87.2 % 87.1 % 87.9 % 88.2 % 88.6 %
Gross profit............................................................. 12.8 % 12.9 % 12.1 % 11.8 % 11.4 %
Selling, general and administrative...................................... 9.2 % 9.4 % 8.9 % 8.8 % 8.7 %
Operating income......................................................... 3.2 % 3.2 % 2.9 % 2.9 % 2.6 %
Interest expense......................................................... 1.3 % 1.6 % 1.7 % 1.6 % 1.6 %
Income before income taxes............................................... 2.2 % 1.7 % 1.3 % 1.5 % 1.2 %
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues grew in each of the Company's primary revenue areas,
except for used vehicles, for the first half of 1997 as compared with the first
half of 1996, causing total revenues to increase 12.2% to $212.7 million. New
vehicle sales revenue increased 18.4% to $137.1 million, compared with $115.7
million. New vehicle unit sales increased from 6,027 to 6,553, accounting for
51.5% of the increase in vehicle sales revenues. The remainder of the increase
was primarily due to a 8.9% increase in the average selling price resulting from
changes in vehicle prices, particularly a shift in customer preference to higher
cost light trucks and sport utility vehicles.
Used vehicle revenues from retail sales declined 7.2% from $35.2 million in
the first half of 1996 to $32.7 million in the first half of 1997. The decline
in used vehicle revenues was due principally to declines in used vehicle unit
sales at the Company's Town & Country Ford and Lone Star Ford locations, which
related to changes in consumer demand.
The Company's parts, service and collision repair revenue increased 9.0% to
$22.9 million from $21.0 million, and declined as a percentage of revenue to
10.8% from 11.1%. The increase in service and parts revenue was due principally
to increased parts revenue, including wholesale parts, from the Company's Lone
Star Ford and Fort Mill Ford locations. F&I revenue increased $0.5 million, due
principally to increased new vehicle sales and related financings.
GROSS PROFIT. Gross profit increased 8.5% in the 1997 period to $24.3
million from $22.4 million in the 1996 period due to increases in revenues of
new vehicles principally at the Company's Lone Star Ford and Fort Mill Ford
locations. Parts and service revenue increases also contributed to the increase
in gross profit. Gross profit as a percentage of sales declined from 11.8% to
11.4% due principally to reductions in higher margin used vehicle sales from the
prior period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased 10.8%
from $16.6 million to $18.4 million. These expenses increased due to increases
in sales volume as well as expenses associated with the Acquisitions and the
Offering.
INTEREST EXPENSE. The Company's interest expense increased 10.1% from $3.0
million to $3.3 million. The increase in interest expense was due to the
acquisition of Fort Mill Chrysler-Plymouth-Dodge dealership in June of 1997,
increases in interest rates on floor plan debt and increased new vehicle
inventory levels at existing dealerships.
NET INCOME. As a result of the factors noted above, the Company's net
income decreased by $0.2 million in the first half of 1997 compared to the first
half of 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. The Company's total revenue increased 21.1% to $376.6 million in
1996 from $311.0 million in 1995. New vehicle sales increased 25.0% to $233.1
million in 1996 from $186.5 million in 1995, primarily because of the
acquisition in
38
<PAGE>
February 1996 of the Company's Fort Mill Ford dealership. The inclusion of the
results of the Fort Mill Ford dealership accounted for 65.3% of the Company's
overall increase in new vehicle sales in 1996. Of the increase in sales, 60.7%
was attributable to increases in unit sales from 1995 to 1996. The remainder of
the increase in new vehicle sales in 1996 was largely attributable to an
increase in average unit sales prices of 9.8% which the Company believes was
primarily due to changes in inventory mix (in response to shifting customer
preferences to light trucks and sport utility vehicles) and general increases in
new vehicle sales prices.
Used vehicle revenues from retail sales increased 12.0% to $68.0 million in
1996 from $60.8 million in 1995. The inclusion of the results of the Company's
Fort Mill Ford dealership accounted for substantially all of this increase in
used vehicle sales. The Company attributes the remainder of the increase in its
used vehicle sales in 1996 to increases of approximately 5.6% in the average
retail selling price per vehicle sold. Increases in average retail selling
prices were due to changes in product mix and general price increases.
The Company's parts, service and collision repair revenue increased 19.0%
to $42.6 million for 1996, compared to $35.9 million in 1995. Of this increase,
$4.4 million or 64.5% was due to the inclusion of the Company's Fort Mill Ford
dealership in the 1996 results of operations. The remainder of the increase was
principally the result of improved service operations and wholesale parts
distribution at the Company's Town and Country Ford dealership. F&I revenues
declined $0.7 million, or 8.9%, due principally to reductions in sales of
finance and insurance products at Town and Country Ford.
GROSS PROFIT. Gross profit increased 13.7% in 1996 to $45.6 million from
$40.1 million in 1995 primarily due to the addition of the Fort Mill Ford
dealership. Gross profit decreased from 12.9% to 12.1% as a percentage of sales
due principally to declines in F&I income and declines in gross profit margins
on the sale of used vehicles. Gross margins on new vehicles increased primarily
due to increases in the average selling price per unit due to a change in mix of
new vehicles sold, particularly higher margin light trucks and sport utility
vehicles.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's SG&A expenses
increased $4.3 million, or 14.8%, from $29.3 million in 1995 to $33.7 million in
1996. However, as a percentage of revenue, SG&A expenses decreased from 9.4% to
8.9%. Expenses associated with the Fort Mill Ford dealership acquired by the
Company in 1996 accounted for approximately 91.4% of this increase. The Company
attributes the remainder of the increase in selling, general and administrative
expenses primarily to higher compensation levels in 1996 and to an increase in
advertising expenses.
INTEREST EXPENSE. The Company's interest expense in 1996 increased 29.6% to
$6.4 million from $4.9 million in 1995. Of this increase, $1.0 million or 70.4%
was attributable to floor plan financing at the Company's Fort Mill Ford
dealership acquired in February 1996. The remainder of the increase primarily
reflects interest expense on the debt assumed in the acquisition of Fort Mill
Ford and an increase in floor plan interest rates during 1996.
NET INCOME. The Company's net income in 1996 decreased 6.3% to $3.0 million
from $3.2 million in 1995. This decrease was principally caused by increased
interest costs related to floor plan financing and debt assumed in the
acquisition of Fort Mill Ford.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. The Company's total revenue increased 16.4% to $311.0 million in
1995 from $267.1 million in 1994. New vehicle sales increased 13.5% to $186.5
million in 1995 from $164.4 million in 1994. The Company attributes the increase
in new vehicle sales to unit sales increases of 6.1% primarily from the Town &
Country Ford and Lone Star Ford dealerships which increased 9.3% and 7.1%,
respectively. The remainder of the increase was due to increased sales of higher
priced light trucks and sport utility vehicles and general price increases.
Used vehicle revenues from retail sales increased by 27.9% to $60.8 million
in 1995, compared with $47.5 million in 1994. The increase in used vehicle unit
sales was due principally to increases at the Company's Lone Star Ford, Town &
Country Ford and Frontier Cadillac-Oldsmobile locations. Unit sales volume
increased 18.2%, or 798 units, accounting for 70.9% of the increase in used
vehicle revenues. The remainder of the increase was due to improvements in
product mix and general increases in used vehicle selling prices.
The Company's parts, service and collision repair revenue increased 5.5% or
$1.9 million, from $34.0 million in 1994 to $35.9 million in 1995. Wholesale
parts sale increases at the Company's Lone Star Ford dealership and improved
service operations at the Company's Town and Country Toyota dealership account
for the majority of the increase. F&I revenue increased $2.6 million due
principally to additional sales of F&I products at the Company's Town and
Country Ford and Lone Star Ford dealerships.
39
<PAGE>
GROSS PROFIT. Gross profit increased 17.6% in 1995 to $40.1 million from
$34.1 million in 1994. Gross profit as a percentage of sales increased from
12.8% to 12.9% due principally to a 50.8% increase in high margin F&I product
sales. Gross margins on used vehicles improved due to the Company's strategy of
improved inventory management and the purchase of quality used vehicles.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's SG&A expenses
increased $4.7 million to $29.3 million or 19.1% and represented 9.4% in total
revenues in 1995 from $24.6 million or 9.2% of total revenues in 1994.
INTEREST EXPENSE. The Company's interest expense in 1995 increased 43.5% to
$4.9 million from $3.4 million in 1994. Increased interest expense was due to
increases in inventory levels and related floor plan borrowings.
NET INCOME. The Company's net income in 1995 decreased 13.5% to $3.2
million from $3.7 million in 1994. This decrease was caused by the increase in
floor plan financing due to an increase in vehicle inventory levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for capital resources are to finance
acquisitions, debt service and working capital requirements. Historically, the
Company has relied primarily upon internally generated cash flows from
operations, borrowing under its various credit facilities and borrowings and
capital contributions from its stockholders to finance its operations and
expansion. After the Offering, the Company does not expect to receive any
additional financing from its existing stockholders.
The Company has historically maintained a separate revolving floor plan
credit facility for each dealership which has been used to finance vehicle
inventory. The Company currently has floor plan credit facilities with Ford
Motor Credit, Chrysler Financial Corporation and World Omni Financial
Corporation. As of June 30, 1997 there was an aggregate of $67.9 million
outstanding under the floor plan credit facilities. These floor plan facilities
bear interest at variable rates ranging from LIBOR plus 2.75% to prime plus
1.0%. 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.
The Company makes monthly interest payments on the amount financed under
the floor plan lines 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 financing agreements contain 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.
The Company has received a commitment from Ford Motor Credit to consolidate
its new vehicle floor plan lines, contingent upon the Offering and other
customary terms and conditions. The average interest expense under this new
agreement is anticipated to be approximately 7.6% compared to historical
interest rates ranging from 7.75% to 10.25%.
The Company leases various facilities and equipment under operating lease
agreements including leases with related parties. See "Certain
Transaction -- Leases."
During the first six months of 1997, the Company generated net cash of $4.0
million from operating activities. Net cash provided by operating activities was
$2.1 million in 1996 and was primarily attributable to net income of $3.0
million. Increased inventory levels and accounts receivable were primarily
offset by increased floor plan indebtedness and accounts payable. The increase
in inventory levels in 1996 reflects an increase in the volume of sales and the
timing of shipments from the Manufacturers. Increased receivables reflect
increased sales primarily attributable to Fort Mill Ford and Fort Mill
Chrysler-Plymouth-Dodge acquired in 1996 and 1997, respectively. The Company
generated net cash from operations of $3.0 million in 1995 and 1994.
Cash used for investing activities, excluding amounts paid in acquisitions,
was approximately $0.8 million for the first six months of 1997 and related
primarily to acquisitions of property and equipment. Cash provided by (used in)
investing activities was ($11.5) million, $0.3 million and ($1.7) million in
1996, 1995 and 1994, respectively, including $1.9 million, $1.5 million and $1.4
million of capital expenditures during such periods.
In 1996, cash provided by financing activities of $7.1 million reflected
the purchase of capital stock by a stockholder of the Company, the proceeds of
which were used to fund the acquisition of Fort Mill Ford and the purchase of
stock by a stockholder of Town & Country Ford. Cash used in financing
activities, excluding capital contributions for the six months ended June 30,
1997 was $0.2 million principally due to scheduled payments on long-term debt.
40
<PAGE>
In conjunction with the recent consummation of the Lake Norman Acquisition,
the Company obtained from NationsBank, N.A. ("NationsBank") a short-term line of
credit in an aggregate principal amount of up to $20.0 million that matures no
later than February 15, 1998 (the "Six-Month Facility"). A total of $20.0
million in aggregate principal amount is currently outstanding under the
Six-Month Facility, which amount has been applied to fund the purchase price of
the Lake Norman Acquisition and the Williams Acquisition. The Six-Month Facility
is secured by a pledge of Speedway Motorsports, Inc. common stock shares owned
by Bruton Smith, the Company's Chairman and Chief Executive Officer. See
"Certain Transactions -- The Smith Guaranties and Pledges." No assets of the
Company secure the Six-Month Facility, and the Company is under no obligation to
repay or reimburse Mr. Smith should NationsBank foreclose on the securities
pledged by Mr. Smith.
The Company recently obtained an acquisition line of credit from Ford Motor
Credit in the form of the Revolving Facility in an initial aggregate principal
amount of $26.0 million (the "Initial Loan Commitment"), which the Company
expects to be increased to an aggregate principal amount of $75.0 million (the
"Maximum Loan Commitment"). The Company has also received a commitment from Ford
Motor Credit to provide floor plan financing to the Company's wholly-owned
dealership subsidiaries (the "Wholesale Credit Lines" and, together with the
Revolving Facility, the "Facilities"). 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. No assurance can be given that such extensions will be granted. The
Revolving Facility is expected to be increased to the Maximum Loan Commitment
after the consummation of the Offering, subject to customary terms and
conditions. The proceeds from the Initial Loan Commitment were used to
consummate the Ken Marks Acquisition. Amounts to be drawn under the Maximum Loan
Commitment are anticipated by the Company to be used (i) for the acquisition of
additional dealership subsidiaries, (ii) to refinance the amounts remaining
outstanding under the Six-Month Facility (after application of the proceeds of
the Offering), which will result in the retirement of the Six-Month Facility,
and (iii) to provide general working capital needs of the Company not to exceed
$10 million. The Wholesale Credit Lines are to be provided to the Company's
dealership subsidiaries, including the dealerships acquired in the Acquisitions,
subject to customary terms and conditions on terms substantially the same as the
floor plan financing previously provided by Ford Motor Credit to the Company's
subsidiaries.
Although management believes that the Revolving Facility will be increased
to the Maximum Loan Commitment after the consummation of the Offering, no
assurance can be given that such increase will occur. The Initial Loan
Commitment is secured by a pledge of Speedway Motorsports, Inc. common stock
owned by Sonic Financial. See "Certain Transactions -- The Smith Guaranties and
Pledges." The Company is under no obligation to repay or reimburse Sonic
Financial if Ford Motor Credit forecloses on its securities. In addition, all of
the Facilities are secured by a pledge by the Company of all the capital stock,
membership interests and partnership interests of all of the Company's
dealership subsidiaries and a lien on all of the Company's other assets, except
for real estate owned by the Company. Mr. Smith and the Company's subsidiaries
also guarantee the Facilities, and the Company will guarantee the Wholesale
Credit Lines. The guarantees made by the Company's dealership subsidiaries are
secured by certain assets of such dealership subsidiaries. If the Revolving
Facility is increased to the Maximum Loan Commitment, Mr. Smith's guaranty and
Sonic Financial's pledge of Speedway Motorsports, Inc. common stock may be
released. (If net proceeds of the Offering to the Company are $70 million or
greater, the guarantee of the Revolving Facility by Bruton Smith, and the pledge
of shares of Speedway Motorsports, Inc. common stock owned by Sonic Financial,
will be released pursuant to the terms of the Revolving Facility. If net
proceeds of the Offering to the Company are less than $70 million, Sonic
Financial will be required to provide continued credit support for the Revolving
Facility in the form of a pledge of shares of Speedway Motorsports, Inc. common
stock owned by Sonic Financial equal in value to three times the amount of the
shortfall between $70 million and the actual net proceeds of the Offering to the
Company.) When the Company will need to refinance the Revolving Facility, there
can be no assurance that Mr. Smith will agree to guarantee such debt or that the
assets of Mr. Smith or Sonic Financial will be available to provide additional
security under a new credit agreement, or that a new credit agreement could be
arranged on terms as favorable as the terms of the Six-Month Facility or the
Revolving Facility without a gurantee by, or pledge of the assets of, Mr. Smith
or Sonic Financial. Pursuant to the terms of the Revolving Facility, the Company
also agreed not to pledge any of its assets to any third party (with the
exception of currently encumbered real estate and assets of the Company's
dealership subsidiaries that are subject to previous pledges or liens). See
"Risk Factors -- Limitations on Financial Resources Available for Acquisitions;
Ability to Refinance Existing Debt."
The Revolving Facility currently does not contain any affirmative financial
covenants by the Company, but does contain certain negative covenants made by
the Company, including covenants restricting or prohibiting the payment of
dividends, capital expenditures and material dispositions of assets as well as
other customary covenants. It is anticipated by the Company that when the
Initial Loan Commitment is increased to the Maximum Loan Commitment, the
Revolving Facility will be amended by Ford Motor Credit and the Company to
provide for, in addition to the negative covenants described in the previous
sentence, additional financial covenants requiring the Company to maintain
compliance with, among other things, specified ratios of (i) debt to tangible
equity (as defined in the Revolving Facility), (ii) current assets to current
liabilities, (iii) earnings before interest, taxes, depreciation and
amortization (EBITDA) to fixed charges, (iv) EBITDA to interest expense, (v)
EBITDA to total debt and (vi) EBITDA to total floor plan debt. Moreover, the
loss of voting control over the Company by the Smith Group or the failure by the
Company, with certain exceptions, to own all the outstanding equity,
41
<PAGE>
membership or partnership interests in its dealership subsidiaries will
constitute an event of default under the Revolving Facility.
Capital expenditures, excluding amounts paid in acquisitions, were $0.9
million, $1.9 million, $1.5 million and $1.4 million in the first six months of
1997 and in 1996, 1995 and 1994, respectively. The Company's principal capital
expenditures typically include building improvements and equipment for use in
the Company's dealerships. Capital expenditures in 1996 and 1995 were primarily
attributable to expenditures for the addition of a used car lot in 1996 and
other capital improvements at the Lone Star Ford dealership. Excluding the
purchase price for the Acquisitions and future acquisitions, the Company is
anticipating total capital expenditures in the second half of 1997 to be
approximately $1.0 million. The Company expects to increase its capital
expenditures over the next few years as part of its acquisition and growth
strategy.
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 (including the Maximum Loan
Commitment expected to become effective after consummation of the Offering) 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 estimates that it will incur a
tax liability of approximately $5.5 million in connection with the change in its
tax basis of accounting for inventory from LIFO to FIFO. The Company believes
that it will be required to pay this liability over a six-year period, beginning
in January 1998, and believes that it will be able to 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 Maximum Loan Commitment) or Class A Common Stock issuances. The Company does
not currently have in place any credit facilities for additional acquisitions.
There can be no assurance that additional financing can be obtained on terms
favorable to the Company, or that the Company will be able to use its Common
Stock to fund any future acquisitions. See "Risk Factors -- Limitations on
Financial Resources Available for Acquisitions; Ability to Refinance Existing
Debt", " -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue
Additional Equity" and "The Acquisitions -- Future Acquisitions."
SEASONALITY
The Company's 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 timing of manufacturer incentive programs and model changeovers.
Set forth below is revenue information with respect to the Company's
operations for the most recent six quarters.
<TABLE>
<CAPTION>
1996 1997
1ST 2ND 3RD 4TH 1ST 2ND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues................................................ $85,669 $103,946 $93,222 $93,767 $98,739 $114,008
</TABLE>
EFFECTS OF INFLATION
Due to the relatively low levels of inflation in 1994, 1995 and 1996 and
the first half of 1997, inflation did not have a significant effect on the
Company's results of operations for those periods.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." This Statement
specifies the computation, presentation and disclosure requirements for earnings
per share. The Company believes that the adoption of such Statement would not
result in earnings per share materially different than pro forma earnings per
share presented in the accompanying statements of income.
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. This
Statement will be effective for the Company's fiscal year ending December 31,
1998, and the Company does not intend to adopt this statement prior to the
effective date. Had the Company adopted this Statement as of January 1, 1994, it
would have reported comprehensive income of $2.8 million, $2.4 million and $2.1
million for the years ended December 31, 1994, 1995 and 1996, respectively.
42
<PAGE>
BUSINESS
OVERVIEW
The Company is one of the leading automotive retailers in the United
States, operating 23 dealership franchises, four standalone used vehicle
facilities and seven collision repair centers in the southeastern and
southwestern United States. Sonic sells new and used cars and light trucks,
sells replacement parts, provides vehicle maintenance, warranty, paint and
repair services and arranges related F&I for its automotive customers. The
Company's business is geographically diverse, with dealership operations in the
Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta
markets, each of which the Company believes is experiencing favorable
demographic trends. Sonic sells 15 domestic and foreign brands, which consist of
BMW, Cadillac, Chrysler, Dodge, Ford, Honda, Infiniti, Jaguar, Jeep, KIA,
Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo. In several of its markets,
the Company has a significant market share for new cars and light trucks,
including 13.7% in Charlotte and 9.1% in Chattanooga in 1996. Pro forma for the
Acquisitions, the Company had revenues of $899.6 million and retail unit sales
of 24,206 new and 13,475 used vehicles in 1996. The Company believes that in
1996, based on pro forma retail unit sales, it would have been one of the ten
largest dealer groups out of a total of more than 15,000 dealer groups in the
United States and, based on pro forma revenues, it would have had three of the
top 100 individual dealerships locations in the United States.
The Company's founder and Chief Executive Officer, O. Bruton Smith, has
over 30 years of automotive retailing experience. In addition, the Company's
other executive officers, regional vice presidents and executive managers have
on average 18 years of automotive retailing experience. The Company's
dealerships have won the highest attainable awards from various manufacturers
measuring quality and customer satisfaction. These awards include the Five Star
Award from Chrysler, the Chairman's Award from Ford, the President's Award from
BMW and the President's Circle Award from Infiniti. In addition, the Company was
named to Ford's Top 100 Club, which consists of Ford's top 100 retailers based
on retail volume and consumer satisfaction. Also, various members of the
management team have served on several manufacturer dealer councils which act as
liaisons between the manufacturers and dealer groups.
The Company intends to pursue an acquisition growth strategy led by a
management team that has experience in the consolidation of automotive retailing
as well as motorsports businesses. Bruton Smith, who is also the Chief Executive
Officer of Speedway Motorsports, Inc., the owner and operator of several
motorsports facilities, first entered the automotive retailing business in the
mid-1960's. Mr. Smith will devote approximately 50% of his business time to the
Company. Since 1990, Mr. Smith has successfully acquired three dealerships and
increased his dealerships' revenues from $199.4 million in 1992 to $376.6
million in 1996, without giving effect to the Acquisitions. In the Tennessee
market, Mr. Bowers has acquired or opened eight dealerships since 1992 and
increased revenues (primarily through acquisitions) of the Bowers Dealerships
from $13.2 million in 1992 to $101.5 million in 1996. No assurance can be given
that Messrs. Smith and Bowers will be successful in acquiring or opening new
dealerships for the Company or increasing the Company's revenues.
The Company believes the competitive advantages which differentiate it from
its local competitors include the reputation of the Company's management in the
automotive retailing industry, regional and national economies of scale, brand
and geographic diversity, and the established customer base and local name
recognition of the Company's dealerships. The Company has developed and
implemented several growth strategies to capitalize on these competitive
advantages. One of these is to continue to expand its operations in the
Southeast and Southwest by acquiring additional dealerships both within its
current markets and in new markets. The Company also is seeking additional
growth from the increased sale of higher margin products and services such as
wholesale parts, after-market products, collision repair services and F&I.
Automobile retailing is highly competitive. The Company's competition
includes franchised automobile dealerships, some with greater resources than the
Company, selling the same or similar makes of vehicles offered by the Company.
Other competitors include other franchised dealers, private market buyers and
sellers of used vehicles, used vehicle dealers, service center chains and
independent service and repair shops. Primarily as a result of competitive
pressures, gross profit margins on new vehicle sales have been declining since
1986. The Company has also experienced gross profit margin pressure on used
vehicle sales over the last 18 months. For further discussion of competition
affecting the Company's business, see "Risk Factors -- Competition" and
"Business -- Competition."
GROWTH STRATEGY
The Company's objective is to capitalize on the consolidation of the
automotive retailing industry. Key elements of the Company's strategy to achieve
this objective include the acquisition of additional dealerships and the
leveraging of the Company's new vehicle franchises to increase sales of higher
margin products and services.
43
<PAGE>
(Bullet) ACQUIRE DEALERSHIPS. The Company plans to implement a "hub and spoke"
acquisition program primarily by pursuing (i) well-managed dealerships
in new metropolitan and growing suburban geographic markets, and (ii)
dealerships that will allow the Company to capitalize on regional
economies of scale, offer a greater breadth of products and services in
any of its markets or increase brand diversity. The growth generated
through acquisitions creates opportunities for economies of scale,
including more favorable financing terms from lenders and cost savings
from the consolidation of administrative functions such as employee
benefits, risk management and employee training.
NEW MARKETS. The Company looks to acquire well-managed dealerships in
geographic markets it does not currently serve, principally in the
Southeast and Southwest regions of the United States. The Company will
target dealers having superior operational and financial management.
Generally, the Company will seek to retain the acquired dealerships'
operational and financial management, and thereby benefit from their market
knowledge, name recognition and local reputation. The Company also
anticipates that management teams at the acquired dealerships will enable
the Company to identify more effectively additional acquisition
opportunities in these markets.
EXISTING MARKETS. The Company seeks growth in its operations within
existing markets by acquiring dealerships that increase the brands,
products and services offered in those markets. These acquisitions should
produce opportunities for additional operating efficiencies, promote
increased name recognition and provide the Company with better
opportunities for repeat and referral business. Such acquisitions should
also create opportunities for regional economies of scale in areas such as
vendor consolidation, facility and personnel utilization and advertising
spending. Additionally, cost savings may be achieved by consolidating
certain administrative functions on a regional basis that would not be
efficient on a national basis, such as accounting, information systems,
title work, credit and collection.
(Bullet) PURSUE OPPORTUNITIES IN ANCILLARY PRODUCTS AND SERVICES. The Company
intends to pursue opportunities to increase its sales of higher-margin
products and services by expanding its collision repair centers and its
wholesale parts and after-market products businesses, which, other than
after market products, are not directly related to the new vehicle
cycle.
COLLISION REPAIR CENTERS. The Company's collision repair business
provides favorable margins and is not significantly affected by economic
cycles or consumer spending habits. The Company believes that because of
the high capital investment required for collision repair shops and the
cost of complying with environmental and worker safety regulations, large
volume body shops will be more successful in the future than smaller volume
shops. The Company believes that this industry will consolidate and that it
will be able to capitalize on this trend by expanding its collision repair
business. The Company also believes that opportunities exist for those
automotive retailers that can establish relationships with major insurance
carriers. The Company currently participates in 35 direct repair programs
with major insurance companies and its relationships with these carriers
provide a source of collision repair customers. The Company currently has
eight collision repair centers accounting for approximately $8.9 million in
pro forma revenue for the year ended 1996. Sonic intends over the next
several years to establish collision repair centers at various of its other
facilities as market conditions warrant.
WHOLESALE PARTS. Over time, the Company plans to capitalize on its
growing representation of numerous manufacturers in order to increase its
sales of factory authorized parts to wholesale buyers such as independent
mechanical and body repair garages and rental and commercial fleet
operators.
AFTER-MARKET PRODUCTS. The Company intends to expand its offerings of
after-market products in many of its dealership locations. After-market
products, such as custom wheels, performance parts, telephones and other
accessories, enable the dealership to capture incremental revenue on new
and used vehicle sales.
(Bullet) ENHANCE PROFIT OPPORTUNITIES IN FINANCE AND INSURANCE. The Company
offers its customers a wide range of financing and leasing alternatives
for the purchase of vehicles, as well as credit life, accident and
health and disability insurance and extended service contracts. As a
result of its size and scale, the Company believes it will be able to
negotiate with the lending institutions that purchase its financing
contracts to increase the Company's revenues. Likewise, the Company
expects to negotiate to increase the commissions it earns on extended
service and insurance products. It also expects that the integration of
innovative computer technologies and in-depth sales training will serve
as an important tool in enhancing F&I profitability.
(Bullet) INCREASE USED VEHICLE SALES. The Company believes that there will be
opportunities to improve the used vehicle departments at several of its
dealerships. The Company currently operates four standalone used
vehicle facilities. In 1998, the Company intends to convert part of an
existing facility in Nashville to a used vehicle facility. It also
intends to develop used vehicle facilities in other markets where
management believes opportunities exist.
44
<PAGE>
OPERATING STRATEGY
Sonic's operating objectives are to focus on customer satisfaction
throughout the organization in order to build long-term customer relationships
and to capitalize on operating efficiencies which will enhance its financial
performance. The Company seeks to achieve these objectives by implementing the
following operating strategies.
(Bullet) OPERATE MULTIPLE DEALERSHIPS IN GEOGRAPHICALLY DIVERSE MARKETS. The
Company operates dealerships in Charlotte, Chattanooga, Nashville,
Tampa-Clearwater, Houston and Atlanta. By operating in several
locations throughout the United States, the Company believes it will be
better able to insulate its earnings from local economic downturns. In
addition, the Company believes that by establishing a significant
market presence in its operating regions, it will be able to provide
superior customer service through a market-specific sales, service,
marketing and inventory strategy. It is the Company's strategy, for
instance, that the savings in a market on reduced advertising costs
will be re-deployed into customer service and customer retention
programs. The Company's market share in its Charlotte and Chattanooga
markets was 13.7% and 9.1%, respectively in 1996.
(Bullet) ACHIEVE HIGH LEVELS OF CUSTOMER SATISFACTION. Customer satisfaction has
been and will continue to be a focus of the Company. The Company's
personalized sales process is intended to satisfy customers by
providing high-quality, affordable vehicles in a positive, "consumer
friendly" buying environment. The Company's service department also
seeks to provide its customers with a professional and reliable service
experience of a consistently high standard. Beyond establishing strong
consumer loyalty, this focus on customer satisfaction engenders good
relations with Manufacturers. Manufacturers generally measure CSI,
which is a result of a survey given to new vehicle buyers. Some
Manufacturers offer specific performance incentives, on a per vehicle
basis, if certain CSI levels (which vary by Manufacturer) are achieved
by a dealer. Manufacturers can withhold approval of acquisitions if a
dealer fails to maintain a minimum CSI score. Historically, the Company
has not been denied Manufacturer approval of acquisitions based on CSI
scores. To keep management focused on customer satisfaction, the
Company includes CSI results as a component of its incentive
compensation program.
(Bullet) TRAIN AND DEVELOP QUALIFIED MANAGEMENT. Sonic requires all of its
employees, from service technicians to regional vice presidents, to
participate in in-house training programs. The Company leverages the
experience of senior management, along with third party trainers from
manufacturers, industry affiliates and vendors, to formally train all
employees. This training regimen has resulted in many of the Company's
regional vice presidents, executive managers and salespeople being
certified by NADA, and has become a convenient and effective way to
share best practices among the Company's employees at all levels of the
various dealerships. The Company is developing an education center (the
"Education Center") to be equipped with classrooms specifically
designed on a departmental basis. The F&I classroom in the Education
Center, for example, is to be equipped with simulation software that
replicates the dealers' systems and allows the employee to handle all
facets of an F&I transaction. The Company believes that its
comprehensive training of all employees at every level of their career
path offers the Company a competitive advantage over other dealership
groups in the development and retention of its workforce.
(Bullet) OFFER A DIVERSE RANGE OF AUTOMOTIVE PRODUCTS AND SERVICES. Sonic offers
a broad range of automotive products and services, including a wide
selection of new and used vehicles, vehicle financing and insurance
programs, replacement parts and maintenance and repair programs. The
Company offers 15 product lines ranging from economy to luxury brands
consisting of BMW, Cadillac, Chrysler, Dodge, Ford, Honda, Infiniti,
Jaguar, Jeep, KIA, Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo.
The Company also offers a variety of used vehicles at a broad range of
prices. Offering numerous new vehicle brands enables the Company to
satisfy a variety of customers, reduces dependence on any one
Manufacturer and reduces exposure to supply problems and product
cycles.
(Bullet) CAPITALIZE ON EFFICIENCIES IN OPERATIONS. Because management
compensation is based primarily on dealership performance, expense
reduction and operating efficiencies are a significant management
focus. As the Company pursues its acquisition strategy, the Company's
size and market presence should provide it with an opportunity to
negotiate favorable contracts on such expense items as advertising,
purchasing, bank financings, employee benefit plans and other vendor
contracts. In addition, the Company has instituted both regional and
national operations committees that meet on a regular basis to share
best practices to improve dealership performance.
(Bullet) UTILIZE PROFESSIONAL MANAGEMENT PRACTICES AND INCENTIVE BASED
COMPENSATION PROGRAMS. As a result of Sonic's size and geographic
dispersion, the Company's senior management has instituted a
multi-tiered management structure to supervise effectively its
dealership operations. In addition to the officers of the Company, this
structure includes executive managers who are responsible for
individual dealership operations, as well as regional vice presidents
responsible for various regions throughout the country. In an effort to
align management's interest with that of stockholders, a portion of
45
<PAGE>
the incentive compensation program for each officer, vice president and
executive manager is provided in the form of Company stock options,
with additional incentives based on the performance of individual
profit centers. Sonic believes that this organizational structure, with
room for advancement and the opportunity for equity participation,
serves as a strong motivation for its employees.
(Bullet) APPLY TECHNOLOGY THROUGHOUT OPERATIONS. The Company believes that, with
the customized technology it has introduced in certain markets, it has
been able to improve its operations over time by integrating its
systems into all aspects of its business. In these markets the Company
uses computer-based technology to monitor its dealerships' operating
performance and quickly adjust to market changes, and to integrate
computer systems into its sales, F&I and parts and service operations.
For example, sales managers use a database to identify and solicit
prospective customers, and to design appropriate financing packages for
prospective buyers. Service and parts managers utilize computer
technology to coordinate between the two departments and to service
customers more efficiently. In addition to these uses, the Company's
technology also plays a role in its inventory management. The Company
intends to expand this computer system into more of its dealerships and
markets as existing contracts for computer systems expire.
INDUSTRY OVERVIEW
Automotive retailing, with approximately $640 billion in 1996 retail sales,
is the largest consumer retail market in the United States, representing
approximately 8% of the domestic gross product based on data collected by NADA
and the U.S. Department of Commerce. Retail sales of new vehicles, which are
sold exclusively through new vehicle dealers, were approximately $328 billion.
In addition, used vehicle retail sales in 1996 were estimated at $311 billion,
with approximately $260 billion in sales by franchised and independent dealers
and the balance in privately negotiated transactions. From 1992 to 1996, new
vehicles sales have grown at an annual compound rate of 10.5%, while used
vehicle sales have grown at a rate of 15.8% for retail used vehicle sales and
6.7% for wholesale used vehicle sales. This significant increase in sales
revenue is primarily because the average price of a new vehicle has risen at a
compound average rate of 6.2% from 1992 to 1996 and newer, high-quality used
vehicles now comprise a larger part of the used vehicle market. During this
period, unit sales grew at rates of only 4.0% for new vehicles, 6.4% for retail
used vehicles and 1.4% for wholesale used vehicles. For the six months ended
June 30, 1997, industry retail sales were down 2% as a result of retail car
sales declines of 5.3% and retail truck sales gains of 2.4% from the same period
in 1996.
The following table sets forth information regarding vehicle sales by new
vehicle dealerships for the periods indicated.
<TABLE>
<CAPTION>
UNITED STATES NEW VEHICLE DEALERS' VEHICLE SALES (1)
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
(UNITS IN MILLIONS; DOLLARS IN BILLIONS)
New vehicle unit sales................................................. 12.9 13.9 15.1 14.7 15.1
New vehicle sales (2).................................................. $220.3 $253.3 $289.1 $301.2 $328.4
Used vehicle unit sales-retail......................................... 9.3 9.9 10.9 11.5 11.9
Used vehicle sales-retail (2).......................................... $ 77.1 $ 90.7 $110.6 $126.9 $137.9
Used vehicle unit sales-wholesale...................................... 6.9 6.4 6.9 7.0 7.3
Used vehicle sales -- wholesale (2).................................... $ 26.2(3) $ 24.3 $ 27.9 $ 30.4 $ 33.9
Total vehicle sales.................................................... $323.6 $368.3 $427.6 $458.5 $500.2
Annual growth in total vehicle sales................................... -- 13.8% 16.1% 7.2% 9.1%
</TABLE>
(1) Reflects new vehicle dealership sales at retail and wholesale. In addition,
sales by independent retail used vehicle dealers were approximately $81,
$100, $134, $130 and $122 billion, respectively, and casual used car sales
were estimated at approximately $36, $33, $40, $52 and $51 billion,
respectively, for each of the five years ended December 31, 1996.
(2) Sales figures are calculated by multiplying unit sales by the average sales
price for the year.
(3) The NADA did not report the averages sales price for wholesale transactions
prior to 1993. As a result, the 1992 wholesale used vehicle sales were
calculated using the 1993 average wholesale price for used vehicles.
In addition to new and used vehicles, dealerships offer a wide range of
other products and services, including repair and warranty work, replacement
parts, extended warranty coverage, financing and credit insurance. In 1996, the
average dealership's revenue consisted of 57.7% new vehicles sales, 30.4% used
vehicle sales, and 11.9% other products and services. As a result of intense
competition for new vehicle sales, the average dealership generates the majority
of its profits from the sale of used vehicles and other products and services,
including finance and insurance, mechanical and collision repair, and parts and
46
<PAGE>
service. In 1996, for example, a used vehicle earned an average gross margin of
11.0% as compared to a new vehicle's average gross margin of 6.4%, in each case
for sales by new vehicle dealerships. As is typical in the retailing industry,
dealership profitability varies widely across different stores and, ultimately,
profitability depends on effective management of inventory, competition,
marketing, quality control and, most importantly, responsiveness to the
customer.
NEW VEHICLE SALES. Franchised dealerships were originally established by
automobile manufacturers for the distribution of their new vehicles. In return
for exclusive distribution rights within specified territories, manufacturers
exerted significant influence over their dealers by limiting the transferability
of ownership in dealerships, designating the dealerships location, and managing
the supply and composition of the dealership's inventory. These arrangements
resulted in the proliferation of small, single-owner operations that, at their
peak in the late 1940's, totaled almost 50,000. As a result of competitive,
economic and political pressures during the 1970's and 1980's, significant
changes and consolidation occurred in the automotive retail industry. One of the
most significant changes was the increased penetration by foreign manufacturers
and the resulting loss of market share by domestic car makers, which forced many
dealerships to close or sell to better-capitalized dealership groups. According
to industry data, the number of franchised dealerships has declined from
approximately 25,000 dealerships in 1990 to approximately 22,000 in 1996.
Although significant consolidation has taken place since the automotive
retailing industry's inception, the industry today remains highly fragmented,
with the largest 100 dealer groups generating less than 10% of total sales
revenues and controlling less than 5% of all franchised dealerships.
USED VEHICLE SALES. Sales of used vehicles have increased over the past
five years, primarily as a result of the substantial increase in new vehicle
prices and the greater availability of newer used vehicles due to the increased
popularity of short-term leases. Like the new vehicle market, the used vehicle
market is highly fragmented, with approximately 22,000 new vehicle dealers
accounting for approximately $172 billion in 1996 sales. In addition, an even
greater number of independent used car dealers accounted for approximately $122
billion in 1996 sales. Privately negotiated transactions accounted for the
remaining 1996 sales, estimated at $51 billion. In addition, an increasing
number of used vehicles are being sold by "superstore" outlets, which market
only used vehicles and offer a wide selection of low mileage, popular models. In
1996, the top 100 new vehicle dealer groups accounted for less than 2% of used
vehicle sales.
INDUSTRY CONSOLIDATION. The Company believes that further consolidation is
likely due to increased capital requirements of dealerships, the limited number
of viable alternative exit strategies for dealership owners, and the desire of
certain manufacturers to strengthen their brand identity by consolidating their
franchised dealerships. The Company also believes that an opportunity exists for
dealership groups with significant equity capital, and experience in
identifying, acquiring and professionally managing dealerships, to acquire
additional dealerships for cash, stock, debt or a combination thereof. Publicly
owned dealer groups, such as the Company, are able to offer prospective sellers
tax advantaged transactions through the use of publicly traded stock which may,
in certain circumstances, make them more attractive to prospective sellers.
DEALERSHIP OPERATIONS
Upon completion of the Reorganization and the Acquisitions, the Company
will own eight dealership franchises in the Charlotte market, ten dealership
franchises in the Chattanooga market, two dealership franchises in the Nashville
market, one dealership franchise in the Houston market, one dealership franchise
in the Tampa-Clearwater market and one dealership franchise in the Atlanta
market.
The following table sets forth, for each of those areas, information
relating to the Company's pro forma performance for the year ended December 31,
1996 and the six months ended June 30, 1997:
<TABLE>
<CAPTION>
NASHVILLE/ TAMPA/
CHARLOTTE CHATTANOOGA HOUSTON CLEARWATER ATLANTA
MARKET MARKET MARKET MARKET MARKET TOTAL
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996 SALES:
New vehicles........................................ $ 229,181 $ 98,777 $ 83,763 $ 88,844 $39,940 $540,505
Used vehicles....................................... 105,034 45,400 33,403 42,982 20,931 247,750
Parts, service and collision repair................. 33,260 17,338 18,927 14,224 11,163 94,912
Finance and insurance............................... 7,397 2,877 3,338 2,317 542 16,471
Total............................................. $ 374,872 $ 164,392 $139,431 $148,367 $72,576 $899,638
SIX MONTHS ENDED JUNE 30, 1997 SALES:
New vehicles........................................ $ 123,130 $ 40,938 $ 55,902 $ 45,577 $19,596 $285,143
Used vehicles....................................... 57,978 26,281 17,865 19,580 11,777 133,481
Parts, service and collision repair................. 17,865 9,694 10,363 5,999 5,960 49,881
Finance and insurance............................... 4,464 1,539 2,249 1,029 129 9,410
Total............................................. $ 203,437 $ 78,452 $ 86,379 $ 72,185 $37,462 $477,915
</TABLE>
47
<PAGE>
Since 1990 the Company has grown significantly, as a result of the
acquisition and integration of new vehicle dealerships and an increase in
revenues at its existing dealerships. The following table sets forth the name,
brands, year of acquisition and location of the dealerships acquired by or
awarded to the Company or one of the Bowers Dealerships since 1990:
<TABLE>
<CAPTION>
YEAR
ACQUIRED LOCATION
<S> <C> <C>
DEALERSHIP AND BRANDS CURRENTLY REPRESENTED
SONIC AUTOMOTIVE
Town & Country Toyota............................................................. 1990 Charlotte
Fort Mill Ford.................................................................... 1996 Charlotte
Fort Mill Chrysler-Plymouth-Dodge................................................. 1997 Charlotte
Lake Norman Dodge................................................................. 1997 Charlotte
Lake Norman Chrysler-Plymouth-Jeep-Eagle.......................................... 1997 Charlotte
Williams Chrysler-Plymouth-Jeep................................................... 1997 Charlotte
Ken Marks Ford.................................................................... 1997 Tampa/
Clearwater
BOWERS DEALERSHIPS
Infiniti of Chattanooga........................................................... 1992 Chattanooga
Nelson Bowers Ford................................................................ 1993 Chattanooga
Cleveland Village Honda........................................................... 1994 Chattanooga
Cleveland Chrysler-Plymouth-Jeep-Eagle............................................ 1994 Chattanooga
Jaguar of Chattanooga (awarded franchise)......................................... 1995 Chattanooga
European Motors of Nashville
"BMW, Volkswagen"............................................................... 1996 Nashville
European Motors
"BMW, Volvo".................................................................... 1996 Chattanooga
Nelson Bowers Dodge............................................................... 1997 Chattanooga
KIA -- VW of Chattanooga (awarded franchise)...................................... 1997 Chattanooga
</TABLE>
DEALERSHIP MANAGEMENT
Operations of the dealerships are overseen by Regional Vice Presidents, who
report to the Company's Chief Operating Officer. Each of the Company's
dealerships is managed by an Executive Manager who is responsible for the
operations of the dealership and the dealership's financial and customer
satisfaction performance. The Executive Manager is responsible for selecting,
training and retaining dealership personnel. All Executive Managers report to
the Company's senior management on a regular basis and prepare a comprehensive
monthly financial and operating statement of their dealership. In addition, the
Company's senior management meets on a monthly basis with its Executive Managers
to address changing customer preferences, operational concerns and to share best
practices, such as maintaining a customer-friendly buying environment,
maximizing potential revenues per new vehicle sale through increased F&I
penetration, using customer calling and coupon programs to attract and retain
service customers, and continued training of dealership personnel.
Each Executive Manager is complemented by a team which includes two senior
managers that aid in the operation of the dealership. The General Sales Manager
is primarily responsible for the operations, personnel, financial performance
and customer satisfaction performance of the new vehicle sales, used vehicle
sales, and finance and insurance departments. The Parts and Service Director is
primarily responsible for the operations, personnel, financial and customer
satisfaction performance of the service, parts and collision repair departments
(if applicable). Each of the departments of the dealership typically has a
manager who reports to the General Sales Manager or Parts and Service Director.
After the Acquisitions, the Company's Regional Vice Presidents will be as
listed, with their region of responsibility and age, on the following table:
<TABLE>
<CAPTION>
NAME AGE REGION OF RESPONSIBILITY
<S> <C> <C>
Ken Marks, Jr. 35 Florida
Jeffrey C. Rachor 35 Mid-South (Tennessee, Georgia, Kentucky and Alabama)
Ivan A. Tufty 57 Texas
William Sullivan 65 North Carolina and South Carolina
</TABLE>
NEW VEHICLE SALES
The Company sells 15 brands of cars, light trucks and sport utility
vehicles. The products have a broad range of prices from lower priced, or
economy vehicles, to luxury vehicles. The Company believes that its brand,
product and price diversity
48
<PAGE>
reduces the risk of changes in customer preferences, product supply shortages
and aging products. Sales of new vehicles in 1996 were approximately 41% cars
and 59% trucks. Approximately 13% of sales in 1996 were luxury brands (BMW,
Cadillac, Infiniti, Jaguar and Volvo). See "Risk Factors -- Dependence on
Automobile Manufacturers."
The following table sets forth, by vehicle brand, information relating to
the Company's and the dealerships being acquired pursuant to the Acquisitions
new vehicle sales for 1996 and the first six months of 1997:
<TABLE>
<CAPTION>
NEW VEHICLE SALES
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 (1) JUNE 30,
PERCENTAGE OF 1997 (1)
NEW VEHICLE NEW VEHICLE NEW VEHICLE
REVENUES REVENUES REVENUES
<S> <C> <C> <C>
(REVENUE AMOUNTS IN THOUSANDS)
VEHICLE BRAND/MANUFACTURER
BMW................................................................... $ 10,838 2.2% $ 13,993
Cadillac.............................................................. 2,029 0.4% 770
Chrysler/Dodge/Plymouth/Jeep/Eagle.................................... 88,951 17.9% 50,935
Ford.................................................................. 297,169 59.9% 164,768
Honda................................................................. 11,599 2.3% 4,992
Infiniti.............................................................. 6,618 1.3% 3,247
Jaguar................................................................ 2,296 0.5% 1,405
KIA................................................................... -- -- 685
Oldsmobile............................................................ 2,212 0.4% 1,055
Toyota................................................................ 30,520 6.2% 19,246
Volvo................................................................. 43,060 8.7% 21,478
Volkswagen............................................................ 732 0.2% 257
Total............................................................... $ 496,024 100.0% $ 282,831
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1997(1)
PERCENTAGE OF
NEW VEHICLE
REVENUES
<S> <C>
VEHICLE BRAND/MANUFACTURER
BMW................................................................... 4.9%
Cadillac.............................................................. 0.3%
Chrysler/Dodge/Plymouth/Jeep/Eagle.................................... 18.0%
Ford.................................................................. 58.3%
Honda................................................................. 1.8%
Infiniti.............................................................. 1.1%
Jaguar................................................................ 0.5%
KIA................................................................... 0.2%
Oldsmobile............................................................ 0.4%
Toyota................................................................ 6.8%
Volvo................................................................. 7.6%
Volkswagen............................................................ 0.1%
Total............................................................... 100.0%
</TABLE>
(1) Does not include Nelson Bowers Dodge which was purchased on March 1, 1997
and KIA-VW of Chattanooga which was purchased in April 1997. European Motors
of Nashville and European Motors were purchased in October 1996 and May
1996, respectively, and information for such dealerships is included from
their purchase dates through December 1996.
The Company seeks to provide customer oriented service and build lasting
customer relationships that will result in repeat and referral business. Sales
techniques and processes vary depending on the product line and local market
conditions. All of the Company's dealerships use computer technology for
prospecting and customer follow-up and extensively train sales staff to meet the
needs of customers. Certain of the dealerships use computer kiosks to allow
customers to browse vehicle inventories at their leisure. Depending on brand and
local market, dealerships may use "greeters" rather than sales people to
initially assist customers entering a dealership.
Substantially all of the Company's new vehicles are acquired from
Manufacturers. Allocation of vehicle inventory from Manufacturers is based
primarily on sales volume and input from dealers. Vehicle purchases are financed
through revolving credit facilities known in the industry as floor plan lending.
The following table presents information with respect to the Company's new
vehicle sales:
<TABLE>
<CAPTION>
SONIC DEALERSHIPS
SONIC DEALERSHIPS SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
PRO FORMA
FOR THE
ACTUAL ACQUISITIONS ACTUAL
1992 1993 1994 1995 1996 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT VEHICLE UNIT DATA)
Unit sales............ 8,060 9,429 9,686 10,273 11,693 24,206 6,027 6,553
Sales revenue......... $126,230 $152,525 $164,361 $186,517 $233,146 $540,505 $115,721 $137,069
Gross profit.......... $ 8,513 $ 10,474 $ 11,494 $ 13,584 $ 17,169 $ 40,221 $ 7,672 $ 8,893
Gross profit margin... 6.7% 6.9% 7.0% 7.3% 7.4% 7.4% 6.6% 6.5%
<CAPTION>
SONIC DEALERSHIPS
SIX MONTHS ENDED
JUNE 30,
PRO FORMA
FOR THE
ACQUISITIONS
1997
<S> <C>
Unit sales............ 12,596
Sales revenue......... $285,143
Gross profit.......... $ 20,749
Gross profit margin... 7.3%
</TABLE>
New vehicle sales include retail lease transactions and lease-type
transactions, both of which are arranged by the Company. New vehicle leases
generally have short terms. Lease customers, therefore, return to the new
vehicle market more
49
<PAGE>
frequently. Leases also provide a source of late-model, generally low mileage,
vehicles for its used vehicle inventory. Generally, leased vehicles are under
warranty for the entire lease term, which allows the Company to provide repair
service to the lessee throughout the term of the lease.
USED VEHICLE SALES
The Company sells a broad variety of makes and models of used cars, vans,
trucks and sport utility vehicles. On a pro forma basis in 1996, the Company
sold 9,281 used car and 4,194 used truck (including sport utility vehicles)
units. Used vehicle retail sales for 1996 represented 35.8% of pro forma total
retail unit sales.
Used vehicles are obtained by the Company through customer trade-ins, at
"closed" auctions which may be attended only by new vehicle dealers and which
offer off-lease, rental and fleet vehicles, and at "open" auctions which offer
repossessed vehicles and vehicles sold by other dealers. The Company sells its
used vehicles to retail customers and, in the case of vehicles in poor condition
or vehicles which remain unsold for a specified period of time, to other dealers
or wholesalers. Sales to other dealers or wholesalers are frequently close to or
below cost and therefore negatively affect the Company's gross margin on used
vehicle sales.
The Company emphasizes retail sales of used vehicles in order to offer a
wider variety of vehicles and to benefit from the higher gross margins from used
vehicle sales. To improve the marketability of used vehicles the Company employs
both manufacturer supported and in-house used car certification programs and
sale of extended warranties on used vehicles. At certain locations, the Company
provides a five day money back guarantee on the sale of all used vehicles. The
Company intends to expand this guarantee program to all locations.
After the Acquisitions, the Company will operate four standalone used car
facilities. As the Company enters new markets and gains market share in existing
markets, the Company intends to expand its standalone used car facilities to
take advantage of the high quality sources of vehicles available to new vehicle
retailers.
The following table sets forth information on the Company's used vehicle
sales:
<TABLE>
<CAPTION>
SONIC DEALERSHIPS
SONIC DEALERSHIPS SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
PRO FORMA
FOR THE
ACTUAL ACQUISITIONS ACTUAL
1992 1993 1994 1995 1996 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT VEHICLE UNIT DATA)
Retail unit sales.......... 3,892 4,104 4,374 5,172 5,488 13,475 2,836 2,638
Retail sales revenue....... $33,636 $37,742 $47,537 $60,766 $68,054 $181,787 $35,200 $32,666
Retail gross profit........ 3,610 3,964 5,182 5,792 5,748 16,762 2,968 2,772
Retail gross margin........ 10.7% 10.5% 10.9% 9.5% 8.4% 9.2% 8.4% 8.5%
Wholesale unit sales....... 3,756 4,189 4,656 5,009 5,344 12,385 2,751 2,750
Wholesale sales revenue.... $11,199 $13,363 $16,062 $20,025 $25,642 $ 65,963 $13,412 $15,342
Wholesale gross profit..... 16 27 43 (45) (23) (52) (12) (145)
Wholesale gross margin..... 0.1% 0.2% 0.3% (0.2)% (0.1)% (0.1)% (0.1)% (0.9)%
Total unit sales........... 7,648 8,293 9,030 10,181 10,832 25,860 5,587 5,388
Total revenue.............. $44,835 $51,105 $63,599 $80,791 $93,696 $247,750 $48,612 $48,008
Total gross profit......... 3,626 3,991 5,225 5,747 5,725 16,710 2,956 2,627
Total gross margin......... 8.1% 7.8% 8.2% 7.1% 6.1% 6.7% 6.1% 5.5%
<CAPTION>
SONIC DEALERSHIPS
SIX MONTHS ENDED
JUNE 30,
PRO FORMA
FOR THE
ACQUISITIONS
1997
<S> <C>
Retail unit sales.......... 7,043
Retail sales revenue....... $ 96,249
Retail gross profit........ 8,521
Retail gross margin........ 8.9%
Wholesale unit sales....... 6,513
Wholesale sales revenue.... $ 37,232
Wholesale gross profit..... (34)
Wholesale gross margin..... 0.1%
Total unit sales........... 13,556
Total revenue.............. $ 133,481
Total gross profit......... 8,487
Total gross margin......... 6.4%
</TABLE>
SERVICE AND PART SALES
The Company provides service and parts at each of its franchised
dealerships. The Company provides maintenance and repair services at its 19 new
vehicle dealership facilities and three used vehicle facilities. The Company
utilizes approximately 400 service bays in providing both warranty and
non-warranty services. Service and parts sales provide higher gross margins than
vehicle sales. On a pro forma basis in 1996, the Company's service and parts
operations generated $85.9 million in revenues and $35.1 million in gross
profit, representing 9.6% and 31.0% of total revenues and gross profit,
respectively.
Historically, the automotive repair industry has been highly fragmented.
However, the Company believes the increased use of advanced technology in
vehicles has made it difficult for independent repair shops to perform major or
technical repairs. Additionally, manufacturers permit warranty work to be
performed only at franchised dealerships. Given the increasing technological
complexity of motor vehicles and the trend to long term warranties, the Company
believes an increasing percentage of repair work will be performed at franchised
dealerships.
50
<PAGE>
The Company regards its service operations as an integral part of its
overall approach to customer service. Vehicle service provides additional
opportunities to build long-term customer relationships. The Company uses
customer calling, coupon programs and other techniques to attract and retain
service customers. Although individual dealerships vary based on markets and
brands, many Company dealerships use service "teams" and variable rate or "menu"
pricing structures to improve customer satisfaction with repair service.
Sales of factory authorized equipment and parts to wholesale customers are
an integral component of parts operations at certain of the Company's
dealerships. For example, the Company's Lone Star Ford dealership sold
approximately $9.3 million in wholesale parts in 1996. The Company plans to
capitalize on its representation of numerous manufacturers and its experience as
a wholesale parts distributor in order to increase sales of factory authorized
equipment and parts to wholesale customers.
The following table sets forth information regarding the Company's service
and parts sales:
<TABLE>
<CAPTION>
SONIC DEALERSHIPS
SONIC DEALERSHIPS SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
PRO FORMA
FOR THE
ACTUAL ACQUISITIONS ACTUAL
1992 1993 1994 1995 1996 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Sales revenue.............. $21,778 $27,243 $30,298 $31,957 $37,702 $ 85,958 $18,607 $20,220
Gross profit............... 7,540 9,540 10,344 11,003 13,106 35,142 6,317 6,822
Gross profit margin........ 34.6% 35.0% 34.1% 34.4% 34.8% 40.9% 33.9% 33.7%
<CAPTION>
SONIC DEALERSHIPS
SIX MONTHS ENDED
JUNE 30,
PRO FORMA
FOR THE
ACQUISITIONS
1997
<S> <C>
Sales revenue.............. $ 44,649
Gross profit............... 18,494
Gross profit margin........ 41.4%
</TABLE>
COLLISION REPAIR
The Company operates collision repair centers, or body shops, at seven of
its dealership locations. In 1996, collision repair accounted for $8.9 million,
or 1.0%, of the Company's pro forma revenues and 4.4% of the Company's gross
profit. The Company's collision repair business provides favorable margins and,
similar to service and parts, is not significantly affected by business cycles
or consumer preferences. In addition, because of the higher cost of used
vehicles, insurance adjusters are more hesitant to declare a vehicle a total
loss, resulting in more significant, and higher cost, repair jobs. The Company
believes that, because of the high capital investment required for collision
repair shops and the cost of complying with governmental regulations, large
volume body shops will be more successful in the future than smaller volume
shops. The Company believes the collision repair business will consolidate and
that it will be able to capitalize on this consolidation.
The following table sets forth information regarding the Company's
collision repair operations:
<TABLE>
<CAPTION>
SONIC
DEALERSHIPS
SONIC DEALERSHIPS SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
PRO FORMA
FOR THE
ACTUAL ACQUISITIONS ACTUAL
1992 1993 1994 1995 1996 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Sales revenue...................... $2,765 $3,094 $3,686 $3,903 $4,942 $8,954 $2,398 $2,686
Gross profit....................... 1,378 1,516 1,870 1,956 2,452 4,993 1,201 1,284
Gross profit margin................ 49.8% 49.0% 50.7% 50.1% 49.6% 55.8% 50.1% 47.8%
<CAPTION>
SONIC DEALERSHIPS
SIX MONTHS ENDED
JUNE 30,
PRO FORMA
FOR THE
ACQUISITIONS
1997
<S> <C>
Sales revenue...................... $5,232
Gross profit....................... 2,628
Gross profit margin................ 50.2%
</TABLE>
FINANCE AND INSURANCE
The Company offers its customers a wide range of financing and leasing
alternatives for the purchase of vehicles. In addition, as part of each sale,
the Company offers customers credit life, accident and health and disability
insurance to cover the financing cost of their vehicle, as well as warranty or
extended service contracts. The Company's pro forma revenue from financing,
insurance and extended warranty transactions was $16.5 million in 1996 and $9.4
million for the six months ended June 30, 1997.
The Company believes that its customers' ability to obtain financing at its
dealerships significantly enhances the Company's ability to sell new and used
vehicles. The Company provides a variety of financing and leasing alternatives
in order to meet the specific needs of each potential customer. The Company
believes its ability to obtain customer-tailored financing on a "same day" basis
provides it with an advantage over many of its competitors, particularly smaller
competitors which do not generate sufficient volume to attract the diversity of
financing sources that are available to the Company. The dealership will then be
able to provide a customer with a broader array of lease payment alternatives
and, consequently, appeal to a term buyer who is trying to purchase a vehicle of
choice at or below a specific monthly payment. During 1996, the Company arranged
for financing for approximately 44.0% of its new vehicle sales and 53.1% of its
used vehicle sales.
51
<PAGE>
The Company assigns its vehicle financing contracts and leases to other
parties, instead of directly financing sales, which reduces the Company's
exposure to loss from financing activities. The Company receives a commission
from the lender for originating and assigning the loan or lease but is assessed
a chargeback fee by the lender if a loan is canceled, in most cases, within 120
days of making the loan. Early cancellation can result from early repayment
because of refinancing of the loan, the sale or trade-in of the vehicle, or
default on the loan. The Company establishes an allowance to absorb estimated
chargebacks and refunds. The Company believes that its high volume of business
makes the Company's retail contracts more attractive to lenders, which may
enable the Company to negotiate higher commission rates in contrast to lower
volume dealerships.
In addition to its financing activities, the Company offers extended
service contracts in connection with the sale of new and used vehicles. Extended
service contracts on new vehicles supplement the warranties offered by the
vehicle manufacturer, and on used vehicles, such contracts supplement any
remaining manufacturer warranty or serve as the primary service contract on the
vehicle. The extended service contracts sold by the Company are issued by
third-party insurers that pay the Company a commission upon sale of the
contract. In 1996, the Company sold extended service contracts on 24.0% and
36.1% respectively, of its new and used retail vehicle sales. The Company also
offers its customers credit life, health and accident insurance when they
finance an automobile purchase, and receives a commission on each policy sold.
SALES AND MARKETING
The Company's marketing and advertising activities vary among its
dealerships and among its markets. The Company advertises primarily through
television, newspapers, radio and direct mail and regularly conducts special
promotions designed to focus vehicle buyers on its product offerings. The
Company intends to continue tailoring its marketing efforts to the relevant
marketplace in order to reach the Company's targeted customer base. The Company
also has computer technology to aid sales people in prospecting for customers.
Under arrangements with manufacturers, the Company receives a subsidy for a
portion of its advertising expenses incurred in connection with a manufacturer's
vehicles. Because of the Company's leading market presence in certain markets,
the Company believes it has been able to realize cost savings on its advertising
expenses due to volume discounts and other concessions from media. The Company
also believes its consolidated marketing campaigns within particular markets
result in enhanced name recognition and sales volume when compared with smaller
competitors in the same market.
RELATIONSHIPS WITH MANUFACTURERS
Each of the Company's dealerships operates under a separate franchise or
dealer agreement (a "Dealer Agreement") which governs the relationship between
the dealership and the Manufacturer. In general, each Dealer Agreement specifies
the location of the dealership for the sale of vehicles and for the performance
of certain approved services in a specified market area. The designation of such
areas generally does not guarantee exclusivity within a specified territory. In
addition, most Manufacturers allocate vehicles on a "turn and earn" basis which
rewards high volume. A Dealer Agreement requires the dealer to meet specified
standards regarding showrooms, the facilities and equipment for servicing
vehicles, inventories, minimum net working capital, personnel training, and
other aspects of the business. The Dealer Agreement with each dealership also
gives each Manufacturer the right to approve the dealership's general manager
and any material change in management or ownership of the dealership. Each
Manufacturer may terminate a Dealer Agreement under certain circumstances, such
as a change in control of the dealership without Manufacturer approval, the
impairment of the reputation or financial condition of the dealership, the
death, removal or withdrawal of the dealership's general manager, the conviction
of the dealership or the dealership's owner or general manager of certain
crimes, a failure to adequately operate the dealership or maintain wholesale
financing arrangements, insolvency or bankruptcy of the dealership or a material
breach of other provisions of the Dealer Agreement. In connection with the
Offering, the Company is amending its Dealer Agreements or otherwise obtaining
consents from Manufacturers to revise those provisions which would have
prohibited the Company from selling its Common Stock to the public. See
"Description of Capital Stock -- Delaware Law, Certain Charter and Bylaw
Provisions and Certain Franchise Agreement Provisions."
Many automobile manufacturers are still developing their policies regarding
public ownership of dealerships. The Company believes that these policies will
continue to change as more dealership groups sell their stock to the public, and
as the established, publicly-owned dealership groups acquire more franchises. To
the extent that new or amended manufacturer policies restrict the number of
dealerships which may be owned by a dealership group, or the transferability of
the Company's Common Stock, such policies could have a material adverse effect
on the Company. See "Risk Factors -- Dependence on Automobile Manufacturers,"
" -- Manufacturers' Restrictions on Acquisitions," " -- Stock Ownership/Issuance
Limits; Limitation on Ability to Issue Additional Equity" and " -- Concentration
of Voting Power and Anti-Takeover Provisions."
52
<PAGE>
The Company's Dealer Agreement with Ford requires the Company to deliver to
Ford all Securities and Exchange Commission filings made by the Company or
third-parties with respect to the Company, including Schedules 13D and 13G. If
any such filing shows that (a) any person or entity would acquire 15% or more of
Sonic's voting securities, (b) any person or entity that owns or controls 15% or
more of Sonic's voting securities (or other securities convertible into such
voting securities) intends or may intend to acquire additional voting securities
of Sonic, (c) an extraordinary corporate transaction, such as a merger or
liquidation, involving Sonic or any of its subsidiaries is anticipated, (d) a
material asset sale involving Sonic or any of its subsidiaries is anticipated,
(e) a change in Sonic's Board of Directors or management is planned or has
occurred, or (f) any other material change in Sonic's business or corporate
structure is planned or has occurred, then the Company must give Ford notice of
such event. If Ford reasonably determines that such an event is not in its
interest, the Company may be required to sell or resign from one or more of its
Ford franchises. Should Sonic or any of its Ford franchisee subsidiaries enter
into an agreement to transfer the assets of a Ford franchisee subsidiary to a
third party, the right of first refusal described in the Ford Dealer Agreement
will apply.
Under the Company's Dealer Agreements with Toyota and Infiniti, Toyota and
Infiniti have the right to approve any ownership or voting rights of Sonic of
20% or greater by any individual or entity. Honda may force the sale of the
Company's Honda franchise if any person or entity, other than members of the
Smith Group, acquires 5% or greater of the Common Stock (10% or greater if such
entity is an institutional investor), and Honda deems such person or entity to
be unsatisfactory. Volkswagen has approved the sale of no more than 25% of the
voting control of Sonic in the Offering, and any future changes in ownership or
transfers among the Company's current stockholders that could effect the voting
or managerial control of Sonic's Volkswagen franchisee subsidiaries requires the
prior approval of Volkswagen. Similarly, Chrysler has approved of the public
sale of only 50% of the Common Stock and requires prior approval of any future
sales that would result in a change in voting or managerial control of the
Company. Moreover, Honda's approval of the Offering is subject to the Smith
Group plus Nelson Bowers owning 51% of the shares of Common Stock on a
fully-diluted basis. Upon consummation of the Offering, 48.9% of the Common
Stock (on a fully-diluted basis after giving effect to the options to be issued
at the time of the Offering under the Stock Option Plan), will be owned by
persons other than the Smith Group or Nelson Bowers (assuming full exercise of
the Underwriters' over-allotment option).
Under the Company's Dealer Agreement with General Motors ("GM"), the
Company has agreed, among other things, to disclose the following provisions:
Sonic will deliver to GM copies of all Schedules 13D and 13G, and all
amendments thereto and terminations thereof, received by Sonic, within five
days of receipt of such Schedules. If Sonic is aware of any ownership of
its stock that should have been reported to it on Schedule 13D but that is
not reported in a timely manner, it will promptly give GM written notice of
such ownership, with any relevant information about the owner that Sonic
possesses.
If Sonic, through its Board of Directors or through shareholder
action, proposes or if any person, entity or group sends Sonic a Schedule
13D, or any amendments thereto, disclosing (a) an agreement to acquire or
the acquisition of aggregate ownership of more than 20% of the voting stock
of Sonic and (b) Sonic, through its Board of Directors or through
shareholder action, proposes or if any plans or proposals which relate to
or would result in the following: (i) the acquisition by any person of more
than 20% of the voting stock of Sonic other than for the purposes of
ordinary passive investment; (ii) an extraordinary corporate transaction,
such as a material merger, reorganization or liquidation, involving Sonic
or a sale or transfer of a material amount of assets of Sonic and its
subsidiaries; (iii) any change which, together with any changes made to the
Board of Directors within the preceding year, would result in a change in
control of the then current Board of Sonic; or (iv) in the case of an
entity that produces motor vehicles or controls or is controlled by or is
under common control with an entity that either produces motor vehicles or
is a motor vehicle franchisor, the acquisition by any person, entity or
group of more than 20% of the voting stock of Sonic and any proposal by any
such person, entity or group, through the Sonic Board of Directors or
shareholders action, to change the Board of Directors of Sonic, then, if
such actions in GM's business judgment could have a material or adverse
effect on its image or reputation in the GM dealerships operated by Sonic
or be materially incompatible with GM's interests (and upon notice of GM's
reasons for such judgment), Sonic has agreed that it will take one of the
remedial actions set forth in the next paragraph within 90 days of
receiving such Schedule 13D or such amendment.
If Sonic is obligated under the previous paragraph to take remedial
action, it will (a) transfer to GM or its designee, and GM or its designee
will acquire the assets, properties or business associated with any GM
dealership operated by Sonic at fair market value as determined in
accordance with GM's Dealership Agreement with the Company, or (b) provide
evidence to GM that such person, entity or group no longer has such
threshold level of ownership interest in Sonic or that the actions
described in clause (b) of the previous paragraph will not occur.
53
<PAGE>
Should Sonic or its GM franchisee subsidiary enter into an agreement
to transfer the assets of the GM franchisee subsidiary to a third party,
the right of first refusal described in the GM Dealer Agreement shall apply
to any such transfer.
Certain state statutes in Florida and other states limit manufacturers'
control over dealerships. Under Florida law, notwithstanding any contrary terms
in a dealer agreement, manufacturers may not unreasonably withhold approval for
the sale of a dealership. Acceptable grounds for disapproval include material
shortcomings in the character, financial condition or business experience of the
proposed transferee. In addition, dealerships may challenge manufacturers'
attempts to establish new dealerships in the dealer's markets, and state
regulators may deny applications to establish new dealerships for a number of
reasons, including a determination that the manufacturer is adequately
represented in the area. Manufacturers must have "good cause" for any
termination or failure to renew a dealer agreement, and an automaker's license
to distribute vehicles in Florida may be revoked if, among other things, the
automaker has forced or attempted to force an automobile dealer to accept
delivery of motor vehicles not ordered by that dealer.
Under Texas law, despite the terms of contracts between manufacturers and
dealers, manufacturers may not unreasonably withhold approval of a transfer of a
dealership. It is unreasonable under Texas law for a manufacturer to reject a
prospective transferee of a dealership who is of good moral character and who
otherwise meets the manufacturer's written, reasonable and uniformly applied
standards or qualifications relating to the prospective transferee's business
experience and financial qualifications. In addition, under Texas law and the
laws of other states, franchised dealerships may challenge manufacturers'
attempts to establish new franchises in the franchised dealers' markets, and
state regulators may deny applications to establish new dealerships for a number
of reasons, including a determination that the manufacturer is adequately
represented in the region. Texas law limits the ability of manufacturers to
terminate or fail to renew franchises. In addition, other laws in Texas and
elsewhere limit the ability of manufacturers to withhold their approval for the
relocation of a franchise or require that disputes be arbitrated. In addition, a
manufacturer's license to distribute vehicles in Texas may be revoked if, among
other things, the manufacturer has forced or attempted to force an automobile
dealer to accept delivery of motor vehicles not ordered by that dealer.
Georgia law provides that no manufacturer may arbitrarily reject a proposed
change of control or sale of an automobile dealership, and any manufacturer
challenging such a transfer of a dealership must provide written reasons for its
rejection to the dealer. Manufacturers bear the burden of proof to show that any
disapproval of a proposed transfer of a dealership is not arbitrary. If a
manufacturer terminates a franchise agreement due to a proposed transfer of the
dealership or for any other reason not considered to constitute good cause under
Georgia law, such termination will be ineffective. As an alternative to
rejecting or accepting a proposed transfer of a dealership or terminating the
franchise agreement, Georgia law provides that a manufacturer may offer to
purchase the dealership on the same terms and conditions offered to the
prospective transferee.
Under Tennessee law, a manufacturer may not modify, terminate or refuse to
renew a franchise agreement with a dealer except for good cause, as defined in
the governing Tennessee statutes. Further, a manufacturer may be denied a
Tennessee license, or have an existing license revoked or suspended if the
manufacturer modifies, terminates, or suspends a franchise agreement due to an
event not constituting good cause. Good cause includes material shortcomings in
the character, financial condition or business experience of the dealer. A
manufacturer's Tennessee license may also be revoked if the manufacturer
prevents or attempts to prevent the sale or transfer of the dealership by
unreasonably withholding consent to the transfer.
COMPETITION
The retail automotive industry is highly competitive. Depending on the
geographic market, the Company competes with both dealers offering the same
brands and product line as the Company and dealers offering other automakers'
vehicles. The Company also competes for vehicle sales with auto brokers and
leasing companies. The Company competes with small, local dealerships and with
large multi-franchise auto dealerships. Many of the Company's larger competitors
are larger and have greater financial and marketing resources and are more
widely known than the Company. Some of the Company's competitors also may
utilize marketing techniques, such as Internet visibility or "no negotiation"
sales methods, not currently used by the Company.
The Company also competes with regional and national car rental companies,
which sell their used rental cars, and used automobile "superstores," such as
AutoNation and CarMax. In the future, new competitors may enter the automotive
retailing market, including automobile manufacturers (such as Ford) that may
decide to open additional retail outlets or acquire other dealerships. In
addition, the used vehicle superstores generally offer a greater and more varied
selection of vehicles than the Company's dealerships. As the Company seeks to
acquire dealerships in new markets, it may face significant competition
(including competition from other publicly-owned dealer groups) as it strives to
gain market share. See "Risk Factors -- Competition"
54
<PAGE>
The Company believes that the principal competitive factors in vehicle
sales are the marketing campaigns conducted by automakers, the ability of
dealerships to offer a wide selection of the most popular vehicles, the location
of dealerships and the quality of customer service. Other competitive factors
include customer preference for makes of automobiles, pricing (including
manufacturer rebates and other special offers) and warranties.
In addition to competition for vehicle sales, the Company also competes
with other auto dealers, service stores, auto parts retailers and independent
mechanics in providing parts and service. The Company believes that the
principal competitive factors in parts and service sales are price, the use of
factory-approved replacement parts, the familiarity with a dealer's makes and
models and the quality of customer service. A number of regional and national
chains offer selected parts and service at prices that may be lower than the
Company's prices.
In arranging or providing financing for its customers' vehicle purchases,
the Company competes with a broad range of financial institutions. The Company
believes that the principal competitive factors in providing financing are
convenience, interest rates and contract terms.
The Company's success depends, in part, on national and regional
automobile-buying trends, local and regional economic factors and other regional
competitive pressures. The Company sells its vehicles in the Charlotte,
Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta markets.
Conditions and competitive pressures affecting these markets, such as
price-cutting by dealers in these areas, or in any new markets the Company
enters, could adversely affect the Company, although the retail automobile
industry as a whole might not be affected. See "Risk Factors -- Competition."
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
A number of regulations affect the Company's business of marketing,
selling, financing and servicing automobiles. The Company also is subject to
laws and regulations relating to business corporations generally.
Under North Carolina, South Carolina, Tennessee, Florida, Georgia and Texas
law as well as the laws of other states into which the Company may expand, the
Company must obtain a license in order to establish, operate or relocate a
dealership or operate an automotive repair service. These laws also regulate the
Company's conduct of business, including its advertising and sales practices.
Other states may have similar requirements.
The Company's operations are also subject to laws governing consumer
protection. Automobile dealers and manufacturers are subject to so-called "Lemon
Laws" that require a manufacturer or the dealer to replace a new vehicle or
accept it for a full refund within one year after initial purchase if the
vehicle does not conform to the manufacturer's express warranties and the dealer
or manufacturer, after a reasonable number of attempts, is unable to correct or
repair the defect. Federal laws require certain written disclosures to be
provided on new vehicles, including mileage and pricing information.
The imported automobiles purchased by the Company are subject to United
States customs duties and, in the ordinary course of its business, the Company
may, from time to time, be subject to claims for duties, penalties, liquidated
damages, or other charges. Currently, United States customs duties are generally
assessed at 2.5% of the customs value of the automobiles imported, as classified
pursuant to the Harmonized Tariff Schedule of the United States. See "Risk
Factors -- Imported Products."
The Company's financing activities with its customers are subject to
federal truth-in-lending, consumer leasing and equal credit opportunity
regulations as well as state and local motor vehicle finance laws, installment
finance laws, usury laws and other installment sales laws. Some states regulate
finance fees that may be paid as a result of vehicle sales. State and federal
environmental regulations, including regulations governing air and water quality
and the storage and disposal of gasoline, oil and other materials, also apply to
the Company.
The Company believes that it complies in all material respects with the
laws affecting its business. Possible penalties for violation of any of these
laws include revocation of the Company's licenses and fines. In addition, many
laws may give customers a private cause of action.
As with automobile dealerships generally, and service parts and body shop
operations in particular, the Company's business involves the use, storage,
handling and contracting for recycling or disposal of hazardous or toxic
substances or wastes, including environmentally sensitive materials such as
motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon,
waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing
agents, gasoline and diesel fuels. The Company's business also involves the past
and current operation and/or removal of aboveground and underground storage
tanks containing such substances or wastes. Accordingly, the Company is subject
to regulation by federal, state and local authorities establishing health and
environmental quality standards, and liability related thereto, and providing
penalties for violations of those standards. The Company is also subject to
laws, ordinances and regulations governing remediation of
55
<PAGE>
contamination at facilities it operates or to which it sends hazardous or toxic
substances or wastes for treatment, recycling or disposal.
The Company believes that it does not have any material environmental
liabilities and that compliance with environmental laws and regulations will
not, individually or in the aggregate, have a material adverse effect on the
Company's results of operations or financial condition. However, soil and
groundwater contamination is known to exist at certain properties used by the
Company. Furthermore, environmental laws and regulations are complex and subject
to frequent change. There can be no assurance that compliance with amended, new
or more stringent laws or regulations, stricter interpretations of existing laws
or the future discovery of environmental conditions will not require additional
expenditures by the Company, or that such expenditures will not be material. See
"Risk Factors -- Adverse Effect of Government Regulation; Environmental
Regulatory Compliance Costs."
56
<PAGE>
FACILITIES
The Company's principal executive offices are located at 5401 East
Independence Boulevard, Charlotte, North Carolina 28218, and its telephone
number is (704) 532-3301. These executive offices are located on the premises
owned by Town & Country Ford. The following table identifies, for each of the
properties to be utilized by the Company's dealership operations the location,
the owner/lessor, and the term and rental rate of the Company's lease for such
property, if applicable:
<TABLE>
<CAPTION>
1997
OWNERSHIP MONTHLY EXPIRATION
DEALERSHIP STATUS OWNER/LESSOR RENT (2) DATE FACILITY
<S> <C> <C> <C> <C> <C>
Town & Country Ford.................. Lease STC Properties (1) $ 34,083 2000 Main Bldg.
Body Shop
5401 East Independence Blvd.,
Charlotte
Lone Star Ford....................... Lease Viking Investments (1) $ 30,000 2005 Main Bldg.
Used Car Bldg.
8477 North Freeway, Houston Body Shop
Fleet Bldg.
Fort Mill Ford....................... Own -- -- -- Main Bldg.
Body Shop
788 Gold Hill Rd., Fort Mill, SC
Fort Mill Chrysler-Plymouth-Dodge.... Lease Jeffrey Boyd $ 16,667 2002 Main Bldg.
Used Car Bldg.
3310 Hwy. 51, Fort Mill, SC
Town & Country Toyota................ Own -- -- -- Main Bldg.
Body Shop
9101 South Blvd., Charlotte
Frontier Oldsmobile-Cadillac......... Lease Landers Oldsmobile-Cadillac $ 17,000 1998(3 ) Main Bldg.
Body Shop
2501 Roosevelt Blvd., Monroe, NC Used Car Bldg.
Ken Marks Ford....................... Lease Marks Holding Company (1) $ 95,000 2007(3 ) Main Bldg.
24825 US Hwy. 19 North, Clearwater
&
3925 Tampa Rd., Oldsmar, FL
Dyer Volvo........................... Lease D&R Investments (1) $ 50,000 (4) 2009(3 ) Main Bldg.
5260 Peachtree Industrial Blvd.,
Atlanta
Lake Norman Lease Phil M. and Quinton M. Gandy $ 40,000 (4) 2007(3 ) Main Bldg.
Chrysler-Plymouth-Jeep-Eagle....... and affiliates
Chartwell Center Dr., Cornelius, NC
Lake Norman Dodge.................... Lease Phil M. and Quinton M. Gandy $ 40,000 (4) 2007(3 ) Main Bldg.
and affiliates Truck Center
I-77 & Torrence Chapel Rd.,
Cornelius, NC
KIA/VW of Chattanooga................ Lease KIA Land Development (1) $ 11,070 2007(3 ) Main Bldg.
6015 International Dr., Chattanooga
European Motors of Nashville......... Lease Third National Bank, $ 21,070 1998(3 ) Main Bldg.(6)
David P'Pool,
630 Murfreeboro Pike, Nashville Stella P'Pool
European Motors...................... Lease Nelson Bowers (1) $ 16,846 (4) 2007(3 ) Main Bldg.
5949 Brainerd Rd., Chattanooga
Jaguar of Chattanooga................ Lease JAG Properties LLC, Thomas $ 22,010 2017(3 ) Main Bldg.
Green, Jr. and
5915 Brainerd Rd., Chattanooga Nelson Bowers (1)
Cleveland Lease Cleveland Properties LLC (1) $ 14,000 2011(3 ) Main Bldg.
Chrysler-Plymouth-Jeep-Eagle.......
2496 South Lee Hwy., Cleveland, TN
Nelson Bowers Dodge.................. Lease Edward & Barbara Wright $ 16,800 2001(3 ) Main Bldg.
402 West Martin Luther King Blvd.,
Chattanooga
Cleveland Village Imports............ Lease Thomas Green, Jr. and Nelson $ 11,000 1997(3 ) Main Bldg.(7)
Bowers (1)
2490 & 2492 South Lee Hwy.,
Cleveland, TN
Nelson Bowers Ford................... Lease Robert G. Card, Jr. $ 8,900 Month to ) Main Bldg.
Month(3
717 South Lee Hwy., Cleveland, TN
Williams Motors...................... Lease J.T. Williams $ 14,000 1998(5 ) Main Bldg.
803 North Anderson Rd., Rock Hill,
SC
<CAPTION>
DEALERSHIP SQ. FT. ACRES
<S> <C> <C>
Town & Country Ford.................. 85,013 12.48
24,768
5401 East Independence Blvd.,
Charlotte
Lone Star Ford....................... 79,725 24.76
2,125
8477 North Freeway, Houston 26,450
1,500
Fort Mill Ford....................... 34,162 10.00
11,275
788 Gold Hill Rd., Fort Mill, SC
Fort Mill Chrysler-Plymouth-Dodge.... 9,809 5.50
1,470
3310 Hwy. 51, Fort Mill, SC
Town & Country Toyota................ 50,800 5.70
17,840
9101 South Blvd., Charlotte
Frontier Oldsmobile-Cadillac......... 14,825 7.08
11,250
2501 Roosevelt Blvd., Monroe, NC 2,200
Ken Marks Ford....................... 79,100 22.00
24825 US Hwy. 19 North, Clearwater
&
3925 Tampa Rd., Oldsmar, FL
Dyer Volvo........................... 60,000 6.00
5260 Peachtree Industrial Blvd.,
Atlanta
Lake Norman 26,000 6.00
Chrysler-Plymouth-Jeep-Eagle.......
Chartwell Center Dr., Cornelius, NC
Lake Norman Dodge.................... 25,000 6.00
5,000
I-77 & Torrence Chapel Rd.,
Cornelius, NC
KIA/VW of Chattanooga................ 8,445 3.75
6015 International Dr., Chattanooga
European Motors of Nashville......... 49,385 4.00
630 Murfreeboro Pike, Nashville
European Motors...................... 40,295 12.24
5949 Brainerd Rd., Chattanooga
Jaguar of Chattanooga................ 34,850 3.57
5915 Brainerd Rd., Chattanooga
Cleveland 17,750 5.60
Chrysler-Plymouth-Jeep-Eagle.......
2496 South Lee Hwy., Cleveland, TN
Nelson Bowers Dodge.................. 30,000 4.88
402 West Martin Luther King Blvd.,
Chattanooga
Cleveland Village Imports............ 15,760 2.05
2490 & 2492 South Lee Hwy.,
Cleveland, TN
Nelson Bowers Ford................... 19,725 1.40
717 South Lee Hwy., Cleveland, TN
Williams Motors...................... 15,000(8) 3.0(8)
803 North Anderson Rd., Rock Hill,
SC
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
57
<PAGE>
(1) These lessors are affiliates of the Company's stockholders and/or executive
officers. See "Risk Factors -- Potential Conflicts of Interest," "Certain
Transactions -- Certain Dealership Leases" and "Principal Stockholders."
(2) All of the Company's leases are "triple net" leases and require the Company
to pay all real estate taxes, maintenance and insurance costs for the
property.
(3) Each of these leases provides for two renewal terms of five years each, at
the option of the Company.
(4) Monthly rent expense based on estimate from the purchase agreement relating
to the Acquisition.
(5) This lease provides for four renewal terms of one year each, at the option
of the Company.
(6) European Motors of Nashville has entered into a 20-year lease with H.G. Hill
Realty Company, an entity unaffiliated with the Company, regarding a new BMW
facility to be constructed at a site separate from its existing facility.
The monthly rent payments under this lease are not presently fixed and will
depend upon the final construction costs of the new facility. The lease term
will begin when the Company occupies these premises.
(7) Cleveland Village Imports also leases a used-car lot across the street from
its main facility from individuals not affiliated with the Company for a
term expiring in 2002 and providing for $3,000 in monthly rent.
(8) Estimated size.
The Company's dealerships are generally located along major U.S. or
interstate highways. One of the principal factors considered by the Company in
evaluating an acquisition candidate is its location. The Company prefers to
acquire dealerships located along major thoroughfares, primarily interstate
highways with ease of access, which can be easily visited by prospective
customers.
The Company owns certain of the real estate associated with Town & Country
Toyota and Fort Mill Ford. The remainder of the properties utilized by the
Company's dealership operations are leased as set forth in the foregoing table.
The Company believes that its facilities are adequate for its current needs. In
connection with its acquisition strategy, the Company intends to lease the real
estate associated with a particular dealership whenever practicable.
Under the terms of its franchise agreements, the Company must maintain an
appropriate appearance and design of its facilities and is restricted in its
ability to relocate its dealerships. See " -- Relationships with Manufacturers."
EMPLOYEES
As of June 30, 1997 the Company employed 1,814 people, of whom
approximately 271 were employed in managerial positions, 654 were employed in
non-managerial sales positions, 387 were employed in non-managerial parts and
service positions and 502 were employed in administrative support positions.
The Company believes that many dealerships in the retail automobile
industry have difficulty in attracting and retaining qualified personnel for a
number of reasons, including the historical inability of dealerships to provide
employees with an equity interest in the profitability of the dealerships. The
Company intends, upon completion of the Offering, to provide certain executive
officers, managers and other employees with stock options and all employees with
a stock purchase plan and believes this type of equity incentive will be
attractive to existing and prospective employees of the Company. See
"Management -- Stock Option Plan" and " -- Employee Stock Purchase Plan" and
"Risk Factors -- Dependence on Key Personnel and Limited Management and
Personnel Resources."
The Company believes that its relationship with its employees is good. None
of the Company's employees is represented by a labor union. Because of its
dependence on the Manufacturers, however, the Company may be affected by labor
strikes, work slowdowns and walkouts at the Manufacturer's manufacturing
facilities. See "Risk Factors -- Dependence on Automobile Manufacturers."
LEGAL PROCEEDINGS AND INSURANCE
From time to time, the Company is named in claims involving the manufacture
of automobiles, contractual disputes and other matters arising in the ordinary
course of the Company's business. Currently, no legal proceedings are pending
against or involve the Company that, in the opinion of management, could
reasonably be expected to have a material adverse effect on the business,
financial condition or results of operations of the Company.
Because of their vehicle inventory and nature of business, automobile
retail dealerships generally require significant levels of insurance covering a
broad variety of risks. The Company's insurance includes an umbrella policy as
well as insurance on its real property, comprehensive coverage for its vehicle
inventory, general liability insurance, employee dishonesty coverage and errors
and omissions insurance in connection with its vehicle sales and financing
activities.
58
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS; KEY PERSONNEL
The executive officers, directors and key personnel of the Company, and
their ages as of the date of this Prospectus, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
<S> <C> <C>
O. Bruton Smith..................... 70 Chairman, Chief Executive Officer and Director*
Bryan Scott Smith................... 29 President, Chief Operating Officer and Director*
Nelson E. Bowers, II................ 53 Executive Vice President and Director Nominee*
Chief Financial Officer, Vice President-Finance, Treasurer, Secretary and
Director*
Theodore M. Wright.................. 35
William R. Brooks................... 47 Director
Jeffrey C. Rachor................... 35 Regional Vice President-Mid South Region
O. Ken Marks, Jr.................... 35 Regional Vice President-Florida
Ivan A. Tufty....................... 57 Regional Vice President-Texas
William M. Sullivan................. 65 Regional Vice President-North and South Carolina
</TABLE>
* Executive Officer
O. BRUTON SMITH has been the Chairman, Chief Executive Officer and a
director of the Company since its organization in 1997 and presently is the
controlling stockholder of the Company through his direct and indirect ownership
of Class B Common Stock. Mr. Smith has been the president and controlling
stockholder of Sonic Financial since its formation, which prior to the
Reorganization owned a controlling interest in all of the Company's dealerships
except Town & Country Toyota and presently owns a controlling interest in the
Company's Common Stock. Mr. Smith, prior to the Reorganization, owned a
controlling interest in Town & Country Toyota. Mr. Smith currently is, and since
their acquisition by Sonic Financial has been, a director and the president of
each of the Company's dealerships. Mr. Smith has worked in the retail automobile
industry since 1966. Mr. Smith's initial term as a director of the Company will
expire at the annual meeting of stockholders of the Company to be held in 2000.
Mr. Smith is also the chairman and chief executive officer, a director and
controlling shareholder, either directly or through Sonic Financial, of Speedway
Motorsports, Inc. ("SMI"). SMI is a public company traded on the NYSE. Among
other things, it owns and operates the following NASCAR racetracks: Atlanta
Motor Speedway, Bristol Motor Speedway, Charlotte Motor Speedway, Sears Point
Raceway and Texas Motor Speedway. He is also the executive officer and a
director of each of SMI's operating subsidiaries. Under his employment agreement
with the Company, Mr. Smith is required to devote approximately 50% of his
business time to the Company's business.
BRYAN SCOTT SMITH has been the President and Chief Operating Officer of the
Company since April 1997, and a director of the Company since its organization
in 1997. Mr. Smith, who is the son of Bruton Smith, has been the Vice President
since 1993 and, prior to the Reorganization, the minority owner of Town &
Country Ford. Mr. Smith joined the Company's predecessor in January 1991 on a
full-time basis as an assistant used car manager. In August of 1991, Mr. Smith
became the used car manager at Town & Country Ford. Mr. Smith was promoted to
General Manager of Town & Country Ford in November 1992 where he remained until
his appointment to President and Chief Operating Officer of the Company in April
of 1997. Mr. Smith's initial term as a director of the Company will expire at
the annual meeting of stockholders of the Company to be held in 1998.
NELSON E. BOWERS, II will be appointed the Executive Vice President and a
director of the Company upon consummation of the Bowers Acquisition. Mr. Bowers
owns a controlling interest in the dealerships that are the subject of the
Bowers Acquisition and has worked in the retail automobile industry since 1974.
Mr. Bowers has served on national dealer councils for BMW and Volvo and has
owned and operated dealerships since 1979. Several of the dealerships owned by
Mr. Bowers have been awarded the highest awards available from manufacturers for
customer satisfaction. Mr. Bowers' initial term as a director of the Company
will expire at the annual meeting of stockholders to be held in 1999.
THEODORE M. WRIGHT has been the Chief Financial Officer, Vice
President-Finance, Treasurer and Secretary of the Company since April 1997, and
a director of the Company since June 1997. Before joining the Company, Mr.
Wright was a Senior Manager and in charge of the Columbia, South Carolina office
of Deloitte & Touche LLP. Prior to joining the Columbia office, Mr. Wright was a
Senior Manager in Deloitte & Touche LLP's National Office Accounting Research
and SEC Services Departments from 1994 to 1995. From 1992 to 1994 Mr. Wright was
an audit manager with Deloitte & Touche LLP. Mr. Wright's initial term as a
director of the Company will expire at the annual meeting of stockholders to be
held in 1999.
59
<PAGE>
WILLIAM R. BROOKS has been a director of the Company since its formation.
Mr. Brooks also served as the Company's Treasurer, Vice President and Secretary
from its organization in February 1997 to April 1997 when Mr. Wright was
appointed to those positions. Since December 1994, Mr. Brooks has been the Vice
President, Treasurer, Chief Financial Officer and a director of SMI. Mr. Brooks
also serves as an executive officer and a director for various operating
subsidiaries of SMI. Before the formation of SMI in December 1994, Mr. Brooks
was the Vice President of the Charlotte Motor Speedway and a Vice President and
a director of Atlanta Motor Speedway. Mr. Brooks joined Sonic Financial from
Price Waterhouse in 1983. At Sonic Financial, he was promoted from Manager to
Controller in 1985 and again to Chief Financial Officer in 1989. Mr. Brooks'
initial term as a director of the Company will expire at the annual meeting of
stockholders to be held in 2000.
JEFFREY C. RACHOR will be appointed Regional Vice President upon
consummation of the Bowers Acquisition. Mr. Rachor has over 13 years experience
in automobile retailing and has been the chief operating officer at the Bowers
Dealerships since 1989. During this period, Mr. Rachor has also served at
various times as the general manager of Toyota, Saturn and
Chrysler-Plymouth-Jeep-Eagle dealerships. Prior to joining the Bowers
organization, Mr. Rachor was an assistant regional manager with American Suzuki
Motor Corporation from 1987 to 1989 and a Metro Sales Manager and a District
Sales Manager with GM's Buick Motor Division from 1983 to 1987.
O. KEN MARKS, JR. owns a controlling interest in Ken Marks Ford and has
operated that dealership as its chief executive since prior to 1992. Mr. Marks
is a Chairman's award winner from Ford and has over 13 years experience in auto
retailing. Ken Marks Ford is one of the top 100 automobile dealerships in the
United States and one of the 30 largest Ford dealerships. Mr. Marks will be
appointed a Regional Vice President upon consummation of the Offering.
IVAN A. TUFTY has been Executive Manager of Lone Star Ford since 1990 and
will be appointed a Regional Vice President upon consummation of the Offering.
Under Mr. Tufty's leadership, Lone Star Ford has been recognized as one of the
30 largest Ford dealerships and one of the 100 largest dealerships in the United
States. Mr. Tufty has over 40 years of experience in auto retailing and was a
dealer principal and equity owner for 12 years.
WILLIAM M. SULLIVAN has been Vice-President of Town & Country Ford since
prior to 1992 and will be appointed a Regional Vice President upon consummation
of the Offering. Mr. Sullivan has over 25 years experience in auto retailing as
an Executive Manager, head of F&I and in other roles.
As soon as practicable after the Offering, the Company intends to name two
or three individuals not employed by or affiliated with the Company to the
Company's Board of Directors.
The Board of Directors of the Company is divided into three classes, each
of which, after a transitional period, will serve for three years, with one
class being elected each year. The executive officers are elected annually by,
and serve at the discretion of, the Company's Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since the Company's organization in February 1997, all matters concerning
executive officer compensation have been addressed by the entire Board of
Directors. Bruton Smith, Scott Smith and Theodore Wright were executive officers
of the Company and, together with William R. Brooks, will constitute the entire
Board until the consummation of the Offering when Nelson Bowers, an executive
officer of the Company, is to be appointed. Bruton Smith serves as Chairman of
the Board of SMI. William R. Brooks, an executive officer of SMI, serves on the
Board of the Company. As soon as practicable after the Offering, the Company
intends to name at least two independent directors who will comprise the
Company's compensation committee. See "Management."
LIMITATIONS OF DIRECTORS LIABILITY
The Certificate includes a provision that effectively eliminates the
liability of directors to the Company or to the Company's stockholders for
monetary damages for breach of the fiduciary duties of a director, except for
breaches of the duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, certain actions
with respect to unlawful dividends, stock repurchases or redemptions and any
transaction from which the director derived an improper personal benefit. This
provision does not prevent stockholders from seeking nonmonetary remedies
covering any such action, nor does it affect liabilities under the federal
securities laws. The Company's Bylaws further provide that the Company shall
indemnify each of its directors and officers, to the fullest extent authorized
by Delaware Law, with respect to any threatened, pending or completed action,
suit or proceeding to which such person may be a party by reason of serving as a
director or officer. Delaware Law currently authorizes a corporation to
indemnify its directors and
60
<PAGE>
officers against expenses (including attorney's fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action, suit or proceeding brought by a third party if such
officers or directors acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reason to believe
their conduct was unlawful. Indemnification is permitted in more limited
circumstances with respect to derivative actions. The Company believes that
these provisions of the Certificate and the Bylaws are necessary to attract and
retain qualified persons to serve as directors and officers.
COMMITTEES OF THE BOARD
The Board of Directors will establish a Compensation Committee and an Audit
Committee consisting of independent directors upon the election of at least two
independent directors. The Compensation Committee will review and approve
compensation for the executive officers, and administer, and determine awards
under, the Stock Option Plan and any other incentive compensation plans for
employees of the Company. See " -- Stock Option Plan" and " -- Employee Stock
Purchase Plan." The Audit Committee will recommend the selection of auditors for
the Company and will review the results of the audit and other reports and
services provided by the Company's independent auditors. The Company has not
previously had either of these committees.
DIRECTOR COMPENSATION
Members of the Board of Directors who are not employees of the Company will
be compensated for their services in amounts to be determined. The Company will
also reimburse all directors for their expenses incurred in connection with
their activities as directors of the Company. Directors who are also employees
of the Company receive no compensation for serving on the Board of Directors.
EXECUTIVE COMPENSATION
Sonic was incorporated on January 31, 1997 and did not conduct any
operations prior to that time. The Company anticipates that during 1997 its most
highly compensated executive officers with annual salaries exceeding $100,000,
and their annual base salaries for 1997, will be: Bruton Smith -- $350,000,
Scott Smith -- $300,000, Nelson Bowers -- $400,000, and Theodore
Wright -- $180,000.
Set forth below is information for the years ended December 31, 1996, 1995
and 1994 with respect to compensation for services to the Company's predecessors
of the Company's executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
OTHER NUMBER OF SHARES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY (1) BONUS (2) COMPENSATION OPTIONS (4) COMPENSATION (5)
<S> <C> <C> <C> <C> <C> <C>
O. Bruton Smith 1996 $ 164,750 -- $ 33,350(3) -- --
Chairman, Chief Executive Officer 1995 142,200 -- 41,350(3) -- --
and Director 1994 142,200 -- 41,000(3) -- --
Bryan Scott Smith 1996 $ 48,000 $ 230,714 (5) -- --
President, Chief 1995 48,000 168,670 (5) -- --
Operating Officer 1994 48,000 134,537 (5) -- --
and Director
</TABLE>
(1) Does not include the dollar value of perquisites and other personal
benefits.
(2) The amounts shown are cash bonuses earned in the specified year and paid in
the first quarter of the following year.
(3) The Company provides Mr. Smith with the use of automobiles for personal use,
the annual cost of which is reflected as Other Annual Compensation.
(4) The Company's Stock Option Plan was adopted in September 1997. Therefore, no
options were granted to any of the Company's executive officers in 1996,
1995 or 1994.
(5) The aggregate amount of perquisites and other personal benefits received did
not exceed the lesser of $50,000 or 10% of the total annual salary and bonus
reported for such executive officer.
61
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Bruton
Smith, Scott Smith, Bowers, Wright, Marks and Rachor (the "Employment
Agreements"), effective upon consummation of the Offering, which provide for an
annual base salary and certain other benefits. Pursuant to the Employment
Agreements, the 1997 base salaries of Messrs. Bruton Smith, Scott Smith, Bowers,
Wright, Marks and Rachor will be $350,000, $300,000, $400,000, $180,000,
$48,000, and $150,000, respectively. The executives will also receive such
additional increases as may be determined by the Compensation Committee. The
Employment Agreements, except those of Messrs. Rachor and Marks, provide for the
payment of annual performance-based bonuses equal to a percentage of the
executive's base salary, upon achievement by the Company (or relevant region) of
certain performance objectives, based on the Company's pre-tax income, to be
established by the Compensation Committee. The Employment Agreements of Messrs.
Rachor and Marks provide for the payment of annual performance-based bonuses,
paid in equal installments on a monthly basis, equal to a percentage of the
pre-tax earnings of subsidiaries of the Company located within his regions of
responsibility, in the case of Mr. Rachor, and of Ken Marks Ford in the case of
Mr. Marks. See " -- Incentive Compensation Plan." Under the terms of the
Employment Agreements, the Company will employ Mr. Bruton Smith through November
2000. Under the terms of their respective Employment Agreements, the Company
will employ Messrs. Scott Smith, Bowers, Wright, Marks and Rachor for five years
or until their respective Employment Agreements are terminated by the Company or
the executive. Messrs. Scott Smith, Bowers, Wright, Marks and Rachor also
receive under their Employment Agreements, options pursuant to the Company's
Stock Option Plan, for 99,875 shares, 79,313 shares, 38,188 shares, 35,250
shares and 41,125 shares, of the Class A Common Stock, respectively, exercisable
at the initial public offering price, vesting in three equal annual installments
beginning October 1998 and expiring in October 2007.
Each of the Employment Agreements contain similar noncompetition
provisions. These provisions, during the term of the Employment Agreement, (i)
prohibit the disclosure or use of confidential Company information, and (ii)
prohibit competition with the Company for the Company's employees and its
customers, interference with the Company's relationships with its vendors, and
employment with any competitor of the Company in specified territories. The
provisions referred to in (ii) above shall also apply for a period of two years
following the expiration or termination of an Employment Agreement. With respect
to Messrs. Bruton Smith, Scott Smith and Wright, the geographic restrictions
apply in any Standard Metropolitan Statistical Area ("SMSA") or county in which
the Company has a place of business at the time their employment ends. With
respect to Messrs. Bowers and Rachor, the restrictions apply only in the SMSA's
for Houston, Charlotte, Chattanooga, and Nashville, provided that such
noncompetition provisions do not apply to his operation of Saturn of
Chattanooga. With respect to Mr. Marks, the territorial restrictions apply only
in the SMSA's or counties in which the Company has a place of business and about
which Marks had access to confidential information or for which he had
operational or managerial involvement.
STOCK OPTION PLAN
In October 1997, the Board of Directors and stockholders of the Company
adopted the Company's 1997 Stock Option Plan (the "Stock Option Plan") in order
to attract and retain key personnel. The following discussion of the material
features of the Stock Option Plan is qualified by reference to the text of such
Plan filed as an exhibit to the Registration Statement of which this Prospectus
is a part.
Under the Stock Option Plan, options to purchase up to an aggregate of
1,125,000 shares of Class A Common Stock may be granted to key employees of the
Company and its subsidiaries and to officers, directors, consultants and other
individuals providing services to the Company. Members of the Board of Directors
who serve on the Compensation Committee must qualify as "non-employee
directors," as that term is defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended.
The Compensation Committee of the Board of Directors of the Company will
administer the Stock Option Plan and will determine, among other things, the
persons who are to receive options, the number of shares to be subject to each
option and the vesting schedule of options. The Board of Directors of the
Company will determine the terms and conditions upon which the Company may make
loans to enable an optionee to pay the exercise price of an option. In selecting
individuals for options and determining the terms thereof, the Compensation
Committee may consider any factors it considers relevant, including present and
potential contributions to the success of the Company. Options granted under the
Stock Option Plan must be exercised within a period fixed by the Compensation
Committee, which period may not exceed ten years from the date of grant of the
option or, in the case of incentive stock options ("ISOs") granted to any holder
on the date of grant of more than ten percent of the total combined voting power
of all classes of stock of the Company, five years from the date of grant of the
option. Options may be made exercisable in whole or in installments, as
determined by the Compensation Committee.
62
<PAGE>
Options generally may not be transferred other than by will or the laws of
descent and distribution and, during the lifetime of an optionee, options may be
exercised only by the optionee. Notwithstanding the foregoing, the Compensation
Committee, in its absolute discretion, may grant transferable options if such
options are not ISOs. The exercise price of options that are not ISOs will be
determined at the discretion of the Compensation Committee. The exercise price
of ISOs may not be less than the market value of the Class A Common Stock on the
date of grant of the option. In the case of ISOs granted to any holder on the
date of grant of more than ten percent of the total combined voting power of all
classes of stock of the Company and its subsidiaries, the exercise price may not
be less than 110% of the market value per share of the Class A Common Stock on
the date of grant. Unless designated as "incentive stock options" intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), options granted under the Stock Option Plan are intended to be
"nonstatutory stock options" ("NSOs"). The exercise price may be paid in cash,
in shares of Class A Common Stock owned by the optionee, in NSOs granted under
the Stock Option Plan (except that the exercise price of an ISO may not be paid
in NSOs) or in any combination of cash, shares and NSOs.
Options granted under the Stock Option Plan may include the right to
acquire a "reload" option. In such a case, if a participant pays all or part of
the exercise price of an option with shares of Class A Common Stock held by the
participant for at least six months, then, upon exercise of the option, the
participant is granted a second option to purchase, at the fair market value as
of the date of grant of the second option, the number of shares of Class A
Common Stock transferred to the Company by the participant in payment of the
exercise price of the original option. A reload option is not exercisable until
one year after the grant date of such reload option or the expiration date of
the original option. If the exercise price of a reload option is paid for with
shares of Class A Common Stock that have been held by the optionee for more than
six months, then another reload option will be issued. Shares of Class A Common
Stock covered by a reload option will not reduce the number of shares of Class A
Common Stock available under the Stock Option Plan.
The Stock Option Plan provides that, in the event of changes in the
corporate structure of the Company or certain events affecting the shares of the
Company, adjustments will automatically be made in the number and kind of shares
available for issuance and in the number and kind of shares covered by
outstanding options. It further provides that, in connection with any merger or
consolidation in which the Company is not the surviving corporation and which
results in the holders of the outstanding voting securities of the Company
owning less than a majority of the surviving corporation or any sale or transfer
by the Company of all or substantially all its assets or any tender offer or
exchange offer for or the acquisition, directly or indirectly, by any person or
group of all or a majority of the then-outstanding voting securities of the
Company, all outstanding options under the Stock Option Plan will become
exercisable in full on and after (i) the 15th day prior to the effective date of
such merger, consolidation, sale, transfer or acquisition or (ii) the date of
commencement of such tender offer or exchange offer, as the case may be.
The Board of Directors of the Company, on or before the consummation of the
Offering, intends to grant NSOs and ISOs to purchase an aggregate of 587,509
shares of Class A Common Stock under the Stock Option Plan to three executive
officers, five regional vice presidents and one dealer manager of the Company.
Messrs. Scott Smith, Bowers and Wright are to be granted NSOs to purchase 79,875
shares, 59,313 shares, and 18,188 shares, respectively at an exercise equal to
the public offering price of the Class A Common Stock sold in the Offering.
Messrs. Scott Smith, Bowers and Wright are also to be granted ISOs to purchase
20,000 shares, 20,000 shares and 20,000 shares, respectively, at an exercise
price equal to the public offering price of the Class A Common Stock sold in the
Offering. All of these options will become exercisable in three equal annual
installments beginning in October 1998 with the last installment vesting in
October 2000, and all these options will expire in October 2007. Consequently,
all executive officers as a group are to be granted NSOs to purchase an
aggregate of 157,376 shares and ISOs to purchase an aggregate of 60,000 shares.
Non-executive officer employees are to be granted NSOs and ISOs to purchase an
aggregate of 290,133 shares and 80,000 shares, respectively. See " -- Employment
Agreements."
The issuance and exercise of ISOs have no federal income tax consequences
to the Company. While the issuance and exercise of ISOs generally have no
ordinary income tax consequences to the holder, upon the exercise of an ISO, the
holder will treat the excess of the fair market value on the date of exercise
over the exercise price as an item of tax adjustment for alternative minimum tax
purposes. If the holder of Class A Common Stock acquired upon the exercise of an
ISO disposes of such stock before the later of (i) two years following the grant
of the ISO and (ii) one year following the exercise of the ISO (a "Disqualifying
Disposition"), the holder will recognize ordinary income for federal income tax
purposes in an amount equal to the lesser of (i) the excess of the Class A
Common Stock's fair market value on the date of exercise over the option
exercise price, and (ii) the excess of the amount realized on disposition of the
Class A Common Stock over the option exercise price. Any additional gain upon
the disposition will be taxed as capital gains. The disposition of Class A
Common Stock acquired from the exercise of an ISO other than in a Disqualifying
Disposition will ordinarily result in capital gains or
63
<PAGE>
loss to the holder for federal income tax purposes equal to the difference
between the amount realized on disposition of the Class A Common Stock and the
option exercise price. Any capital gain will be subject to reduced rates of tax
if such shares were held more than twelve months, and will be subject to further
reduced rates if such shares were held more than eighteen months. The Company
will be entitled to a compensation expense deduction for the Company's taxable
year in which the disposition occurs equal to the amount of ordinary income
recognized by the holder.
The issuance of NSOs has no federal income tax consequences to the Company
or the holder. Upon the exercise of an NSO, the Company generally will be
allowed a federal income tax deduction equal to the amount by which the fair
market value of the underlying shares on the date of exercise exceeds the
exercise price. NSO holders will recognize ordinary income for federal income
tax purposes at the time of option exercise in the same amount. In the event of
a sale of shares acquired by exercise of a NSO, any appreciation or depreciation
after the exercise date generally will be taxed as capital gain or loss;
provided that any gain will be subject to reduced rates of tax if such shares
were held for more than twelve months and will be subject to further reduced
rates if such shares were held for more than eighteen months. The disposition of
shares acquired by exercise of a NSO will result in capital gains or losses to
the holder.
The Company intends to register the shares underlying the Stock Option Plan
as required by the federal securities laws. If such registration is not
required, such shares may be issued upon option exercise in reliance upon the
private offering exemption codified in Section 4(2) of the Securities Act.
Resale of such shares may be permitted subject to the limitations of Rule 144.
EMPLOYEE STOCK PURCHASE PLAN
In October 1997, the Board of Directors and stockholders of the Company
adopted the Sonic Employee Stock Purchase Plan (the "ESPP"). The ESPP is
intended to promote the interests of the Company by providing employees of the
Company the opportunity to acquire a proprietary interest in the Company through
the purchase of Class A Common Stock. The following discussion of the material
features of the ESPP is qualified by reference to the text of such Plan filed in
an exhibit to the Registration Statement of which this Prospectus is a part.
The ESPP is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Code. The ESPP is administered by the Compensation Committee,
which, subject to the terms of the ESPP, has plenary authority in its discretion
to interpret and construe the ESPP. The Compensation Committee will construe the
provisions of the ESPP so as to extend and limit participation in a manner
consistent with the requirements of Section 423 of the Code. A total of 150,000
shares of Class A Common Stock have been reserved for purchase under the ESPP.
On January 1 of each year during the term of the ESPP (the "Grant Date"),
all eligible employees electing to participate in the ESPP ("Participating
Employees") will be granted options to purchase shares of Class A Common Stock.
Prior to each Grant Date, the Compensation Committee will determine the number
of shares of Class A Common Stock available for purchase under each option, with
the same number of shares to be available under each option granted on the same
Grant Date. No Participating Employee may be granted an option which would
permit such employee to purchase stock under the ESPP and all other employee
stock purchase plans of the Company at a rate which exceeds $25,000 of the fair
market value of such stock (determined at the time such option is granted) for
each calendar year in which such option is outstanding at any time.
A Participating Employee may elect to designate a limited percentage of
such employee's compensation (as defined in the ESPP) to be deferred by payroll
deduction as a contribution to the ESPP. A Participating Employee instead may
elect to make contributions by direct cash payment to the ESPP rather than by
payroll deduction. To the extent a Participating Employee has accumulated enough
funds, his or her contributions to the ESPP will be used to exercise the option
granted under the ESPP through purchases of Class A Common Stock on the last
business day of March, June, September and December on which the principal
trading market for the Class A Common Stock is open for trading and on any other
interim dates during the year which the Compensation Committee designates for
such purpose (the "Exercise Date"). Contributions which are not enough to
purchase a whole share of Class A Common Stock will be carried forward and
applied on the next Exercise Date in that calendar year; provided that
contributions remaining after the last Exercise Date of the calendar year may be
distributed to the Participating Employee at his election.
The purchase price at which Class A Common Stock will be purchased through
the ESPP shall be 85% of the lesser of (i) the fair market value of the Class A
Common Stock on the applicable Grant Date, and (ii) the fair market value of the
Class A Common Stock on the applicable Exercise Date. Any option granted to a
Participating Employee will be exercised automatically on each Exercise Date
during the calendar year of the option's Grant Date in whole or in part such
that the Participating Employee's accumulated contributions as of such Exercise
Date, either through direct cash payment or payroll
64
<PAGE>
deduction, will be applied to the purchase of the maximum number of whole shares
of Class A Common Stock that such contribution will permit at the applicable
option price, limited to the number of shares available for purchase under the
option.
Any option granted to a Participating Employee will expire on the last
Exercise Date of the calendar year in which granted. However, if a Participating
Employee withdraws from the ESPP or terminates employment prior to such Exercise
Date, the option may expire earlier.
Upon termination of a Participating Employee's employment for any reason
other than cause, death or leave of absence in excess of ninety days, such
employee may, at his election, request the return of contributions not yet used
to purchase Class A Common Stock or continue participation in the ESPP until the
Exercise Date next following the date of termination of employment such that any
unexpired option held will be exercised automatically on such Exercise Date. If
a Participating Employee dies while employed by the Company or prior to the
Exercise Date next following termination of employment, such employee's estate
will have the right to elect to withdraw all contributions not yet used to
purchase Class A Common Stock or to exercise the Participating Employee's option
for the purchase of Class A Common Stock on the Exercise Date next following the
date of such employee's death.
The Board of Directors of the Company may at any time amend, suspend or
terminate the ESPP; provided, however, that the ESPP may not be amended to
increase the maximum number of shares of Class A Common Stock for which options
may be granted under the ESPP, other than in connection with a change in
capitalization, without obtaining the approval of Sonic stockholders.
The ESPP is intended to meet the requirements of an "employee stock
purchase plan" under Section 423 of the Code. No federal taxable income will be
recognized by Participating Employees upon the grant of an option to purchase
Class A Common Stock under the ESPP. In addition, a Participating Employee will
not recognize federal taxable income on the exercise of an option granted under
the ESPP.
If the Participating Employee holds shares of Class A Common Stock acquired
upon the exercise of an option granted under the ESPP until a date that is more
than two years from the grant date of the relevant option and one year from the
date of option exercise (or dies while owning such shares), the employee must
report as ordinary income in the year of disposition of the shares (or at death)
the lesser of (a) the excess of the fair market value of the shares at the time
of disposition (or death) over the option exercise price and (b) the excess of
the fair market value of the shares on the date the relevant option was granted
over the option exercise price. For this purpose, the option exercise price is
85% of the fair market value of the shares on the date the relevant option was
granted (assuming the shares are offered at a 15% discount). Any additional
income is treated as long-term capital gain. If these holding period
requirements are met, the Company is not entitled to any deduction for tax
purposes. If the Participating Employee does not meet the holding period
requirements, the employee recognizes at the time of disposition of the shares
ordinary income equal to the difference between the price paid for the shares
and the fair market value on the date of exercise, irrespective of the price at
which the employee disposes of the shares, and an amount equal to such ordinary
income is generally deductible by the Company. Any gain or loss realized on the
disposition of the shares will generally be capital gain or loss; provided that
any gain will be subject to reduced rates of tax if the shares were held for
more than twelve months and will be subject to further reduced rates if the
shares were held for more than eighteen months.
Because the ESPP is based on voluntary participation, benefits thereunder
are not determinable.
The Company intends to register the shares underlying the ESPP as required
by the federal securities laws. If such registration is not required, such
shares may be issued upon option exercise in reliance upon the private offering
exemption codified in Section 4(2) of the Securities Act. Resale of such shares
may be permitted subject to the limitations of Rule 144.
65
<PAGE>
CERTAIN TRANSACTIONS
REGISTRATION RIGHTS AGREEMENT
As part of the Reorganization, the Company entered into a Registration
Rights Agreement dated as of June 30, 1997 (the "Registration Rights
Agreements") with Sonic Financial, Bruton Smith, Scott Smith and William S.
Egan. Sonic Financial, Bruton Smith, Scott Smith and Egan Group, LLC, an
assignee of Mr. Egan (the "Egan Group") currently are the owners of record of
4,440,625, 1,035,625, 478,125 and 295,625 shares of Class B Common Stock,
respectively. Upon the registration of any of their shares or as otherwise
provided in the Certificate, such shares will automatically be converted into a
like number of shares of Class A Common Stock. Subject to certain limitations,
the Registration Rights Agreements provide Sonic Financial, Bruton Smith, Scott
Smith and the Egan Group with certain piggyback registration rights that permit
them to have their shares of Common Stock, as selling security holders, included
in any registration statement pertaining to the registration of Class A Common
Stock for issuance by the Company or for resale by other selling security
holders, with the exception of registration statements on Forms S-4 and S-8
relating to exchange offers (and certain other transactions) and employee stock
compensation plans, respectively. These registration rights will be limited or
restricted to the extent an underwriter of an offering, if an underwritten
offering, or the Company's Board of Directors, if not an underwritten offering,
determines that the amount to be registered by Sonic Financial, Bruton Smith,
Scott Smith or the Egan Group would not permit the sale of Class A Common Stock
in the quantity and at the price originally sought by the Company or the
original selling security holders, as the case may be. The Registration Rights
Agreement expires on the tenth anniversary of the closing of the Offering. Sonic
Financial is controlled by the Company's Chairman and Chief Executive Officer,
Bruton Smith.
THE SMITH ADVANCE
In connection with the Fort Mill Acquisition, Mr. Smith advanced
approximately $3.5 million to the Company (the "Smith Advance"). The Smith
Advance was used by the Company to pay a portion of the cash consideration for
the Fort Mill Acquisition at closing. The Smith Advance is evidenced by a demand
note bearing interest at the minimum statutory rate of 3.83% per annum. The
Company anticipates seeking additional cash advances or credit support in the
form of guarantees or collateral from Mr. Smith in order to meet cash payment
obligations in the remaining Acquisitions which close prior to the consummation
of the Offering. The Company intends to repay the principal of and interest on
the Smith Advance and any similar future advances from Mr. Smith used to fund
the Acquisitions from the proceeds of this Offering.
THE SMITH GUARANTIES AND PLEDGES
Under the Six-Month Facility, Bruton Smith has guaranteed the obligations
of the Company and secured his guarantee with a pledge of shares of common stock
of Speedway Motorsports, Inc. owned directly by him. Under the Revolving
Facility, Mr. Smith guaranteed the obligations of the Company and such
obligations are further secured with a pledge of shares of common stock of
Speedway Motorsports, Inc. owned directly or indirectly by him. Mr. Smith has
pledged securities having an estimated value of approximately $40.0 million to
secure the Six-Month Facility (the "Six-Month Pledge"). Should NationsBank
foreclose on the Six-Month Pledge, the Company is under no obligation to repay
or reimburse Mr. Smith. Mr. Smith pledged securities indirectly owned by him
having an estimated value of approximately $50.0 million to secure the Initial
Loan Commitment under the Revolving Facility (the "Revolving Pledge"). If net
proceeds of the Offering to the Company are $70 million or greater, the
Revolving Pledge will be released pursuant to the terms of the Revolving
Facility. If net proceeds of the Offering to the Company are less than $70
million, Sonic Financial, a company controlled by Mr. Smith, will be required to
provide continued credit support for the Revolving Facility in the form of a
pledge of securities owned by Sonic Financial equal in value to three times the
amount of the shortfall between $70 million and the actual net proceeds of the
Offering to the Company. The Company will be under no obligation to repay or
reimburse Mr. Smith or Sonic Financial if Ford Motor Credit forecloses on the
Revolving Pledge. For further discussion of these lending arrangements, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
CERTAIN DEALERSHIP LEASES
Certain of the properties leased by the Company's dealership subsidiaries
are owned by officers, directors or holders of 5% or more of the Common Stock of
the Company or their affiliates. These leases contain terms comparable to, or
more favorable to the Company than, terms that would be obtained from
unaffiliated third parties. Town & Country Ford operates at facilities leased
from STC Properties, a North Carolina joint venture ("STC"). Town & Country Ford
maintains a 5% undivided interest in STC and Sonic Financial owns the remaining
95% of STC. The STC lease on the Town & Country Ford facilities will expire in
October 2000. Annual payments under the STC lease were $510,085 for each of
1994, 1995 and 1996. Current minimum rent payments are $409,000 annually
($34,083 monthly) through 1999, and will be decreased to $340,833
66
<PAGE>
in 2000, such rents being below market. When this lease expires, the Company
anticipates obtaining a long-term lease on the Town & Country Ford facility at
fair market rent.
Lone Star Ford operates, in part, at facilities leased from Viking
Investments Associates, a Texas association ("Viking"), which is controlled by
Mr. Bruton Smith. The Viking lease on the Lone Star Ford property expires in
2005. Annual payments under the Viking lease were $351,420, $331,302 and
$360,000 for 1994, 1995 and 1996, respectively. Minimum annual rents under this
lease are $360,000 ($30,000 monthly), such amount being below market. When this
lease expires, the Company anticipates obtaining a long-term lease on the Lone
Star Ford facility at fair market rent.
The dealership leases discussed below will be executed and effective as of
the consummation of the Acquisitions. The terms of these leases are comparable
to terms that would be obtained from unaffiliated third parties because they
were negotiated at arms-length before the lessors became affiliated with the
Company.
KIA of Chattanooga operates at facilities leased from KIA Land Development,
a company in which Nelson Bowers, the Company's Executive Vice President,
maintains an ownership interest. The Company negotiated this lease in connection
with the Bowers Acquisition. This triple net lease expires in 2007 and the
monthly rent will be $11,070 per month. The Company may renew this lease at its
option for two additional five year terms. At each renewal, the lessor may
adjust lease rents to reflect fair market rents for the property.
European Motors operates at its Chattanooga facilities under a triple net
lease from Mr. Bowers. The Company negotiated this lease in connection with the
Bowers Acquisition. The European Motors lease expires in 2007 and provides for
monthly rent of $16,846. This lease also provides for renewals on terms
identical to the KIA of Chattanooga lease.
Jaguar of Chattanooga operates at facilities leased from JAG Properties, a
company in which Mr. Bowers maintains an ownership interest. The Company
negotiated this lease in connection with the Bowers Acquisition. This triple net
lease expires in 2017 and provides for monthly rent of $22,010. The Company may
renew this lease on terms identical to the KIA of Chattanooga renewal options.
Cleveland Chrysler-Plymouth-Jeep-Eagle leases its facilities from Cleveland
Properties LLC, a limited liability company in which Mr. Bowers maintains an
ownership interest. The Company negotiated this lease in connection with the
Bowers Acquisition. This triple net lease expires in 2011, provides for monthly
rent of $14,000 and may be renewed on terms identical to the KIA of Chattanooga
lease.
Cleveland Village Imports operates at facilities leased from Nelson Bowers
and another individual. Nelson Bowers, the Company's President and a director,
owns a 75% undivided interest in the land and buildings leased by Cleveland
Village Imports, with the remaining interests owned by an unrelated party. Such
land and buildings are leased under two leases: one is a triple net fixed lease
expiring on December 31, 1997 with rent of $8,000 per month and the other,
pertaining to a used car lot, is a month-to-month lease with rent of $3,000 per
month. In connection with the Bowers Acquisition, the lessors have agreed to
allow the expiration of these leases in October 1997, and to replace them with a
triple net lease at a negotiated rental rate for a 15-year initial term and two
five-year renewals at the option of the Company.
Dyer Volvo operates at facilities leased from D&R Investments, an entity in
which Richard Dyer, the Company's Executive Manager for Dyer Volvo, maintains an
ownership interest. This triple net lease, negotiated by the Company in
connection with the Dyer Acquisition, expires in 2009 and provides for monthly
rent of $50,000. The Dyer Volvo lease also provides the Company with two
optional renewals of five years each with rent at each renewal being adjusted to
fair market rent.
Ken Marks Ford ("KMF") operates at facilities leased from Marks Holding
Company, a corporation that is owned by Ken Marks, the Company's Regional Vice
President-Florida. In connection with the Ken Marks Acquisition, the lessor has
agreed to enter into a triple net lease with the Company as lessee at a
negotiated rental rate of $95,000 per month for an initial term expiring 2007
with two five-year renewals at the option of the Company.
CHARTOWN TRANSACTIONS
Chartown is a general partnership engaged in real estate development and
management. Before the Reorganization, Town & Country Ford maintained a 49%
partnership interest in Chartown with the remaining 51% held by SMDA Properties,
LLC, a North Carolina limited liability company ("SMDA"). Mr. Smith owns an 80%
direct membership interest in SMDA with the remaining 20% owned indirectly
through Sonic Financial. In addition, Sonic Financial also held a demand
promissory note for approximately $1.6 million issued by Chartown (the "Chartown
Note"), which was uncollectible due to insufficient funds. As part of the
Reorganization, the Chartown Note was canceled and Town & Country Ford
transferred its partnership interest in Chartown to Sonic Financial for nominal
consideration. In connection with that transfer, Sonic Financial
67
<PAGE>
agreed to indemnify Town & Country Ford for any and all obligations and
liabilities, whether known or unknown, relating to Chartown and Town & Country
Ford's ownership thereof.
THE BOWERS VOLVO NOTE
In connection with Volvo's approval of the Company's acquisition of a Volvo
franchise in the Bowers Acquisition, Volvo, among other things, conditioned its
approval upon Nelson Bowers, the Company's Executive Vice President and a
director nominee, acquiring and maintaining a 20% interest in the Company's
Sonic Automotive of Chattanooga, LLC ("Chattanooga Volvo") subsidiary that will
operate the Volvo franchise. Mr. Bowers will finance all of the purchase price
for this 20% interest by issuing a promissory note (the "Bowers Volvo Note") in
favor of Sonic Automotive of Nevada, Inc. ("Sonic Nevada"), the wholly-owned
subsidiary of the Company that controls a majority interest in Chattanooga
Volvo. The Bowers Note will be secured by Mr. Bowers' interest in Chattanooga
Volvo.
The Bowers Volvo Note will be in a principal amount of $900,000 (subject to
adjustment following the closing of the Bowers Acquisition) and bear interest at
the lowest applicable federal rate as published by the U.S. Treasury Department
in effect on the date Mr. Bowers purchases his interest in Chattanooga Volvo.
Accrued interest will be payable annually. The operating agreement of
Chattanooga Volvo will provide that profits and distributions are to be
allocated first to Mr. Bowers to the extent of interest to be paid on the Bowers
Volvo Note and next to the other members of Chattanooga Volvo according to their
percentages of ownership. No other profits or any losses of Chattanooga Volvo
will be allocated to Mr. Bowers under this arrangement. Mr. Bowers' interest in
Chattanooga Volvo will be redeemed and the Bowers Volvo Note will be due and
payable in full when Volvo no longer requires Mr. Bowers to maintain his
interest in Chattanooga Volvo.
OTHER TRANSACTIONS
During each of the three years ended December 31, 1996, Town & Country Ford
paid $48,000 to Sonic Financial as a management fee. Sonic Financial's services
to Town & Country Ford have included performance of the following functions,
among others: maintenance of lender and creditor relationships; tax planning;
preparation of tax returns and representation in tax examinations; record
maintenance; internal audits and special audits; assistance to independent
public accountants; and litigation support to company counsel. Payments of fees
to and receipt of services from Sonic Financial ceased before the
Reorganization. Since that time, the Company has been providing these services
for itself and its subsidiaries, including Town and Country Ford.
Beginning in early 1997, certain of the Sonic Dealerships have entered into
arrangements to sell to their customers credit life insurance policies
underwritten by American Heritage Life Insurance Company, an insurer
unaffiliated with Sonic ("American Heritage"). American Heritage in turn
reinsures all of these policies with Provident American Insurance Company, a
Texas insurance company ("Provident American"). Under these arrangements, the
Sonic Dealerships paid an aggregate of $140,000 to American Heritage in premiums
for these policies since January 1, 1997. The Company anticipates terminating
this arrangement with American Heritage by 1998. Provident American is a
wholly-owned subsidiary of Sonic Financial.
Town & Country Ford and Lone Star Ford have each made several non-interest
bearing advances to Sonic Financial. As of June 30, 1997, Town & Country Ford
had made approximately $2.1 million of such advances. In preparation for the
Reorganization, a demand promissory note by Sonic Financial evidencing certain
of Town & Country Ford's advances in the amount of $1.6 million was canceled in
exchange for the redemption of certain shares of the capital stock of Town &
Country Ford held by Sonic Financial. As of June 30, 1997, Lone Star Ford had
made approximately $0.5 million of advances to Sonic Financial. In preparation
for the Reorganization, a demand promissory note by Sonic Financial evidencing
certain of Lone Star Ford's advances in the amount of $363,000 was canceled
pursuant to a dividend. At years ended December 31, 1996, 1995 and 1994, the
aggregate balances of such advances due from Sonic Financial were approximately
$2.5 million, $0 and $0, respectively.
Certain subsidiaries of the Company (such subsidiaries together with the
Company and Sonic Financial being hereinafter referred to as the "Sonic Group")
have joined with Sonic Financial in filing consolidated federal income tax
returns for several years. Such subsidiaries will join with Sonic Financial in
filing for 1996 and for the period ending on June 30, 1997. Under applicable
federal tax law, each corporation included in Sonic Financial's consolidated
return is jointly and severally liable for any resultant tax. Under a tax
allocation agreement dated as of June 30, 1997, however, the Company agreed to
pay to Sonic Financial, in the event that additional federal income tax is
determined to be due, an amount equal to the Company's separate federal income
tax liability computed for all periods in which any member of the Sonic Group
has been a member of Sonic Financial's consolidated group less amounts
previously recorded by the Company. Also pursuant to such agreement, Sonic
Financial agreed to indemnify the Company for any additional amount determined
to be due from Sonic Financial's consolidated group in excess of the federal
income tax liability of the Sonic Group for such periods. The tax allocation
68
<PAGE>
agreement establishes procedures with respect to tax adjustments, tax claims,
tax refunds, tax credits and other tax attributes relating to periods ending
prior to the time that the Sonic Group shall leave Sonic Financial's
consolidated group.
The Company acquired the Sonic Dealerships in the Reorganization pursuant
to four separate stock subscription agreements (the "Subscription Agreements").
The Subscription Agreements provide for the acquisition of 100% of the capital
stock or membership interests, as the case may be, of each of the Sonic
Dealerships from Sonic Financial, Mr. Smith, the Egan Group (an assignee of Mr.
Egan) and Bryan Scott Smith in exchange for certain amounts of the Company's
issued and outstanding Class B Common Stock. See "Principal Stockholders."
For additional information concerning related party transactions of the
Company, see Note (7) to the Combined and Consolidated Financial Statements of
Sonic and for the businesses being acquired in the Acquisitions, see "The
Acquisitions" and the notes to the historical financial statements for each
respective business acquired included in this Prospectus.
69
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of October 10, 1997 by (i) each
stockholder who is known by the Company to own beneficially more than five
percent of the outstanding Common Stock, (ii) each director of the Company,
(iii) each executive officer of the Company, and (iv) all directors and
executive officers of the Company as a group, and as adjusted to reflect the
sale by the Company of the shares of Class A Common Stock in this Offering.
Prior to this Offering, no shares of Class A Common Stock were issued and
outstanding. However, options to acquire 587,509 shares of Class A Common Stock
will be issued on or before the closing of the Offering to certain of the
Company's officers and employees, and the Dyer Warrant will be issued upon the
closing of the Dyer Acquisition. Holders of Class A Common Stock are entitled to
one vote per share on all matters submitted to a vote of the stockholders of the
Company. Holders of Class B Common Stock are entitled to ten votes per share on
all matters submitted to a vote of the stockholders, except that the Class B
Common Stock is entitled to only one vote per share with respect to any
transaction proposed or approved by the Board of Directors of the Company or
proposed by all the holders of the Class B Common Stock or as to which any
member of the Smith Group or any affiliate thereof has a material financial
interest other than as a then existing stockholder of the Company constituting a
(a) "going private" transaction (as defined herein), (b) disposition of
substantially all of the Company's assets, (c) transfer resulting in a change in
the nature of the Company's business, or (d) merger or consolidation in which
current holders of Common Stock would own less than 50% of the Common Stock
following such transaction. In the event of any transfer outside of the Smith
Group or the Smith Group holds less than 15% of the total number of shares of
Common Stock outstanding, such transferred shares or all shares, respectively,
of Class B Common Stock will automatically convert into an equal number of
shares of Class A Common Stock. See "Description of Capital Stock."
<TABLE>
<CAPTION>
PERCENTAGE OF ALL
OUTSTANDING
NUMBER OF SHARES NUMBER OF SHARES COMMON STOCK
OF CLASS A COMMON OF CLASS B COMMON BEFORE AFTER
NAME (1) STOCK OWNED STOCK OWNED OFFERING OFFERING(2)
<S> <C> <C> <C> <C>
O. Bruton Smith (3)(4).......................................... -- 5,476,250 87.6% 48.7%
Sonic Financial Corporation (3)................................. -- 4,440,625 71.1% 39.5%
Bryan Scott Smith (3)(5)........................................ -- 478,125 7.7% 4.3%
William R. Brooks (3)........................................... -- -- -- --
Theodore M. Wright (3)(5)....................................... -- -- -- --
Nelson E. Bowers, II (3)(5)..................................... -- -- -- --
All directors and executive officers as a group (10 persons).... -- 5,954,375 95.27% 52.9%
</TABLE>
(1) Unless otherwise noted, each person has sole voting and investment power
over the shares listed opposite his name subject to community property laws
where applicable.
(2) The percentages of total voting power would be as follows: Bruton Smith,
81.1%; Sonic Financial, 65.8%; Scott Smith, 7.1%; William Brooks, less than
1%; Theodore Wright, less than 1%; Nelson E. Bowers, II, less than 1%; and
all directors and executive officers as a group, 88.2%. Assumes the
Underwriters' over-allotment option is not exercised.
(3) The address of such person is care of the Company at 5401 East Independence
Boulevard, Charlotte, North Carolina 28218.
(4) The shares of Common Stock shown as owned by such person or group include
all of the shares owned by Sonic Financial as indicated elsewhere in the
table. Mr. Smith owns the substantial majority of Sonic Financial's
outstanding capital stock.
(5) Does not give effect to options granted under the Company's Stock Option
Plan to purchase shares of Class A Common Stock at the public offering
price. Since none of such options become exercisable prior to October 1998.
See "Management -- Stock Option Plan."
70
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of (i) 50,000,000 shares of
Class A Common Stock, $.01 par value, (ii) 15,000,000 shares of Class B Common
Stock, $.01 par value, and (iii) 3,000,000 shares of Preferred Stock, $.10 par
value. Upon completion of this Offering, the Company will have 5,000,000
outstanding shares of Class A Common Stock and 6,250,000 outstanding shares of
Class B Common Stock and no outstanding shares of preferred stock (assuming the
Underwriters' over-allotment option is not exercised).
The following summary description of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
Company's Certificate, which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, and Delaware Law. Reference is
made to such exhibit and Delaware Law for a detailed description of the
provisions thereof summarized below.
COMMON STOCK
The Company's Class A Common Stock and Class B Common Stock are equal in
all respects except for voting rights, conversion rights of the Class B Common
Stock and as required by law, as discussed more fully below.
VOTING RIGHTS; CONVERSION OF CLASS B COMMON STOCK TO CLASS A COMMON STOCK
The voting powers, preferences and relative rights of the Class A Common
Stock and the Class B Common Stock are subject to the following provisions.
Holders of Class A Common Stock have one vote per share on all matters submitted
to a vote of the stockholders of the Company. Holders of Class B Common Stock
are entitled to ten votes per share except as described below. Holders of all
classes of Common Stock entitled to vote will vote together as a single class on
all matters presented to the stockholders for their vote or approval except as
otherwise required by Delaware Law. There is no cumulative voting with respect
to the election of directors. In the event any shares of Class B Common Stock
held by a member of the Smith Group (as defined below) are transferred outside
of the Smith Group, such shares will automatically be converted into shares of
Class A Common Stock. In addition, if the total number of shares of Common Stock
held by members of the Smith Group is less than 15% of the total number of
shares of Common Stock outstanding, all of the outstanding shares of Class B
Common Stock automatically will be reclassified as Class A Common Stock. In any
merger, consolidation or business combination, the consideration to be received
per share by holders of Class A Common Stock must be identical to that received
by holders of Class B Common Stock, except that in any such transaction in which
shares of common stock are distributed, such shares may differ as to voting
rights to the extent that voting rights now differ between the classes of Common
Stock.
Notwithstanding the foregoing, the holders of Class A Common Stock and
Class B Common Stock vote as a single class, with each share of each class
entitled to one vote per share, with respect to any transaction proposed or
approved by the Board of Directors of the Company or proposed by or on behalf of
holders of the Class B Common Stock or as to which any member of the Smith Group
or any affiliate thereof has a material financial interest other than as a then
existing stockholder of the Company constituting a (a) "going private"
transaction, (b) sale or other disposition of all or substantially all of the
Company's assets, (c) sale or transfer which would cause the nature of the
Company's business to be no longer primarily oriented toward automobile
dealership operations and related activities or (d) merger or consolidation of
the Company in which the holders of the Common Stock will own less than 50% of
the Common Stock following such transaction. A "going private" transaction is
defined as any "Rule 13e-3 Transaction," as such term is defined in Rule 13e-3
promulgated under the Securities Exchange Act of 1934. An "affiliate" is defined
as (i) any individual or entity who or that, directly or indirectly, controls,
is controlled by, or is under common control with any member of the Smith Group,
(ii) any corporation or organization (other than the Company or a majority-owned
subsidiary of the Company) of which any member of the Smith Group is an officer
partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of voting securities, or in which any member of the Smith Group has a
substantial beneficial interest, (iii) a voting trust or similar arrangement
pursuant to which any member of the Smith Group generally controls the vote of
the shares of Common Stock held by or subject to such trust or arrangement, (iv)
any other trust or estate in which any member of the Smith Group has a
substantial beneficial interest or as to which any member of the Smith Group
serves as trustee or in a similar fiduciary capacity, or (v) any relative or
spouse of any member of the Smith Group or any relative of such spouse, who has
the same residence as any member of the Smith Group.
As used in this Prospectus, the term the "Smith Group" consists of the
following persons: (i) Mr. Smith and his guardian, conservator, committee, or
attorney-in-fact; (ii) William S. Egan and his guardian, conservator, committee,
or attorney-in-fact; (iii) each lineal descendant of Messrs. Smith and Egan (a
"Descendant") and their respective guardians, conservators,
71
<PAGE>
committees or attorneys-in-fact; and (iv) each "Family Controlled Entity" (as
defined below). The term "Family Controlled Entity" means (i) any not-for-profit
corporation if at least 80% of its board of directors is composed of Mr. Smith,
Mr. Egan and/or Descendants; (ii) any other corporation if at least 80% of the
value of its outstanding equity is owned by members of the Smith Group; (iii)
any partnership if at least 80% of the value of the partnership interests are
owned by members of the Smith Group; and (iv) any limited liability or similar
company if at least 80% of the value of the company is owned by members of the
Smith Group. For a discussion of the effects of the disproportionate voting
rights of the Common Stock, see "Risk Factors -- Concentration of Voting Power
and Antitakeover Provisions."
Under the Company's Certificate and Delaware Law, the holders of Class A
Common Stock and/or Class B Common Stock are each entitled to vote as a separate
class, as applicable, with respect to any amendment to the Company's Certificate
that would increase or decrease the aggregate number of authorized shares of
such class, increase or decrease the par value of the shares of such class, or
modify or change the powers, preferences or special rights of the shares of such
class so as to affect such class adversely.
DIVIDENDS
Holders of the Class A Common Stock and the Class B Common Stock are
entitled to receive ratably such dividends, if any, as are declared by the
Company's Board of Directors out of funds legally available for that purpose,
provided, that dividends paid in shares of Class A Common Stock or Class B
Common Stock shall be paid only as follows: shares of Class A Common Stock shall
be paid only to holders of Class A Common Stock and shares of Class B Common
Stock shall be paid only to holders of Class B Common Stock. The Company's
Certificate provides that if there is any dividend, subdivision, combination or
reclassification of either class of Common Stock, a proportionate dividend,
subdivision, combination or reclassification of the other class of Common Stock
shall simultaneously be made.
OTHER RIGHTS
Stockholders of the Company have no preemptive or other rights to subscribe
for additional shares. In the event of the liquidation, dissolution or winding
up of the Company, holders of Class A Common Stock and Class B Common Stock are
entitled to share ratably in all assets available for distribution to holders of
Common Stock after payment in full of creditors. No shares of any class of
Common Stock are subject to a redemption or a sinking fund. All outstanding
shares of Common Stock are, and all shares offered by this Prospectus will be,
when sold, validly issued, fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
The Company has appointed First Union National Bank as the transfer agent
and registrar for the Class A Common Stock. The Company has not appointed a
transfer agent for the Class B Common Stock.
PREFERRED STOCK
No shares of preferred stock are outstanding. The Company's Certificate
authorizes the Board of Directors to issue up to 3,000,000 shares of preferred
stock in one or more series and to establish such designations and such relative
voting, dividend, liquidation, conversion and other rights, preferences and
limitations as the Board of Directors may determine without further approval of
the stockholders of the Company. The issuance of preferred stock by the Board of
Directors could, among other things, adversely affect the voting power of the
holders of Class A Common Stock and, under certain circumstances, make it more
difficult for a person or group to gain control of the Company. See "Risk
Factors -- Concentration of Voting Power and Anti-takeover Provisions."
The issuance of any series of preferred stock, and the relative
designations, rights, preferences and limitations of such series, if and when
established, will depend upon, among other things, the future capital needs of
the Company, the then-existing market conditions and other factors that, in the
judgment of the Board of Directors, might warrant the issuance of preferred
stock. At the date of this Prospectus, there are no plans, agreements or
understandings for the issuance of any shares of preferred stock.
DELAWARE LAW, CERTAIN CHARTER AND BYLAW PROVISIONS AND CERTAIN FRANCHISE
AGREEMENT PROVISIONS
Certain provisions of Delaware Law and of the Company's Certificate and
Bylaws, summarized in the following paragraphs, may be considered to have an
antitakeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.
72
<PAGE>
DELAWARE ANTITAKEOVER LAW. The Company, a Delaware corporation, is subject
to the provisions of Delaware Law, including Section 203. In general, Section
203 prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which such person became an interested
stockholder unless: (i) prior to such date, the Board of Directors approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder; or (ii) upon becoming an
interested stockholder, the stockholder then owned at least 85% of the voting
stock, as defined in Section 203; or (iii) subsequent to such date, the business
combination is approved by both the Board of Directors and by holders of at
least 66 2/3% of the corporation's outstanding voting stock, excluding shares
owned by the interested stockholder. For these purposes, the term "business
combination" includes mergers, asset sales and other similar transactions with
an "interested stockholder." An "interested stockholder" is a person who,
together with affiliates and associates, owns (or, within the prior three years,
did own) 15% or more of the corporation's voting stock. Although Section 203
permits a corporation to elect not to be governed by its provisions, the Company
to date has not made this election.
CLASSIFIED BOARD OF DIRECTORS. The Company's Bylaws provide for the Board
of Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. Classification of the Board of Directors expands the
time required to change the composition of a majority of directors and may tend
to discourage a takeover bid for the Company. Moreover, under Delaware Law, in
the case of a corporation having a classified board of directors, the
stockholders may remove a director only for cause. This provision, when coupled
with the provision of the Bylaws authorizing only the board of directors to fill
vacant directorships, will preclude stockholders of the Company from removing
incumbent directors without cause, simultaneously gaining control of the Board
of Directors by filing the vacancies with their own nominees. See
"Mangement -- Executive Officers and Directors; Key Personnel."
SPECIAL MEETINGS OF STOCKHOLDERS. The Company's Bylaws provide that special
meetings of stockholders may be called only by the Chairman or by the Secretary
or any Assistant Secretary at the request in writing of a majority of the Board
of Directors of the Company. The Company's Bylaws also provide that no action
required to be taken or that may be taken at any annual or special meeting of
stockholders may be taken without a meeting; the powers of stockholders to
consent in writing, without a meeting, to the taking of any action is
specifically denied. These provisions may make it more difficult for
stockholders to take action opposed by the Board of Directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Company's Bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual or a special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the principal executive office
of the Company, (i) in the case of an annual meeting that is called for a date
that is within 30 days before or after the anniversary date of the immediately
preceding annual meeting of stockholders, not less than 60 days nor more than 90
days prior to such anniversary date, and, (ii) in the case of an annual meeting
that is called for a date that is not within 30 days before or after the
anniversary date of the immediately preceding annual meeting, or in the case of
a special meeting of stockholders called for the purpose of electing directors,
not later than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure of the date of
the meeting was made, whichever occurs first. The Bylaws also specify certain
requirements for a stockholder's notice to be in proper written form. These
provisions may preclude some stockholders from bringing matters before the
stockholders at an annual or special meeting or from making nominations for
directors at an annual or special meeting.
CONFLICT OF INTEREST PROCEDURES. The Company's Certificate contains
provisions providing that transactions between the Company and its affiliates
must be no less favorable to the Company than would be available in transactions
involving arms'-length dealing with unrelated third parties. Moreover, any such
transaction involving aggregate payments in excess of $500,000 must be approved
by a majority of the Company's directors and a majority of the Company's
independent directors. Otherwise, the Company must obtain an opinion as to the
financial fairness of the transactions to be issued by an investment banking or
appraisal firm of national standing.
RESTRICTIONS UNDER FRANCHISE AGREEMENTS. The Company's franchise agreements
impose restrictions on the transfer of the Common Stock. A number of
Manufacturers prohibit transactions which affect changes in management control
of the Company. For instance, Ford may cause the Company to sell or resign from
its Ford franchises if any person or entity acquires 15% or more of the
Company's voting securities. Likewise, General Motors, Toyota and Infiniti may
force the sale of their respective franchises if 20% or more of the Company's
voting securities are so acquired. Honda may force the sale of the Company's
Honda franchise if any person or entity, other than members of the Smith Group,
acquires 5% of the Common
73
<PAGE>
Stock (10% if such entity is an institutional investor), and Honda deems such
person or entity to be unsatisfactory. Volkswagen has approved of the public
sale of only 25% of the voting control of the Company and requires prior
approval of any change in control or management of the Company that would affect
the Company's control or management of its Volkswagen franchisee subsidiaries.
Chrysler also has approved of the public sale of only 50% of the Common Stock
and requires prior approval of any future sales that would result in a change in
voting or managerial control of the Company. Such restrictions may prevent or
deter prospective acquirers from obtaining control of the Company. See "Risk
Factors -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue
Additional Equity" and "Business -- Relationships with Manufacturers."
74
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
5,000,000 shares of Class A Common Stock (assuming no exercise of the
Underwriters' over-allotment option). All of such shares will be freely
transferable and may be resold without further registration under the Securities
Act, except for any shares purchased by an "affiliate" of the Company (as
defined by Rule 144), which shares will be subject to the resale limitations of
Rule 144. The 6,250,000 shares (the "Restricted Shares") of Class B Common Stock
outstanding, which are convertible into Class A Common Stock, are "restricted"
securities within the meaning of Rule 144 irrespective of whether the conversion
right is exercised. The 629,696 shares of Class A Common Stock, which underlie
options to be granted on or before the closing of the Offering under the
Company's Stock Option Plan and the Dyer Warrant, may be resold only pursuant to
a registration statement under the Securities Act or an applicable exemption
from registration thereunder such as an exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year may, under certain circumstances, resell within any
three-month period, such number of shares as does not exceed the greater of one
percent of the then-outstanding shares of Class A Common Stock or the average
weekly trading volume of Class A Common Stock during the four calendar weeks
prior to such resale. Rule 144 also permits, under certain circumstances, the
resale of shares without any quantity limitation by a person who has satisfied a
two-year holding period and who is not, and has not been for the preceding three
months, an affiliate of the Company. In addition, holding periods of successive
non-affiliate owners are aggregated for purposes of determining compliance with
these one- and two-year holding period requirements.
Upon completion of this Offering, none of the 6,250,000 shares of Class B
Common Stock outstanding on the date of this Prospectus will have been held for
at least one year. Since all such shares are restricted securities, none of them
may be resold pursuant to Rule 144 upon completion of this Offering. Any
transfer of shares of the Class B Common Stock to any person other than a member
of the Smith Group will result in a conversion of such shares to Class A Common
Stock.
The Restricted Shares will not be eligible for sale under Rule 144 until
the expiration of the one-year holding period from the date such Restricted
Shares were acquired.
The availability of shares for sale or actual sales under Rule 144 and the
perception that such shares may be sold may have a material adverse effect on
the market price of the Class A Common Stock. Sales under Rule 144 also could
impair the Company's ability to market additional equity securities.
Additionally, the Company has entered into the Registration Rights
Agreement with Sonic Financial, Bruton Smith, Scott Smith and William Egan. The
Registration Rights Agreement provides piggyback registration rights with
respect to 6,250,000 shares of Common Stock in the aggregate. For further
information regarding the Registration Rights Agreement, see "Certain
Transactions -- Registration Rights Agreements."
The Company, all of the executive officers of the Company and the holders
of Class B Common Stock have agreed, subject to certain exceptions, not,
directly or indirectly, to (i) sell, grant an option or otherwise transfer or
dispose of any Class A Common Stock or securities convertible into or
exchangeable or exercisable for Class A Common Stock, including shares of Class
B Common Stock, or file a registration statement under the Securities Act with
respect to the foregoing, or (ii) enter into any swap or other agreement or
transaction that transfers, in whole or part, the economic consequences of
ownership of the Class A Common Stock for 180 days from the date of this
Prospectus without the prior written consent of Merrill Lynch; provided that the
Company may sell shares of Class A Common Stock to a third party as
consideration for the Company's acquisition from such third party of an
automobile dealership, so long as such third party executes a lock up agreement
on substantially the same terms described above for a period expiring 180 days
after the date of this Prospectus.
75
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), NationsBanc Montgomery
Securities, Inc. and Wheat, First Securities, Inc. are acting as representatives
(the "Representatives"), has severally agreed to purchase from the Company, the
number of shares of Class A Common Stock set forth opposite its name below. In
the Purchase Agreement, the several Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the shares of Class A
Common Stock offered hereby, if any are purchased. In the event of a default by
an Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................................................
NationsBanc Montgomery Securities, Inc...........................................................................
Wheat, First Securities, Inc.....................................................................................
Total............................................................................................... 5,000,000
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares of Class A Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share of
Class A Common Stock. The Underwriters may allow, and such dealers may reallow,
a discount not in excess of $ per share of Class A Common Stock to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
At the request of the Company, the Underwriters have reserved up to 5% of
the shares of Class A Common Stock for sale at the initial public offering
price, and otherwise on the same terms as sales pursuant to the Offering, to
directors, officers, employees, business associates and related persons of the
Company. The number of shares of Class A Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares which are not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.
The Company, all of the executive officers of the Company and all the
holders of Class B Common Stock have agreed, subject to certain exceptions, not
to, directly or indirectly, (i) sell, grant any option to purchase or otherwise
transfer or dispose of any Class A Common Stock or securities convertible into
or exchangeable or exercisable for Class A Common Stock, including shares of
Class B Common Stock, or file a registration statement under the Securities Act
with respect to the foregoing or (ii) enter into any swap or other agreement or
transaction that transfers, in whole or part, the economic consequence of
ownership of the Class A Common Stock, without the prior written consent of
Merrill Lynch, for a period of 180 days after the date of this Prospectus;
provided that the Company may sell shares of Class A Common Stock to a third
party as consideration for the Company's acquisition from such third party of an
automobile dealership, provided that such third party executes a lock-up
agreement on substantially the same terms described above for a period expiring
180 days after the date of this Prospectus.
The Company has granted an option to the Underwriters, exercisable within
30 days after the date of this Prospectus, to purchase up to an aggregate of
750,000 additional shares of Class A Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. The Underwriters may exercise this option only to
76
<PAGE>
cover over-allotments, if any, made on the sale of the Class A Common Stock
offered hereby. To the extent that the Underwriters exercise this option, each
Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares of Class A Common Stock proportionate to such
Underwriter's initial amount reflected in the foregoing table.
Prior to the Offering, there has been no public market for the Class A
Common Stock. The initial public offering price for the Class A Common Stock
will be determined by negotiation between the Company and the Representatives.
The factors considered in determining the initial public offering price, in
addition to prevailing market conditions, are price-earnings ratios of publicly
traded companies that the Representatives believe to be comparable to the
Company, certain financial information of the Company, the history of, and the
prospects for, the Company and the industry in which it competes, and an
assessment of the Company's management, its past and present operations, the
prospects for and the timing of future revenues of the Company, the present
state of the Company's development, and the above factors in relation to market
values and various valuation measures of other companies engaged in activities
similar to the Company. There can be no assurance that an active trading market
will develop for the Class A Common Stock or that the Class A Common Stock will
trade in the public market subsequent to the Offering made hereby at or above
the initial public offering price.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriters may be required to make
in respect thereof.
The Class A Common Stock has been approved for listing on the NYSE, subject
to official notice of issuance, under the symbol "SAH." In order to meet the
requirements for listing of the Class A Common Stock on that exchange, the
Underwriters have undertaken to sell lots of 100 or more shares to a minimum of
2,000 beneficial holders.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of Class A Common Stock offered hereby to any accounts
over which they exercise discretionary authority.
Until the distribution of the Class A Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Class A Common
Stock. As an exception to these rules, the Representatives are permitted to
engage in certain transactions that stabilize the price of Class A Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Class A Common Stock.
If the Underwriters create a short position in the Class A Common Stock in
connection with the Offering, I.E., if they sell more shares of Class A Common
Stock than are set forth on the cover page of this Prospectus, the
Representatives may reduce that short position by purchasing Class A Common
Stock in the open market. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Class A Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Class A Common Stock, they may
reclaim the amount of the selling concession from the Underwriters and selling
group members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A Common Stock. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
NationsBank, an affiliate of NationsBanc Montgomery Securities, Inc.,
loaned the Company $20 million under the Six-Month Facility to finance the Lake
Norman Acquisition and the Williams Acquistion. More than 10% of the net
proceeds of the Offering will be received by NationsBank by reason of the use of
such proceeds to repay a portion of such borrowings. Accordingly, the Offering
will be conducted in accordance with NASD Conduct Rule 2710(c)(8), which
requires that the public offering price of the Common Stock be no higher than
the price recommended by a Qualified Independent Underwriter which has
participated in the preparation of the Registration Statement and performed its
usual standard of due diligence with respect thereto. Merrill Lynch will act as
the Qualified Independent Underwriter for the Offering, and the public offering
price will not be higher than the price recommended by Merrill Lynch.
77
<PAGE>
LEGAL MATTERS
Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina, counsel
to the Company, will render an opinion that the shares of Class A Common Stock
offered hereby, when issued and paid for in accordance with the terms of the
Underwriting Agreement, will be duly authorized, validly issued, fully paid and
nonassessable. Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), New York, New York, has served as counsel to the
Underwriters in connection with this Offering.
EXPERTS
The combined and consolidated financial statements of Sonic Automotive,
Inc. and Affiliated Companies, the financial statements of Dyer & Dyer, Inc.,
the combined financial statements of Bowers Automotive Group, the combined
financial statements of Lake Norman Dodge, Inc. and Affiliated Companies, and
the financial statements of Ken Marks Ford, Inc. included in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein, and are included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 under the Securities Act with
respect to the shares of Class A Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the shares of Class A Common Stock offered hereby, reference is
made to the Registration Statement, including the exhibits and schedules filed
as part thereof. Statements contained in this Prospectus as to the contents of
any contract or any other documents are not necessarily complete, and, in each
such instance, reference is made to the copy of the contract or document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference thereto. The Registration Statement, together
with its exhibits and schedules, may be inspected at the Public Reference
Section of the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048 and at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part
of such materials may be obtained from any such office upon payment of the fees
prescribed by the SEC. Such information may also be inspected and copied at the
office of the NYSE at 20 Broad Street, New York, New York 10005. The Commission
also maintains a Website (http://www.sec.gov.) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
78
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES:
INDEPENDENT AUDITORS' REPORT........................................................................................ F-2
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS:
Combined and Consolidated Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997............ F-3
Combined and Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996 and unaudited
for the six months ended June 30, 1996 and 1997................................................................. F-4
Combined and Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996 and unaudited for the six months ended June 30, 1997.......................... F-5
Combined and Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and
unaudited for the six months ended June 30, 1996 and 1997....................................................... F-6
Notes to Combined and Consolidated Financial Statements.......................................................... F-7
DYER & DYER, INC.:
INDEPENDENT AUDITORS' REPORT........................................................................................ F-16
FINANCIAL STATEMENTS:
Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997...................................... F-17
Statements of Income and Retained Earnings for the years ended December 31, 1994, 1995 and 1996 and unaudited for
the six months ended June 30, 1996 and 1997..................................................................... F-18
Statements of Stockholder's Equity for the years ended December 31, 1994, 1995 and 1996 and unaudited for the six
months ended June 30, 1997...................................................................................... F-19
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and unaudited for the six months
ended June 30, 1996 and 1997.................................................................................... F-20
Notes to Financial Statements.................................................................................... F-21
BOWERS DEALERSHIPS AND AFFILIATED COMPANIES:
INDEPENDENT AUDITORS' REPORT........................................................................................ F-25
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997............................. F-26
Combined Statements of Income for the years ended December 31, 1995 and 1996 and unaudited for the six months
ended June 30, 1996 and 1997.................................................................................... F-27
Combined Statements of Stockholders' Equity for the years ended
December 31, 1995 and 1996 and unaudited for the six months ended June 30, 1997................................ F-28
Combined Statements of Cash Flows for the years ended December 31, 1995 and 1996 and unaudited for the six months
ended June 30, 1996 and 1997.................................................................................... F-29
Notes to Combined Financial Statements........................................................................... F-30
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES:
INDEPENDENT AUDITORS' REPORT........................................................................................ F-37
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets at December 31, 1996 and unaudited at June 30, 1997...................................... F-38
Combined Statements of Income for the year ended December 31, 1996 and unaudited for the six months ended June
30, 1996 and 1997............................................................................................... F-39
Combined Statements of Stockholders' Equity for the year ended December 31, 1996 and unaudited for the six months
ended June 30, 1997............................................................................................. F-40
Combined Statements of Cash Flows for the year ended December 31, 1996 and unaudited for the six months ended
June 30, 1996 and 1997.......................................................................................... F-41
Notes to Combined Financial Statements........................................................................... F-42
KEN MARKS FORD, INC.:
INDEPENDENT AUDITORS' REPORT........................................................................................ F-46
FINANCIAL STATEMENTS:
Balance Sheets at April 30, 1997 and unaudited at July 31, 1997.................................................. F-47
Statements of Income for the year ended April 30, 1997 and unaudited for the three months ended July 31, 1996 and
1997............................................................................................................ F-48
Statements of Stockholders' Equity for the year ended April 30, 1997 and unaudited for the three months ended
July 31, 1997................................................................................................... F-49
Statements of Cash Flows for the year ended April 30, 1997 and unaudited for the three months ended July 31, 1996
and 1997........................................................................................................ F-50
Notes to Financial Statements.................................................................................... F-51
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
SONIC AUTOMOTIVE, INC.
Charlotte, North Carolina
We have audited the accompanying combined balance sheets of Sonic Automotive,
Inc. and Affiliated Companies (the "Company"), which are under common ownership
and management, as of December 31, 1995 and 1996, and the related combined
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Sonic Automotive, Inc.
and Affiliated Companies as of December 31, 1995 and 1996, and the combined
results of their operations and their combined cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
September 29, 1997 (October 16, 1997 as to Notes 1 and 2)
F-2
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
COMBINED AND CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 8,993,887 $ 6,679,490 $ 9,237,585
Marketable equity securities............................................... 706,126 638,500 769,123
Receivables (Note 5) (net of allowance for doubtful accounts of $160,031
and $224,789 at December 31, 1995 and 1996,
respectively)........................................................... 9,085,376 11,907,786 12,897,264
Inventories (Notes 1, 3 and 5)............................................. 51,347,994 71,549,716 73,409,956
Deferred income taxes (Note 6)............................................. 117,500 279,896 256,032
Other current assets....................................................... 311,019 332,561 818,171
Total current assets.................................................... 70,561,902 91,387,949 97,388,131
PROPERTY AND EQUIPMENT, NET (Notes 4 and 5).................................. 8,527,338 12,466,713 13,269,789
GOODWILL, NET (Note 1)....................................................... -- 4,266,084 9,463,179
DUE FROM AFFILIATES (Note 7)................................................. -- 2,465,929 --
OTHER ASSETS................................................................. 372,610 389,277 263,374
TOTAL ASSETS................................................................. $79,461,850 $110,975,952 $120,384,473
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 3)....................................... $45,151,111 $ 63,893,356 $ 67,855,408
Trade accounts payable..................................................... 3,043,180 3,642,572 3,847,922
Accrued interest........................................................... 503,391 521,190 491,341
Other accrued liabilities.................................................. 1,554,713 3,031,473 4,307,119
Payable to affiliated companies (Note 7)................................... 2,000,000 -- --
Payable to Company's Chairman (Note 2)..................................... -- -- 3,500,000
Current maturities of long-term debt....................................... 169,932 518,979 487,242
Total current liabilities............................................... 52,422,327 71,607,570 80,489,032
LONG-TERM DEBT (Note 5)...................................................... 3,560,766 5,285,862 5,137,210
PAYABLE TO AFFILIATED COMPANIES (Note 7)..................................... 1,219,204 914,339 854,984
DEFERRED INCOME TAXES (Note 6)............................................... 777,600 1,059,380 930,923
INCOME TAX PAYABLE (Note 6).................................................. 4,976,276 5,499,777 4,565,796
MINORITY INTEREST (Note 1)................................................... 199,522 313,912 --
COMMITMENTS AND CONTINGENCIES (Notes 7 and 10)
STOCKHOLDERS' EQUITY (Notes 1, 8 and 9):
Preferred stock, $.10 par, 3,000,000 shares authorized and unissued........ -- -- --
Class A Common Stock, $.01 par, 50,000,000 shares authorized and
unissued................................................................ -- -- --
Class B Common Stock, $.01 par, 15,000,000 shares authorized,
6,250,000 shares issued and outstanding................................. 62,500 62,500 62,500
Paid-in capital............................................................ 6,269,046 13,333,160 14,418,342
Retained earnings.......................................................... 10,010,097 12,993,014 14,023,119
Unrealized loss on marketable equity securities............................ (35,488) (93,562) (97,433)
Total stockholders' equity.............................................. 16,306,155 26,295,112 28,406,528
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $79,461,850 $110,975,952 $120,384,473
</TABLE>
See notes to combined and consolidated financial statements.
F-3
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Vehicle sales............................ $227,959,827 $267,307,949 $326,841,772 $164,332,724 $185,077,493
Parts, service and collision repair...... 33,984,096 35,859,960 42,643,812 21,005,202 22,906,377
Finance and insurance.................... 5,180,998 7,813,408 7,118,217 4,277,094 4,763,248
Total revenues........................ 267,124,921 310,981,317 376,603,801 189,615,020 212,747,118
COST OF SALES.............................. 233,011,078 270,878,010 331,047,060 167,191,296 188,422,240
GROSS PROFIT............................... 34,113,843 40,103,307 45,556,741 22,423,724 24,324,878
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 24,631,532 29,343,430 33,677,529 16,590,478 18,413,226
DEPRECIATION AND AMORTIZATION.............. 838,011 832,261 1,075,618 359,630 395,573
OPERATING INCOME........................... 8,644,300 9,927,616 10,803,594 5,473,616 5,516,079
OTHER INCOME AND EXPENSE:
Interest expense, floor plan............. 3,000,622 4,504,526 5,968,430 2,800,778 3,017,903
Interest expense, other.................. 443,409 436,435 433,250 183,898 269,145
Gain on sale of marketable equity
securities............................ -- 107,007 354,922 278,917 134,496
Other income............................. 609,088 342,047 263,676 90,495 139,346
Total other expense................... 2,834,943 4,491,907 5,783,082 2,615,264 3,013,206
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST........................ 5,809,357 5,435,709 5,020,512 2,858,352 2,502,873
PROVISION FOR INCOME TAXES
(Note 6)................................. 2,118,004 2,175,680 1,923,205 1,093,034 916,172
INCOME BEFORE MINORITY
INTEREST................................. 3,691,353 3,260,029 3,097,307 1,765,318 1,586,701
MINORITY INTEREST IN EARNINGS
OF SUBSIDIARY............................ 15,564 22,167 114,390 40,612 46,993
NET INCOME................................. $ 3,675,789 $ 3,237,862 $ 2,982,917 $ 1,724,706 $ 1,539,708
PRO FORMA NET INCOME PER SHARE
(Note 1) (unaudited)..................... $ 0.48 $ 0.25
PRO FORMA NUMBER OF SHARES
USED TO COMPUTE PER SHARE
DATA (Note 1) (unaudited)................ 6,250,000 6,250,000
</TABLE>
See notes to combined and consolidated financial statements.
F-4
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
COMBINED AND CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
UNREALIZED LOSS
CLASS B ON MARKETABLE
COMMON STOCK (NOTE 1) PAID-IN RETAINED EQUITY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993...................... 6,250,000 $ 62,500 $ 4,774,700 $ 3,096,446 $ --
Net income...................................... -- -- -- 3,675,789 --
BALANCE AT DECEMBER 31, 1994...................... 6,250,000 62,500 4,774,700 6,772,235 --
Capital contribution............................ -- -- 1,494,346 -- --
Change in net unrealized loss on marketable
equity
securities.................................... -- -- -- -- (35,488)
Net income...................................... -- -- -- 3,237,862 --
BALANCE AT DECEMBER 31, 1995...................... 6,250,000 62,500 6,269,046 10,010,097 (35,488)
Capital contribution -- -- 7,064,114 -- --
Change in net unrealized loss on marketable
equity
securities.................................... -- -- -- -- (58,074)
Net income...................................... -- -- -- 2,982,917 --
BALANCE AT DECEMBER 31, 1996...................... 6,250,000 62,500 13,333,160 12,993,014 (93,562)
Capital contribution (unaudited)................ -- -- 3,208,510 -- --
Stock redemption (unaudited) (Note 7)........... -- -- (2,123,328) -- --
Dividend (unaudited) (Note 7)................... -- -- -- (509,603) --
Change in net unrealized loss on
marketable equity
securities (unaudited)........................ -- -- -- -- (3,871)
Net income (unaudited).......................... -- -- -- 1,539,708 --
BALANCE AT JUNE 30, 1997 (UNAUDITED).............. 6,250,000 $ 62,500 $ 14,418,342 $ 14,023,119 $ (97,433)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
<S> <C>
BALANCE AT DECEMBER 31, 1993...................... $ 7,933,646
Net income...................................... 3,675,789
BALANCE AT DECEMBER 31, 1994...................... 11,609,435
Capital contribution............................ 1,494,346
Change in net unrealized loss on marketable
equity
securities.................................... (35,488)
Net income...................................... 3,237,862
BALANCE AT DECEMBER 31, 1995...................... 16,306,155
Capital contribution 7,064,114
Change in net unrealized loss on marketable
equity
securities.................................... (58,074)
Net income...................................... 2,982,917
BALANCE AT DECEMBER 31, 1996...................... 26,295,112
Capital contribution (unaudited)................ 3,208,510
Stock redemption (unaudited) (Note 7)........... (2,123,328)
Dividend (unaudited) (Note 7)................... (509,603)
Change in net unrealized loss on
marketable equity
securities (unaudited)........................ (3,871)
Net income (unaudited).......................... 1,539,708
BALANCE AT JUNE 30, 1997 (UNAUDITED).............. $ 28,406,528
</TABLE>
See notes to combined and consolidated financial statements.
F-5
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 3,675,789 $ 3,237,862 $ 2,982,917 $ 1,724,706 $ 1,539,708
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 838,011 832,261 1,075,618 359,630 395,573
Minority interest................................... 15,564 22,167 114,390 40,612 46,993
Loss (gain) on disposal of property and equipment -- (38,721) 79,660 -- --
Gain on sale of marketable equity securities........ -- (107,007) (354,922) (278,917) (134,496)
Deferred income taxes............................... 258,400 450,400 (240,548) (62,002) 23,864
Changes in assets and liabilities that relate to
operations:
(Increase) decrease in receivables................ (2,091,063) (228,084) (2,420,651) 287,459 (989,478)
(Increase) decrease in inventories................ (10,392,680) (5,025,452) (14,012,965) (3,511,263) 2,799,710
(Increase) decrease in other current assets....... (66,945) 21,173 (10,455) (189,391) (483,564)
Increase (decrease) in other non-current assets... (679) (14,104) (69,883) 2,851 113,403
Increase in notes payable-floor plan.............. 9,489,146 3,431,241 12,984,772 4,117,088 290,190
Increase (decrease) in accounts payable and
accrued expenses............................... 676,526 (42,224) 1,439,486 1,285,875 1,309,913
Increase (decrease) in income tax payable......... 558,254 500,780 523,501 -- (933,981)
Total adjustments.............................. (715,466) (197,570) (891,997) 2,051,942 2,438,127
Net cash provided by operating activities...... 2,960,323 3,040,292 2,090,920 3,776,648 3,977,835
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash received............ -- -- (5,126,595) (692,883) (3,627,347)
Purchases of property and equipment................... (1,386,877) (1,508,848) (1,906,739) -- (886,149)
Proceeds from sale of property and equipment.......... 32,162 556,789 4,036 -- --
Purchase of marketable equity securities.............. (82,801) (1,622,845) (207,400) -- --
Proceeds from sales of marketable equity securities... -- 1,073,539 514,700 88,900 --
Net (advances to) receipts from affiliate companies... (295,578) 1,772,022 (4,770,794) (3,251,199) 65,633
Net cash provided by (used in) investing
activities................................... (1,733,094) 270,657 (11,492,792) (3,855,182) (4,447,863)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions................................. -- 1,494,346 7,064,114 1,000,000 3,208,510
Proceeds from long-term debt.......................... 107,284 2,899 599,206 -- --
Payments of long-term debt............................ (441,500) (269,254) (575,845) (468,970) (180,387)
Net cash provided by (used in) financing
activities................................... (334,216) 1,227,991 7,087,475 531,030 3,028,123
NET INCREASE (DECREASE) IN CASH......................... 893,013 4,538,940 (2,314,397) 452,496 2,558,095
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD............................................. 3,561,934 4,454,947 8,993,887 8,993,887 6,679,490
CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 4,454,947 $ 8,993,887 $ 6,679,490 $ 9,446,383 $ 9,237,585
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -- Cash paid during the period for:
Interest.............................................. $ 3,324,678 $ 4,776,504 $ 6,488,657 $ 2,839,031 $ 3,320,996
Income taxes.......................................... $ 998,850 $ 1,522,100 $ 2,042,268 $ 834,000 $ 930,000
</TABLE>
See notes to combined and consolidated financial statements.
F-6
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Sonic Automotive, Inc ("Sonic" or the
"Company") was incorporated in the State of Delaware in February, 1997 in order
to effect a reorganization of certain affiliated companies (the
"Reorganization") and to undertake an initial public offering of Sonic's common
stock (the "Offering"). Sonic and affiliated companies (collectively, the
"Company") operate automobile dealerships in the Houston, Texas and Charlotte,
North Carolina metropolitan areas. The Company sells new and used cars and light
trucks, sells replacement parts, provides vehicle maintenance, warranty, paint
and repair services and arranges related financing and insurance. The financial
statements for the periods through June 30, 1997 represent the combined data for
the entities under common ownership and control which became subsidiaries of
Sonic pursuant to the Reorganization on June 30, 1997, including the following
entities:
<TABLE>
<S> <C>
Town and Country Ford, Inc.................................................... Charlotte
Lone Star Ford, Inc........................................................... Houston
FMF Management, Inc. (d/b/a Fort Mill Ford)................................... Charlotte
Town and Country Toyota, Inc.................................................. Charlotte
Frontier Oldsmobile-Cadillac, Inc............................................. Charlotte
</TABLE>
All material intercompany transactions have been eliminated in the combined
financial statements. Effective June 30, 1997, these five entities became
wholly-owned subsidiaries of Sonic through the exchange of their common stock or
membership interests for 6,250,000 shares of Sonic's Class B common stock having
a $.01 par value per share. On June 2, 1997 Sonic, through its wholly-owned
subsidiary, Fort Mill Chrysler-Plymouth-Dodge, acquired certain dealership
assets and liabilities of Jeff Boyd Chrysler-Plymouth-Dodge, Inc. (a previously
unrelated entity) for a total purchase price of approximately $3.7 million. The
unaudited consolidated financial statements as of and for the six months ended
June 30, 1997, which give effect to the Reorganization, include the accounts of
the above five entities and also include the accounts and results of operations
of Fort Mill Chrysler-Plymouth-Dodge from the date of its acquisition.
The Reorganization was accounted for at historical cost in a manner similar
to a pooling-of-interests as the entities were under the common management and
control of Mr. O. Bruton Smith. The acquisition of Jeff Boyd
Chrysler-Plymouth-Dodge was accounted for as a purchase.
Prior to the Reorganization, Town and Country Toyota, Inc. was 69% owned by
Mr. O. Bruton Smith, the Company's Chairman and Chief Executive Officer, Lone
Star Ford, Inc. and Frontier Oldsmobile -- Cadillac, Inc. were 100% owned by
Sonic Financial Corporation ("SFC"), which in turn is 100% owned by Mr. Smith
and related family trusts. Town and Country Ford, Inc. was owned 80% by SFC and
20% by Mr. Scott Smith (O. Bruton Smith's son). FMF Management, Inc. was owned
50% by SFC and 50% by Mr. O. Bruton Smith.
In connection with the Reorganization, the Company purchased the 31%
minority interest in Town and Country Toyota, Inc. for $3.2 million in a
transaction accounted for using purchase accounting. On a pro forma basis for
the six months ended June 30, 1996 and 1997, revenues would have been unchanged
and net income and net income per share would not be materially different had
the acquisition of this minority interest occurred on January 1, 1996 and
January 1, 1997, respectively.
In connection with the anticipated Offering, Sonic expects to issue shares
of its Class A common stock. The Class B common stock entitles the holder to ten
votes per share, except in certain circumstances, while the Class A common stock
entitles its holder to one vote per share.
PRO FORMA NET INCOME PER SHARE -- Pro forma net income per share in the
accompanying financial statements has been prepared based upon the shares
outstanding after the Reorganization and without giving effect to the issuance
of common stock related to the Offering.
REVENUE RECOGNITION -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
F-7
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
DEALER AGREEMENTS -- The Company purchases substantially all of its new
vehicles from manufacturers at the prevailing prices charged by the manufacturer
to its franchised dealers. The Company's sales could be unfavorably impacted by
the manufacturer's unwillingness or inability to supply the dealership with an
adequate supply of new car inventory.
Each dealership operates under a dealer agreement with the manufacturer
which generally restricts the location, management and ownership of the
respective dealership. The ability of the Company to acquire additional
franchises from a particular manufacturer may be limited due to certain
restrictions imposed by manufacturers. Additionally, the Company's ability to
enter into other significant acquisitions may be restricted and the acquisition
of the Company's stock by third parties may be limited by the terms of the
franchise agreement.
CASH AND CASH EQUIVALENTS -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to vehicle purchases, and was
$2,644,804 and $5,222,589 at December 31, 1995 and 1996, respectively.
INVENTORIES -- In connection with the Offering, the Company intends to
convert from the last-in-first-out method (the "LIFO Method") of inventory
accounting to the first-in-first-out method (the "FIFO Method"), for its
inventories of new vehicles. In accordance with Accounting Principles Board
Opinion No. 20, "Accounting Changes", the accompanying financial statements and
related notes have been retroactively restated to reflect that change.
Accordingly, inventories of new vehicles, including demonstrators, and parts and
accessories are stated at the lower of FIFO cost or market. Inventories of used
vehicles are stated at the lower of specific cost or market.
The new method of accounting for inventories of new vehicles was adopted to
provide a better matching of revenues and expenses in the future and to conform
with the predominant industry practice for automobile dealerships that are
publicly-held. The effect of the accounting change on net income as previously
reported is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Net income on a LIFO Basis.................................. $2,784,032 $2,437,915 $2,146,675
Adjustment for effect of a change in accounting principle
that is applied retroactively............................. 891,757 799,947 836,242
Net income as adjusted.................................... $3,675,789 $3,237,862 $2,982,917
</TABLE>
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of the assets. The range of estimated useful lives is as
follows:
<TABLE>
<CAPTION>
USEFUL LIVES
<S> <C>
Building..................................................................... 40
Office equipment and fixtures................................................ 5-7
Parts and service equipment.................................................. 5
Company vehicles............................................................. 5
</TABLE>
Leasehold improvements are amortized over the lesser of the terms of their
respective leases or the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
GOODWILL -- Goodwill represents the excess of purchase price over the
estimated fair value of the net assets acquired and is being amortized over a 40
year period. The cumulative amount of goodwill amortization at December 31, 1996
was approximately $98,000.
The Company periodically reviews goodwill to assess recoverability. The
Company's policy is to compare the carrying value of goodwill with the expected
undiscounted cash flows from operations of the acquired business.
F-8
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
MARKETABLE EQUITY SECURITIES -- The Company's marketable equity securities
are classified as "available for sale" and are not bought and held principally
for the purpose of selling them in the near term. As such, these securities are
reported at fair value, with unrealized gains and losses, net of tax, excluded
from earnings and reported as a separate component of stockholders' equity.
Realized gains and losses on sales of marketable equity securities are
determined using the specific identification method.
INCOME TAXES -- Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to the capitalization of additional
inventory costs for income tax purposes, the recording of chargebacks and
repossession losses on the direct write-off method for income tax purposes, the
direct write-off of uncollectible accounts for income tax purposes, and the
accelerated depreciation method used for income tax purposes. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. In addition, deferred tax assets are
recognized for state operating losses that are available to offset future
taxable income.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
on deposit with financial institutions. At times, amounts invested with
financial institutions may exceed FDIC insurance limits.
Concentrations of credit risk with respect to receivables are limited
primarily to automobile manufacturers and financial institutions. Credit risk
arising from trade receivables from commercial customers is reduced by the large
number of customers comprising the trade receivables balances. Trade receivables
are concentrated in the Company's two market areas of Houston, Texas and
Charlotte, North Carolina metropolitan areas.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- As of December 31, 1995 and 1996 the
fair values of the Company's financial instruments including receivables, due
from affiliates, notes payable-floor plan, trade accounts payable, payables to
affiliated companies and Company Chairman and long-term debt approximate their
carrying values.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ADVERTISING -- The Company expenses advertising costs in the period
incurred. Advertising expense amounted to $3,765,363, $4,525,670 and $4,989,283
for 1994, 1995 and 1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS -- Effective January 1, 1996, the Company
adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This Statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Adoption of SFAS No. 121 did not have a material impact on the
Company's results of operations, financial position, and cash flows.
NEW ACCOUNTING STANDARDS -- In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." This Statement specifies the computation, presentation and
disclosure requirements for earnings per share. The Company believes that the
adoption of such Statement would not result in earnings per share materially
different than pro forma earnings per share presented in the accompanying
statements of income.
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. This
Statement will be effective for the Company's fiscal year ending December 31,
1998, and the Company does not intend to adopt this Statement prior to the
effective date. Had the Company early adopted this Statement, it would have
reported comprehensive income of $2,784,032, $2,402,427 and $2,088,601 for the
years ended December 31, 1994, 1995 and 1996, respectively.
F-9
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial
information for the six months ended June 30, 1996 and 1997 has been prepared on
substantially the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein. The results
for interim periods are not necessarily indicative of the results to be expected
for the entire fiscal year.
STOCK SPLIT -- All share and per share amounts included in the accompanying
financial statements for all periods presented have been adjusted to reflect a
625 for 1 stock split of the Class B Common Stock effective as of October 16,
1997.
2. BUSINESS ACQUISITIONS
In June 1997, the Company through its wholly-owned subsidiary, Fort Mill
Chrysler-Plymouth-Dodge, acquired certain dealership assets and liabilities of
Jeff Boyd Chrysler-Plymouth-Dodge for a total purchase price of $3.7 million. Of
the total purchase price of $3.7 million, $3.5 million was advanced to the
Company by Mr. O. Bruton Smith, with interest charged at 3.83%. It is
anticipated that this advance will be repaid in full with proceeds from the
Offering. Had the Offering occurred as of June 1997 (the date of the advance),
and this $3.5 million advance was repaid with the proceeds, supplemental pro
forma earnings per share, using weighted average shares of 6,294,872 would not
have resulted in a change to earnings per share as reported.
This transaction was accounted for using purchase accounting and the
results of the operations of this dealership have been included from the date of
acquisition through June 30, 1997 in the accompanying Unaudited Combined and
Consolidated Statement of Income. Company management believes that on a
pro-forma basis, revenues, net income and earnings per share would not have been
materially affected assuming this acquisition had occurred on January 1, 1996.
The purchase price has been allocated to the assets and liabilities acquired at
their estimated fair market value at the acquisition date as follows:
<TABLE>
<S> <C>
Working capital............................................................. $ 977,000
Property and equipment...................................................... 250,000
Goodwill.................................................................... 2,473,000
Total....................................................................... $3,700,000
</TABLE>
In June, July and August the Company entered into definitive agreements to
purchase six additional dealership groups for an aggregate purchase price of
$94.8 million as follows:
<TABLE>
<S> <C>
Bowers Dealerships.......................... Chattanooga, Tennessee
Lake Norman Dodge and Affiliates............ Cornelius, North Carolina
Ken Marks Ford.............................. Clearwater, Florida
Dyer Volvo.................................. Atlanta, Georgia
Jeff Boyd Chrysler-Plymouth-Dodge........... Fort Mill, South Carolina
Williams Motors, Inc........................ Rock Hill, South Carolina
</TABLE>
The Lake Norman Dodge and Affiliates, Ken Marks Ford, Jeff Boyd
Chrysler-Plymouth-Dodge and Williams Motors, Inc. acquisitions have been
consummated. The completion of the remaining acquisitions may be dependent upon
the successful completion of the Offering.
In conjunction with the Lake Norman acquisition, the Company obtained a
short-term line of credit with aggregate principal availability of $20 million
maturing no later than February 15, 1998. The Company borrowed $18.2 million
against this line to fund the purchase of Lake Norman. This line of credit is
secured by certain assets of the Company's Chairman and Chief Executive Officer.
F-10
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. BUSINESS ACQUISITIONS -- Continued
On February 1, 1996, the Company acquired Fort Mill Ford for a total
purchase price of $5,741,114. The acquisition has been accounted for as a
purchase and the results of operations of Fort Mill Ford have been included in
the accompanying combined financial statements from the date of acquisition. The
purchase price has been allocated to the assets and liabilities acquired at
their estimated fair market value at the acquisition date as follows:
<TABLE>
<S> <C>
Working capital............................................................. $ 822,000
Property and equipment...................................................... 3,022,000
Goodwill.................................................................... 4,364,000
Non-current liabilities assumed............................................. (2,467,000)
Total....................................................................... $5,741,000
</TABLE>
The following unaudited pro forma financial data is presented as if Fort
Mill Ford had been acquired at January 1, 1995. Pro forma results of operations
for 1996 are not presented because the acquisition occurred in February 1996,
and the pro forma results for the year ended December 31, 1996 would not be
materially different from the historical results presented:
<TABLE>
<CAPTION>
1995
<S> <C>
Revenues.................................................................. $345,198,523
Net income................................................................ $ 2,874,909
Earnings per share........................................................ $ 0.46
</TABLE>
The pro forma information presented above is not necessarily indicative of
the operating results that would have occurred had Fort Mill Ford been acquired
on January 1, 1995. These results are also not necessarily indicative of the
results of future operations.
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
New vehicles.................................................................... $37,895,075 $51,797,883 $56,126,061
Used vehicles................................................................... 8,913,145 14,372,285 11,826,874
Parts and accessories........................................................... 4,185,547 4,939,724 4,997,869
Other........................................................................... 354,227 439,824 459,152
Total........................................................................... $51,347,994 $71,549,716 $73,409,956
</TABLE>
The inventory balance is generally reduced by manufacturer's purchase
discounts, and such reduction is not reflected in the related floor plan
liability.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $45,151,111 and
$63,893,356 at December 31, 1996. The floor plan notes bear interest, payable
monthly on the outstanding balance, at the prime rate plus 1% (9 1/4% at
December 31, 1995 and 1996). Total floor plan interest expense amounted to
$3,000,622, $4,504,526 and $5,968,430 in 1994, 1995 and 1996, respectively. The
notes payable are due when the related vehicle is sold. As such, these floor
plan notes payable are shown as a current liability in the accompanying combined
and consolidated balance sheets.
F-11
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
Land............................................................................ $ 1,477,795 $ 2,677,795 $ 2,677,795
Buildings and improvements...................................................... 7,085,878 10,080,659 10,381,145
Office equipment and fixtures................................................... 2,442,965 2,036,980 2,360,424
Parts and service equipment..................................................... 2,955,729 2,866,291 2,941,456
Company vehicles................................................................ 373,683 437,261 512,113
Construction in progress........................................................ 265,677 -- --
Total, at cost.................................................................. 14,601,727 18,098,986 18,872,933
Less accumulated depreciation................................................... (6,074,389) (5,632,273) (5,603,144)
Property and equipment, net..................................................... $ 8,527,338 $12,466,713 $13,269,789
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
<S> <C> <C>
Note payable in monthly installments of $8,333 plus interest at the prime rate plus 1 1/2%,
through July 2001, collateralized by accounts receivable, inventory and equipment............... $ -- $ 458,335
Mortgage payable in monthly installments of $12,222 plus interest at prime plus 3/4%, through May
2004, collateralized by building................................................................ -- 1,087,778
Unsecured note payable in monthly installments of $9,100, including interest at 8%, through March
2004............................................................................................ -- 599,238
Mortgage note payable in monthly installments of $4,203, including interest at 7%, through
November 2008, collateralized by land and building.............................................. 425,751 405,700
Mortgage note payable in monthly installments of $27,415 including interest at prime plus 1/2%,
through April 2001, at which time remaining outstanding principal balance is due, collateralized
by building..................................................................................... 3,135,379 3,062,926
Other notes payable............................................................................... 169,568 190,864
3,730,698 5,804,841
Less current maturities........................................................................... (169,932) (518,979)
Long-term debt.................................................................................... $3,560,766 $5,285,862
</TABLE>
Future maturities of debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997........................................................................ $ 518,979
1998........................................................................ 455,505
1999........................................................................ 434,609
2000........................................................................ 446,374
2001........................................................................ 3,096,525
Thereafter.................................................................. 852,849
Total....................................................................... $5,804,841
</TABLE>
F-12
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following
components:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Current:
Federal........................................................................... $1,814,944 $1,608,418 $1,855,901
State............................................................................. 44,660 116,862 307,852
1,859,604 1,725,280 2,163,753
Deferred............................................................................ 244,900 427,200 (189,179)
Change in valuation allowance....................................................... 13,500 23,200 (51,369)
Total............................................................................. $2,118,004 $2,175,680 $1,923,205
</TABLE>
The reconciliation of the statutory federal income tax rate with the
Company's federal and state overall effective income tax rate is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Statutory federal rate............................................................................... 34.00% 34.00% 34.00%
State income taxes................................................................................... -- 3.84 3.60
Miscellaneous........................................................................................ 2.46 2.19 .71
Effective tax rates.................................................................................. 36.46% 40.03% 38.31%
</TABLE>
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31 are as
follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts....................................................................... $ 62,300 $ 85,992
Inventory reserves............................................................................ 126,400 160,820
Net operating loss carryforwards.............................................................. 183,800 74,931
Other......................................................................................... 1,300 75,656
Total deferred tax assets..................................................................... 373,800 397,399
Valuation allowance........................................................................... (126,300) (75,000)
Deferred tax assets, net...................................................................... 247,500 322,399
Deferred tax liabilities:
Basis difference in fixed assets.............................................................. (155,200) (556,384)
Basis difference in equity investment......................................................... (644,400) (478,876)
Other......................................................................................... (108,000) (66,623)
Total deferred tax liability.................................................................... (907,600) (1,101,883)
Net deferred tax liability...................................................................... $ (660,100) $ (779,484)
</TABLE>
The net changes in the valuation allowance against deferred tax assets were
an increase of $23,200 for the year ended December 31, 1995 and a decrease of
($51,300) for the year ended December 31, 1996. The increase (decrease) was
related primarily to the generation (expiration) of state net operating loss
carryforwards. At December 31, 1996, the Company had state net operating loss
carryforwards of $1,259,000 which will expire between 1998 and 2002.
A change to the FIFO from the LIFO method of inventory for new vehicles
resulted in an additional income tax liability. This liability was recorded as
$4,976,276 and $5,499,777 at December 31, 1995 and 1996, respectively and is
payable over a six year period beginning in January 1998.
F-13
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. INCOME TAXES -- Continued
Certain subsidiaries of Sonic (such subsidiaries together with the Company
and Sonic Financial being hereinafter referred to as the "Sonic Group") have
joined with Sonic Financial in filing consolidated federal income tax returns
for several years. Such subsidiaries will join with Sonic Financial in filing
for 1996 and for the period ending on June 30, 1997. Under applicable federal
tax law, each corporation included in Sonic Financial's consolidated return is
jointly and severally liable for any resultant tax. Under a tax allocation
agreement dated as of June 30, 1997, however, the Company agreed to pay to Sonic
Financial, in the event that additional federal income tax is determined to be
due, an amount equal to the Company's separate federal income tax liability
computed for all periods in which any member of the Sonic Group has been a
member of Sonic Financial's consolidated group, less amounts previously recorded
by the Company. Also pursuant to such agreement, Sonic Financial agreed to
indemnify the Company for any additional amount determined to be due from Sonic
Financial's consolidated group in excess of the federal income tax liability of
the Sonic Group for such periods. The tax allocation agreement establishes
procedures with respect to tax adjustments, tax claims, tax refunds, tax credits
and other tax attributes relating to periods ending prior to the time that the
Sonic Group shall leave Sonic Financial's consolidated group.
7. RELATED PARTIES
Town & Country Ford and Lone Star Ford have each made several non-interest
bearing advances to Sonic Financial. As of December 31, 1996, Town & Country
Ford had made $1,956,326 of such advances. In preparation for the
Reorganization, a demand promissory note by Sonic Financial evidencing these
advances was canceled in exchange for the redemption of certain shares of the
capital stock of Town & Country Ford held by Sonic Financial. As of December 31,
1996, Lone Star Ford had made $509,603 of advances to Sonic Financial. In
preparation for the Reorganization, a demand promissory note by Sonic Financial
evidencing certain of Lone Star Ford's advances was canceled pursuant to a
dividend.
The Company had amounts payable to affiliated companies of $3,219,204 and
$914,339, at December 31, 1995 and 1996, respectively. The balance, consisting
of non-interest bearing loans from affiliates, is classified as noncurrent based
upon its expected repayment date.
Town & Country Ford, Inc. operates at facilities leased from an entity
owned 5% by Town & Country Ford, Inc. and 95% by Sonic Financial Corporation.
This lease expires in October 2000. Annual payments under this lease were
$510,085 for each of the 1994, 1995 and 1996 fiscal years. Current minimum rent
payments are $409,000 annually ($34,083 monthly) through 1999, and will be
decreased to $340,833 in 2000.
Lone Star Ford operates in part from an entity controlled by the Company's
Chairman and Chief Executive Officer. This lease expires in 2005. Annual
payments under this lease were $351,420, $331,302 and $360,000 for the 1994,
1995 and 1996 fiscal years, respectively. Current minimum rent payments are
$360,000 annually ($30,000 monthly).
During each of the three years ended December 31, 1996, Town & Country Ford
paid $48,000 to Sonic Financial as a management fee. Sonic Financial's services
to Town & Country Ford have included performance of the following functions,
among others: maintenance of lender and creditor relationships; tax planning;
preparation of tax returns and representation in tax examinations; record
maintenance; internal audits and special audits; assistance to independent
public accountants; and litigation support to company counsel. Payments of fees
to and receipt of services from Sonic Financial ceased before the
Reorganization.
Beginning in early 1997, certain of Sonic's dealerships have entered into
arrangements to sell to their customers credit life insurance policies
underwritten by American Heritage Life Insurance Company, an insurer
unaffiliated with Sonic ("American Heritage"). American Heritage in turn
reinsures all of these policies with Provident American Insurance Company, a
Texas insurance company ("Provident American") and a wholly-owned subsidiary of
Sonic Financial. Under these arrangements, the dealerships paid an aggregate of
$140,000 to American Heritage in premiums for these policies for the six months
ended June 30, 1997. The Company anticipates terminating this arrangement with
American Heritage by 1998.
Chartown is a general partnership engaged in real estate development and
management. Before the Reorganization, Town & Country Ford maintained a 49%
partnership interest in Chartown with the remaining 51% held by SMDA Properties,
LLC, a North Carolina limited liability company ("SMDA"). The Company's Chairman
and Chief Executive Officer owns an
F-14
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. RELATED PARTIES -- Continued
80% direct membership interest in SMDA with the remaining 20% owned indirectly
through Sonic Financial. In addition, Sonic Financial also held a demand
promissory note for $1,555,528 million issued by Chartown (the "Chartown Note"),
which was uncollectible due to insufficient funds. As a part of the
Reorganization, the Chartown Note was cancelled and Town & Country Ford
transferred its partnership interest in Chartown to Sonic Financial for nominal
consideration. In connection with that transfer, Sonic Financial agreed to
indemnify Town & Country Ford for any and all obligations and liabilities,
whether known or unknown, relating to Chartown and Town & Country Ford's
ownership thereof. Town & Country Ford's recorded investment in Chartown was
nominal for all periods presented in the accompanying financial statements.
8. PREFERRED STOCK
In 1997, the Company authorized 3,000,000 shares of "blank check" preferred
stock with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. No preferred shares were issued and
outstanding at June 30, 1997.
9. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of the Company are eligible to
participate in a 401(k) plan maintained by SFC. Contributions by the Company to
the plan were not significant in any period presented.
The Company intends to adopt the 1997 Stock Option Plan (the "Plan"). Under
the provisions of the Plan, options to purchase shares of Class A Common Stock
may be granted to key employees of the Company and its subsidiaries and to
officers, directors, consultants and other individuals providing services to the
Company. The exercise price of the options may not be less than the market value
of the Class A Common Stock on the date of grant. Vesting periods will range
from 5 to 10 years. The Company intends to adopt the provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" to
account for the Plan's transactions.
The Company intends to adopt the Sonic Employee Stock Purchase Plan (the
"ESPP"). The ESPP provides employees of the Company the opportunity to purchase
Class A Common Stock after completion of the Offering. Under the terms of the
ESPP, on January 1 of each year all eligible employees electing to participate
will be granted an option to purchase shares of Class A Common Stock. The
Company's Compensation Committee will annually determine the number of shares of
Class A Common Stock available for purchase under each option. The purchase
price at which Class A Common Stock will be purchased through the ESPP will be
90% of the lesser of (i) the fair market value of the Class A Common Stock on
the applicable Grant Date and (ii) the fair market value of the Class A Common
Stock on the applicable Exercise Date. Options will expire on the last exercise
date of the calendar year in which granted.
10. CONTINGENCIES
The Company is contingently liable for customer contracts placed with
financial institutions of approximately $675,000 and $741,000 at December 31,
1995 and 1996, respectively. However, the Company's potential loss is limited to
the difference between the present value of the installment contract at the date
of the repossession and the market value of the vehicle at the date of sale.
Other accrued liabilities include a provision for repossession losses. The
Company provides a reserve for repossession losses based on the ratio that
historical loss experience bears to the amount of outstanding customer
contracts.
The Company has available $1,500,000 under draft-clearing credit lines with
a bank in order to immediately fund the Company's checking account for sold
vehicle contracts from other financial institutions. The Company is contingently
liable to the bank until the contracts are approved by the financial
institutions. At December 31, 1996, $151,227 was outstanding under these lines.
In the event that the Company fails to close the acquisitions of Dyer
Volvo, Ken Marks Ford, and the Bowers Dealerships by certain dates, the Company
will be required to pay termination fees which total approximately $4.0 million.
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.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
DYER & DYER, INC.
Atlanta, Georgia
We have audited the accompanying balance sheets of Dyer & Dyer, Inc. (the
"Company") as of December 31, 1995 and 1996, and the related statements of
income, stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dyer & Dyer, Inc. as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
August 7, 1997
F-16
<PAGE>
DYER & DYER, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 1,522,546 $ 941,280 $ 172,937
Receivables................................................................... 432,779 1,213,846 2,535,230
Inventories (Notes 1 and 2)................................................... 9,043,156 15,071,313 11,128,333
Prepaid expenses.............................................................. 274,998 103,958 32,267
Total current assets..................................................... 11,273,479 17,330,397 13,868,767
PROPERTY AND EQUIPMENT, NET (Notes 1 and 3)..................................... 774,909 1,279,774 1,156,207
OTHER ASSETS.................................................................... 287,628 292,250 297,424
TOTAL ASSETS.................................................................... $12,336,016 $18,902,421 $15,322,398
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, floor plan (Note 2)............................................ $ 2,610,935 $ 7,146,245 $ 5,533,925
Trade accounts payable........................................................ 511,292 1,131,472 --
Income taxes payable (Notes 1 and 5).......................................... -- 238,712 238,712
Accrued payroll and bonuses................................................... 82,183 229,297 277,377
Other accrued liabilities..................................................... 196,537 261,932 235,360
Total current liabilities................................................ 3,400,947 9,007,658 6,285,374
INCOME TAXES PAYABLE (Note 5)................................................... 21,012 477,423 238,711
COMMITMENTS (Note 4)
STOCKHOLDER'S EQUITY:
Common stock, $100 par value -- 3,000 shares authorized; 1,531 shares issued;
781 shares outstanding..................................................... 153,100 153,100 153,100
Paid-in capital............................................................... 27,623 27,623 27,623
Retained earnings............................................................. 13,709,477 14,212,760 13,593,733
Total.................................................................... 13,890,200 14,393,483 13,774,456
Less treasury stock (750 shares at cost)...................................... (4,976,143) (4,976,143) (4,976,143)
Total stockholder's equity............................................... 8,914,057 9,417,340 8,798,313
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY...................................... $12,336,016 $18,902,421 $15,322,398
</TABLE>
See notes to financial statements.
F-17
<PAGE>
DYER & DYER, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Vehicle sales.................................. $52,245,947 $52,613,480 $60,870,919 $30,767,026 $31,373,513
Parts, service and collision repair............ 8,680,440 9,097,763 11,163,230 5,481,708 5,960,212
Finance and insurance.......................... 203,198 404,505 542,474 213,711 128,911
Total..................................... 61,129,585 62,115,748 72,576,623 36,462,445 37,462,636
COST OF SALES.................................... 54,121,066 55,776,668 62,547,497 31,969,022 32,377,247
GROSS PROFIT..................................... 7,008,519 6,339,080 10,029,126 4,493,423 5,085,389
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 6,160,564 5,621,343 6,997,283 3,353,559 3,498,432
DEPRECIATION AND AMORTIZATION.................... 123,228 90,538 126,359 45,451 150,621
OPERATING INCOME................................. 724,727 627,199 2,905,484 1,094,413 1,436,336
OTHER INCOME AND EXPENSE:
Interest expense, floor plan................... 56,944 171,690 372,590 178,970 276,393
Other income................................... 609,684 314,788 452,063 234,834 247,213
Total other income (expense).............. 552,740 143,098 79,473 55,864 (29,180)
INCOME BEFORE INCOME TAXES....................... 1,277,467 770,297 2,984,957 1,150,277 1,407,156
PROVISION FOR INCOME TAXES (Notes 1
and 5)......................................... 491,365 295,850 954,846 954,846 --
NET INCOME....................................... $ 786,102 $ 474,447 $ 2,030,111 $ 195,431 $ 1,407,156
PRO FORMA PROVISION FOR INCOME TAXES (Note 5).... $ 1,149,507 $ 442,972 $ 541,896
PRO FORMA NET INCOME (Note 5).................... $ 1,835,450 $ 707,305 $ 865,260
</TABLE>
See notes to financial statements
F-18
<PAGE>
DYER & DYER, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN TREASURY RETAINED STOCKHOLDER'S
STOCK CAPITAL STOCK EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1993...................................... $153,100 $27,623 $(4,976,143) $12,448,928 $ 7,653,508
Net income............................................. -- -- -- 786,102 786,102
BALANCE
DECEMBER 31, 1994...................................... 153,100 27,623 (4,976,143) 13,235,030 8,439,610
Net income............................................. -- -- -- 474,447 474,447
BALANCE
DECEMBER 31, 1995...................................... 153,100 27,623 (4,976,143) 13,709,477 8,914,057
Dividends.............................................. -- -- -- (1,526,828) (1,526,828)
Net income............................................. -- -- -- 2,030,111 2,030,111
BALANCE
DECEMBER 31, 1996...................................... 153,100 27,623 (4,976,143) 14,212,760 9,417,340
Dividends (unaudited).................................. -- -- -- (2,026,183) (2,026,183)
Net income (unaudited)................................. -- -- -- 1,407,156 1,407,156
BALANCE
JUNE 30, 1997 (unaudited).............................. $153,100 $27,623 $(4,976,143) $13,593,733 $ 8,798,313
</TABLE>
See notes to financial statements.
F-19
<PAGE>
DYER & DYER, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 786,102 $ 474,447 $2,030,111 $ 195,431 $1,407,156
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) loss on disposal of fixed assets........... 8,011 11,757 86,745 -- (116)
Depreciation and amortization..................... 123,228 90,538 126,359 45,451 150,621
Changes in assets and liabilities that relate to
operations:
(Increase) decrease in accounts receivable........ (390,834) 191,714 (768,730) (39,751) (1,355,959)
(Increase) decrease in inventories................ 11,184 (4,213,189) (6,028,157) (1,566,226) 3,942,980
(Increase) decrease in prepaid expenses........... 79,966 (177,992) 171,040 218,576 71,691
Increase (decrease) in notes payable,
floor plan...................................... (127,470) 2,581,585 4,535,310 290,990 (1,612,320)
Increase (decrease) in accounts payable........... 7,048 498,092 620,180 (376,134) (1,131,472)
Increase (decrease) in other accrued
liabilities..................................... 105,201 (187,726) 147,106 170,944 25,008
Increase (decrease) in income taxes payable....... (20,682) 8,484 760,526 760,526 (242,212)
Total adjustments............................... (204,348) (1,196,737) (349,621) (495,624) (151,779)
Net cash provided by (used) in operating
activities................................... 581,754 (722,290) 1,680,490 (300,193) 1,255,377
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... (18,485) (181,259) (717,969) (14,013) (26,938)
Increase in cash value of life insurance............. (15,398) (26,316) (4,622) (2,311) (5,174)
Deposits held by financial institutions.............. 13,001 10,849 (12,337) 22,238 34,575
Net cash provided by (used) in investing
activities................................... (20,882) (196,726) (734,928) 5,914 2,463
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid....................................... -- -- (1,526,828) (759,810) (2,026,183)
INCREASE (DECREASE) IN CASH............................ 560,872 (919,016) (581,266) (1,054,089) (768,343)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 1,880,690 2,441,562 1,522,546 1,522,546 941,280
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $2,441,562 $1,522,546 $ 941,280 $ 468,457 $ 172,937
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.......................................... $ 57,766 $ 176,464 $ 509,621 $ 247,970 $ 279,460
Income taxes...................................... $ 399,605 $ 438,810 $ 31,826 $ 31,826 $ 242,237
</TABLE>
See notes to financial statements.
F-20
<PAGE>
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Dyer & Dyer, Inc. (the "Company") was
incorporated in South Carolina in 1978, and operates a Volvo automobile
dealership in Atlanta, Georgia. The Company sells new and used cars, sells
replacement parts, provides vehicle maintenance, warranty, paint and repair
services and arranges related financing and insurance.
In August 1997, the Company signed a definitive purchase agreement whereby
its net assets would be acquired by Sonic Automotive, Inc. ("Sonic") for $18
million. This acquisition is to be effective prior to the completion of an
anticipated public offering of common stock by Sonic Automotive in 1997. In
addition to the $18 million, the Company's stockholder will receive a warrant
entitling the holder to acquire common stock of Sonic Automotive at an exercise
price equal to the public offering stock price.
In connection with Volvo's approval of the sale of the Company to Sonic,
Volvo, among other things, conditioned its approval upon Richard Dyer, acquiring
and maintaining a 20% interest in the subsidiary of Sonic that will operate the
Volvo franchise. Mr. Dyer will finance all of the purchase price for this 20%
interest by the issuance of a promissory note to be secured by Mr. Dyers'
interest in the dealership. The principal amount of the note will be $3.6
million and it will bear interest at the lowest applicable federal rate, payable
annually. Mr. Dyers' interest in the dealership will be redeemed and the note
will be due and payable in full when Volvo no longer requires Mr. Dyer to
maintain his interest in the dealership.
REVENUE RECOGNITION -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
DEALER AGREEMENTS -- The Company purchases substantially all of its new
vehicles from the manufacturer at the prevailing prices charged by the
manufacturer to its franchised dealers. The Company's sales could be unfavorably
impacted by the manufacturer's unwillingness or inability to supply the
dealership with an adequate supply of new car inventory.
The dealership operates under a dealer agreement with the manufacturer
which generally restricts the location, management and ownership of the
dealership. The ability of the Company to acquire additional franchises may be
limited due to certain restrictions imposed by the manufacturer. Additionally,
the Company's ability to enter into significant acquisitions may be restricted
and the acquisition of the Company's stock by third parties may be limited by
the terms of the franchise agreement.
The manufacturer has implemented various incentive programs for its dealers
that provide for specified payments to the dealers based on the results of
customer satisfaction surveys and the implementation of certain standardized
policies and procedures. These programs are for a limited duration and remain
subject to cancellation by the manufacturer at any time. Incentive payments
credited to cost of sales amounted to approximately $210,000, $267,000 and
$1,326,000 during 1994, 1995 and 1996, respectively, and $290,000 and $912,000
for the six months ended June 30, 1996 and 1997, respectively.
CASH AND CASH EQUIVALENTS -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to vehicle purchases, and was
approximately $1,522,000 and $934,000 at December 31, 1995 and 1996,
respectively, and $167,000 at June 30, 1997.
INVENTORIES -- Inventories of new vehicles, including demonstators, are
valued at the lower of last-in, first-out ("LIFO") cost or market. Inventories
of used vehicles are stated at the lower of first-in, first-out ("FIFO") cost or
market, and parts and accessories are stated at the lower of specific cost or
market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of the assets. The range of estimated useful lives are as
follows:
<TABLE>
<CAPTION>
USEFUL LIVES
<S> <C>
Office equipment and fixtures............................................................ 5-7
Parts and service equipment.............................................................. 5
Company vehicles......................................................................... 5
</TABLE>
F-21
<PAGE>
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Leasehold improvements are amortized over the lesser of the terms of their
respective leases or the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are expensed as incurred. Significant
betterments are capitalized.
INCOME TAXES -- For the years ended December 31, 1994 and 1995, the Company
was a C Corporation and, therefore, provided for income taxes using the balance
sheet method. There were no significant deferred tax assets and liabilities as
of December 31, 1995. Effective January 1, 1996, the Company elected to be
treated as an S Corporation for federal and state income tax purposes. As such
the Company's taxable income is included in the stockholder's annual income tax
return. Accordingly, no provision for federal or state income taxes has been
included in the Company's statements of income for the periods beginning after
December 31, 1995, except for the amounts associated with the Company's change
to an S corporation (See Note 5).
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
on deposit with financial institutions. At times, amounts invested with
financial institutions may exceed FDIC insurance limits.
Concentrations of credit risk with respect to receivables are limited
primarily to automobile manufacturers and financial institutions. Credit risk
arising from trade receivables from commercial customers is reduced by the large
number of customers comprising the trade receivables balances. Trade receivables
are concentrated in the Atlanta, Georgia area.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ADVERTISING -- The Company expenses advertising costs in the period
incurred. Advertising expense approximated $709,000, $525,000 and $765,000
during 1994, 1995 and 1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS -- Effective January 1, 1996, the Company
adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Adoption of SFAS No. 121 did not have a material impact on the
Company's results of operations or financial position.
INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial
information for the six months ended June 30, 1996 and 1997 has been prepared on
substantially the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein. The results
of interim periods are not necessarily indicative of results to be expected for
the entire fiscal year.
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
New vehicles.................................................................... $ 5,692,043 $ 7,980,256 $ 5,017,765
Used vehicles................................................................... 2,768,230 6,362,410 5,542,979
Parts and accessories........................................................... 503,490 586,129 420,959
Other........................................................................... 79,393 142,518 146,630
Total........................................................................... $ 9,043,156 $15,071,313 $11,128,333
</TABLE>
At December 31, 1995 and 1996 and at June 30, 1997, the excess of current
replacement cost over the stated LIFO valuation of new vehicles, parts and
accessories amount to $2,387,114, $2,503,330 and $2,503,330 (unaudited),
respectively.
F-22
<PAGE>
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN -- Continued
Had the Company used the FIFO method of valuing new vehicle, parts and
accessories inventory, pretax earnings would have been $1,335,380, $1,200,776
and $3,101,173 in 1994, 1995 and 1996, respectively.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $2,610,935 and
$7,146,245 at December 31, 1995 and 1996, respectively. The floor plan notes
bear interest, payable monthly on the outstanding balance, at the prime rate
plus 1/2% to 1 1/2% (prime rate was 8.25% at December 31, 1996). Total floor
plan interest expense amounted to $56,944, $171,690 and $372,590 in 1994, 1995
and 1996, respectively. The notes payable are due when the related vehicle is
sold. As such, these floor plan notes payable are shown as a current liability
in the accompanying balance sheets.
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
Leasehold improvements.............................................................. $1,479,385 $1,885,415 $1,885,415
Furniture and fixtures.............................................................. 1,372,801 1,546,987 1,550,022
Other equipment..................................................................... 565,398 571,778 571,778
Computer equipment.................................................................. 188,851 195,598 198,428
Service vehicles.................................................................... 117,535 122,916 143,989
3,723,970 4,322,694 4,349,632
Less accumulated depreciation and amortization...................................... (2,949,061) (3,042,920) (3,193,425)
Property and equipment, net......................................................... $ 774,909 $1,279,774 $1,156,207
</TABLE>
4. LEASES
The Company leases its business premises under noncancelable operating
leases for five to twenty-five year terms from a partnership partially owned by
the sole stockholder of the Company. Future minimum rental payments required
under noncancelable leases at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997.................................................................................... $ 754,162
1998.................................................................................... 756,956
1999.................................................................................... 759,832
2000.................................................................................... 762,800
2001.................................................................................... 765,856
Thereafter.............................................................................. 5,551,504
Total................................................................................... $9,351,110
</TABLE>
Rent expense approximated $711,000, $708,000 and $715,000 during 1994, 1995
and 1996, respectively.
F-23
<PAGE>
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
Current:
Federal................................................................................ $439,714 $231,720 $811,620
State.................................................................................. 47,463 40,864 143,226
487,177 272,584 954,846
Deferred................................................................................. 4,188 23,266 --
Total.................................................................................... $491,365 $295,850 $954,846
</TABLE>
Effective with the Company's S Corporation election, it was required to
recapture its December 31, 1995 LIFO reserve of approximately $2,400,000 and pay
tax on that amount for both Federal and State income tax purposes. The taxes are
payable in four equal annual installments beginning March 15, 1996. This
conversion to S Corporation status resulted in the recognition of approximately
$955,000 in income tax expense.
As a result of the Company's change to S Corporation status on January 1,
1996 (see Note 1), it is exposed to potential future taxes on built-in gains
which were present on the date of the conversion. If the planned acquisition of
the net assets of the Company described in Note 1 is consummated, the disposal
of tangible and intangible property which appreciated prior to the election of S
Corporation status will result in the assessment of the built-in gains tax.
The pro forma provision for income taxes and the pro forma net income for
the year ended December 31, 1996 and the six months ended June 30, 1996 and 1997
reflect amounts that would have been recorded had the Company's income been
taxed for federal and state purposes as if it was a C Corporation.
6. RETIREMENT PLAN
The Company has a contributory 401(k) plan covering substantially all
employees. Company contributions to the Plan are equal to 25% of the first 4% of
participant contributions. Company contributions amounted to $1,000, $18,000 and
$18,000 in 1994, 1995 and 1996, respectively.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARDS OF DIRECTORS AND STOCKHOLDERS OF
BOWERS DEALERSHIPS AND AFFILIATED COMPANIES
Chattanooga, Tennessee
We have audited the accompanying combined balance sheets of Bowers
Dealerships and Affiliated Companies (the "Company"), which are under common
ownership and management, as of December 31, 1995 and 1996, and the related
combined statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Bowers Dealerships
and Affiliated Companies as of December 31, 1995 and 1996, and the combined
results of their operations and their combined cash flows for the years then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
August 7, 1997 (October 16, 1997 as to Note 1)
F-25
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 1,385,006 $ 2,738,432 $ 4,766,608
Receivables................................................................... 1,622,865 3,088,329 2,648,740
Inventories (Note 3).......................................................... 10,752,116 19,605,557 30,948,007
Other current assets (Note 7)................................................. 994,715 2,067,241 2,778,937
Total current assets..................................................... 14,754,702 27,499,559 41,142,292
PROPERTY AND EQUIPMENT, NET (Note4)............................................. 870,400 3,825,229 4,105,822
GOODWILL, NET (Note 1).......................................................... 978,735 4,374,573 8,285,460
OTHER ASSETS.................................................................... 560,729 564,240 658,529
TOTAL ASSETS.................................................................... $17,164,566 $36,263,601 $54,192,103
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 3).......................................... $10,187,565 $16,695,482 $26,771,632
Notes payable -- other (Note 6)............................................... 1,770,025 3,256,407 3,684,869
Trade accounts payable........................................................ 185,858 1,012,806 1,189,736
Accrued interest.............................................................. 69,164 105,505 178,143
Other accrued liabilities..................................................... 580,745 1,397,118 1,424,075
Current maturities of long-term debt.......................................... 363,851 285,469 427,557
Total current liabilities................................................ 13,157,208 22,752,787 33,676,012
LONG-TERM DEBT (Note 6)......................................................... 668,390 2,224,813 2,332,276
COMMITMENTS AND CONTINGENCIES (Notes 5 and 10)
EQUITY
Common stock of combined companies (Note 8):.................................. 300,000 300,000 300,000
Retained earnings and members' and partners' equity........................... 3,038,968 10,986,001 17,883,815
Total equity............................................................. 3,338,968 11,286,001 18,183,815
TOTAL LIABILITIES AND EQUITY.................................................... $17,164,566 $36,263,601 $54,192,103
</TABLE>
See notes to combined financial statements
F-26
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Vehicle sales.................................. $67,318,855 $91,182,583 $37,133,540 $63,950,004
Parts, service and collision repair............ 3,939,295 7,969,924 3,337,725 9,107,226
Finance and insurance.......................... 1,843,590 2,337,303 1,107,834 1,496,912
Total revenues............................ 73,101,740 101,489,810 41,579,099 74,554,142
COST OF SALES.................................... 63,581,225 87,756,814 35,532,069 63,945,021
GROSS PROFIT..................................... 9,520,515 13,732,996 6,047,030 10,609,121
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 8,004,120 11,807,108 5,080,153 8,293,720
DEPRECIATION AND AMORTIZATION.................... 186,545 364,958 137,879 309,048
OPERATING INCOME................................. 1,329,850 1,560,930 828,998 2,006,353
OTHER INCOME AND EXPENSE:
Interest expense, floor plan................... 964,399 1,177,603 569,072 880,676
Interest expense, other........................ 75,365 195,954 64,374 118,666
Other income (expense)......................... (29,827) 120,511 21,714 421,730
Total other expense....................... 1,069,591 1,253,046 611,732 577,612
INCOME BEFORE INCOME TAXES (Note 1).............. 260,259 307,884 217,266 1,428,741
PROVISION FOR INCOME TAXES....................... 41,879 60,851 60,215 30,927
NET INCOME....................................... $ 218,380 $ 247,033 $ 157,051 $ 1,397,814
PRO FORMA PROVISION FOR INCOME TAXES (Note 1).... $ 101,709 $ 120,321 $ 84,907 $ 558,352
PRO FORMA NET INCOME (Note 1).................... $ 158,550 $ 187,563 $ 132,359 $ 870,389
</TABLE>
See notes to combined financial statements
F-27
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
RETAINED
EARNINGS
AND
COMMON MEMBERS'
STOCK OF AND
COMBINED PARTNERS' TOTAL
COMPANIES EQUITY EQUITY
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994..................................................... $ 300,000 $ 1,032,746 $ 1,332,746
Capital contribution........................................................... -- 1,787,842 1,787,842
Net income..................................................................... -- 218,380 218,380
BALANCE AT DECEMBER 31, 1995..................................................... 300,000 3,038,968 3,338,968
Capital contribution........................................................... -- 7,700,000 7,700,000
Net income..................................................................... -- 247,033 247,033
BALANCE AT DECEMBER 31, 1996..................................................... 300,000 10,986,001 11,286,001
Capital contribution (unaudited)............................................... -- 5,500,000 5,500,000
Net income (unaudited)......................................................... -- 1,397,814 1,397,814
BALANCE AT JUNE 30, 1997 (unaudited)............................................. $ 300,000 $17,883,815 $18,183,815
</TABLE>
See notes to combined financial statements.
F-28
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
1995 1996 1996 1997
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 218,380 $ 247,033 $ 157,051 $1,397,814
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization................................. 186,545 364,958 137,879 309,048
Changes in assets and liabilities that relate to operations:
(Increase) decrease in receivables.......................... 479,709 (1,465,463) 492,538 439,590
(Increase) decrease in inventories.......................... 149,322 (2,990,886) (129,128) (8,623,984)
Increase in other current assets............................ (231,440) (1,072,526) (538,493) (711,698)
Increase in other non-current assets........................ (450,803) (3,511) (135,291) (94,289)
Increase (decrease) in notes payable -- floor plan.......... (198,815) 6,507,915 2,301,244 10,076,150
Increase (decrease) in accounts payable and accrued
expenses................................................. (1,151,902) 1,679,663 1,073,370 276,524
Total adjustments........................................ (1,217,384) 3,020,150 3,202,119 1,671,341
Net cash provided by (used in) operating activities......... (999,004) 3,267,183 3,359,170 3,069,155
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash received....................... -- (9,840,438) (4,790,970) (6,718,465)
Additions to property and equipment.............................. (263,811) (2,737,742) (2,850,697) (500,528)
Net cash used in investing activities....................... (263,811) (12,578,180) (7,641,667) (7,218,993)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions............................................ 1,787,842 7,700,000 2,700,000 5,500,000
Proceeds from long-term debt..................................... 272,084 1,872,169 1,872,169 500,000
Payments of long-term debt....................................... (797,363) (394,129) (114,690) (250,448)
Proceeds from notes payable -- other............................. 1,410,025 1,486,382 1,600,994 539,000
Payments of notes payable -- other............................... (220,000) -- -- (110,538)
Net cash provided by financing activities................... 2,452,588 10,664,422 6,058,473 6,178,014
NET INCREASE IN CASH............................................... 1,189,773 1,353,425 1,775,976 2,028,176
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..................... 195,234 1,385,007 1,385,007 2,738,432
CASH AND CASH EQUIVALENTS, END OF PERIOD........................... $ 1,385,007 $ 2,738,432 $3,160,983 $4,766,608
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the period for:
Interest......................................................... $ 1,021,118 $ 1,337,216 $ 649,259 $ 926,704
Income taxes..................................................... $ 96,391 $ 76,081 $ 35,636 $ 27,620
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Net liabilities recorded from combining affiliated companies..... $ 372,533 $ -- $ -- $ --
</TABLE>
See notes to combined financial statements.
F-29
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Bowers Dealerships and Affiliated Companies
(the "Company") operates automobile dealerships in the Chattanooga and
Nashville, Tennessee areas. The Company sells new and used cars and light
trucks, sells replacement parts, provides vehicle maintenance, warranty, paint
and repair services and arranges financing and insurance. As of December 31,
1996, the Company had eight dealership locations selling new vehicles
manufactured by BMW, Chrysler, Ford, Honda, Infiniti, Jaguar, and Volkswagen.
Subsequent to December 31, 1996 the Company acquired a Dodge dealership. (see
Note 2).
The accompanying combined financial statements include the accounts of the
following entities:
<TABLE>
<CAPTION>
NAME LOCATION STRUCTURE
<S> <C> <C>
Cleveland Village Imports, Inc.......................... Chattanooga C Corporation
Nelson Bowers Ford, L.P................................. Chattanooga Limited Partnership
Infiniti of Chattanooga, Inc............................ Chattanooga C Corporation
Cleveland Chrysler Plymouth Jeep Eagle, LLC............. Chattanooga Limited Liability Company
Jaguar of Chattanooga, LLC.............................. Chattanooga Limited Liability Company
KIA of Chattanooga...................................... Chattanooga Limited Liability Company
European Motors of Nashville LLC........................ Nashville Limited Liability Company
European Motors LLC..................................... Chattanooga Limited Liability Company
</TABLE>
The combined financial statements have been prepared in connection with a
planned acquisition of the net assets of these entities and the aforementioned
Dodge dealership by Sonic Automotive ("Sonic"). Sonic will purchase the net
assets of the above entities for a total purchase price of $27.6 million,
comprised of $23.6 in cash and a $4 million note payable. This acquisition is to
be effective prior to the completion of an anticipated public offering of common
stock by Sonic in 1997. The accompanying combined financial statements reflect
the financial position, results of operations, and cash flows of each of the
above listed dealerships. The combination of these entities has been accounted
for at historical cost in a manner similar to a pooling-of-interest because the
entities are under common management and control. All material intercompany
transactions have been eliminated.
In connection with Volvo's approval of the sale of the Company's Volvo
dealership to Sonic, Volvo, among other things, conditioned its approval upon
Nelson Bowers, acquiring and maintaining a 20% interest in the subsidiary of
Sonic that will operate the Volvo franchise. Mr. Bowers will finance all of the
purchase price for this 20% interest by issuing a promissory note to the
subsidiary of Sonic that controls the majority interest in Chattanooga Volvo.
This note will be secured by Mr. Bowers' interest in Chattanooga Volvo. The
principal amount of the note will be approximately $900,000 and it will bear
interest at the lowest applicable federal rate payable annually. Mr. Bowers'
interest in Chattanooga Volvo will be redeemed and this note will be due and
payable in full when Volvo no longer requires Mr. Bowers to maintain his
interest in Chattanooga Volvo.
REVENUE RECOGNITION -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
DEALER AGREEMENTS -- The Company purchases substantially all of its new
vehicles from manufacturers at the prevailing prices charged by the manufacturer
to its franchised dealers. The Company's sales could be unfavorably impacted by
the manufacturer's unwillingness or inability to supply the dealership with an
adequate supply of new car inventory.
Each dealership operates under a dealer agreement with the manufacturer
except Volkswagen of Nashville which operates under a management agreement which
generally restricts the location, management and ownership of the respective
dealership. The ability of the Company to acquire additional franchises from a
particular manufacturer may be limited due to certain restrictions imposed by
manufacturers. Additionally, the Company's ability to enter into significant
acquisitions may be restricted and the acquisition of the Company's stock by
third parties may be limited by the terms of the franchise agreement.
F-30
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
CASH AND CASH EQUIVALENTS -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to a vehicle purchase, and was
$654,165 and $1,702,294 at December 31, 1995 and 1996, respectively.
INVENTORIES -- Inventories of new and used vehicles, including
demonstrators, are valued at the lower of first-in, first-out ("FIFO") cost or
market, and parts and accessories are stated at the lower of specific cost or
market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of the assets. The range of estimated useful lives is as
follows:
<TABLE>
<CAPTION>
USEFUL LIVES
<S> <C>
Building..................................................................... 31.5-39
Office equipment and fixtures................................................ 5-7
Parts, service equipment and vehicles........................................ 7
</TABLE>
Leasehold improvements are amortized over the lesser of the terms of their
respective leases or the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
GOODWILL -- Goodwill represents the excess of purchase price over the
estimated fair value of the net assets acquired and is being amortized over a 40
year period. The cumulative amount of goodwill amortization at December 31, 1995
and 1996 was $33,561 and $87,723, respectively.
The Company periodically reviews goodwill for impairment by comparing the
carrying amount of goodwill with the estimated undiscounted future cash flows
from operations of the acquired business.
INCOME TAXES -- With the exception of Infiniti of Chattanooga, Inc. and
Cleveland Village Imports, Inc., all entities included in the accompanying
combined financial statements are either S Corporations, Limited Partnerships or
Limited Liability Companies (LLC). As such, these entities do not pay Federal
corporate income taxes on their taxable income. In addition, the Limited
Partnerships and LLC's are not subject to state income taxes. The stockholders
or partners are liable for individual income taxes on their respective shares of
the Company's taxable income.
Because Infiniti of Chattanooga, Inc. and Cleveland Village Imports, Inc.
is a C Corporation, federal and state income taxes are provided for in the
financial statements and consist of taxes currently due plus deferred taxes. In
addition, the S Corporations are subject to Tennessee income taxes which are
provided for in the financial statements. Income taxes are provided for income
taxes using the balance sheet method. Deferred taxes result primarily from
warranty accruals and the accelerated depreciation method used for income tax
purposes. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled. In
addition, deferred tax assets are recognized for state operating losses that are
available to offset future taxable income.
The pro forma provision for income taxes and the pro forma net income for
the years ended December 31, 1995 and 1996, and for the six months ended June
30, 1996 and 1997 reflect amounts that would have been recorded had the
Company's income been taxed for federal and state purposes as if it was a C
Corporation.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
deposits. At times, amounts invested with financial institutions may exceed FDIC
insurance limits.
F-31
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
Concentrations of credit risk with respect to receivables are limited
primarily to automobile manufacturers and financial institutions. Credit risk
arising from trade receivables from commercial customers is reduced by the large
number of customers comprising the trade receivables balances. Trade receivables
are concentrated in the Company's two market areas of Chattanooga and Nashville,
Tennessee.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ADVERTISING -- The Company expenses advertising costs in the period
incurred. Advertising expense amounted to $744,674 and $1,132,263 for 1995 and
1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS -- Effective January 1, 1996, the Company
adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may be
impaired. Adoption of SFAS No. 121 did not have a material impact on the
Company's results of operations or financial position.
INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial
information for the six months ended June 30, 1997 has been prepared on
substantially the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein. The results
of interim periods are not necessarily indicative of results to be expected for
the entire fiscal year.
2. BUSINESS ACQUISITIONS
EUROPEAN MOTORS LLC -- In May 1996, the Company acquired European Motors
LLC for a total purchase price of $4,790,970. The acquisition has been accounted
for as a purchase and the results of operations of European Motors LLC have been
included in the accompanying combined financial statements from the date of
acquisition. The total purchase price has been allocated to the assets and
liabilities acquired at their estiamted fair market value at acquisition date as
follows:
<TABLE>
<S> <C>
Inventory................................................................... $3,840,970
Property and equipment...................................................... 250,000
Goodwill.................................................................... 700,000
Total....................................................................... $4,790,970
</TABLE>
EUROPEAN MOTORS OF NASHVILLE, INC. -- In October 1996, the Company acquired
European Motors of Nashville, Inc. The total purchase price was $5,049,468. The
acquisition has been accounted for using purchase accounting and the results of
operations of this dealership has been included in the accompanying combined
financial statements from the date of acquisition. The total purchase price has
been allocated to the assets and liabilities acquired at their estimated fair
market value at acquisition date as follows:
<TABLE>
<S> <C>
Inventory................................................................... $2,003,086
Property and equipment...................................................... 296,382
Goodwill.................................................................... 2,750,000
Total....................................................................... $5,049,468
</TABLE>
DODGE OF CHATTANOOGA -- On March 1, 1997, the Company acquired Dodge of
Chattanooga for a total purchase price of $6,718,465. The acquisition has been
accounted for as a purchase and the results of operations of Dodge of
Chattanooga have been included in the accompanying unaudited combined financial
statements from the date of acquisition through June 30,
F-32
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
2. BUSINESS ACQUISITIONS -- Continued
1997. The purchase price has been allocated to the assets and liabilities
acquired at their estimated fair market value at acquisition date as follows:
<TABLE>
<S> <C>
Inventory................................................................... $2,718,465
Goodwill.................................................................... 4,000,000
Total....................................................................... $6,718,465
</TABLE>
The following unaudited pro forma financial data is presented as if
European Motors of Nashville, Inc. and European Motors LLC were acquired on
January 1, 1995 and January 1, 1996, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996
<S> <C> <C>
Revenues....................................................... $130,223,683 $136,389,810
Net income..................................................... $ 694,050 $ 476,033
</TABLE>
The following unaudited pro forma financial data is presented as if Dodge
of Chattanooga, Inc. was acquired on January 1, 1996 and January 1, 1997,
respectively:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1997
<S> <C> <C>
Revenues......................................................... $57,230,202 $78,452,142
Net income....................................................... $ 635,737 $ 1,404,814
</TABLE>
The pro forma information presented above is not necessarily indicative of
the operating results that would have occurred had European Motors of Nashville,
Inc. and European Motors LLC been acquired on January 1, 1995 and 1996,
respectively and Dodge of Chattanooga on January 1, 1996 and January 1, 1997.
These results are also not necessarily indicative of the results of future
operations.
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
New vehicles.................................................................... $ 8,261,122 $13,622,029 $19,572,873
Used vehicles................................................................... 1,911,689 4,178,998 9,235,162
Parts and accessories........................................................... 564,263 1,707,880 1,837,802
Other........................................................................... 15,042 96,650 302,170
Total........................................................................... $10,752,116 $19,605,557 $30,948,007
</TABLE>
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $10,187,565 and
$16,695,482 at December 31, 1995 and 1996, respectively. The floor plan notes
bear interest, that fluctuates with prime and are payable monthly on the
outstanding balance, ranging from 6.25% to 9.75% at December 31, 1996. Total
floor plan interest expense amounted to $964,399 and $1,177,603 in 1995 and
1996, respectively. The notes payable are due when the related vehicle is sold.
As such, these floor plan notes payable are shown as a current liability in the
accompanying combined balance sheets.
F-33
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
Land............................................................................ $ -- $ 608,307 $ 638,557
Buildings and improvements...................................................... 22,149 1,723,644 1,723,644
Office equipment and fixtures................................................... 844,823 1,208,546 1,422,551
Parts and service equipment..................................................... 630,827 1,200,983 1,491,388
Leasehold improvements.......................................................... 254,693 262,260 262,261
1,752,492 5,003,740 5,538,401
Less accumulated depreciation................................................... 882,092 1,178,511 1,432,579
Property and equipment, net..................................................... $ 870,400 $ 3,825,229 $ 4,105,822
</TABLE>
5. OPERATING LEASES
The Company leases its business premises under noncancelable operating
leases for one to twenty-six year terms. Future minimum rental payments required
under nonconcealable leases at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997........................................................................ $ 929,765
1998........................................................................ 687,431
1999........................................................................ 387,120
2000........................................................................ 387,120
2001........................................................................ 387,120
Thereafter.................................................................. 4,994,184
Total....................................................................... $7,772,740
</TABLE>
Rent expense under these noncancelable leases amounted to $458,999 and
$740,187 during 1995 and 1996, respectively.
6. FINANCING ARRANGEMENTS
Notes payable-other consists of a demand note to a bank and advances
principally from a stockholder. The stockholder advances are restricted to
investment in a cash management fund sponsored by finance companies. Other
current assets at December 31, 1995 and 1996 include $797,000 and $1,041,000,
respectively, of restricted cash in the cash management fund.
Notes payable-other consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
Unsecured stockholder advances restricted for investment -- due on
demand, interest ranging from 8.5% to 9.25%......................... $ 552,000 $1,041,000 $ 1,580,000
Other unsecured non-interest bearing stockholder advances due on
demand.............................................................. 1,218,025 2,215,407 2,104,869
Notes payable -- other................................................ $1,770,025 $3,256,407 $ 3,684,869
</TABLE>
F-34
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
6. FINANCING ARRANGEMENTS -- Continued
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
Mortgage note payable on land and building with a carrying value of
$2,302,487, interest payable at 8.9%, due June 1, 2001.............. $ -- $1,799,152 $ 1,767,753
Note payable due to stockholder, interest payable at 9.5%, due
December 31, 2001................................................... 564,000 564,000 564,000
Note payable related to purchase of dealership, due February 28,
1999................................................................ -- -- 333,333
Notes payable for equipment with a carrying value of $76,608, interest
payable ranging from 9.6% to 11.18%, payable in full November 15,
1997................................................................ 109,380 76,199 45,332
Note payable on company owned vehicles, with a carrying value of
approximately $20,253, bearing interest at 9.5%..................... 298,861 20,253 --
Note payable to an unrelated car dealership, due December 3, 1999..... 60,000 45,000 45,000
Note payable -- other................................................. -- 5,678 4,415
1,032,241 2,510,282 2,759,833
Less current maturities............................................... (363,851) (285,469) (427,557)
Long-term debt........................................................ $ 668,390 $2,224,813 $ 2,332,276
</TABLE>
Future maturities of the above debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997........................................................................ $ 285,469
1998........................................................................ 259,650
1999........................................................................ 372,930
2000........................................................................ 89,829
2001........................................................................ 1,502,404
Total....................................................................... $2,510,282
</TABLE>
7. RELATED PARTIES
The Company operates certain dealerships at facilities leased from
affiliated companies. The leases are classified as operating leases. Future
minimum rent payments are $483,390 in 1997, $387,390 annually through 2001 and
$4,994,184 thereafter. Rent expense in 1995 and 1996 for these leases amounted
to $315,390 and $441,390, respectively.
The Company has made non-interest bearing advances to stockholders totaling
$403,415, which was outstanding as of December 31, 1995 and 1996 and June 30,
1997, respectively. These amounts are reflected in other non-current assets in
the accompanying combined balance sheets.
The Company also made advances to stockholders totaling $459,818, which
primarily relates to the purchase of real estate and the construction of a
facility owned by an entity affiliated through common ownership. This amount is
included in other current assets, as it is the opinion of Company management
that this amount will be collected in full by December 31, 1997.
The Company purchases advertising services from an entity affiliated
through common ownership. Advertising expenses from services received from this
entity included in the accompanying statements of operations for the years ended
December 31, 1995 and 1996 was $422,777 and $412,982, respectively.
The Company sells extended warranty contracts to customers related to
vehicle sales through warranty contracts procured from an entity affiliated
through common ownership. Total premiums paid to this affiliated entity for
these contracts totaled $389,620 and $453,850 for the years ended December 31,
1995 and 1996, respectively.
F-35
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
7. RELATED PARTIES -- Continued
The Company purchases products and services from an entity affiliated
through common ownership relative to automobile etching and automobile pack
products sold to customers. Total products and services purchased for the years
ended December 31, 1995 and 1996 was $69,733 and $97,164 respectively.
For the year ended December 31, 1996, the Company paid $23,760 for services
provided to an automobile auction entity which is related through common
ownership.
8. EQUITY
During 1997, an entity affiliated through common ownership began paying the
salaries of certain executive officers and other selling, general and
administrative expenses relating to the Company. The affiliated company charged
the Company management fees during the six months ended June 30, 1997 totaling
$864,000 for the reimbursement of amounts paid by the affiliate on behalf of the
Company.
The capital structure of the entities included in the combined financial
statements of the Company at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
COMMON STOCK
SHARES RETAINED EARNINGS
PAR SHARES ISSUED AND AND MEMBERS' AND
VALUE AUTHORIZED OUTSTANDING AMOUNT PARTNERS' EQUITY
<S> <C> <C> <C> <C> <C>
Cleveland Village Imports, Inc.......................... No par 2,000 2,000 $ 300,000 $ 552,817
Nelson Bowers Ford, L.P................................. -- 759,039
Cleveland Chrysler Plymouth Jeep Eagle, LLC............. -- 562,328
Jaguar of Chattanooga, LLC.............................. -- 1,164,784
$ 300,000 $ 3,038,968
</TABLE>
The capital structure of the entities included in the combined financial
statements of the Company at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
COMMON STOCK
SHARES RETAINED EARNINGS
PAR SHARES ISSUED AND AND MEMBERS' AND
VALUE AUTHORIZED OUTSTANDING AMOUNT PARTNERS' EQUITY
<S> <C> <C> <C> <C> <C>
Cleveland Village Imports, Inc.......................... No par 2,000 2,000 $ 300,000 $ 563,672
Nelson Bowers Ford, L.P................................. -- 699,958
Cleveland Chrysler Plymouth Jeep Eagle, LLC............. -- 417,300
Jaguar of Chattanooga, LLC.............................. -- 1,141,782
European Motors of Nashville, LLC....................... -- 5,014,936
European Motors LLC..................................... -- 3,148,353
$ 300,000 $10,986,001
</TABLE>
9. EMPLOYEE BENEFIT PLANS
In April 1997, the Company established a 401(k) plan, whereby substantially
all of the employees of the company meeting certain service requirements are
eligible to participate. Contributions by the Company to the plan were not
significant in any period presented.
10. 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.
F-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
LAKE NORMAN DODGE, INC.
Cornelius, North Carolina
We have audited the accompanying combined balance sheet of Lake Norman
Dodge, Inc. and Affiliated Companies (the "Company"), which are under common
ownership and management, as of December 31, 1996, and the related combined
statements of income, stockholders' equity, and cash flows for the year then
ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Lake Norman Dodge,
Inc. and Affiliated Companies as of December 31, 1996, and the combined results
of their operations and their combined cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
August 7, 1997
(September 29, 1997 as to Note 1)
F-37
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER
31, JUNE 30,
1996 1997
<S> <C> <C>
(UNAUDITED)
ASSETS (NOTE 4)
CURRENT ASSETS:
Cash and cash equivalents.................................................................... $ 3,491,358 $ 3,466,789
Receivables.................................................................................. 1,998,315 2,535,247
Inventories (Note 2)......................................................................... 23,603,843 22,778,488
Prepaid expenses............................................................................. -- 243,870
Total current assets...................................................................... 29,093,516 29,024,394
PROPERTY AND EQUIPMENT, NET (Note 3)........................................................... 485,880 566,875
OTHER ASSETS (NOTE 6):
Due from employees........................................................................... 281,497 302,628
Due from related partnership................................................................. 159,554 159,554
Total other assets........................................................................ 441,051 462,182
TOTAL ASSETS................................................................................... $30,020,447 $30,053,451
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable-floor plan (Note 2)............................................................ $25,957,314 $25,865,010
Trade accounts payable....................................................................... 1,364,121 1,351,664
Note payable to bank (Note 4)................................................................ 68,168 27,644
Other accrued liabilities.................................................................... 765,620 472,485
Current maturities of long-term debt......................................................... 142,857 71,429
Total current liabilities................................................................. 28,298,080 27,788,232
LONG-TERM DEBT (Note 4)........................................................................ 785,715 785,714
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
Common stock of combined companies........................................................... 75,000 75,000
Paid-in capital.............................................................................. 600,009 600,009
Retained earnings............................................................................ 261,643 804,496
Total stockholders' equity................................................................ 936,652 1,479,505
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................................... $30,020,447 $30,053,451
</TABLE>
See notes to combined financial statements.
F-38
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1996 AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1996 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
REVENUES:
Vehicle sales................................................................ $124,538,878 $55,071,168 $69,798,274
Finance and insurance........................................................ 3,617,296 1,773,355 1,949,987
Parts and service............................................................ 9,543,187 4,371,529 5,321,329
Total revenues............................................................ 137,699,361 61,216,052 77,069,590
COST OF SALES.................................................................. 121,806,212 53,845,015 68,272,355
GROSS PROFIT................................................................... 15,893,149 7,371,037 8,797,235
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................... 14,215,002 6,736,729 6,937,071
DEPRECIATION AND AMORTIZATION.................................................. 88,987 37,414 46,900
OPERATING INCOME............................................................... 1,589,160 596,894 1,813,264
OTHER INCOME AND EXPENSE:
Interest expense, floor plan................................................. 1,552,250 588,951 1,185,518
Interest expense, other...................................................... 49,540 2,880 67,647
Other income................................................................. 257,747 113,277 176,322
Total other expense....................................................... 1,344,043 478,554 1,076,843
NET INCOME..................................................................... $ 245,117 $ 118,340 $ 736,421
PRO FORMA INCOME TAX PROVISION
(Note 1)..................................................................... $ 97,213 $ 46,934 $ 292,138
PRO FORMA NET INCOME
(Note 1)..................................................................... $ 147,904 $ 71,406 $ 444,283
</TABLE>
See notes to combined financial statements.
F-39
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996 AND SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.................................. 75 $75,000 $475,009 $728,963 $1,278,972
Capital contribution........................................ -- -- 125,000 -- 125,000
Net income.................................................. -- -- -- 245,117 245,117
Distributions to owners..................................... -- -- -- (712,437) (712,437)
BALANCE AT DECEMBER 31, 1996.................................. 75 75,000 600,009 261,643 936,652
Net income (unaudited)...................................... -- -- -- 736,421 736,421
Distributions to owners (unaudited)......................... -- -- -- (193,568) (193,568)
BALANCE AT JUNE 30, 1997 (unaudited).......................... 75 $75,000 $600,009 $804,496 $1,479,505
</TABLE>
See notes to combined financial statements.
F-40
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, 1996 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 245,117 $ 118,340 $ 736,421
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Bad debts and repossessions........................................... 44,523 -- 9,910
Depreciation and amortization expense................................. 88,987 37,414 46,900
Increase in LIFO reserve.............................................. 169,316 177,898 324,486
Changes in assets and liabilities that relate to operations:
Increase in receivable.............................................. (533,128) (417,366) (546,842)
Increase (decrease) in inventories.................................. (10,887,995) 1,039,475 500,867
Increase (decrease) in prepaid expenses............................. 15,895 (271,689) (243,870)
(Increase) decrease in accounts payable............................. 109,802 (240,517) (12,456)
(Increase) decrease in notes payable floor plan..................... 13,226,616 547,291 (92,304)
(Increase) decrease in other accrued liabilities.................... 488,012 1,281,747 (293,135)
Total adjustments................................................ 2,722,028 2,154,253 (306,444)
Net cash provided by operating activities........................ 2,967,145 2,272,593 429,977
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................................... (282,711) (141,084) (127,895)
Advances to employees -- net............................................. (86,179) (87,558) (21,131)
Advances to related partnership -- net................................... (159,553) -- --
Net cash used in investing activities............................ (528,443) (228,642) (149,026)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank note.................................................. 100,000 100,000 --
Payments on bank note.................................................... (69,331) (30,214) (40,524)
Proceeds from long-term debt............................................. 1,000,000 1,000,000 --
Payments on long-term debt............................................... (71,429) -- (71,428)
Capital contribution..................................................... 125,000 -- --
Distributions to owners.................................................. (712,437) (540,205) (193,568)
Net cash provided by (used in) financing activities.............. 371,803 529,581 (305,520)
NET INCREASE (DECREASE) IN CASH............................................ 2,810,505 2,573,532 (24,569)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 680,853 680,853 3,491,358
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 3,491,358 $ 3,254,385 $ 3,466,789
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest................................. $ 1,601,790 $ 591,831 $ 1,253,165
</TABLE>
See notes to combined financial statements.
F-41
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Lake Norman Dodge, Inc. and Affiliated
Companies' (the "Company") operates two automobile dealerships in the Charlotte,
North Carolina area. The Company sells new and used cars and light trucks, sells
replacement parts, provides vehicle maintenance, warranty, paint and repair
services and arranges related financing and insurance.
The combined financial statements include the accounts of Lake Norman
Dodge, Inc. ("LND") and its subsidiary, Lake Norman Chrysler-Plymouth-Jeep-
Eagle, LLC ("LNCPJE") and certain proprietorships of Phil Gandy and Quinton
Gandy. LND is 100% owned by Phil Gandy and Quinton Gandy. All significant
intercompany balances and planned transactions have been eliminated in
combination.
The combined financial statements have been prepared in connection with a
planned acquisition of the net assets of these entities by Sonic Automotive,
Inc. ("Sonic"). In May 1997, the Company signed a definitive purchase agreement
whereby its outstanding capital stock would be acquired by Sonic for
$18,200,000. This acquisition was consummated on September 29, 1997, and is
being done in contemplation of an anticipated public offering of common stock by
Sonic in 1997.
The accompanying combined financial statements reflect the financial
position, results of operations, and cash flows of each of the above listed
entities. The combination of these entities has been accounted for at historical
cost in a manner similar to a pooling-of-interest because the entities are under
common management and control. All material intercompany transactions have been
eliminated.
LNCPJE was organized on March 18, 1996, as a North Carolina limited
liability company and commenced operations on July 1, 1996. The certain
proprietorships of Phil Gandy and Quinton Gandy include commissions earned
related to sales of extended warranty contracts through LND and LNCPJE, which
were paid directly to Phil Gandy and Quinton Gandy at the option of LND and
LNCPJE. Earned commissions relating to the sales of these contracts reflect a
recurring transaction relating to the dealerships and therefore these
proprietorships have been included in the accompanying combined financial
statements.
REVENUE RECOGNITION -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institutions.
DEALER AGREEMENTS -- The Company purchases substantially all of its new
vehicles from manufacturers at the prevailing prices charged by the manufacturer
to its franchised dealers. The Company's sales could be unfavorably impacted by
the manufacturers' unwillingness or inability to supply the dealership with an
adequate supply of new car inventory.
Each dealership operates under a dealer agreement with the manufacturer
which generally restricts the location, management and ownership of the
respective dealership. The ability of the Company to acquire additional
franchises from a particular manufacturer may be limited due to certain
restrictions imposed by manufacturers. Additionally, the Company's ability to
enter into significant acquisitions may be restricted and the acquisition of the
Company's stock by third parties may be limited by the terms of the franchise
agreement.
CASH AND CASH EQUIVALENTS -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to vehicle purchases, and was
$2,110,467 at December 31, 1996.
INVENTORIES -- Inventories of new vehicles, including demonstrators, are
valued at the lower of last-in, first-out ("LIFO") cost or market. Inventories
of used vehicles are stated at the lower of first-in, first-out ("FIFO") cost or
market, and parts and accessories are stated at the lower of specific cost or
market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed over the estimated useful lives of the assets using
primarily accelerated methods. The range of estimated useful lives is as
follows:
<TABLE>
<CAPTION>
USEFUL LIVES
<S> <C>
Parts and service equipment................................................... 5 years
Office equipment and fixtures................................................. 5-7 years
Company vehicles.............................................................. 5 years
</TABLE>
F-42
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
Leasehold improvements are amortized over the lesser of the terms of their
respective leases or the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
INCOME TAXES -- LND has elected to be treated as an S Corporation for
federal and state income tax purposes, and LNCPJE is a limited liability company
(LLC). As such the stockholders and members, respectively, include their pro
rata share of the Company's taxable income for the year in their individual
income tax returns. The proprietorship income of Phil and Quinton Gandy combined
herein is also included in their personal income tax returns. Accordingly, no
provision for federal or state income taxes has been included in the
accompanying combined statement of income.
The pro forma provision for income taxes and the pro forma net income for
the year ended December 31, 1996 and for the six months ended June 30, 1996 and
1997 reflect amounts that would have been recorded had the Company's income been
taxed for federal and state purposes as if it was a C Corporation.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
deposits. At times, amounts invested with financial institutions may exceed FDIC
insurance limits.
Concentrations of credit risk with respect to receivables are limited
primarily to automobile manufacturers and financial institutions. Credit risk
arising from trade receivables from commercial customers is reduced by the large
number of customers comprising the trade receivables balances. Trade receivables
are concentrated in the Charlotte, North Carolina metropolitan area.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ADVERTISING COSTS -- The Company expenses all costs of advertising when
incurred. Advertising costs of $1,828,534 are included in operating expenses for
1996.
INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial
information for the six months ended June 30, 1997 has been prepared on
substantially the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein. The results
for interim periods are not necessarily indicative of the results to be expected
for the entire fiscal year.
The combined statement of income for the year ended December 31, 1996
includes expenses approximating $1,200,000 for discretionary bonuses to
stockholders determined at year end. Of this amount approximately $565,000 was
incurred through June 30, 1996. Given the planned acquisition by Sonic, it is
uncertain if a similar discretionary bonus will be awarded in 1997. As such, no
bonus has been accrued through June 30, 1997.
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOORPLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
<S> <C> <C>
(UNAUDITED)
New vehicles................................................................................... $ 16,617,268 $18,626,219
Used vehicles.................................................................................. 6,437,598 3,720,437
Parts and accessories.......................................................................... 548,977 431,832
Total.......................................................................................... $ 23,603,843 $22,778,488
</TABLE>
Had the Company used the FIFO method of valuing new vehicle inventory,
inventories would have been $1,564,142 higher and net income would have been
$414,432 as of and for the year ended December 31, 1996. The inventory balance
is
F-43
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOORPLAN -- Continued
generally reduced by the manufacturer's purchase discounts and such reduction is
not reflected in the related floor plan liability.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $25,957,314 at December
31, 1996. The floor plan notes bear interest, payable monthly on the outstanding
balance, at the prime rate plus 0.5% (8.75% at December 31, 1996). Total floor
plan interest expense amounted to $1,552,250 in 1996. The notes payable are due
when the related vehicle is sold. As such, these floor plan notes payable are
shown as a current liability in the accompanying balance sheet.
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
<S> <C> <C>
(UNAUDITED)
Service equipment........................................................ $ 309,944 $ 373,652
Parts and accessory equipment............................................ 35,480 38,876
Vehicles................................................................. 11,809 53,898
Furniture and fixtures................................................... 212,155 278,479
Leasehold improvements................................................... 460,097 497,345
1,029,485 1,242,250
Less accumulated depreciation............................................ (543,605) (675,375)
Property and equipment, net.............................................. $ 485,880 $ 566,875
</TABLE>
4. NOTE PAYABLE TO BANK AND LONG-TERM DEBT
The note payable with a balance of $68,168 at December 31, 1996 is due in
monthly installments of $7,172, including interest at 8.25%, through October,
1997. The note is collateralized by modular buildings used in Company
operations.
In July, 1996, the Company borrowed $1,000,000 from Chrysler Financial
Corporation. Payments of $11,905 plus interest at prime plus .5% (8.75% at
December 31, 1996) are due monthly, through July, 2003. The loan is
collateralized by a security interest in all assets of LNCPJE. Principal is due
as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997.......................................................................... $142,857
1998.......................................................................... 142,857
1999.......................................................................... 142,857
2000.......................................................................... 142,857
2001.......................................................................... 142,857
2002.......................................................................... 142,857
Thereafter.................................................................... 71,430
928,572
Less current maturities....................................................... 142,857
Long-term debt................................................................ $785,715
</TABLE>
5. OPERATING LEASES
The Company leases its operating facilities from its shareholders under
three separate leases expiring March, 2000 and June, 2001. Monthly payments
under these leases at December 31, 1996, total $83,000. One of these leases has
an option for renewal for two additional five year terms. The Company pays all
operating costs such as utilities, repairs, maintenance and insurance relating
to these facilities. Total payments made to related parties under these leases
in 1996 were $786,000 exclusive of operating costs.
F-44
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
5. OPERATING LEASES -- Continued
At December 31, 1996 future minimum rental payments under these operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR
<S> <C>
1997........................................................................ $ 996,000
1998........................................................................ 996,000
1999........................................................................ 996,000
2000........................................................................ 564,000
2001........................................................................ 210,000
Total................................................................ $3,762,000
</TABLE>
The Company leases automobiles through Chrysler Finance under twenty-four
and thirty-six month agreements expiring at various dates. The Company pays
monthly rental of varying amounts. In addition, the Company pays all operating
costs, including insurance, repairs, and maintenance. Payments under automobile
leases were $170,800 in 1996.
At December 31, 1996, minimum future lease payments under these leases are
as follows:
<TABLE>
<S> <C>
1997.......................................................................... $216,000
1998.......................................................................... 81,000
Total.................................................................. $297,000
</TABLE>
6. RELATED PARTIES
DUE FROM RELATED PARTIES -- Due from employees includes $219,878 due from
shareholders. These amounts bear interest at the prevailing U. S. Treasury rates
for short-term debt, are noncollateralized and have no specific repayment terms.
Amounts due from related partnership are noninterest bearing,
noncollateralized and have no specific repayment terms.
7. EMPLOYEE SAVINGS PLAN
The Company operates a savings plan under Section 401(k) of the Internal
Revenue Code. This plan allows employees to defer a portion of their income on a
pre-tax basis through plan contributions. The Company makes matching
contributions up to 2% of employee salary. Company contributions to the plan in
1996 totaled $56,800. The Company also paid plan expenses of $1,312.
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
KEN MARKS FORD, INC.
Clearwater, Florida
We have audited the accompanying balance sheet of Ken Marks Ford, Inc. (the
"Company") as of April 30, 1997, and the related statements of income,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ken Marks Ford, Inc. as of
April 30, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
August 26, 1997 (October 15, 1997 as to Note 1)
F-46
<PAGE>
KEN MARKS FORD, INC.
BALANCE SHEETS
APRIL 30, 1997 AND JULY 31, 1997
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1997 1997
<S> <C> <C>
(UNAUDITED)
ASSETS (NOTE 4)
CURRENT ASSETS:
Cash and cash equivalents.................................................................... $ 2,504,102 $ 2,937,429
Receivables.................................................................................. 2,374,483 1,558,416
Inventories (Note 2)......................................................................... 11,216,499 11,809,574
Prepaid expenses and other current assets.................................................... 529,633 265,122
Deferred income taxes (Note 5)............................................................... 91,742 91,742
TOTAL CURRENT ASSETS...................................................................... 16,716,459 16,662,283
PROPERTY AND EQUIPMENT (Note 3)................................................................ 470,738 530,257
OTHER ASSETS................................................................................... 14,000 14,000
TOTAL ASSETS................................................................................... $17,201,197 $17,206,540
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 2)......................................................... $12,557,574 $12,720,185
Trade accounts payable....................................................................... 678,252 691,537
Accrued payroll and bonuses.................................................................. 836,425 718,767
Other accrued liabilities (Note 7)........................................................... 777,388 541,500
Allowance for insurance, service contract and finance income chargebacks..................... 224,544 224,544
Income tax payable (Note 5).................................................................. 15,161 0
TOTAL CURRENT LIABILITIES................................................................. 15,089,344 14,896,533
DEFERRED INCOME TAXES (Note 5)................................................................. 17,705 17,705
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value, 500 shares authorized and issued.............................. 500 500
Paid-in capital.............................................................................. 423,800 423,800
Retained earnings............................................................................ 1,669,848 1,868,002
Total stockholders' equity................................................................ 2,094,148 2,292,302
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................................... $17,201,197 $17,206,540
</TABLE>
See notes to financial statements.
F-47
<PAGE>
KEN MARKS FORD, INC.
STATEMENTS OF INCOME
YEAR ENDED APRIL 30, 1997 AND THREE MONTHS ENDED JULY 31, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED JULY
APRIL 30, 31,
1997 1996 1997
<S> <C> <C> <C>
(UNAUDITED)
REVENUES:
Vehicle sales................................................................ $130,045,246 $33,823,641 $33,167,639
Parts, service and collision repairs......................................... 13,116,124 3,660,782 2,930,561
Finance and insurance........................................................ 2,188,071 596,854 529,109
Total revenues............................................................ 145,349,441 38,081,277 36,627,309
COST OF SALES.................................................................. 126,870,910 33,111,680 32,195,397
GROSS PROFIT................................................................... 18,478,531 4,969,597 4,431,912
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 7).......................... 15,743,940 4,034,940 3,644,179
DEPRECIATION AND AMORTIZATION.................................................. 100,771 20,846 20,302
OPERATING INCOME............................................................... 2,633,820 913,811 767,431
OTHER INCOME AND EXPENSE:
Interest expense, floor plan (Note 2)........................................ 2,008,468 480,132 485,358
Other income................................................................. 140,916 16,189 40,654
Total other income and expense............................................ 1,867,552 463,943 444,704
INCOME BEFORE INCOME TAXES..................................................... 766,268 449,868 322,727
PROVISION FOR INCOME TAXES (Note 5)............................................ 295,988 173,649 124,573
NET INCOME..................................................................... $ 470,280 $ 276,219 $ 198,154
</TABLE>
See notes to financial statements.
F-48
<PAGE>
KEN MARKS FORD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED APRIL 30, 1997 AND THREE MONTHS ENDED JULY 31, 1997
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C>
BALANCE
APRIL 30, 1996.......................................................... $ 500 $423,800 $1,219,568 $ 1,643,868
Dividends............................................................... -- -- (20,000) (20,000)
Net income.............................................................. -- -- 470,280 470,280
BALANCE
APRIL 30, 1997.......................................................... $ 500 $423,800 $1,669,848 $ 2,094,148
Net income (unaudited).................................................. -- -- 198,154 198,154
BALANCE
JULY 31, 1997 (unaudited)............................................... $ 500 $423,800 $1,868,002 $ 2,292,302
</TABLE>
See notes to financial statements.
F-49
<PAGE>
KEN MARKS FORD, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED APRIL 30, 1997 AND THREE MONTHS ENDED
JULY 31, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED JULY 31,
APRIL 30, 1997 1996
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 470,280 $ 276,219
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.............................................. 100,771 20,846
Deferred income taxes...................................................... 13,763 6,600
Loss on disposal of property and equipment................................. 45,192 --
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable............................... (1,033,143) 323,213
(Increase) decrease in inventories....................................... 5,197,288 1,129,058
(Increase) decrease in prepaid expenses.................................. 429,467 (595,810)
Decrease in due from related parties..................................... 134,141 --
Increase (decrease) in notes payable, floor plan......................... (3,401,971) (663,355)
Increase in trade accounts payable....................................... 322,319 219,902
Decrease in accrued payroll and bonuses.................................. (284,875) (400,442)
Increase (decrease) in accrued expenses and other payables............... (848,544) 484,719
Decrease in allowance for insurance, service contract and finance income
chargebacks........................................................... (85,107) --
Increase (decrease) in income tax payable................................ (39,839) 112,049
Total adjustments..................................................... 549,462 636,780
Net cash provided by operating activities.................................. 1,019,742 912,999
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................... (183,674) (5,060)
Net cash used in investing activities...................................... (183,674) (5,060)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to stockholders................................................ (20,000) --
Net cash used in financing activities...................................... (20,000) --
NET INCREASE IN CASH............................................................ 816,068 907,939
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................... 1,688,034 1,688,034
CASH AND CASH EQUIVALENTS, END OF YEAR.......................................... $ 2,504,102 $ 2,595,973
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................................... $ 2,008,468 $ 480,132
Income taxes............................................................... $ 322,064 $ 55,000
<CAPTION>
THREE MONTHS
ENDED JULY 31,
1997
(UNAUDITED)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 198,154
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.............................................. 20,302
Deferred income taxes...................................................... --
Loss on disposal of property and equipment................................. --
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable............................... 816,067
(Increase) decrease in inventories....................................... (593,075)
(Increase) decrease in prepaid expenses.................................. 264,511
Decrease in due from related parties..................................... --
Increase (decrease) in notes payable, floor plan......................... 162,611
Increase in trade accounts payable....................................... 13,285
Decrease in accrued payroll and bonuses.................................. (117,658)
Increase (decrease) in accrued expenses and other payables............... (235,888)
Decrease in allowance for insurance, service contract and finance income
chargebacks........................................................... --
Increase (decrease) in income tax payable................................ (15,161)
Total adjustments..................................................... 314,994
Net cash provided by operating activities.................................. 513,148
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................... (79,821)
Net cash used in investing activities...................................... (79,821)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to stockholders................................................ --
Net cash used in financing activities...................................... --
NET INCREASE IN CASH............................................................ 433,327
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................... 2,504,102
CASH AND CASH EQUIVALENTS, END OF YEAR.......................................... $ 2,937,429
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................................... $ 485,358
Income taxes............................................................... $ 144,000
</TABLE>
See notes to financial statements.
F-50
<PAGE>
KEN MARKS FORD, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Ken Marks Ford, Inc. (the "Company") operates
an automobile dealership in the Tampa-Clearwater areas in Florida. The Company
sells new and used cars, sells replacement parts, provides vehicle maintenance,
warranty, paint and repair services and arranges related financing and
insurance.
In July 1997, the Company signed a definitive purchase agreement whereby
its outstanding capital stock would be acquired by Sonic Automotive, Inc.
("Sonic") for $25,482,500. This acquisition was consummated on October 15, 1997,
and is being done in contemplation of an anticipated public offering of common
stock by Sonic Automotive, Inc. in 1997.
REVENUE RECOGNITION -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
DEALER AGREEMENTS -- The Company purchases substantially all of its new
vehicles from manufacturers at the prevailing prices charged by the manufacturer
to its franchised dealers. The Company's sales could be unfavorably impacted by
the manufacturer's unwillingness or inability to supply the dealership with an
adequate supply of new car inventory. Each dealership operates under a dealer
agreement with the manufacturer. These agreements generally restrict the
location, management and ownership of the respective dealership.
CASH AND CASH EQUIVALENTS -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to vehicle purchases, and was
approximately $628,000 at April 30, 1997.
INVENTORIES -- Inventories of new vehicles, including demonstrators, are
valued at the lower of last-in, first-out ("LIFO") cost or market. Inventories
of parts and accessories are valued on a LIFO basis using the Current Year Parts
Price Index. Inventories of used vehicles are valued on a specific
identification basis.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over
the estimated useful lives of the assets. The range of estimated useful lives is
as follows:
<TABLE>
<CAPTION>
USEFUL LIVES
<S> <C>
Leasehold improvements.................................................................. 18-31 years
Machinery and equipment................................................................. 5-7 years
Furniture and fixtures.................................................................. 5-7 years
</TABLE>
INCOME TAXES -- Deferred income tax assets and liabilities are determined
based on the difference between financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
deposits. At times, amounts invested with financial institutions may exceed FDIC
insurance limits.
Concentrations of credit risk with respect to receivables are limited
primarily to automobile manufacturers and financial institutions. Credit risk
arising from trade receivables from commercial customers is reduced by the large
number of customers comprising the trade receivables balance. Trade receivables
are concentrated in the Tampa-Clearwater metropolitan area.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
F-51
<PAGE>
KEN MARKS FORD, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
Advertising -- The Company expenses advertising costs in the period
incurred. Advertising expenses approximated $991,000 for the year ended April
30, 1997.
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1997 1997
<S> <C> <C>
(UNAUDITED)
New vehicles........................................................... $ 8,477,840 $ 9,270,932
Used vehicles.......................................................... 2,341,929 2,193,166
Parts and accessories.................................................. 396,730 345,476
Total.................................................................. $11,216,499 $11,809,574
</TABLE>
At April 30, 1997, the excess of current replacement cost over the stated
LIFO valuation of new vehicles, parts and accessories amounts to $2,749,237. The
inventory balance generally is reduced by the manufacturer's purchase discounts,
and such reduction is not reflected in the related floor plan liability.
Had the Company used the FIFO method of valuing new vehicle, parts and
accessories inventory, pretax earnings would have been $949,454 for the year
ended April 30, 1997.
All new vehicles are pledged to collateralize floor plan notes payable to
financial institutions in the amount of $12,557,574 at April 30, 1997. The floor
plan notes bear interest, payable monthly on the outstanding balance, at the
prime rate plus 1% (9.5% at April 30, 1997). Total floor plan interest expense
amounted to $2,008,468 during the year ended April 30, 1997. The notes payable
become due when the related vehicle is sold. As such, these floor plan notes
payable are shown as a current liability in the accompanying balance sheet.
Certain inventory items collateralize the revolving line of credit
described in Note 4. All new vehicles and demonstrators and substantially all
parts and accessories are purchased from Ford Motor Company.
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1997 1997
<S> <C> <C>
(UNAUDITED)
Parts and service equipment............................................... $ 333,063 $ 340,284
Furniture and fixtures.................................................... 400,152 409,991
Leasehold improvements.................................................... 481,815 544,576
1,215,030 1,294,851
Less accumulated depreciation............................................. (744,292) (764,594)
Property and equipment, net............................................... $ 470,738 $ 530,257
</TABLE>
4. FINANCING ARRANGEMENT
The Company has a revolving line of credit with Ford Motor Credit
Corporation in the amount of $2,500,000. At April 30, 1997, no amount was
outstanding relating to this line of credit, which is collateralized by personal
guarantees from the stockholders and the net assets of the Company.
F-52
<PAGE>
KEN MARKS FORD, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
APRIL 30,
1997
<S> <C>
Current taxes............................................................................. $ 282,225
Deferred taxes............................................................................ 13,763
Provision for income taxes................................................................ $ 295,988
</TABLE>
Deferred income tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
1997
<S> <C>
Deferred tax asset -- current, primarily from differences relating to finance and insurance
reserves and allowance for bad debts..................................................... $ 91,742
Deferred tax liability -- long-term, primarily from differences relating to depreciation... (17,705)
Net deferred tax asset..................................................................... $ 74,037
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Ford Motor Company (FMC) owns vehicles which are used as short-term rentals
for which the Company pays FMC monthly fees. A portion of the fees are applied
against the purchase price the Company must pay for the vehicles when they are
no longer used for rental. The contingent liability to FMC to purchase the
vehicles under this program was approximately $1,771,000 at April 30, 1997.
The Company is a defendant in various legal proceedings incurred in the
normal course of business. Management believes that the outcome of such
proceedings will not have a materially adverse effect on the Company's financial
position or future operations and cashflows.
7. RELATED PARTY TRANSACTIONS
The Company leases its operating facility from a corporation which is owned
by the Company's stockholders. The lease is currently on a month-to-month basis.
Rent charged to expense under this lease was $359,630 for the year ended April
30, 1997. In addition, management fees of $675,000 for the year ended April 30,
1997 were paid by the Company to the above corporation and are included in
selling, general and administrative expenses. In addition, related party
payables of $270,000 were included in other accrued liabilities at April 30,
1997.
F-53
<PAGE>
NO DEALER, SALESPERSON, OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE CLASS A
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 9
The Reorganization................................... 19
The Acquisitions..................................... 19
Use of Proceeds...................................... 23
Dividend Policy...................................... 23
Capitalization....................................... 24
Dilution............................................. 25
Selected Combined And Consolidated Financial Data.... 26
Pro Forma Combined and Consolidated Financial Data... 28
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 36
Business............................................. 43
Management........................................... 59
Certain Transactions................................. 66
Principal Stockholders............................... 70
Description of Capital Stock......................... 71
Shares Eligible for Future Sale...................... 75
Underwriting......................................... 76
Legal Matters........................................ 78
Experts.............................................. 78
Additional Information............................... 78
Index to Financial Statements........................ F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
5,000,000 SHARES
(SONIC AUTOMOTIVE logo appears here)
CLASS A COMMON STOCK
PROSPECTUS
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES, INC.
WHEAT FIRST BUTCHER SINGER
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be borne by the Registrant
in connection with the issuance and distribution of the securities being
registered hereby other than underwriting discounts and commissions. All the
amounts shown are estimates, except for the registration fee with the Securities
and Exchange Commission, the NASD filing fee and the NYSE fees.
<TABLE>
<S> <C>
SEC Registration fee.................................................................... $ 31,516
NASD filing fee......................................................................... 10,900
NYSE fees............................................................................... 84,600
Transfer agent and registrar fees....................................................... 15,000
Accounting fees and expenses............................................................ 950,000
Legal fees and expenses................................................................. 450,000
"Blue Sky" fees and expenses (including legal fees)..................................... 15,000
Costs of printing and engraving......................................................... 325,000
Miscellaneous........................................................................... 117,984
Total................................................................................... $2,000,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Bylaws effectively provide that the Registrant shall, to
the full extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as amended from time to time ("Section 145"), indemnify all
persons whom it may indemnify pursuant thereto. In addition, the Registrant's
Amended and Restated Certificate of Incorporation eliminates personal liability
of its directors to the full extent permitted by Section 102(b)(7) of the
General Corporation Law of the State of Delaware, as amended from time to time
("Section 102(b)(7)").
Section 145 permits a corporation to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to matter
as to which they shall have acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interest of the corporation, except
that no indemnification shall be made if such person shall have been adjudged
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine upon application that the
defendant officers or directors are reasonably entitled to indemnify for such
expenses despite such adjudication of liability.
Section 102(b)(7) provides that a corporation may eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for reach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for willful or negligent conduct
in paying dividends or repurchasing stock out of other than lawfully available
funds or (iv) for any transaction from which the director derived an improper
personal benefit. No such provisions shall eliminate or limit the liability of a
director for any act or omission occurring prior to the date when such provision
becomes effective.
The Company intends to obtain, prior to the effective date of the
Registration Statement, insurance against liabilities under the Securities Act
of 1933 for the benefit of its officers and directors.
Section 7 of the Underwriting Agreement (to be filed as Exhibit 1.1 to this
Registration Statement) provides that the Underwriters severally and not jointly
will indemnify and hold harmless the Registrant and each director, officer or
controlling person of the Registrant from and against any liability caused by
any statement or omission in the Registration Statement or Prospectus based upon
information furnished to the Registrant by the Underwriters for use therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Except as hereinafter set forth, there have been no sales of unregistered
securities by the Registrant within the past there years.
As of January 30, 1997, as part of the original organization of the
Company, the Registrant issued to Sonic Financial Corporation 100 shares of
Common Stock of the Company (the "Original Shares") in exchange for $500 in
cash.
II-1
<PAGE>
As of June 30, 1997, as part of the Reorganization, the Registrant issued
to (i) its Chief Executive Officer, Bruton Smith, 1,657 shares of the
Registrant's Class B Common Stock in exchange for all his interests in Town &
Country Toyota and Fort Mill Ford, (ii) Sonic Financial Corporation 7,105 shares
of its Class B Common Stock in exchange for all its interests in the Original
Shares, Town & Country Ford, Fort Mill Ford, Lone Star Ford and Frontier
Plymouth-Oldsmobile-Cadillac, (iii) William S. Egan 473 shares of its Class B
Common Stock in exchange for all his interest in Town & Country Toyota, and (iv)
Bryan Scott Smith 765 shares of its Class B Common Stock in exchange for all his
interests in Town & Country Ford and Fort Mill Ford. Also, in connection with
the Dyer Acquisition, the Company will issue the Dyer Warrant. In each such
transaction, the securities were not or will not be registered under the
Securities Act, in reliance upon the exemption from registration provided by
Section 4(2) of said Act in view of the sophistication of the foregoing
purchasers, their access to material information, the disclosures actually made
to them by the Registrant and the absence of any general solicitation or
advertising.
On or before the consummation of the Offering, the Registrant will issue to
nine of its officers and employees, pursuant to the Registrant's Stock Option
Plan, options to purchase 562,500 shares of Class A Common Stock in the
aggregate and will dividend to holders of its Class B Common Stock 6,240,000
shares of Class B Common Stock in the aggregate. Such securities will not be
registered under the Securities Act because such grants and dividend will be
without consideration to the Registrant and, consequently, do not constitute
offers or sales within the meaning of Section 5 of the Securities Act.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
1.1 Form of Purchase Agreement
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* Bylaws of the Company
4.1 Form of Class A Common Stock Certificate
4.2* Registration Rights Agreement dated as of June 30, 1997 among the Company, O. Bruton Smith, Bryan Scott
Smith, William S. Egan and Sonic Financial Corporation
5.1 Form of opinion letter of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities
to be registered
10.1* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Nelson E. Bowers,
II or his affiliates
10.2* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Marks Holding
Company, Inc.
10.3* Lease Agreement dated as of January 1, 1995 between Lone Star Ford, Inc. and Viking Investment Associates
10.4* Lease Agreement dated as of October 23, 1979 between O. Bruton Smith, Bonnie Smith and Town and Country
Ford, Inc.
10.5* North Carolina Warranty Deed dated as of April 24, 1987 between O. Bruton Smith and Bonnie Smith, as
Grantors and STC Properties, as Grantee
10.6* Lease dated January 13, 1995 between JAG Properties LLC and Jaguar of Chattanooga LLC
10.7* Lease dated October 18, 1991 by and between Nelson E. Bowers II, Thomas M. Green, Jr., and Infiniti of
Chattanooga, Inc.
10.8* Amendment to Lease Agreement dated as of January 13, 1995 among Nelson E. Bowers II, Thomas M. Green, Jr.,
JAG Properties LLC and Infiniti of Chattanooga, Inc.
10.9* Lease dated March 15, 1996 between Cleveland Properties LLC and Cleveland Chrysler-Plymouth-Jeep-Eagle LLC
10.10* Lease Agreement dated January 2, 1993 among Nelson E. Bowers II, Thomas M. Green, Jr. and Cleveland
Village Imports, Inc.
10.11* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing dated August 10,
1972 by Lone Star Ford, Inc.
10.12* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing and Security
Agreement dated August 22, 1984 by Town and Country Ford, Inc.
10.13* Wholesale Floor Plan Security Agreement dated October 5, 1990 between Marcus David Corporation (d/b/a Town
& Country Toyota) and World Omni Financial Corp.
10.14* Demand Promissory Note dated October 5, 1990 of Marcus David Corporation (d/b/a Town & Country Toyota) in
favor of World Omni Financial Corp.
10.15* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 21, 1995
between Cleveland Chrysler-Plymouth-Jeep-Eagle LLC and Chrysler Credit Corporation
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
10.15a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Cleveland Chrysler
Plymouth Jeep Eagle, LLC
10.16* Security Agreement & Master Credit Agreement dated April 21, 1995 between Saturn of Chattanooga, Inc. and
Chrysler Credit Corporation
10.16a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Saturn of Chattanooga,
Inc.
10.17* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 24, 1995
between Nelson Bowers Ford, L.P. and Chrysler Credit Corporation
10.17a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Nelson Bowers Ford L.P.
10.18* Floor Plan Agreement dated May 6, 1996 between European Motors, LLC and NationsBank, N.A.
10.19* Floor Plan Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A.
10.19a* Security Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A.
10.20* Floor Plan Agreement dated October 17, 1996 between European Motors of Nashville, LLC and NationsBank,
N.A.
10.20a* Security Agreement dated October 17, 1996 between European Motors of Nashville, LLC and NationsBank, N.A.
10.21* Floor Plan Agreement dated March 5, 1997 between Nelson Bowers Dodge, LLC (d/b/a Dodge of Chattanooga) and
NationsBank, N.A.
10.22* Security Agreement and Master Credit Agreement dated May 15, 1996 between Lake Norman Chrysler Plymouth
Jeep Eagle, LLC and Chrysler Financial Corporation
10.22a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Chrysler
Plymouth Jeep Eagle, LLC
10.23* Security Agreement & Capital Loan Agreement dated May 15, 1996 between Lake Norman Dodge, Inc and Chrysler
Financial Corp.
10.23a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Dodge, Inc.
10.23b* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Dodge, Inc.
10.24* Security Agreement and Master Credit Agreement (Non-Chrysler Corporation Dealer) dated May 15, 1996
between Lake Norman Chrysler Plymouth Jeep Eagle, LLC and Chrysler Financial Corporation
10.24a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Chrysler
Plymouth Jeep Eagle, LLC
10.25* Floor Plan Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc.
10.25a* Security Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc.
10.26* Security Agreement and Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 21, 1995
between Cleveland Village Imports, Inc. (d/b/a Cleveland Village Honda, Inc.) and Chrysler Credit
Corporation
10.27* Jaguar Credit Corporation Automotive Wholesale Plan Application for Wholesale Financing and Security
Agreement dated March 14, 1995 by Jaguar of Chattanooga LLC
10.28* Assignment of Joint Venturer Interest in Chartown dated as of June 30, 1997 among Town and Country Ford,
Inc., SMDA LLC and Sonic Financial Corporation
10.29* Form of Employment Agreement between the Company and O. Bruton Smith
10.30* Form of Employment Agreement between the Company and Bryan Scott Smith
10.31* Form of Employment Agreement between the Company and Theodore M. Wright
10.32* Form of Employment Agreement between the Company and Nelson E. Bowers, II
10.33* Tax Allocation Agreement dated as of June 30, 1997 between the Company and Sonic Financial Corporation
10.34 Form of Sonic Automotive, Inc. Stock Option Plan
10.35 Form of Sonic Automotive, Inc. Employee Stock Purchase Plan
10.36* Subscription Agreement dated as of June 30, 1997 between O. Bruton Smith and the Company
10.37* Subscription Agreement dated as of June 30, 1997 between Sonic Financial Corporation and the Company
10.38* Subscription Agreement dated as of June 30, 1997 between Bryan Scott Smith and the Company
10.39* Subscription Agreement dated as of June 30, 1997 between William S. Egan and the Company
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
10.40* Asset Purchase Agreement dated as of May 27, 1997 by and among Sonic Auto World, Inc., Lake Norman Dodge,
Inc., Lake Norman Chrysler-Plymouth-Jeep-Eagle LLC, Quinton M. Gandy and Phil M. Gandy, Jr. (confidential
portions omitted and filed separately with the SEC)
10.41* Asset Purchase Agreement dated as of June 24, 1997 by and among Sonic Auto World, Inc., Kia of
Chattanooga, LLC, European Motors of Nashville, LLC, European Motors, LLC, Jaguar of Chattanooga LLC,
Cleveland Chrysler-Plymouth-Jeep-Eagle LLC, Nelson Bowers Dodge, LLC, Cleveland Village Imports, Inc.,
Saturn of Chattanooga, Inc., Nelson Bowers Ford, L.P., Nelson E. Bowers II, Jeffrey C. Rachor, and the
other shareholders named herein (confidential portions omitted and filed separately with the SEC)
10.42* Stock Purchase Agreement dated as of July 29, 1997 between Sonic Auto World, Inc. and Ken Marks, Jr., O.K.
Marks, Sr. and Michael J. Marks (confidential portions omitted and filed separately with the SEC)
10.43* Asset Purchase Agreement dated as of August 1997 by and among Sonic Automotive, Inc., Dyer & Dyer, Inc.
and Richard Dyer (confidential portions omitted and filed separately with the SEC)
10.44* Security Agreement and Master Credit Agreement dated April 21, 1995 between Cleveland Chrysler Plymouth
Jeep Eagle and Chrysler Credit Corporation
10.45* Promissory Note dated as of August 28, 1997 by Sonic Automotive, Inc. in favor of NationsBank, N.A.
10.46** Credit Agreement dated October 15, 1997 by and between Sonic Automotive, Inc. and Ford Motor Credit
Company
10.47 Automotive Wholesale Plan Application For Wholesale Financing And Security Agreement dated June 29, 1982
between Ford Motor Credit Company and O.K. Marks Ford, Inc.
21.1* Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration Statement)
24* Power of Attorney (included on the signature page to this Registration Statement)
27* Financial Data Schedule
99.1* Consent of Nelson E. Bowers, II
</TABLE>
* Filed previously.
** To be filed by Amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing or closings specified in the Purchase Agreement,
certificates in such denominations and registered in such names as may be
required by the Underwriters in order to permit prompt delivery to each
purchaser.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Charlotte, North
Carolina on October 17, 1997.
SONIC AUTOMOTIVE, INC.
By: /s/ THEODORE M. WRIGHT
THEODORE M. WRIGHT
VICE PRESIDENT, TREASURER AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ * Chairman and Chief Executive Officer October 17, 1997
O. BRUTON SMITH (principal executive officer)
/s/ * President, Chief Operating Officer October 17, 1997
BRYAN SCOTT SMITH and Director
/s/ THEODORE M. WRIGHT Vice President, Treasurer, October 17, 1997
THEODORE M. WRIGHT Chief Financial Officer
(principal financial and
accounting officer) and
Director
/s/ * Director October 17, 1997
WILLIAM R. BROOKS
*By: /s/ THEODORE M. WRIGHT
THEODORE M. WRIGHT
(ATTORNEY-IN-FACT FOR EACH OF
THE PERSONS INDICATED)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
<C> <S> <C>
1.1 Form of Purchase Agreement
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* Bylaws of the Company
4.1 Form of Class A Common Stock Certificate
4.2* Registration Rights Agreement dated as of June 30, 1997 among the Company, O. Bruton Smith,
Bryan Scott Smith, William S. Egan and Sonic Financial Corporation
5.1 Form of opinion letter of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the
securities to be registered
10.1* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and
Nelson E. Bowers, II or his affiliates
10.2* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Marks
Holding Company, Inc.
10.3* Lease Agreement dated as of January 1, 1995 between Lone Star Ford, Inc. and Viking Investment
Associates
10.4* Lease Agreement dated as of October 23, 1979 between O. Bruton Smith, Bonnie Smith and Town
and Country Ford, Inc.
10.5* North Carolina Warranty Deed dated as of April 24, 1987 between O. Bruton Smith and Bonnie
Smith, as Grantors and STC Properties, as Grantee
10.6* Lease dated January 13, 1995 between JAG Properties LLC and Jaguar of Chattanooga LLC
10.7* Lease dated October 18, 1991 by and between Nelson E. Bowers II, Thomas M. Green, Jr., and
Infiniti of Chattanooga, Inc.
10.8* Amendment to Lease Agreement dated as of January 13, 1995 among Nelson E. Bowers II, Thomas M.
Green, Jr., JAG Properties LLC and Infiniti of Chattanooga, Inc.
10.9* Lease dated March 15, 1996 between Cleveland Properties LLC and Cleveland Chrysler-
Plymouth-Jeep-Eagle LLC
10.10* Lease Agreement dated January 2, 1993 among Nelson E. Bowers II, Thomas M. Green, Jr. and
Cleveland Village Imports, Inc.
10.11* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing dated
August 10, 1972 by Lone Star Ford, Inc.
10.12* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing and
Security Agreement dated August 22, 1984 by Town and Country Ford, Inc.
10.13* Wholesale Floor Plan Security Agreement dated October 5, 1990 between Marcus David Corporation
(d/b/a Town & Country Toyota) and World Omni Financial Corp.
10.14* Demand Promissory Note dated October 5, 1990 of Marcus David Corporation (d/b/a Town & Country
Toyota) in favor of World Omni Financial Corp.
10.15* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 21,
1995 between Cleveland Chrysler-Plymouth-Jeep-Eagle LLC and Chrysler Credit Corporation
10.15a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Cleveland
Chrysler Plymouth Jeep Eagle, LLC
10.16* Security Agreement & Master Credit Agreement dated April 21, 1995 between Saturn of
Chattanooga, Inc. and Chrysler Credit Corporation
10.16a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Saturn of
Chattanooga, Inc.
10.17* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 24,
1995 between Nelson Bowers Ford, L.P. and Chrysler Credit Corporation
10.17a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Nelson Bowers
Ford L.P.
10.18* Floor Plan Agreement dated May 6, 1996 between European Motors, LLC and NationsBank, N.A.
10.19* Floor Plan Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank,
N.A.
10.19a* Security Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A.
10.20* Floor Plan Agreement dated October 17, 1996 between European Motors of Nashville, LLC and
NationsBank, N.A.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
<C> <S> <C>
10.20a* Security Agreement dated October 17, 1996 between European Motors of Nashville, LLC and
NationsBank, N.A.
10.21* Floor Plan Agreement dated March 5, 1997 between Nelson Bowers Dodge, LLC (d/b/a Dodge of
Chattanooga) and NationsBank, N.A.
10.22* Security Agreement and Master Credit Agreement dated May 15, 1996 between Lake Norman Chrysler
Plymouth Jeep Eagle, LLC and Chrysler Financial Corporation
10.22a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman
Chrysler Plymouth Jeep Eagle, LLC
10.23* Security Agreement & Capital Loan Agreement dated May 15, 1996 between Lake Norman Dodge, Inc
and Chrysler Financial Corp.
10.23a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman
Dodge, Inc.
10.23b* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman
Dodge, Inc.
10.24* Security Agreement and Master Credit Agreement (Non-Chrysler Corporation Dealer) dated May 15,
1996 between Lake Norman Chrysler Plymouth Jeep Eagle, LLC and Chrysler Financial Corporation
10.24a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman
Chrysler Plymouth Jeep Eagle, LLC
10.25* Floor Plan Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc.
10.25a* Security Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc.
10.26* Security Agreement and Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April
21, 1995 between Cleveland Village Imports, Inc. (d/b/a Cleveland Village Honda, Inc.) and
Chrysler Credit Corporation
10.27* Jaguar Credit Corporation Automotive Wholesale Plan Application for Wholesale Financing and
Security Agreement dated March 14, 1995 by Jaguar of Chattanooga LLC
10.28* Assignment of Joint Venturer Interest in Chartown dated as of June 30, 1997 among Town and
Country Ford, Inc., SMDA LLC and Sonic Financial Corporation
10.29* Form of Employment Agreement between the Company and O. Bruton Smith
10.30* Form of Employment Agreement between the Company and Bryan Scott Smith
10.31* Form of Employment Agreement between the Company and Theodore M. Wright
10.32* Form of Employment Agreement between the Company and Nelson E. Bowers, II
10.33* Tax Allocation Agreement dated as of June 30, 1997 between the Company and Sonic Financial
Corporation
10.34 Form of Sonic Automotive, Inc. Stock Option Plan
10.35 Form of Sonic Automotive, Inc. Employee Stock Purchase Plan
10.36* Subscription Agreement dated as of June 30, 1997 between O. Bruton Smith and the Company
10.37* Subscription Agreement dated as of June 30, 1997 between Sonic Financial Corporation and the
Company
10.38* Subscription Agreement dated as of June 30, 1997 between Bryan Scott Smith and the Company
10.39* Subscription Agreement dated as of June 30, 1997 between William S. Egan and the Company
10.40* Asset Purchase Agreement dated as of May 27, 1997 by and among Sonic Auto World, Inc., Lake
Norman Dodge, Inc., Lake Norman Chrysler-Plymouth-Jeep-Eagle LLC, Quinton M. Gandy and Phil M.
Gandy, Jr. (confidential portions omitted and filed separately with the SEC)
10.41* Asset Purchase Agreement dated as of June 24, 1997 by and among Sonic Auto World, Inc., Kia of
Chattanooga, LLC, European Motors of Nashville, LLC, European Motors, LLC, Jaguar of
Chattanooga LLC, Cleveland Chrysler-Plymouth-Jeep-Eagle LLC, Nelson Bowers Dodge, LLC,
Cleveland Village Imports, Inc., Saturn of Chattanooga, Inc., Nelson Bowers Ford, L.P., Nelson
E. Bowers II, Jeffrey C. Rachor, and the other shareholders named herein (confidential
portions omitted and filed separately with the SEC)
10.42* Stock Purchase Agreement dated as of July 29, 1997 between Sonic Auto World, Inc. and Ken
Marks, Jr., O.K. Marks, Sr. and Michael J. Marks (confidential portions omitted and filed
separately with the SEC)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
<C> <S> <C>
10.43* Asset Purchase Agreement dated as of August 1997 by and among Sonic Automotive, Inc., Dyer &
Dyer, Inc. and Richard Dyer (confidential portions omitted and filed separately with the SEC)
10.44* Security Agreement and Master Credit Agreement dated April 21, 1995 between Cleveland Chrysler
Plymouth Jeep Eagle and Chrysler Credit Corporation
10.45* Promissory Note dated as of August 28, 1997 by Sonic Automotive, Inc. in favor of NationsBank,
N.A.
10.46** Credit Agreement dated October 15, 1997 by and between Sonic Automotive, Inc. and Ford Motor
Credit Company
10.47 Automotive Wholesale Plan Application For Wholesale Financing And Security Agreement dated
June 29, 1982 between Ford Motor Credit Company and O.K. Marks Ford, Inc.
21.1* Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration
Statement)
24* Power of Attorney (included on the signature page to this Registration Statement)
27* Financial Data Schedule
99.1* Consent of Nelson E. Bowers, II
</TABLE>
* Filed previously.
** To be filed by Amendment.
DRAFT 10/15/97
========================================================================
SONIC AUTOMOTIVE, INC.
A Delaware corporation
5,000,000 Shares of Class A Common Stock
PURCHASE AGREEMENT
Dated: November [ ], 1997
========================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
SECTION 1. Representations and Warranties....................................................................3
(a) Representations and Warranties by the Company........................................................3
(i) Compliance with Registration Requirements.....................................................3
(ii) Independent Accountants......................................................................4
(iii) Financial Statements........................................................................4
(iv) No Material Adverse Change in Business.......................................................4
(v) Good Standing of the Company..................................................................5
(vi) Good Standing of Subsidiaries................................................................5
(vii) Capitalization..............................................................................5
(viii) Authorization of Agreement.................................................................5
(ix) Authorization and Description of Securities..................................................6
(x) Absence of Defaults and Conflicts.............................................................6
(xi) Absence of Labor Dispute.....................................................................6
(xii) Absence of Proceedings......................................................................7
(xiii) Accuracy of Exhibits.......................................................................7
(xiv) Possession of Intellectual Property.........................................................7
(xv) Absence of Further Requirements..............................................................7
(xvi) Possession of Licenses and Permits..........................................................7
(xvii) Title to Property..........................................................................8
(xviii) Investment Company Act....................................................................8
(xix) Environmental Laws..........................................................................8
(xx) Registration Rights..........................................................................9
(xxi) Income Taxes................................................................................9
(xxii) Internal Controls..........................................................................9
(xxiii) Insurance................................................................................10
(xxiv) Offering Material.........................................................................10
(xxv) Suppliers..................................................................................10
(xxvi) Related Party Transactions................................................................10
(xxvii) Reorganization...........................................................................10
(xxviii) Pending Acquisitions....................................................................10
(xxix) Franchise Agreements......................................................................11
(xxx) Credit Agreement...........................................................................11
(b) Officer's Certificates..............................................................................11
SECTION 2. Sale and Delivery to Underwriters; Closing......................................................11
(a) Initial Securities..................................................................................11
(b) Option Securities...................................................................................11
(c) Payment.............................................................................................12
(d) Denominations; Registration.........................................................................12
-1-
<PAGE>
SECTION 3. Covenants of the Company.........................................................................13
(a) Compliance with Securities Regulations and Commission Requests......................................13
(b) Filing of Amendments................................................................................13
(c) Delivery of Registration Statements.................................................................13
(d) Delivery of Prospectus..............................................................................13
(e) Continued Compliance with Securities Laws...........................................................14
(f) Blue Sky Qualifications.............................................................................14
(g) Rule 158............................................................................................15
(h) Use of Proceeds.....................................................................................15
(i) Listing.............................................................................................15
(j) Restriction on Sale of Securities...................................................................15
(k) Reporting Requirements..............................................................................15
(l) Compliance with NASD Rules..........................................................................15
SECTION 4. Payment of Expenses..............................................................................16
(a) Expenses............................................................................................16
(b) Termination of Agreement............................................................................16
SECTION 5. Conditions of Underwriters' Obligations.........................................................16
(a) Effectiveness of Registration Statement.............................................................16
(b) Opinion of Counsel for Company......................................................................17
(c) Opinion of Counsel for Underwriters................................................................17
(d) Officers' Certificate...............................................................................17
(e) Accountant's Comfort Letter.........................................................................18
(f) Bring-down Comfort Letter...........................................................................18
(g) Approval of Listing.................................................................................18
(h) No Objection........................................................................................18
(i) Lock-up Agreement...................................................................................18
(j) Acquisition Agreements..............................................................................18
(k) Reorganization......................................................................................18
(l) Manufacturers' Consents.............................................................................19
(m) Credit Agreement...................................................................................19
(n) Subscription Agreements............................................................................19
(o) Additional Documents...............................................................................19
(p) Conditions to Purchase of Option Securities........................................................19
(q) Termination of Agreement............................................................................20
SECTION 6. Indemnification..................................................................................20
(a) Indemnification of Underwriters....................................................................20
(b) Indemnification of Company, Directors and Officers..................................................21
(c) Actions against Parties; Notification...............................................................21
(d) Settlement without Consent if Failure to Reimburse..................................................22
(e) Indemnification for Reserved Securities.............................................................22
SECTION 7. Contribution.....................................................................................23
SECTION 8. Representations, Warranties and Agreements to Survive Delivery...................................24
SECTION 9. Termination Agreement............................................................................24
-2-
<PAGE>
(a) Termination; General................................................................................24
(b) Liabilities.........................................................................................24
SECTION 10. Default by One or More of the Underwriters.....................................................25
SECTION 11. Notices.........................................................................................25
SECTION 12. Parties.........................................................................................26
SECTION 13 Governing Law and Time...........................................................................26
SECTION 14 Effect of Headings...............................................................................26
SCHEDULES
SCHEDULE A - LIST OF UNDERWRITERS.........................................................SCH A-1
SCHEDULE B - PRICING INFORMATION..........................................................SCH B-1
SCHEDULE C - LIST OF PERSONS SUBJECT TO LOCK-UP...........................................SCH C-1
EXHIBITS A-1
EXHIBIT A - FORM OF OPINION OF COMPANY'S COUNSEL.............................................A-1
EXHIBIT B - FORM OF LOCK-UP LETTER............................................................B-1
EXHIBIT C - REORGANIZATION DOCUMENTS..........................................................C-1
</TABLE>
-3-
<PAGE>
DRAFT OF UNDERWRITING AGREEMENT [10/13/97]
SONIC AUTOMOTIVE, INC.
A Delaware corporation
Shares of Class A Common Stock
Par Value $0.01 Per Share
PURCHASE AGREEMENT
November [ ], 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
NationsBanc Montgomery Securities, Inc.
Wheat, First Securities, Inc.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Sonic Automotive, Inc., a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the " Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, NationsBanc Montgomery Securities, Inc. and
Wheat, First Securities, Inc. are acting as representatives (in such capacity,
the " Representatives"), with respect to the issue and sale by the Company and
the purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of Class A Common Stock, par value $0.01 per share,
of the Company ("Common Stock") set forth in said Schedule A, and with respect
to the grant by the Company to the Underwriters, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of 750,000 additional shares of Common Stock to cover over-allotments, if
any. The aforesaid
-1-
<PAGE>
5,000,000 shares of Common Stock (the "Initial Securities") to be purchased by
the Underwriters and all or any part of the 750,000 shares of Common Stock
subject to the option described in Section 2(b) hereof (the "Option Securities")
are hereinafter called, collectively, the " Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company and the Underwriters agree that up to [ ] shares of the
Initial Securities to be purchased by the Underwriters (the "Reserved
Securities") shall be reserved for sale by the Underwriters to certain eligible
employees and persons having business relationships with the Company, as part of
the distribution of the Securities by the Underwriters, subject to the terms of
this Agreement, the applicable rules, regulations and interpretations of the
National Association of Securities Dealers, Inc. and all other applicable laws,
rules and regulations. To the extent that such Reserved Securities are not
orally confirmed for purchase by such eligible employees and persons having
business relationships with the Company by the end of the first business day
after the date of this Agreement, such Reserved Securities may be offered to the
public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-33295) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in any such prospectus or in any such Term Sheet, as the
case may be, that was omitted from such registration statement at the time it
became effective but that is deemed to be part of such registration statement at
the time it became effective (a) pursuant to paragraph (b) of Rule 430A is
referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule
434 is referred to as "Rule 434 Information." Each Prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities are
herein called the "Prospectus." If Rule 434 is relied on, the term
-2-
<PAGE>
"Prospectus" shall refer to the preliminary prospectus dated October [ ], 1997
together with the Term Sheet and all references in this Agreement to the date of
the Prospectus shall mean the date of the Term Sheet. For purposes of this
Agreement, all references to the Registration Statement, any preliminary
prospectus, the Prospectus or any Term Sheet or any amendment or supplement to
any of the foregoing shall be deemed to include the copy filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b), hereof and agrees with each Underwriter,
as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement,
the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading., and the
Prospectus, any preliminary prospectus and any supplement thereto or
prospectus wrapper prepared in connection therewith, at their
respective times of issuance and at the Closing Time, complied and will
comply in all material respects with any applicable laws or regulations
of foreign jurisdictions in which the Prospectus and such preliminary
prospectus, as amended or supplemented, if applicable, are distributed
in connection with the offer and sale of Reserved Securities. Neither
the Prospectus nor any amendments or supplements thereto (including any
prospectus wrapper), at the time the Prospectus or any amendments or
supplements thereto were issued and at the Closing Time (and, if any
Option Securities are purchased, at the Date of Delivery), included or
will include an untrue statement of a material fact or omitted or will
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectus shall not be "materially
different", as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became effective.
The representations and warranties in this
-3-
<PAGE>
subsection shall not apply to statements in or omissions from the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished to the Company in writing by any
Underwriter through the Representatives expressly for use in the
Registration Statement or the Prospectus.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included
in the Registration Statement and the Prospectus, together with the
related schedules and notes, present fairly the financial position of
the Company and its consolidated subsidiaries at the dates indicated
and the statement of operations, stockholders' equity and cash flows of
the Company and its consolidated subsidiaries for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included
in the Prospectus present fairly the information shown therein and have
been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. The pro forma
financial statements and the related notes thereto included in the
Registration Statement and the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and have been properly compiled on the bases described
therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give
effect to the transactions and circumstances referred to therein.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or
not arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the
Company or any of its subsidiaries, other than those in the ordinary
-4-
<PAGE>
course of business, which are material with respect to the Company and
its subsidiaries considered as one enterprise, and (C) there has been
no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus or as proposed to be conducted
and to enter into and perform its obligations under this Agreement; and
the Company is duly qualified as a foreign corporation to transact
business and is in good standing in each other jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a
Material Adverse Effect.
(vi) Good Standing of Subsidiaries. All of the subsidiaries of
the Company (each a "Subsidiary") have been duly organized and are
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued
and outstanding capital stock of each such Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and is
owned by the Company, directly or through subsidiaries, free and clear
of any security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of any
Subsidiary was issued in violation of the preemptive or similar rights
of any securityholder of such Subsidiary. The only subsidiaries of the
Company are the subsidiaries listed on Exhibit 21.1 to the Registration
Statement.
(vii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus). The shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any
securityholder of the Company.
(viii) Authorization of Agreement. This Agreement has been
duly authorized, executed and delivered by the Company.
-5-
<PAGE>
(ix) Authorization and Description of Securities. The
Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued, fully paid and
non-assessable; the Common Stock conforms to all statements relating
thereto contained in the Prospectus and such description conforms to
the rights set forth in the instruments defining the same; no holder of
the Securities will be subject to personal liability by reason of being
such a holder; and the issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the
Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor
any of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, franchise agreement,
indenture, mortgage, deed of trust, loan or credit agreement, note,
lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which it or any of them may be bound,
or to which any of the property or assets of the Company or any
subsidiary is subject (collectively, "Agreements and Instruments")
except for such defaults that would not result in a Material Adverse
Effect; and the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein and in the
Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities
as described in the Prospectus under the caption "Use of Proceeds", the
reorganization as described in the Prospectus (the "Reorganization"),
entering into the Bank Credit Agreement and consummating the
Acquisitions) and compliance by the Company with its obligations
hereunder have been duly authorized by all necessary corporate action
and do not and will not, whether with or without the giving of notice
or passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any subsidiary pursuant to, the
Agreements and Instruments, nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or
any subsidiary or any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
the Company or any subsidiary or any of their assets, properties or
operations. As used herein, a "Repayment Event" means any event or
condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's behalf)
the right to require the repurchase, redemption or repayment of all or
a portion of such indebtedness by the Company or any subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any subsidiary exists or, to the knowledge
of the Company, is imminent, and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its
or any subsidiary's principal suppliers, manufacturers, customers or
contractors, which, in any case, may reasonably be expected to result
in a Material Adverse Effect.
-6-
<PAGE>
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the
transactions contemplated in this Agreement or the performance by the
Company of its obligations hereunder or thereunder; the aggregate of
all pending legal or governmental proceedings to which the Company or
any subsidiary is a party or of which any of their respective property
or assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which
have not been so described and filed as required.
(xiv) Possession of Intellectual Property. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, and neither the Company
nor any of its subsidiaries has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of others
with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its
subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity
or inadequacy, singly or in the aggregate, would result in a Material
Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except (i) such as have
been already obtained or as may be required under the 1933 Act or the
1933 Act Regulations and foreign or state securities or blue sky laws
and (ii) such as have been obtained under the laws and regulations of
jurisdictions outside the United States in which the Reserved
Securities are offered.
(xvi) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and
other authorizations (collectively, "Governmental Licenses") issued by
the appropriate federal, state, local or foreign
-8-
<PAGE>
regulatory agencies or bodies necessary to conduct the business now
operated by them; the Company and its subsidiaries are in compliance
with the terms and conditions of all such Governmental Licenses, except
where the failure so to comply would not, singly or in the aggregate,
have a Material Adverse Effect; all of the Governmental Licenses are
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to
be in full force and effect would not have a Material Adverse Effect;
and neither the Company nor any of its subsidiaries has received any
notice of proceedings relating to the revocation or modification of any
such Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in
a Material Adverse Effect.
(xvii) Title to Property. The Company and its subsidiaries
have good and marketable title to all real property owned by the
Company and its subsidiaries and good title to all other properties
owned by them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectus or (b) do not,
singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company or any of its subsidiaries; and all of
the leases and subleases material to the business of the Company and
its subsidiaries, considered as one enterprise, and under which the
Company or any of its subsidiaries holds properties described in the
Prospectus, are in full force and effect, and neither the Company nor
any subsidiary has any notice of any material claim of any sort that
has been asserted by anyone adverse to the rights of the Company or any
subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such subsidiary
to the continued possession of the leased or subleased premises under
any such lease or sublease.
(xviii) Investment Company Act.. The Company is not, and upon
the issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company as such terms are defined in the
Investment Company Act of 1940, as amended (the "1940 Act").
(xix) Environmental Laws. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its subsidiaries is in violation of any federal, state,
local or foreign statute, law, rule, regulation, ordinance, code,
policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of
human health, the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata) or
wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum
or petroleum products (collectively, "Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous
-8-
<PAGE>
Materials (collectively, "Environmental Laws"), (B) the Company and its
subsidiaries have all permits, authorizations and approvals required
under any applicable Environmental Laws and are each in compliance with
their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of
its subsidiaries relating to Hazardous Materials or any Environmental
Laws.
(xx) Registration Rights. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xxi) Income Taxes. All United States federal income tax
returns of the Company and its subsidiaries required by law to be filed
have been filed (taking into account extensions granted by the
applicable federal governmental agency) and all taxes shown by such
returns or otherwise assessed, which are due and payable, have been
paid, except for such taxes, if any, as are being contested in good
faith and as to which adequate reserves have been provided. All other
corporate franchise and income tax returns of the Company and its
subsidiaries required to be filed pursuant to applicable foreign, state
or local law have been filed, except insofar as the failure to file
such returns would not individually or in the aggregate have in a
material adverse effect on the condition (financial or otherwise),
earnings, business affairs or business prospects of the Company and its
subsidiaries, considered together as one enterprise, and all taxes
shown on such returns or otherwise assessed which are due and payable
have been paid, except for such taxes, if any, as are being contested
in good faith and as to which adequate reserves have been provided. The
charges, accruals and reserves on the books of the Company in respect
of any income and corporation tax liability for any years not finally
determined are adequate to meet any assessments or re-assessments for
additional income tax for any years not finally determined, except to
the extent of any inadequacy that would not have a material adverse
effect on the condition (financial or otherwise), earnings, business
affairs or business prospects of the Company and its subsidiaries,
considered together as one enterprise.
(xxii) Internal Controls. The Company and its subsidiaries
maintain (and in the future will maintain) a system of internal
accounting controls sufficient to provide reasonable assurances that
(A) transactions are executed in accordance with management's general
or specific authorization; (B) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP
and to maintain accountability for assets; (C) access to assets is
permitted only in accordance with management's general or specific
authorization; and (D) the recorded accountability
-9-
<PAGE>
for assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(xxiii) Insurance. The Company and its subsidiaries carry or
are entitled to the benefits of insurance, with financially sound and
reputable insurers, in such amounts and covering such risks as is
generally maintained by companies of established repute engaged in the
same or similar business, and all such insurance is in full force and
effect.
(xxiv) Offering Material. The Company has not distributed and,
prior to the later to occur of (i) the Closing Time and (ii) completion
of the distribution of the Securities, will not distribute any offering
material in connection with the offering and sale of the Securities
other than the Registration Statement, any preliminary prospectus, the
Prospectus or other materials, if any, permitted by the 1933 Act and
approved by the Representative(s).
(xxv) Suppliers. No supplier of merchandise to the Company or
any of its subsidiaries has ceased shipments of merchandise to the
Company, other than in the normal and ordinary course of business
consistent with past practices, which cessation would not result in a
Material Adverse Effect.
(xxvi) Related Party Transactions. There are no business
relationships or related party transactions of the nature described in
Item 404 of Regulation S-K involving the Company or any of businesses
being acquired pursuant to the Acquisitions (as defined in the
Prospectus) and any person described in such Item that are required to
be disclosed in the Registration Statement and which have not been so
disclosed.
(xxvii) Reorganization. The representations and warranties of
the Company contained in the Reorganization documents (the
"Reorganization Agreements") as set forth in Exhibit C hereto are true
and correct as of the date hereof and the Reorganization Agreements are
enforceable against the Company. All of the transactions contemplated
by such agreements have been consummated in accordance with the terms
as described therein (and as described in the Prospectus) and none of
such agreements have been amended or modified since the date of their
execution.
(xxviii) Pending Acquisitions. Each of the agreements (collectively,
the "Acquisition Agreements") governing the Acquisitions that are
contemplated to occur on or before the Closing Date has been duly
authorized, executed and delivered by each of the parties, and
constitutes a legally valid and binding obligation of the Company and
to the Company's knowledge is enforceable against each such party
thereto in accordance with its terms; except as described in the
Prospectus, each of the representations and warranties of the Company
and its subsidiaries and, to the best of the Company's knowledge, of
each of the other parties set forth in the Acquisition Agreements was
true and correct at the time such representations and warranties were
made and will be true and correct at and as of the Closing Date and the
Company has received manufacturers consents to all of the Acquisitions.
-10
<PAGE>
(xxix) Franchise Agreements. Each franchise agreement, in each case
between a Subsidiary and the applicable Manufacturer (as defined in the
Prospectus) has been duly authorized by the Company and such
Subsidiaries, and, as of the Closing Date, the Company shall have
obtained all consents, authorizations and approvals from the
Manufacturers required to conduct the Acquisitions and the public
offering of Common Stock as contemplated hereby [except for Jaguar].
(xxx) Credit Agreement. The Company has all necessary corporate
power and authority to execute, deliver and perform its obligations
under the New Credit Agreement, between the Company and Ford Motor
Credit Company (the "New Credit Agreement") and the credit agreement
between the Company and NationsBank N.A. (the "NationsBank Credit
Agreement"); the New Credit Agreement and the NationsBank Credit
Agreement have been duly authorized, executed and delivered by the
Company, are in the forms heretofore delivered to you, constitute valid
and binding obligations of the Company, enforceable against the Company
in accordance with its terms; and at the Closing Date, the Company
shall be able to make borrowings thereunder.
(b) OFFICER'S CERTIFICATES. Any certificate signed by any officer of
the Company or any of its subsidiaries delivered to the Representatives, or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number of
Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) OPTION SECURITIES. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional shares of Common Stock at the
price per share set forth in Schedule B, less an amount per share equal to any
dividends or distributions declared by the Company and payable on the Initial
Securities but not payable on the Option Securities. The option hereby granted
will expire 30 days after the date hereof and may be exercised in whole or in
part from time to time only for the purpose of covering over-allotments which
may be made in connection with the offering and distribution of the Initial
Securities upon notice by the Representatives to the Company setting forth the
number of Option Securities as to which the several Underwriters are then
exercising the option and the time and date of payment and delivery for such
Option Securities. Any such time and date of delivery for the Option Securities
(a "Date of Delivery") shall be determined by the Representatives, but shall not
be later than seven full business days after the exercise of said
-11-
<PAGE>
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the Option Securities, each
of the Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of Option Securities then being purchased which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter bears to the total number of Initial Securities, subject in
each case to such adjustments as the Representatives in their discretion shall
make to eliminate any sales or purchases of fractional shares.
(c) PAYMENT Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Fried,
Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, NY 10004, or at
such other place as shall be agreed upon by the Representatives and the Company,
at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after
4:30 P.M. (Eastern time) on any given day business day after the date hereof
(unless postponed in accordance with the provisions of Section 10), or such
other time not later than ten business days after such date as shall be agreed
upon by the Representatives and the Company (such time and date of payment and
delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
one full business day before the Closing Time or the relevant Date of Delivery,
as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
(e) APPOINTMENT OF QUALIFIED INDEPENDENT UNDERWRITER. The Company
hereby confirms its engagement of Merrill Lynch as, and Merril Lynch hereby
confirms its agreement with the Company to render services as, a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules
of the National Association of Securities Dealers, Inc. with respect to the
offering and sale of the Securities. Merrill Lynch, solely in its capacity
as qualified independent underwriter and not otherwise, is referred to herein
as the "Independent Underwriter."
-12-
<PAGE>
SECTION 3. Covenants of the Company. The Company covenants with
each Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION
REQUESTS. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify
the Representatives immediately, and confirm the notice in writing, (i)
when any post-effective amendment to the Registration Statement shall
become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments
from the Commission, (iii) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale
in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect
the filings necessary pursuant to Rule 424(b) and will take such steps
as it deems necessary to ascertain promptly whether the form of
prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order
is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) FILING OF AMENDMENTS. The Company will give the
Representatives notice of its intention to file or prepare any
amendment to the Registration Statement (including any filing under
Rule 462(b)), any Term Sheet or any amendment, supplement or revision
to either the prospectus included in the Registration Statement at the
time it became effective or to the Prospectus, will furnish the
Representatives with copies of any such documents a reasonable amount
of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or
counsel for the Underwriters shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has
furnished or will deliver to the Representatives and counsel for the
Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including
exhibits filed therewith or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will
also deliver to the Representatives, without charge, a conformed copy
of the Registration Statement as originally filed and of each amendment
thereto (without exhibits) for each of the Underwriters. The copies of
the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUS. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary
prospectus as such Underwriter
-13-
<PAGE>
reasonably requested, and the Company hereby consents to the use of
such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the
Securities Exchange Act of 1934 (the "1934 Act"), such number of copies
of the Prospectus (as amended or supplemented) as such Underwriter may
reasonably request. The Prospectus and any amendments or supplements
thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company
will comply with the 1933 Act and the 1933 Act Regulations so as to
permit the completion of the distribution of the Securities as
contemplated in this Agreement and in the Prospectus. If at any time
when a prospectus is required by the 1933 Act to be delivered in
connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the
opinion of counsel for the Underwriters or for the Company, to amend
the Registration Statement or amend or supplement any Prospectus in
order that the Prospectus will not include any untrue statements of a
material fact or omit to state a material fact necessary in order to
make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or
if it shall be necessary, in the opinion of such counsel, at any such
time to amend the Registration Statement or amend or supplement any
Prospectus in order to comply with the requirements of the 1933 Act or
the 1933 Act Regulations, the Company will promptly prepare and file
with the Commission, subject to Section 3(b), such amendment or
supplement as may be necessary to correct such statement or omission or
to make the Registration Statement or the Prospectus comply with such
requirements, and the Company will furnish to the Underwriters such
number of copies of such amendment or supplement as the Underwriters
may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the
Securities for offering and sale under the applicable securities laws
of such states and other jurisdictions as the Representatives may
designate and to maintain such qualifications in effect for a period of
not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement;
provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which
it is not so qualified or to subject itself to taxation in respect of
doing business in any jurisdiction in which it is not otherwise so
subject. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement and any Rule 462(b)
Registration Statement.
-14-
<PAGE>
(g) RULE 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified
in the Prospectus under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect
the listing of the Common Stock (including the Securities) on the New
York Stock Exchange (the "NYSE").
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180
days from the date of the Prospectus, the Company will not, without the
prior written consent of the Representatives, (i) directly or
indirectly, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or
dispose of any share of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not
apply to the Securities to be sold hereunder; provided that the Company
may sell shares of Class A Common Stock to a third party as
consideration for the Company's acquisition from such third party of a
car dealership, provided that such third party executes a lock-up
agreement on substantially the same terms described above for a
period expiring 180 days after the date of the Prospectus.
(k) REPORTING REQUIREMENTS. The Company, during the period
when the Prospectus are required to be delivered under the 1933 Act or
the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the rules and regulations of the Commission
thereunder.
(l) COMPLIANCE WITH NASD RULES. The Company hereby agrees that
it will ensure that the Reserved Securities will be restricted as
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of this
Agreement. The Underwriters will notify the Company as to which persons
will need to be so restricted. At the request of the Underwriters, the
Company will direct the transfer agent to place a stop transfer
restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the
Reserved Securities, the Company agrees to reimburse the Underwriters
for any reasonable expenses (including, without limitation, legal
expenses) they incur in connection with such release.
-15-
<PAGE>
SECTION 4. Payment of Expenses. (a) EXPENSES. The Company will
pay all expenses incident to the performance of its obligations under this
Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectus and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities and (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees
and expenses incurred in connection with the listing of the Securities on the
NYSE and all costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, in connection with matters
related to the Reserved Securities which are designated by the Company for sale
to employees and others having a business relationship with the Company. In
addition, the Company will pay all expenses above $90,000 incurred in connection
with the lodging, meals and travel costs incurred by or on behalf of Company
officers and the Underwriters in connection with the road show presentations to
prospective purchasers of the Securities. The Underwriters will pay the first
$90,000 of such expenses.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The
obligations of the several Underwriters hereunder are subject to the accuracy of
the representations and warranties of the Company contained in Section 1 hereof
or in certificates of any officer of the Company or any subsidiary of the
Company delivered pursuant to the provisions hereof, to the performance by the
Company of its covenants and other obligations hereunder, and to the following
further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by
the
-16-
<PAGE>
Commission, and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing
such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has
elected to rely upon Rule 434, a Term Sheet shall have been filed with
the Commission in accordance with Rule 424(b).
(b) OPINION OF COUNSEL FOR COMPANY. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Parker, Poe, Adams & Bernstein LLP , counsel for the
Company, in form and substance satisfactory to counsel for the
Underwriters, together with signed or reproduced copies of such letter
for each of the other Underwriters to the effect set forth in Exhibit A
hereto and to such further effect as counsel to the Underwriters may
reasonably request.
In addition, at Closing Time, the Representatives shall have
received a signed copy of the opinions rendered by Parker, Poe, Adams &
Bernstein LLP pursuant to the New Credit Agreement, the NationsBank
Credit Agreement and the Acquisition Agreements, accompanied by a
letter dated as of the date of such opinions stating that the
Underwriters may rely on such opinions as if they were addressed to the
Underwriters.
(c) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Fried, Frank, Harris, Shriver & Jacobson, counsel for
the Underwriters, together with signed or reproduced copies of such
letter for each of the other Underwriters with respect to the matters
set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or
other similar rights arising by operation of law or under the charter
or by-laws of the Company), (viii) through (x), inclusive, (xii), (xiv)
(solely as to the information in the Prospectus under "Description of
Capital Stock--Common Stock") and the penultimate paragraph of Exhibit
A hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the
State of New York and the federal law of the United States and the
General Corporation Law of the State of Delaware, upon the opinions of
counsel satisfactory to the Representatives which may include counsel
to the Company. Such counsel may also state that, insofar as such
opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
(d) OFFICERS' CERTIFICATE. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in
the ordinary course of business, and the Representatives shall have
received a certificate of the President of the Company
-17-
<PAGE>
and of the chief financial or chief accounting officer of the Company,
dated as of Closing Time, to the effect that (i) there has been no such
material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect
as though expressly made at and as of Closing Time, (iii) the Company
has complied with all agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to Closing Time, and (iv)
no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or are contemplated by the Commission.
(e) ACCOUNTANT'S COMFORT LETTER. At the time of the execution
of this Agreement, the Representatives shall have received from
Deloitte & Touche LLP a letter dated such date, in form and substance
satisfactory to the Representatives, together with signed or reproduced
copies of such letter for each of the other Underwriters containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(f) BRING-DOWN COMFORT LETTER. At Closing Time, the
Representatives shall have received from Deloitte & Touche LLP a
letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (e) of
this Section, except that the specified date referred to shall be a
date not more than three business days prior to Closing Time.
(g) APPROVAL OF LISTING. At Closing Time, the Securities shall
have been approved for listing on the NYSE, subject only to official
notice of issuance.
(h) NO OBJECTION. The NASD has confirmed that it has not
raised any objection with respect to the fairness and reasonableness of
the underwriting terms and arrangements.
(i) LOCK-UP AGREEMENTS. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the
form of Exhibit B hereto signed by the persons listed on Schedule C
hereto.
(j) ACQUISITION AGREEMENTS. The acquisitions contemplated by
the Acquisition Agreements shall have been consummated in accordance
with the terms described therein and there have been no amendments or
modifications to the Acquisition Agreements since the date of their
execution without the consent of the Representatives and no conditions
to the Acquisitions shall have been waived without the consent of the
Representatives.
(k) REORGANIZATION. The Reorganization (as described in the
Prospectus) shall have been consummated in accordance with the terms as
described therein and in the Reorganization Documents and there have
been no amendments or modifications to the Reorganization Documents
since the date of their execution.
-18-
<PAGE>
(l) MANUFACTURERS' CONSENTS. The Representatives shall have
received on or as of the Closing Date, as the case may be, a
certificate, in a form and substance satisfactory to the
Representative, of two executive officers of the Company certifying
that each of the Company and its subsidiaries owns, possesses or has
obtained all required consents and approvals from all Manufacturers
with respect to the Acquisitions and the public offering of Common
Stock hereunder and such consents and approvals shall be in a form
satisfactory to the Representatives [other than Jaguar].
(m) CREDIT AGREEMENT. The New Credit Agreement and the
NationsBank Credit Agreement shall have been entered into at or prior
to Closing Time. The Company has obtained or assumed floor plan
financing for each of the dealerships acquired in the Acquisitions in
form and substance satisfactory to the Representatives and in
accordance with the pro forma presentation in the Prospectus.
(n) SUBSCRIPTION AGREEMENTS. The subscription agreements and
related promissory notes relating to the sale of a 20% interest in the
Company's Dyer Volvo and Volvo of Chattanooga dealerships to Richard
Dyer and Nelson Bowers, respectively, are substantially in the form
provided and there have been no amendments or modifications to such
agreements and related notes since the date of their execution.
(o) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with
such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as
herein contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company
in connection with the issuance and sale of the Securities as herein
contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(p) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event
that the Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company or any
subsidiary of the Company hereunder shall be true and correct as of
each Date of Delivery and, at the relevant Date of Delivery, the
Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date
of Delivery, of the President or a Vice President of
the Company and of the chief financial or chief
accounting officer of the Company confirming that the
certificate delivered at the Closing Time pursuant to
Section 5(d) hereof remains true and correct as of
such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion
of Parker, Poe, Adams & Bernstein LLP, counsel for
the Company, in form and substance satisfactory to
counsel for the Underwriters, dated such Date of
Delivery,
-19-
<PAGE>
relating to the Option Securities to be purchased on
such Date of Delivery and otherwise to the same
effect as the opinion required by Section 5(b)
hereof.
(iii) Opinion of Counsel for Underwriters. The favorable
opinion of Fried, Frank, Harris, Shriver & Jacobson,
counsel for the Underwriters, dated such Date of
Delivery, relating to the Option Securities to be
purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section
5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Deloitte &
Touche LLP, in form and substance satisfactory to the
Representatives and dated such Date of Delivery,
substantially in the same form and substance as the
letter furnished to the Representatives pursuant to
Section 5(f) hereof, except that the "specified date"
in the letter furnished pursuant to this paragraph
shall be a date not more than five days prior to such
Date of Delivery.
(q) TERMINATION OF AGREEMENT. If any condition specified in
this Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several Underwriters to purchase
the relevant Option Securities, may be terminated by the
Representatives by notice to the Company at any time at or prior to
Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) INDEMNIFICATION OF UNDERWRITERS. The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or
-20-
<PAGE>
any investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through the Representatives expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives expressly for use in the Registration Statement (or
any amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action;
-21-
<PAGE>
provided, however, that counsel to the indemnifying party shall not (except with
the consent of the indemnified party) also be counsel to the indemnified party.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a) (ii) or (iii) effected without its written consent if (i) such
settlement is entered into more than 45 days after receipt by such indemnifying
party of the aforesaid request, (ii) such indemnifying party shall have received
notice of the terms of such settlement at least 30 days prior to such settlement
being entered into and (iii) such indemnifying party shall not have reimbursed
such indemnified party in accordance with such request prior to the date of such
settlement.
(e) INDEMNIFICATION FOR RESERVED SECURITIES. In connection with the
offer and sale of the Reserved Securities, the Company agrees, promptly upon a
request, in writing to indemnify and hold harmless the Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of eligible directors, officers, employees,
business associates and related persons of the Company to pay for and accept
delivery of Reserved Securities which, by the end of the first business day
following the date of this Agreement, were subject to a properly confirmed
agreement to purchase.
-22-
<PAGE>
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Securities pursuant to this Agreement or (ii) if the allocation provided
by clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Underwriters on the other hand in connection with the statements or omissions,
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
-23-
<PAGE>
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) TERMINATION; GENERAL. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Representatives, impracticable to market the Securities or to enforce contracts
for the sale of the Securities, or (iii) if trading in any securities of the
Company has been suspended or materially limited by the Commission, or the NYSE,
if trading generally on the American Stock Exchange or the NYSE or in the Nasdaq
National Market has been suspended or materially limited, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices have been
required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in
-24-
<PAGE>
Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive
such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for a Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Joel Van Dusen;
with a copy to Stuart Gelfond, Esq., Fried, Frank, Harris, Shriver & Jacobson,
One New York Plaza, New York, New York 10004; and notices to the Company shall
be directed to it at Sonic Automotive, Inc., 5401 East Independence Boulevard,
P.O. Box 18747, Charlotte,
-25-
<PAGE>
North Carolina 28218, attention of Theodore Wright; with a copy to Gary C. Ivey,
Esq., Parker, Poe, Adams & Bernstein L.L.P, 2500 Charlotte Plaza, Charlotte,
North Carolina 28244.
SECTION 12. Parties. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters and the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
-26-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
SONIC AUTOMOTIVE, INC
By
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES, INC.
WHEAT, FIRST SECURITIES, INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
Authorized Signatory
-27-
<PAGE>
SCHEDULE A
Number of
Initial
Name of Underwriter Securities
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................
NationsBanc Montgomery Securities, Inc...........................
Wheat, First Securities, Inc.
Total............................................................
5,000,000
-1-
<PAGE>
SCHEDULE B
SONIC AUTOMOTIVE, INC.
5,000,000 Shares of Class A Common Stock
(Par Value $0.01 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $ [ ].
2. The purchase price per share for the Securities to be paid
by the several Underwriters shall be $ [ ], being an amount equal to
the initial public offering price set forth above less $ [ ] per share;
provided that the purchase price per share for any Option Securities
purchased upon the exercise of the over-allotment option described in
Section 2(b) shall be reduced by an amount per share equal to any
dividends or distributions declared by the Company and payable on the
Initial Securities but not payable on the Option Securities.
-1-
<PAGE>
SCHEDULE C
O. Bruton Smith
B. Scott Smith
William R. Brooks
Sonic Financial Corporation
Nelson E. Bowers, II
Theodore M. Wright
Jeffrey C. Rachor
O. Ken Marks, Jr.
Ivan A. Tufty
William M. Sullivan
William S. Egan
Richard S. Dyer
-1-
<PAGE>
Exhibit A
October 17, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
NationsBanc Montgomery Securities, Inc.
Wheat, First Securities, Inc.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
We have acted as counsel for Sonic Automotive, Inc., a Delaware
corporation (the "Company") in connection with the underwritten public offering
of up to 5,750,000 shares (the "Shares") of Class A Common Stock, par value $.01
per share (the "Common Stock"), of the Company, of which 750,000 shares will be
sold pursuant to the exercise of an over-allotment option. This opinion is being
delivered to you pursuant to Section 5(b) of the Purchase Agreement between the
Underwriters named in Schedule A thereto and the Company (the" Purchase
Agreement"). All capitalized terms used herein that are defined in, or by
reference in, the Purchase Agreement have the meanings assigned to such terms
therein or by reference therein, unless otherwise defined herein.
In connection with this opinion, we have (i) investigated such
questions of law, (ii) examined originals or certified, conformed or
reproduction copies of such agreements, instruments, documents and records of
the Company, such certificates of public officials and such other documents, and
(iii) received such information from officers and representatives of the Company
as we have deemed necessary or appropriate for the purposes of this opinion.
-1-
<PAGE>
In all such examinations, we have assumed the legal capacity of all
natural persons executing Documents, the genuineness of all signatures, the
authenticity of original and certified documents and the conformity to original
or certified documents of all copies submitted to us as conformed or
reproduction copies.
To the extent it may be relevant to the opinions expressed herein, we
have assumed that the parties to the Documents other than the Company have the
power and authority to enter into and perform such documents and to consummate
the transactions contemplated thereby, that the Documents have been duly
authorized, executed and delivered by, and constitute legal, valid and binding
obligations of such parties enforceable against such parties in accordance with
their terms, and that such parties will comply with all of their obligations
under the Documents and all laws applicable thereto.
Based upon the foregoing, and subject to the limitations, qualifications and
assumptions set forth herein, we are of the opinion that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus or as proposed to be conducted and to enter
into and perform its obligations under the Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation
to transact business and is in good standing in each state set forth on
Schedule A to the opinion.
(iv) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectuses in the column entitled
"Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to the Purchase Agreement or pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or options referred to in the Prospectus); the shares of
issued and outstanding capital stock have been duly authorized and
validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any
securityholder of the Company.
(v) The Securities to be purchased by the Underwriters from
the Company have been duly authorized for issuance and sale to the
Underwriters pursuant to the Purchase Agreement, and, when issued and
delivered by the Company pursuant to the Purchase Agreement against
payment of the consideration set forth in the Purchase Agreement, will
be validly issued and fully paid and non-assessable and no holder of
the Securities is or will be subject to personal liability by reason of
being such a holder.
-2-
<PAGE>
(vi) The issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the
Company.
(vii) Each Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued
and outstanding capital stock of each Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and, to
the best of our knowledge, is owned by the Company, directly or through
subsidiaries, and except as described in the Prospectus, free and clear
of any security interest, mortgage, pledge, lien, encumbrance, claim or
equity, and except as described in the Prospectus, none of the
outstanding shares of capital stock of any Subsidiary was issued in
violation of the preemptive or similar rights of any securityholder of
such Subsidiary.
(viii) The Purchase Agreement has been duly authorized,
executed and delivered by the Company.
(ix) The Registration Statement has been declared effective
under the 1933 Act; any required filing of the Prospectus pursuant to
Rule 424(b) has been made in the manner and within the time period
required by Rule 424(b); and, to the best of our knowledge, no stop
order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the 1933 Act
and no proceedings for that purpose have been instituted or are pending
or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectus and each amendment or
supplement to the Registration Statement and the Prospectus as of its
effective or issue date (other than the financial statements and
supporting schedules included therein or omitted therefrom, as to which
we need express no opinion) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(xi) If Rule 434 has been relied upon, the Prospectuses were
not "materially different," as such term is used in Rule 434, from the
prospectuses included in the Registration Statement at the time it
became effective.
(xii) The form of certificate used to evidence the Common
Stock complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the charter and
by-laws of the Company and the requirements of the New York Stock
Exchange.
-3-
<PAGE>
(xiii) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to
which the Company or any subsidiary is a party, or to which the
property of the Company or any subsidiary is subject, before or brought
by any court or governmental agency or body, domestic or foreign, which
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the
transactions contemplated in the Purchase Agreement or the performance
by the Company of its obligations thereunder.
(xiv) The information in the Prospectus under "Description of
Capital Stock--Common Stock", "Business--Governmental Regulation and
Environmental Matters ", "Business--Legal Proceedings and Insurance",
"Description of Capital Stock--Preferred Stock", and in the
Registration Statement under Item 14, to the extent that it constitutes
matters of law, summaries of legal matters, the Company's charter and
bylaws or legal proceedings, or legal conclusions, has been reviewed by
us and is correct in all material respects.
(xv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that
are not described as required.
(xvi) All descriptions in the Prospectus of contracts and
other documents to which the Company or its subsidiaries are a party
are accurate in all material respects; to the best of our knowledge,
there are no franchises, contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments required to be described
or referred to in the Registration Statement or to be filed as exhibits
thereto other than those described or referred to therein or filed or
incorporated by reference as exhibits thereto, and the descriptions
thereof or references thereto are correct in all material respects.
(xvii) To the best of our knowledge, neither the Company nor
any subsidiary is in violation of its charter or by-laws and no default
by the Company or any subsidiary exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any item that is listed on Exhibit B to this opinion.
(xviii) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency, domestic or foreign (other than under
the 1933 Act and the 1933 Act Regulations, which have been obtained, or
as may be required under the securities or blue sky laws of the various
states, as to which we need express no opinion) is necessary or
required in connection with the due authorization, execution and
delivery of the Purchase Agreement or for the offering, issuance, sale
or delivery of the Securities.
(xix) The execution, delivery and performance of the Purchase
Agreement and the consummation of the Acquisitions transactions
contemplated in Purchase Agreement (including the issuance and sale of
the Securities, and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use Of
Proceeds") and the consummation of the Acquisitions and the financing
thereof and compliance by the Company with its obligations under the
Purchase Agreement do not and will not, whether with or without the
giving of notice or lapse of time or both,
-4-
<PAGE>
conflict with or constitute a breach of, or default or Repayment Event
(as defined in Section 1(a)(x) of the Purchase Agreements) under or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any subsidiary pursuant
to any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease or any other agreement or instrument, known to
us, to which the Company or any subsidiary is a party or by which it or
any of them may be bound, or to which any of the property or assets of
the Company or any subsidiary is subject, nor will such action result
in any violation of the provisions of the charter or by-laws of the
Company or any subsidiary, or any applicable law, statute, rule,
regulation, judgment, order, writ or decree, known to us, of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any subsidiary or any of their
respective properties, assets or operations.
(xx) To the best of our knowledge, there are no persons,
except as disclosed in the Prospectus, with registration rights or
other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the
1933 Act.
(xxi) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in
the 1940 Act.
(xxii) To the best of our knowledge, the Company contained in
the Reorganization documents as set forth in Exhibit C of the Purchase
Agreement have been duly authorized, executed and delivered by each of
the parties thereto and constitute a legally valid and binding
obligation of the Company and is enforceable against the Company in
accordance with their terms.
(xxiii) To the best of our knowledge, each of the Acquisition
Agreements governing the acquisitions that are contemplated to occur on
or before the Closing Date has been duly authorized, executed and
delivered by the Company, and constitutes a legally valid and binding
obligation of the Company and is enforceable against the Company in
accordance with its terms.
(xxiv) To the best of our knowledge, each franchise agreement,
in each case between a Subsidiary and the applicable Manufacturer (as
defined in the Prospectus) has been duly authorized by the Company and
such Subsidiaries, enforceable in accordance with its terms, and the
Company has obtained all consents, authorizations and approvals from
the Manufacturers required to conduct the Acquisitions and the public
offering of Common Stock as contemplated hereby [other than Jaguar].
(xxv) To the best of our knowledge, the Company has all
necessary corporate power and authority to execute, deliver and perform
its obligations under the New Credit Agreement and the NationsBank
Credit Agreement; and the New Credit Agreement and the NationsBank
Credit Agreement have been duly authorized, executed and delivered by
the Company, are in the form heretofore delivered to you, and
constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with its terms, except as enforcement
thereof may be limited by bankruptcy, insolvency,
-5-
<PAGE>
reorganization or other similar laws relating to or affecting
enforcement of creditors' rights generally or by general principles of
equity.
Nothing has come to our attention that would lead us to
believe that the Registration Statement or any amendment thereto,
including the Rule 430A Information and Rule 434 Information (if
applicable), (except for financial statements and schedules and other
financial data included therein or omitted therefrom, as to which we
need make no statement), at the time such Registration Statement or any
such amendment became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
that the Prospectuses or any amendment or supplement thereto (except
for financial statements and schedules and other financial data
included therein or omitted therefrom, as to which we need make no
statement), at the time the Prospectuses were issued, at the time any
such amended or supplemented prospectus was issued or at the Closing
Time, included or includes an untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which
they were made, not misleading.
Very truly yours
PARKER, POE, ADAMS & BERNSTEIN L.L.P.
By:__________________________________
-6-
<PAGE>
Exhibit B
October [ ], 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Montgomery Securities
Wheat First Butcher Singer
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Sonic Automotive, Inc.
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of
Sonic Automotive, Inc., a Delaware corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Montgomery Securities and Wheat First Butcher Singer propose
to enter into a Purchase Agreement (the "Purchase Agreement") with the Company
providing for the public offering of shares (the "Securities") of the Company's
Class A common stock, par value $0.01 per share (the "Common Stock"). In
recognition of the benefit that such an offering will confer upon the
undersigned as a stockholder [and an officer and/or director] of the Company,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the undersigned agrees with each underwriter to
be named in the U.S. Purchase Agreement that, during a period of 180 days from
the date of the Purchase Agreement, the undersigned will not, without the prior
written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge,
sell, contract to sell, sell any option or
-1-
<PAGE>
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, or otherwise dispose of or transfer any shares
of the Company's Common Stock or any securities convertible into or exchangeable
or exercisable for Common Stock, whether now owned or hereafter acquired by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, or file any registration statement under the
Securities Act of 1933, as amended, with respect to any of the foregoing or (ii)
enter into any swap or any other agreement or any transaction that transfers, in
whole or in part, directly or indirectly, the economic consequence of ownership
of the Common Stock, whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature:
Print Name:
CLASS A COMMON STOCK CLASS A COMMON STOCK
[SONIC LOGO GOES HERE]
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
THIS CERTIFICATE TRANSFERABLE IN
CHARLOTTE, NORTH CAROLINA CUSIP 83545 G 10 2
OR NEW YORK, NEW YORK SEE REVERSE FOR CERTAIN DEFINITIONS
SONIC AUTOMOTIVE, INC.
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS A COMMON STOCK,
PAR VALUE $0.01 PER SHARE OF
SONIC AUTOMOTIVE, INC. transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed.
This Certificate is not valid unless countersigned by the Transfer Agent
and registered by the Registrar.
<TABLE>
<S> <C> <C>
Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated: [SONIC AUTOMOTIVE SEAL
GOES HERE]
/S/ Theodore M. Wright /S/ O. Bruton Smith
TREASURER CHAIRMAN
</TABLE>
[SIGNATURE LANGUAGE HORIZONTALLY TURNED 90 DEGREES TO THE RIGHT, CENTER EDGE OF
THE CERTIFICATE AND COPY READS AS SUCH:]
COUNTERSIGNED AND REGISTERED:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
(Charlotte, North Carolina) TRANSFER AGENT
AND REGISTRAR
By
AUTHORIZED SIGNATURE
<PAGE>
SONIC AUTOMOTIVE, INC.
Sonic Automotive, Inc. will furnish to each stockholder a statement of the
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions or such preferences and rights upon request
therefor.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM- as tenants in common
TEN ENT- as tenants by the entireties
JT TEN- as joint tenants with
right of survivorship and not as tenants in common
UNIF TRANS MIN ACT-___________Custodian________________
(Cust) (Minor)
under Uniform Transfers to Minors
Act ____________________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value received, __________________________________________hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------
- -----------------------------------------
- -------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------ Shares
of the Class A Common Stock represented by the within Certificate, and
do hereby irrevocably constitute and appoint __________________________________
_________________________________________________________________, Attorney, to
transfer the said shares on the books of the within named Corporation with full
power of substitution.
Dated, _______________________________
X __________________________________________
X___________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE, IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
SIGNATURE(S) GUARANTEED:_______________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION, (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE, IF IT IS LOST, STOLEN, OR DESTROYED, THE
CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF
A REPLACEMENT CERTIFICATE.
Exhibit 5.1
, 1997
Board of Directors
Sonic Automotive, Inc.
5401 East Independence Boulevard
Charlotte, North Carolina
Dear Sirs:
We are acting as counsel to Sonic Automotive, Inc., a Delaware
corporation (the "Company"), in connection with the preparation, execution,
filing and processing, with the Securities and Exchange Commission (the
"Commission"), pursuant to the Securities Act of 1933, as amended (the "Act"),
of a Registration Statement (No. 333-33295) on Form S-1 (as amended through the
date hereof, the "Registration Statement") and the issuance and sale of the
Shares referred to below. This opinion is furnished to you for filing with the
Commission pursuant to Item 601(b)(5) of Regulation S-K promulgated under the
Act.
The Registration Statement covers the issuance and sale of up to
5,750,000 shares (the "Shares") of Class A Common Stock, par value $.01 per
share (the "Common Stock"), consisting of 5,000,000 shares to be offered by the
Company, and up to 750,000 shares that the several underwriters to be party to
the Purchase Agreement referred to below (the "Underwriters") will have an
option to purchase from the Company solely to cover over-allotments. The Shares
are proposed to be sold pursuant to a Purchase Agreement among the Company and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wheat,
First Securities, Inc. and NationsBanc Montgomery Securities, Inc. as
representatives of the several Underwriters, a form of which Purchase Agreement
is filed as Exhibit 1.1 to the Registration Statement (the "Purchase
Agreement").
In our representation of the Company, we have examined the Registration
Statement, the Underwriting Agreement, the Company's Amended and Restated
Certificate of Incorporation and Bylaws, as amended to date, all actions of the
Company's Board of Directors recorded in the Company's minute book, the form of
certificate evidencing the Shares and such other documents as we have considered
necessary for purposes of rendering the opinions expressed below.
Based upon the foregoing, we are of the following opinion:
<PAGE>
1. The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
2. The completion, execution, attestation, issuance and delivery
against payment by the Company of the Shares pursuant to the
terms of the Purchase Agreement have been duly authorized by
all necessary corporate action on behalf of the Company.
3. When (a) the Company shall have complied with the registration
and prospectus delivery requirements of the Act and with such
state securities or "blue sky" laws as may be applicable, (b)
the Purchase Agreement in definitive form shall have been duly
completed by including therein the purchase price of the
Shares and related terms, (c) the Purchase Agreement as so
completed shall have been duly executed and delivered by or on
behalf of the Underwriters and by or on behalf of the Company,
and (d) the Shares shall have been duly completed, executed,
attested, issued, delivered and paid for in accordance with
the terms of the Purchase Agreement, then the Shares will be
validly issued, fully paid and nonassessable.
The opinions expressed herein are limited to the laws of the State of
North Carolina, the General Corporation Law of the State of Delaware and the
Act.
We hereby consent to the use of this opinion letter as Exhibit 5.1 to
the Registration Statement and to the use of our name under the heading "Legal
Matters" in related prospectuses. In giving this consent, we do not admit that
we are in the category of persons whose consent is required under Section 7 of
the Act or the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
<PAGE>
EXHIBIT 10.34
SONIC AUTOMOTIVE, INC.
1997 STOCK OPTION PLAN
1. PURPOSES OF PLAN. The purposes of the Plan, which shall be known as
the Sonic Automotive, Inc. 1997 Stock Option Plan and is hereinafter referred to
as the "Plan", are (i) to provide incentives for key employees, directors,
consultants and other individuals providing services to Sonic Automotive, Inc.
(the "Company") and its subsidiaries (within the meaning of Section 424(f) of
the Internal Revenue Code of 1986, as amended (the "Code"), each of which is
referred to herein as a "Subsidiary") by encouraging their ownership of the
Class A Common Stock, $.01 par value, of the Company (the "Stock") and (ii) to
aid the Company in retaining such key employees, directors, consultants and
other individuals upon whose efforts the Company's success and future growth
depends, and attracting other such employees, directors, consultants and other
individuals.
2. ADMINISTRATION. The Plan shall be administered by a committee of the
Board of Directors of the Company (the "Committee"). The Committee shall be
appointed from time to time by the Board of Directors of the Company (the "Board
of Directors") and shall consist of not fewer than two of its members. Each
Committee member shall be a "non-employee director" within the meaning of Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the
"Act"). In the event that no such Committee exists or is appointed, then the
powers to be exercised by the Committee hereunder shall be exercised by the
Board of Directors.
For purposes of administration, the Committee, subject to the terms of
the Plan, shall have plenary authority to establish such rules and regulations,
to make such determinations and interpretations, and to take such other
administrative actions, as it deems necessary or advisable. All determinations
and interpretations made by the Committee shall be final, conclusive and binding
on all persons, including those granted options hereunder ("Optionees") and
their legal representatives and beneficiaries.
Notwithstanding any other provisions of the Plan, the Committee may
impose such conditions on any options as may be required to satisfy the
requirements of Rule 16b-3 of the Act or Section 162(m) of the Code.
The Committee shall hold its meetings at such times and places as it
may determine. A majority of its members shall constitute a quorum. All
determinations of the Committee shall be made by a majority of its members. Any
decision or determination reduced to writing and signed by all members shall be
as effective as if it had been made by a majority vote at a meeting duly called
and held. The Committee may appoint a secretary (who need not be a member of the
Committee). No member of the Committee shall be liable for any act or omission
with respect to his service on the Committee, if he acts in good faith and in a
manner he reasonably believes to be in or not opposed to the best interests of
the Company.
3. STOCK AVAILABLE FOR OPTIONS. There shall be available for options
under the Plan a total of 1,125,000 shares of Stock, subject to any adjustments
which may be made pursuant to Section 5(f) hereof. Shares of Stock used for
purposes of the Plan may be either authorized and unissued shares, or previously
issued shares held in the treasury of the Company, or both. Shares of Stock
covered by options
1
<PAGE>
which have terminated or expired prior to exercise or which have been tendered
as payment upon exercise of other options pursuant to Section 5(c), shall be
available for further option grants hereunder.
4. ELIGIBILITY. Options under the Plan may be granted to key employees
of the Company or any Subsidiary, including officers or directors of the Company
or any Subsidiary, and to directors, consultants and other individuals providing
services to the Company or any Subsidiary. Options may be granted to eligible
employees whether or not they hold or have held options previously granted under
the Plan or otherwise granted or assumed by the Company. In selecting employees
for options, the Committee may take into consideration any factors it may deem
relevant, including its estimate of the employee's present and potential
contributions to the success of the Company and its Subsidiaries. Service as a
director, officer or consultant of or to the Company or any Subsidiary shall be
considered employment for purposes of the Plan (and the period of such service
shall be considered the period of employment for purposes of Section 5(d) of the
Plan); provided, however, that incentive stock options may be granted under the
Plan only to an individual who is an "employee" (as such term is used in Section
422 of the Code) of the Company or any Subsidiary.
5. TERMS AND CONDITIONS OF OPTIONS. The Committee shall, in its
discretion, prescribe the terms and conditions of the options to be granted
hereunder, which terms and conditions need not be the same in each case, subject
to the following:
(a) OPTION PRICE. The price at which each share of Stock
covered by an incentive option granted under the Plan may be purchased
shall not be less than the market value per share of Stock on the date
of grant of the option. In the case of any option intended to be an
incentive stock option granted to an individual owning (directly or by
attribution as provided in Section 424(d) of the Code), on the date of
grant, stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or any Subsidiary (which
individual shall hereinafter be referred to as a "10% Stockholder"),
the price at which each share of Stock covered by the option may be
purchased shall not be less than 110% of the market value per share of
Stock on the date of grant of the option. The date of the grant of an
option shall be the date specified by the Committee in its grant of the
option. The price at which each share of Stock covered by an option
granted under the Plan (but not as an incentive stock option) may be
purchased shall be the price determined by the Committee, in its
absolute discretion, to be suitable to attain the purposes of this
Plan.
(b) OPTION PERIOD. The period for exercise of an option shall
in no event be more than ten years from the date of grant, or in the
case of an option intended to be an incentive stock option granted to a
10% Stockholder, more than five years from the date of grant. Options
may, in the discretion of the Committee, be made exercisable in
installments during the option period. Any shares not purchased on any
applicable installment date may be purchased thereafter at any time
before the expiration of the option period.
(c) EXERCISE OF OPTIONS. In order to exercise an option, the
Optionee shall deliver to the Company written notice specifying the
number of shares of Stock to be purchased, together with cash or a
certified or bank cashier's check payable to the order of the Company
in the full amount of the purchase price therefor; provided that, for
the purpose of assisting an Optionee to exercise an option, the Company
may make loans to the Optionee or guarantee loans made by third parties
to the Optionee, on such terms and conditions as the Board of Directors
may authorize; and provided further that such purchase price may be
paid in shares of Stock, or in nonstatutory
2
<PAGE>
options granted under the Plan (provided, however, that the purchase
price of Stock acquired under an incentive stock option may not be paid
in options), in either case owned by the Optionee and having a market
value on the date of exercise not less than the aggregate purchase
price, or in any combination of cash, Stock and such options. For
purposes of this Section 5(c), the market value per share of Stock
shall be the last sale price regular way on the date of reference, or,
in case no sales take place on such date, the average of the closing
high bid and low asked prices regular way, in either case on the
principal national securities exchange on which the Stock is listed or
admitted to trading, or if the Stock is not listed or admitted to
trading on any national securities exchange, the last sale price
reported on the National Market System of the National Association of
Securities Dealers Automated Quotation system ("NASDAQ") on such date,
or the average of the closing high bid and low asked prices of the
Stock in the over-the-counter market reported on NASDAQ on such date,
as furnished to the Committee by any New York Stock Exchange member
selected from time to time by the Committee for such purpose. If there
is no bid or asked price reported on any such date, the market value
shall be determined by the Committee in accordance with the regulations
promulgated under Section 2031 of the Code, or by any other appropriate
method selected by the Committee. For purposes of this Section 5(c),
the market value of an option granted under the Plan shall be the
market value of the underlying Stock, determined as aforesaid, less the
exercise price of the option. If the Optionee so requests, shares of
Stock purchased upon exercise of an option may be issued in the name of
the Optionee or another person. An Optionee shall have none of the
rights of a stockholder until the shares of Stock are issued to him.
(d) EFFECT OF TERMINATION OF EMPLOYMENT.
(i) An option may not be exercised after the Optionee
has ceased to be in the employ of the Company or any
Subsidiary for any reason other than the Optionee's death,
Disability or Involuntary Termination Without Cause. Any
cessation of employment, for purposes of incentive stock
options only, shall include any leave of absence in excess of
90 days unless the Optionee's reemployment rights are
guaranteed by law or by contract. "CAUSE" shall mean any act,
action or series of acts or actions or any omission,
omissions, or series of omissions which result in, or which
have the effect of resulting in, (i) the commission of a crime
by the Optionee involving moral turpitude, which crime has a
material adverse impact on the Company or any Subsidiary, (ii)
gross negligence or willful misconduct which is continuous and
results in material damage to the Company or any Subsidiary,
or (iii) the continuous, willful failure of the person in
question to follow the reasonable directives of the Board of
Directors. "DISABILITY" shall mean the inability or failure of
a person to perform those duties for the Company or any
Subsidiary traditionally assigned to and performed by such
person because of the person's then-existing physical or
mental condition, impairment or incapacity. The fact of
disability shall be determined by the Committee, which may
consider such evidence as it considers desirable under the
circumstances, the determination of which shall be final and
binding upon all parties. "INVOLUNTARY TERMINATION WITHOUT
CAUSE" shall mean either (i) the dismissal of, or the request
for the resignation of, a person, by court order, order of any
court-appointed liquidator or trustee of the Company, or the
order or request of any creditors' committee of the Company
constituted under the federal bankruptcy laws, PROVIDED that
such order or request contains no specific reference to Cause;
or (ii) the dismissal of, or the request for the resignation
of, a person, by a duly constituted corporate officer of the
Company or any Subsidiary, or by the Board, for any reason
other than for Cause.
3
<PAGE>
(ii) During the three months after the date of the
Optionee's Involuntary Termination Without Cause, the Optionee
shall have the right to exercise the options granted under the
Plan, but only to the extent the option was exercisable on the
date of the cessation of the Optionee's employment.
(iii) During the twelve months after Termination of
the Optionee's employment with the Company or any Subsidiary
as a result of the Optionee's Disability, the Optionee shall
have the right to exercise the options granted under the Plan,
but only to the extent the option was exercisable on the date
of the cessation of the Optionee's employment.
(iv) In the event of the death of the Optionee while
employed or, in the event of the death of the Optionee after
cessation of employment described in subparagraph (ii) or
(iii), above, but within the three-month or twelve-month
period described in subparagraph (ii) or (iii), above, the
option shall thereupon become exercisable in full until the
expiration of twelve months following the Optionee's death.
During such extended period, the option may be exercised by
the person or persons to whom the deceased Optionee's rights
under the Option Agreement shall pass by will or by the laws
of descent and distribution, but only to the extent the option
was exercisable on the date of the cessation of the Optionee's
employment. The provisions of the foregoing sentence shall
apply to any outstanding options which are incentive stock
options to the extent permitted by Section 422(d) of the Code
and such outstanding options in excess thereof shall,
immediately upon the occurrence of the event described in the
preceding sentence, be treated for all purposes of the Plan as
nonstatutory stock options and shall be immediately
exercisable as such as provided in the foregoing sentence.
In no event shall any option be exercisable beyond the
applicable exercise period provided in Section 5(b) of the Plan.
Nothing in the Plan or in any option granted pursuant to the Plan (in
the absence of an express provision to the contrary) shall confer on
any individual any right to continue in the employ of the Company or
any Subsidiary or interfere in any way with the right of the Company or
Subsidiary to terminate his employment at any time.
(e) NONTRANSFERABILITY OF OPTIONS. Except as otherwise set
forth herein, during the lifetime of an Optionee, options held by such
Optionee shall be exercisable only by him, and no option shall be
transferable other than by will or the laws of descent and
distribution. Notwithstanding the foregoing, the Committee, in its
absolute discretion, may grant nonstatutory options that are
transferable, subject to applicable law and the terms and restrictions
imposed by the Committee.
(f) ADJUSTMENTS FOR CHANGE IN STOCK SUBJECT TO PLAN. In the
event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, rights offering
or any other change in the corporate structure or shares of the
Company, corresponding adjustments automatically shall be made to the
number and kind of shares available for issuance under this Plan and
the number and kind of shares covered by outstanding options under this
Plan.
(g) ACCELERATION OF EXERCISABILITY OF OPTIONS UPON OCCURRENCE
OF CERTAIN EVENTS. In connection with any merger or consolidation in
which the Company is not the surviving corporation and which results in
the holders of the outstanding voting securities of the Company
(determined immediately prior to such merger or consolidation) owning
less than a majority of the
4
<PAGE>
outstanding voting securities of the surviving corporation (determined
immediately following such merger or consolidation), or any sale or
transfer by the Company of all or substantially all of its assets or
any tender offer or exchange offer for or the acquisition, directly or
indirectly, by any person or group of all or a majority of the
then-outstanding voting securities of the Company, all outstanding
options under the Plan shall become exercisable in full,
notwithstanding any other provision of the Plan or of any outstanding
options granted thereunder, on and after (i) the fifteenth day prior to
the effective date of such merger, consolidation, sale, transfer or
acquisition or (ii) the date of commencement of such tender offer or
exchange offer, as the case may be. The provisions of the foregoing
sentence shall apply to any outstanding options which are incentive
stock options to the extent permitted by Section 422(d) of the Code and
such outstanding options in excess thereof shall, immediately upon the
occurrence of the event described in clause (i) or (ii) of the
foregoing sentence, be treated for all purposes of the Plan as
nonstatutory stock options and shall be immediately exercisable as such
as provided in the foregoing sentence. Notwithstanding the foregoing,
in no event shall any option be exercisable after the date of
termination of the exercise period of such option specified in Sections
5(b) and 5(d).
(h) REGISTRATION, LISTING AND QUALIFICATION OF SHARES OF
STOCK. Each option shall be subject to the requirement that if at any time the
Board of Directors shall determine that the registration, listing or
qualification of shares of Stock covered thereby upon any securities exchange or
under any federal or state law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such option or the purchase of shares of Stock thereunder,
no such option may be exercised unless and until such registration, listing,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board of Directors. The Company may require
that any person exercising an option shall make such representations and
agreements and furnish such information as it deems appropriate to assure
compliance with the foregoing or any other applicable legal requirement.
(i) OTHER TERMS AND CONDITIONS. The Committee may impose such
other terms and conditions, not inconsistent with the terms hereof, on
the grant or exercise of options, as it deems advisable.
(j) RELOAD OPTIONS. If upon the exercise of an option granted
under the Plan (the "Original Option") the Optionee pays the purchase
price for the Original Option pursuant to Section 5(c) in whole or in
part in shares of Stock owned by the Optionee for at least six months,
the Company shall grant to the Optionee on the date of such exercise an
additional option under the Plan (the "Reload Option") to purchase that
number of shares of Stock equal to the number of shares of Stock so
held for at least six months transferred to the Company in payment of
the purchase price in the exercise of the Original Option. The price at
which each share of Stock covered by the Reload Option may be purchased
shall be the market value per share of Stock (as specified in Section
5(c)) on the date of exercise of the Original Option. The Reload Option
shall not be exercisable until one year after the date the Reload
Option is granted or after the expiration date of the Original Option.
Upon the payment of the purchase price for a Reload Option granted
hereunder in whole or in part in shares of Stock held for more than six
months pursuant to Section 5(c), the Optionee is entitled to receive a
further Reload Option in accordance with this Section 5(j). Shares of
Stock covered by a Reload Option shall not reduce the number of shares
of Stock available under the Plan pursuant to Section 3.
6. ADDITIONAL PROVISIONS APPLICABLE TO INCENTIVE STOCK OPTIONS. The
Committee may, in its discretion, grant options under the Plan to eligible
employees which constitute "incentive stock options" within the meaning of
Section 422 of the Code, provided, however, that (a) the aggregate market value
of
5
<PAGE>
the Stock with respect to which incentive stock options are exercisable for the
first time by the Optionee during any calendar year shall not exceed the
limitation set forth in Section 422(d) of the Code and (b) Section 5(d)(ii)
hereof shall not apply to any incentive stock option.
7. EFFECTIVENESS OF PLAN. The Plan shall be effective when it is
adopted and approved by the Board of Directors, provided that the Plan is
approved within one year of such adoption by a majority of the votes cast
thereon by the stockholders of the Company at a meeting of stockholders duly
called and held for such purpose or by unanimous written consent of such
stockholders, and no option granted hereunder shall be exercisable prior to such
approval.
8. AMENDMENT AND TERMINATION. The Board of Directors may at any time
amend the Plan or the term of any option outstanding under the Plan; provided,
however, that, except as contemplated in Section 5(f), the Board of Directors
shall not, without approval by a majority of the votes cast by the stockholders
of the Company at a meeting of stockholders at which a proposal to amend the
Plan is voted upon, (i) increase the maximum number of shares of Stock for which
options may be granted under the Plan, or (ii) except as otherwise provided in
the Plan, amend the requirements as to the class of employees eligible to
receive options. Unless the Plan shall theretofore have been terminated as
hereinafter provided, the Plan shall terminate, and no option shall be granted
hereunder after, ten years from the date the Plan is adopted by the Board of
Directors, which termination date shall be on or about October 10, 2007;
provided, however, that the Board of Directors may at any time prior to that
date terminate the Plan. No amendment or termination of the Plan or any option
outstanding under the Plan may, without the consent of an Optionee, adversely
affect the rights of such Optionee under any option held by such Optionee.
9. WITHHOLDING. It shall be a condition to the obligation of the
Company to issue shares of Stock upon exercise of an option that the Optionee
(or any beneficiary or person entitled to act under Section 5(d) hereof) pay to
the Company, upon its demand, such amount as may be requested by the Company for
the purpose of satisfying any other taxes. If the amount requested is not paid,
the Company may refuse to issue such shares of Stock.
10. OTHER ACTIONS. Nothing contained in the Plan shall be construed to
limit the authority of the Company to exercise its corporate rights and powers,
including, but not by way of limitation, the right of the Company to grant or
assume options for proper corporate purposes other than under the Plan with
respect to any employee or other person, firm, corporation or association.
6
<PAGE>
EXHIBIT 10.35
SONIC AUTOMOTIVE, INC.
EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
SONIC AUTOMOTIVE, INC.
EMPLOYEE STOCK PURCHASE PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I PURPOSE; DEFINITIONS; CONSTRUCTION......................................................................1
1.1 Purpose of Plan.................................................................................1
1.2 Definitions.....................................................................................1
(a) "Account"..............................................................................1
(b) "Base Pay".............................................................................1
(c) "Board of Directors"...................................................................1
(d) "Business Day".........................................................................1
(e) "Cause"................................................................................1
(f) "Code".................................................................................1
(g) "Committee"............................................................................2
(h) "Company"..............................................................................2
(i) "Company Stock"........................................................................2
(j) "Contributions"........................................................................2
(k) "Employee".............................................................................2
(l) "Employer".............................................................................2
(m) "Exercise Date"........................................................................2
(n) "Grant Date"...........................................................................2
(o) "Option"...............................................................................2
(p) "Participant"..........................................................................2
(q) "Plan".................................................................................2
1.3 Construction....................................................................................2
ARTICLE II ADMINISTRATION.........................................................................................3
2.1 Appointment and Procedures of Committee.........................................................3
2.2 Authority of Committee..........................................................................3
ARTICLE III PARTICIPATION.........................................................................................3
3.1 Eligibility to Participate......................................................................3
3.2 Restrictions on Participation...................................................................3
3.3 Leave of Absence................................................................................4
ARTICLE IV CONTRIBUTIONS..........................................................................................4
4.1 Payroll Deductions..............................................................................4
4.2 Direct Payment..................................................................................4
4.3 Leave of Absence................................................................................4
4.4 Contributions to Accounts.......................................................................5
4.5 Withdrawal of Contributions from Plan...........................................................5
4.6 Termination of Employment.......................................................................5
i
<PAGE>
ARTICLE V OPTIONS.................................................................................................5
5.1 Company Stock Available for Options.............................................................5
5.2 Granting of Options.............................................................................5
5.3 Option Price....................................................................................6
5.4 Option Period...................................................................................6
5.5 Exercise of Options.............................................................................6
(a) Automatic Exercise.....................................................................6
(b) Nontransferability of Options..........................................................6
(c) Effect of Termination of Employment....................................................7
(i) Termination of Employment Related to Cause....................................7
(ii) Termination of Employment Due to Death........................................7
(iii) Other Termination of Employment...............................................7
(d) Leave of Absence.......................................................................8
(e) Delivery of Stock......................................................................8
(f) Acceleration of Exercisability of Options Upon Occurrence of Certain
Events.................................................................................8
(g) Registration, Listing and Qualification of Shares of Stock.............................8
ARTICLE VI MISCELLANEOUS..........................................................................................9
6.1 Adjustments Upon Changes in Capitalization......................................................9
6.2 Approval of Shareholders........................................................................9
6.3 Amendment, Suspension and Termination...........................................................9
6.4 Intent to Comply With Code Section 423..........................................................9
6.5 Equal Rights and Privileges.....................................................................9
6.6 Use of Funds....................................................................................9
6.7 Withholding....................................................................................10
6.8 Effect of Plan.................................................................................10
6.9 No Employment Rights...........................................................................10
6.10 Governing Law..................................................................................10
6.11 Other Actions..................................................................................10
</TABLE>
ii
<PAGE>
SONIC AUTOMOTIVE, INC.
EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I
PURPOSE; DEFINITIONS; CONSTRUCTION
1.1 Purpose of Plan. The purpose of the Plan, which shall be known as
the Sonic Automotive, Inc. Employee Stock Purchase Plan (the "Plan"), is to
provide employees of Sonic Automotive, Inc. (the "Company") and its
participating subsidiaries (which hereinafter shall be referred to collectively
with the Company as the "Employer") an opportunity to acquire a proprietary
interest in the Company through the purchase of the Class A Common Stock, $.01
par value, of the Company. This Plan is intended to qualify as an "employee
stock purchase plan" within the meaning of Section 423 of the Internal Revenue
Code of 1986, as amended (the "Code"). The Plan shall be effective as of the
date the Plan is adopted by the Board of Directors and approved by the
shareholders of the Company.
1.2 Definitions. Throughout this Plan, the following terms shall have
the meanings indicated:
(a) "Account" shall mean a memorandum account maintained to
record each Participant's Contributions pending purchase of Company Stock.
(b) "Base Pay" shall mean the Participant's regular cash
compensation (excluding overtime pay, bonuses, shift premiums, commissions,
fringe benefits, other special payments and imputed income) determined without
reduction for Contributions made under this Plan or contributions to any Code
Section 401(k) or Section 125 Plan.
(c) "Board of Directors" shall mean the Board of Directors of
the Company.
(d) "Business Day" shall mean any day other than a Saturday,
Sunday or holiday.
(e) "Cause" shall mean any act, action or series of acts or
actions or any omission, omissions or series of omissions which, in the opinion
of the Committee, result in, or which have the effect of resulting in, (i) the
commission of a crime by the Participant involving moral turpitude, which crime
has a material adverse impact on the Employer, (ii) gross negligence or willful
misconduct which is continuous and results in material damage to the Employer,
or (iii) the continuous, willful failure of the person in question to follow the
reasonable directives of the Employer.
(f) "Code" shall mean the Internal Revenue Code of 1986, as
amended, any successor revenue laws of the United States, and the rules and
regulations promulgated thereunder.
1
<PAGE>
(g) "Committee" shall mean the committee of directors of the
Company appointed by the Board of Directors in accordance with Section 2.1 to
administer this Plan, or in the event that no such committee exists or is
appointed, "Committee" shall mean the Board of Directors.
(h) "Company" shall mean Sonic Automotive, Inc., a company
organized and existing under the laws of the State of Delaware.
(i) "Company Stock" shall mean the Class A Common Stock,
$.01 par value, of the Company.
(j) "Contributions" shall mean the after-tax payroll
deductions or other permissible contributions made by Participants to the Plan
pursuant to Article IV.
(k) "Employee" shall mean any person who (i) is employed on a
full-time or part-time basis by a participating Employer, (ii) is regularly
scheduled to work more than twenty hours per week, and (iii) is customarily
employed more than five months in any calendar year. Independent contractors and
outside directors shall not be included in the definition of Employee for
purposes of this Plan.
(l) "Employer" shall mean the Company and any of its present
or future subsidiaries (within the meaning of Section 424(f) of the Code) which
the Committee may designate from time to time as participating Employers under
this Plan.
(m) "Exercise Date" shall mean the last Business Day of March,
June, September and December on which the principal trading market for Company
Stock is open for trading, plus any other interim dates during the year which
the Committee designates as Exercise Dates.
(n) "Grant Date" shall mean (i) initially, January 1, 1998,
and (ii) each January 1 thereafter.
(o) "Option" shall mean an option to purchase shares of
Company Stock granted by the Committee to a Participant pursuant to this Plan.
(p) "Participant" shall mean an Employee participating in this
Plan in accordance with Article III.
(q) "Plan" shall mean this Sonic Automotive, Inc. Employee
Stock Purchase Plan, as amended from time to time.
1.3 Construction. The masculine gender, where appearing in the Plan,
shall be deemed to include the feminine gender, unless the context clearly
indicates to the contrary. The words "hereof," "herein," "hereunder" and other
similar compounds of the word "here" shall mean and refer to the entire Plan and
not to any particular provision or Section.
2
<PAGE>
ARTICLE II
ADMINISTRATION
2.1 Appointment and Procedures of Committee. The Plan shall be
administered by the Committee as appointed from time to time by the Board of
Directors. The Committee shall consist of not fewer than two members of the
Board of Directors. Each Committee member shall be a "non-employee director"
within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended. No member of the Board of Directors who serves on the
Committee shall be eligible to participate in the Plan. The Committee shall hold
its meetings at such times and places as it may determine. A majority of its
members shall constitute a quorum. All determinations of the Committee shall be
made by a majority of its members. Any decision or determination reduced to
writing and signed by all members shall be as effective as if it had been made
by a majority vote at a meeting duly called and held. The Committee may appoint
a secretary (who need not be a member of the Committee).
2.2 Authority of Committee. The Committee, subject to the terms of the
Plan, shall have plenary authority in its discretion to interpret and construe
the Plan (including, without limitation, any of its terms which are uncertain,
doubtful or disputed); to decide all questions of Employee eligibility
hereunder; to determine the amount, manner and timing of all Options and
purchases of Company Stock hereunder; to establish, amend and rescind rules and
regulations pertaining to the administration of the Plan; and to make
determinations and interpretations and take such other administrative actions as
it deems necessary or advisable for the administration of this Plan. The express
grant in the Plan of any specific power to the Committee shall not be construed
as limiting any power or authority of the Committee. No member of the Committee
shall be liable for any act, determination or omission with respect to his
service on the Committee, if he acts in good faith and in a manner he reasonably
believes to be in or not opposed to the best interest of the Employer. All
expenses of administering this Plan shall be borne by the Employer.
ARTICLE III
PARTICIPATION
3.1 Eligibility to Participate. Subject to the restrictions of Section
3.2 below, any Employee employed on the date of the closing of the Company's
initial public offering shall be eligible to participate in this Plan as of the
initial Grant Date under the Plan (provided that the Employee is still employed
on such Grant Date). Each other Employee shall be eligible to participate in the
Plan as of the Grant Date coincident with or next following the first
anniversary of his date of employment with the Employer (provided that the
Employee is still employed on such Grant Date). For purposes of the preceding
sentence, with respect to acquisitions of a controlling interest in or
substantially all of the assets of an entity, years of employment with such
entity prior to such acquisition by the Company will be recognized.
3.2 Restrictions on Participation. Notwithstanding the foregoing
Section 3.1, no Employee shall be eligible to participate in the Plan if such
Employee owns or holds options to purchase (or upon participation in this Plan
would own or hold options to purchase) stock
3
<PAGE>
possessing an aggregate of 5% or more of the total combined voting power or
value of all classes of stock of the Company or any other Employer (as
determined in accordance with the rules of Section 424(d) of the Code relating
to attribution of stock ownership).
3.3 Leave of Absence. For purposes of becoming a participant in the
Plan, a person on a leave of absence shall be deemed to be an Employee for the
first ninety days of such leave of absence and such Employee's employment shall
be deemed to have terminated at the close of business on the ninetieth day of
such leave of absence unless such Employee shall have returned to regular
full-time or part-time employment prior to the close of business on such
ninetieth day. Termination by the Company of any Employee's leave of absence,
other than termination of such leave of absence on return to regular full-time
or part-time employment, shall terminate an Employee's employment for all
purposes of the Plan.
ARTICLE IV
CONTRIBUTIONS
4.1 Payroll Deductions. By written election, made and filed with the
Committee pursuant to the Committee's rules and procedures, a Participant may
elect to designate a whole percentage between one percent and ten percent (or
such higher or lower percentage as may be allowed by the Committee's rules and
procedures) of his Base Pay to be deferred by payroll deduction as a
Contribution to the Plan. Payroll deductions shall commence as soon as
administratively practicable following the filing of such written election with
the Committee. The Committee in its discretion may develop additional rules and
procedures regarding payroll deduction elections.
A Participant may change or revoke his payroll deduction amount by
filing, on such forms and in accordance with such rules and procedures as the
Committee in its discretion may prescribe, a revised written election with the
Committee. Such modification or revocation shall take effect as soon as
administratively practicable after the Committee's receipt of such revised
election. Notwithstanding the foregoing, a Participant may change his payroll
deduction election only once each calendar quarter, or as otherwise specifically
allowed by the Committee's rules and procedures. If payroll deductions are
discontinued, payroll deductions may not be resumed by the Participant until the
payroll period which begins on or after the next Exercise Date, or as otherwise
specifically allowed by the Committee's rules and procedures. Under no
circumstances may a Participant's payroll deduction election be made, modified
or revoked retroactively.
4.2 Direct Payment. In accordance with such rules and procedures as the
Committee may prescribe in its discretion and in lieu of payroll deductions
pursuant to Section 4.1, a Participant may elect to make Contributions by direct
cash payment (including by check, subject to the Committee's rules and
procedures) to the Plan rather than by payroll deduction. Such direct payments
must be received by the Plan at least ten Business Days prior to an Exercise
Date in order for such payments to be applied in the exercise of an Option for
the purchase of Company Stock on such Exercise Date.
4.3 Leave of Absence. If a Participant is on a leave of absence, such
Participant shall have the right to elect to (a) withdraw from the Plan and
receive a distribution of the balance in
4
<PAGE>
his Account pursuant to Section 4.5, (b) discontinue Contributions to the Plan
but remain a Participant in the Plan, or (c) remain a Participant in the Plan
during such leave of absence, authorizing deductions to be made from payments by
the Company to the Participant during such leave of absence, or making direct
cash payments to the Plan pursuant to Section 4.2.
4.4 Contributions to Accounts. A memorandum Account shall be
established by the Committee for each Participant for the purpose of accounting
for Contributions. Contributions shall be credited to Accounts as soon as
administratively practicable following payroll withholding or receipt of other
permissible direct cash payment. Amounts credited to Accounts will not accrue
interest.
4.5 Withdrawal of Contributions from Plan. Prior to the end of a
calendar quarter, a Participant may elect to withdraw the Contributions credited
to his Account for that quarter by filing written notice thereof with the
Committee on such forms and in accordance with such procedures as the Committee
may prescribe. The Participant's Contributions shall be distributed to him as
soon as administratively practicable after the Committee's receipt of his notice
of withdrawal and, if applicable, no further payroll deductions shall be made
from his Base Pay.
4.6 Termination of Employment. Upon termination of a Participant's
employment for any reason, such Participant may no longer make Contributions to
the Plan or be granted Options under the Plan. A Participant's right, if any, to
exercise any unexpired Option he holds as of his termination of employment shall
be determined in accordance with Section 5.5(c).
ARTICLE V
OPTIONS
5.1 Company Stock Available for Options. There shall be available for
Options under the Plan an aggregate maximum of 150,000 shares of Company Stock,
subject to any adjustments which may be made pursuant to Section 6.1 of the Plan
in connection with changes in capitalization of the Company. Shares of Company
Stock used for purposes of the Plan may be either authorized and unissued
shares, or previously issued shares held in the treasury of the Company, or
both. Shares of Company Stock covered by Options which have expired prior to
exercise shall be available for further Options granted hereunder.
5.2 Granting of Options. The Plan shall be implemented by annual
offerings of approximately twelve months duration (except as otherwise provided
in Section 5.4). On each Grant Date, all eligible Employees shall be granted an
Option to purchase shares of Company Stock. Prior to each Grant Date, the
Committee shall determine the number of shares of Company Stock available for
purchase under each Option to be granted on such Grant Date; provided that, the
same number of shares must be available under each Option granted on such Grant
Date. No Participant may be granted an Option which permits his rights to
purchase stock under this Plan and all other employee stock purchase plans of
the Company or Employer to accrue at a rate which exceeds $25,000 of the fair
market value of such stock (determined at the time such Option is granted) for
each calendar year in which such Option is outstanding at any time.
5
<PAGE>
5.3 Option Price. The purchase price at which shares of Company Stock
may be acquired pursuant to the exercise of all or any portion of an Option
granted under this Plan shall be eighty-five percent of the lesser of (i) the
fair market value of the Company Stock on the applicable Grant Date, and (ii)
the fair market value of the Company Stock on the applicable Exercise Date. For
purposes of this Section 5.3, the fair market value per share of Company Stock
shall be the closing price on the last Business Day prior to the date of
reference, or in the event that no sales take place on such date, the average of
the closing high bid and low asked prices, in either case on the principal
national securities exchange on which the Company Stock is listed or admitted to
trading, or if the Company Stock is not listed or admitted to trading on any
national securities exchange, the last sale price reported on the National
Market System of the National Association of Securities Dealers Automated
Quotation system ("NASDAQ") on such date, or the average of the closing high bid
and low asked prices of the Company Stock in the over-the-counter market
reported on NASDAQ on such date, as furnished to the Committee by any New York
Stock Exchange member selected from time to time by the Committee for such
purposes. If there is no bid or asked price reported on any such date, the
market value shall be determined by the Committee in accordance with the
regulations promulgated under Section 2031 of the Code, or by any other
appropriate method selected by the Committee.
5.4 Option Period. Each Option granted to a Participant under the Plan
shall expire on the earliest of (a) the last Exercise Date of the calendar year
in which the Option was granted, (b) the Participant's voluntary withdrawal from
the Plan following termination of employment, and (c) the date of the
Participant's termination of employment related to Cause, or the Exercise Date
immediately following the Participant's termination of employment for any reason
unrelated to Cause. In no event will the duration of an Option period exceed
twenty-seven months (or such other applicable period permitted under Section
423(b)(7) of the Code) from the date on which such Option is granted.
5.5 Exercise of Options.
(a) Automatic Exercise. Any Option granted to a Participant
shall be exercised automatically on each Exercise Date during the calendar year
of the Option's Grant Date in whole or in part such that the Participant's
accumulated Contributions as of such Exercise Date shall be applied to the
purchase of the maximum number of whole shares of Company Stock that his
Contributions will allow at the applicable Option price (determined in
accordance with Section 5.3), limited to the number of shares subject to such
Option. In the event that the number of shares of Company Stock that may be
purchased by all Participants in the Plan exceeds the number of shares then
available for issuance under the Plan, the Committee shall make a pro rata
allocation of the available shares in as uniform a manner as it determines to be
practicable and equitable. Any remaining Contributions in the Participant's
Account amounting to less than the Option price of a whole share of Company
Stock shall be carried forward and applied on the next Exercise Date; provided
that, Contributions remaining after the last Exercise Date of the calendar year
may be distributed to the Participant at his election.
(b) Nontransferability of Options. During a Participant's
lifetime, Options held by such Participant shall be exercisable only by that
Participant. No Option shall be transferable other than by will or the laws of
descent and distribution.
6
<PAGE>
(c) Effect of Termination of Employment.
(i) Termination of Employment Related to Cause. Upon
termination of a Participant's employment related to Cause, the Participant's
participation in the Plan also shall terminate. Any unexpired Option he holds
will expire as of the date of his termination of employment. Remaining
contributions credited to his Account shall be distributed to the Participant as
soon as administratively practicable following termination of employment.
(ii) Termination of Employment Due to Death. In the
event of the death of the Participant while employed, or during the period
following his termination of employment for any reason unrelated to Cause but
prior to the next Exercise Date, the Participant's estate shall have the right
to elect by written notice to the Committee prior to the earlier of the
expiration of sixty days commencing with the date of the Participant's death and
the Exercise Date next following the date of the Participant's death:
(A) To withdraw all of the Contributions
credited to the Participant's Account under the Plan, or
(B) To exercise any unexercised Option held
by the Participant as of the date of his death for the purchase of Company Stock
on the Exercise Date next following the date of the Participant's death in
accordance with Section 5.5(a) but only to the extent such Option was
exercisable on the date of the Participant's death, with any remaining
Contributions credited to the Participant's Account being distributed to the
Participant's estate as soon as administratively practicable after such Exercise
Date.
In the event that no such written election is timely and properly received by
the Committee, all Contributions credited to the Participant's Account shall be
distributed to the Participant's estate. In no event shall any Option be
exercisable beyond the applicable exercise period specified in Section 5.4 of
the Plan.
(iii) Other Termination of Employment. Upon
termination of a Participant's employment for any reason unrelated to Cause or
death, the Participant may at his election:
(A) Withdraw from the Plan pursuant to
Section 4.5 and request the return of the remaining Contributions then credited
to his Account, or
(B) Continue participation in the Plan,
subject to the provisions of Section 4.6, until the Exercise Date next following
his date of termination of employment for the limited purpose of allowing any
unexpired Option he holds as of his termination of employment to be exercised
automatically in accordance with Section 5.5(a) on the Exercise Date next
following his termination of employment but only to the extent such Option was
exercisable on the date of the Participant's termination of employment, with any
remaining Contributions credited to the Participant's Account being distributed
to the Participant as soon as administratively practicable after such Exercise
Date.
7
<PAGE>
(d) Leave of Absence. A Participant on a leave of absence
shall, subject to the election made by such Participant pursuant to Section 4.3,
continue to be a Participant in the Plan so long as such Participant is on
continuous leave of absence. A Participant who has been on leave of absence for
more than ninety days and who therefore is not an Employee for the purpose of
the Plan shall not be entitled to participate in any offering commencing on any
Grant Date following the ninetieth day of such leave of absence. Notwithstanding
any other provisions of the Plan, unless a Participant on a leave of absence
returns to eligible regular full-time or part-time employment with the Employer
at the earlier of (i) the termination of such leave of absence, or (ii) three
months from the ninetieth day of such leave of absence, such Participant's
participation in the Plan shall terminate on whichever of such dates first
occurs.
(e) Delivery of Stock. As soon as administratively practicable
after each Exercise Date, the Company or the Committee will deliver to each
Participant, as applicable, certificates evidencing shares of Company Stock
purchased under this Plan.
(f) Acceleration of Exercisability of Options Upon Occurrence
of Certain Events. In connection with any merger or consolidation in which the
Company is not the surviving corporation and which results in the holders of the
outstanding voting securities of the Company (determined immediately prior to
such merger or consolidation) owning less than a majority of the outstanding
voting securities of the surviving corporation (determined immediately following
such merger or consolidation), or any sale or transfer by the Company of all or
substantially all of its assets or any tender offer or exchange offer for or the
acquisition, directly or indirectly, by any person or group of all or a majority
of the then-outstanding voting securities of the Company, all outstanding
Options under the Plan shall become exercisable in full, notwithstanding any
other provision of the Plan or of any outstanding Options granted thereunder, on
and after (i) the fifteenth day prior to the effective date of such merger,
consolidation, sale, transfer or acquisition or (ii) the date of commencement of
such tender offer or exchange offer, as the case may be. Notwithstanding the
foregoing, in no event shall any Option be exercisable after the date of
termination of the exercise period of such Option specified in Section 5.4.
(g) Registration, Listing and Qualification of Shares of
Stock. Each Option shall be subject to the requirement that if at any time the
Board of Directors shall determine that the registration, listing or
qualification of shares of Company Stock covered thereby upon any securities
exchange or under any federal or state law, or the consent or approval of any
governmental regulatory body, is necessary or desirable as a condition of, or in
connection with, the granting of such option or the purchase of shares of
Company Stock thereunder, no such Option may be exercised unless and until such
registration, listing, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Board of
Directors. The Employer may require that any person exercising an Option shall
make such representations and agreements and furnish such information as it
deems appropriate to assure compliance with the foregoing or any other
applicable legal requirement.
8
<PAGE>
ARTICLE VI
MISCELLANEOUS
6.1 Adjustments Upon Changes in Capitalization. In the event of a
reorganization, stock split, stock dividend, combination of shares, merger,
consolidation, rights offering or any other change in the corporate structure of
shares of the Company, corresponding adjustments shall be made to the number and
kind of shares of Company Stock available for issuance under this Plan and the
number and kind of shares of Company Stock covered by outstanding Options under
this Plan. Any adjustments made pursuant to this Section 6.1 remain subject to
the limitations of Section 423 of the Code (including its $25,000 annual
limitations).
6.2 Approval of Shareholders. Within twelve months before or after the
Plan is adopted by the Board of Directors, this Plan must be approved by a
majority of the votes cast thereon by the stockholders of the Company at a
meeting of stockholders duly called and held for such purpose or by unanimous
written consent of such stockholders, and no Option granted hereunder shall be
exercisable prior to such approval.
6.3 Amendment, Suspension and Termination. The Board of Directors may
at any time amend, suspend or terminate this Plan; provided, however, that the
Board of Directors shall not increase the maximum number of shares of Company
Stock for which Options may be granted under the Plan except as provided in
Section 6.1 without obtaining approval of the stockholders in the manner
described in Section 6.2. The Plan will continue until terminated by the Board
of Directors or until all of the shares of Company Stock reserved for issuance
under the Plan have been issued, whichever first occurs. No amendment,
suspension or termination of the Plan may, without the consent of the
Participants then holding Options to purchase Company Stock, adversely affect
the rights of such Participants under such Options.
6.4 Intent to Comply With Code Section 423. It is intended that this
Plan qualify as an "employee stock purchase plan" under Section 423 of the Code.
The provisions of this Plan shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that Section of
the Code. In the event of an inconsistency between the Plan and Section 423 of
the Code, the Plan shall be interpreted in a manner which complies with the
requirements of Section 423 of the Code and the regulations thereunder, without
further act or amendment by the Company or the Board of Directors unless
otherwise required pursuant to Section 6.3 of this Plan.
6.5 Equal Rights and Privileges. All Participants granted Options under
this Plan shall have equal rights and privileges within the meaning of Section
423(b)(5) of the Code and the regulations thereunder. The provisions applying to
one Option granted on a Grant Date must apply in the same manner to all other
Options granted on such Grant Date.
6.6 Use of Funds. All Contributions received and held by the Employer
under this Plan may be used by the Employer for any corporate purpose and the
Employer shall not be obligated to segregate such Contributions.
9
<PAGE>
6.7 Withholding. It shall be a condition to the obligation of the
Company to issue shares of Company Stock upon exercise of an Option that the
Participant (or his estate pursuant to Section 5.5(c)(ii)) pay to the Company,
upon its demand, such amount as may be requested by the Company for the purpose
of satisfying taxes, including taxes owed by the Participant due to the
disposition of Company Stock by the Participant prior to the expiration of the
holding periods described in Section 423(a) of the Code.
6.8 Effect of Plan. This Plan shall be binding upon each Participant
and his successors, including, without limitation, such Participant's estate and
the executors, administrators or trustees thereof, heirs and legatees, and any
receiver, trustee in bankruptcy or representative of creditors of such
Participant.
6.9 No Employment Rights. Nothing in this Plan or in any Option granted
pursuant to the Plan shall be construed as a contract of employment between the
Employer and any employee, or as a right of any employee to continue in the
employ of the Employer, or as a limitation of the right of the Employer to
discharge any of its employees, with or without cause.
6.10 Governing Law. This Plan and all rights and obligations hereunder
shall be construed in accordance with and governed by the laws of the State of
North Carolina, except to the extent such laws are preempted by the laws of the
United States.
6.11 Other Actions. Nothing contained in the Plan shall be construed to
limit the authority of the Company to exercise its corporate rights and powers,
including, but not by way of limitation, the right of the Company to grant or
assume options for proper corporate purposes other than under the Plan with
respect to any employee or other person, firm, corporation or association.
10
<PAGE>
EXHIBIT 10.47
Ford Motor Credit Company
AUTOMOTIVE WHOLESALE PLAN
APPLICATION FOR WHOLESALE FINANCING
AND SECURITY AGREEMENT
Date June 29, 1982
To: Ford Motor Credit Company (hereinafter called "Ford Credit")
The undersigned O.K. MARKS FORD, INC. (hereinafter called "Dealer") of
----------------------------
(Dealer's exact business name)
814 Cleveland Street, Clearwater, Florida 33515
- -----------------------------------------------------------------------------
(Street and Number) / (City) / (State) / (Zip Code)
hereby requests Ford Credit to establish and maintain for Dealer a wholesale
line of credit, and to make advances to or on behalf of Dealer thereunder, to
finance new and used automobiles, trucks, truck-tractors, trailers, semi-
trailers, buses, mobile homes, motor homes, other vehicles and other merchandise
for Dealer under the terms of the Ford Credit Wholesale Plan as set forth in
the January, 1973 edition of the Ford Credit Dealer Manual entitled "Automotive
Finance Plans for Ford Motor Company Dealers" or any subsequent edition thereof
(hereinafter called the "Plan"). In consideration thereof Dealer hereby agrees
as follows:
1. Advances by Ford Credit
Ford Credit at all times shall have the right in its sole discretion to
determine the extent to which, the terms and conditions on which, and the period
for which it will make advances to or on behalf of Dealer, or extend credit to
Dealer, under the Plan or otherwise. Ford Credit, at any time and from time to
time, in its sole discretion, may establish, rescind or change limits or the
extent to which financing accommodations under the Plan will be made available
to Dealer. Ford Credit may pay to any manufacturer, distributor or other seller
of merchandise the invoice amount therefor, and Ford Credit shall be fully
protected in relying in good faith upon any invoice or advice from any such
manufacturer, distributor or seller that the merchandise described therein has
been ordered by or shipped to Dealer and that the invoice amount therefor is
correctly stated. Any such payment made by Ford Credit to any such manufacturer,
distributor or seller shall be an advance made by Ford Credit to or on behalf of
Dealer pursuant hereto and shall be repayable by Dealer in accordance with the
terms hereof. In addition, Ford Credit may make loans or other advances directly
to Dealer with respect to merchandise of any type held by Dealer for sale, and
any loan or other advance shall be an advance made by Ford Credit to or on
behalf of Dealer pursuant hereto and shall be repayable by Dealer in
accordance with the terms hereof. Ford Credit from time to time shall furnish
statements to Dealer of advances made by Ford Credit to or on behalf of Dealer
pursuant hereto. Promptly upon receipt by Dealer of any such statement, Dealer
shall review the same and advise Ford Credit in writing of any discrepancy
therein. In the event Dealer shall fail to advise Ford Credit of any discrepancy
in any such statement within ten calendar days following the receipt thereof by
Dealer, such statement shall be deemed to be conclusive evidence of advances
made by Ford Credit to or on behalf of Dealer pursuant hereto unless Dealer or
Ford Credit establishes by a preponderance of evidence that such advances were
not made or were made in different amounts than as set forth in such statement.
2. Interest and Service and Insurance Flat Charges
All advances made by Ford Credit to or on behalf of Dealer pursuant
hereto shall bear interest from the date of advance by Ford Credit to the date
of repayment in good funds by Dealer at the rates established by Ford Credit
from time to time for Dealer; provided, however, that any amount not paid when
due hereunder shall bear interest at the rate of 15% per annum or the maximum
contract rate permitted by the law of the state where Dealer maintains his
business as indicated above, whichever is the lesser. In addition to such
interest, the financing of merchandise under the Plan shall be subject to
service and insurance flat charges established by Ford Credit from time to time
for Dealer. Ford Credit shall advise Dealer in writing from time to time of
changes in the interest rate and service and insurance flat charges applicable
to Dealer. Such changed rates and flat charges shall be effective from the date
stated in such notice; provided, however, that in the event any such notice
advises Dealer of an increase in any such rate or flat charge, Dealer shall have
the option of terminating this agreement by paying to Ford Credit the full
unpaid balance outstanding under Dealer's wholesale line of credit and all other
amounts due or to become due hereunder in good funds within ten calendar days
after the receipt of such notice by Dealer, in which event such increased rate
or flat charge shall not become effective.
3. Payments by Dealer
The aggregate amount outstanding from time to time of all advances made
by Ford Credit to or on behalf of Dealer pursuant hereto shall constitute an
obligation of Dealer, notwithstanding such advances are made from time to time,
and such amount, or so much thereof as may be demanded, together with Ford
Credit's interest and flat charges with respect thereto, shall be payable by
Dealer to Ford Credit upon demand. Notwithstanding that Ford Credit shall not
have demanded payment therefor, Dealer shall pay to Ford Credit, at or before
the time of sale of any merchandise financed under the Plan, the full unpaid
balance of any advance made by Ford Credit to or on behalf of Dealer with
respect to such merchandise. Dealer also shall pay to Ford Credit, upon demand,
the full amount of any rebate, refund or other credit received by Dealer with
respect to any merchandise financed by Ford Credit hereunder.
4. Ford Credit's Security Interest
As security for all advances now or hereafter made by Ford Credit to or
on behalf of Dealer pursuant hereto, and for the observance and performance of
all other obligations of Dealer to Ford Credit in connection with the wholesale
financing of merchandise for Dealer, Dealer hereby grants to Ford Credit a
purchase money security interest in all such merchandise now owned or hereafter
acquired by Dealer and a security interest in the proceeds, in whatever form, of
any sale or other disposition thereof and Dealer hereby assigns to Ford Credit
and grants to Ford Credit a security interest in all amounts that may now or
hereafter be payable to Dealer by the manufacturer, distributor or seller of
any such merchandise by way of rebate or refund of all or any portion of the
purchase price thereof.
5. Dealer's Possession and Sale of Merchandise
Dealer's possession of the merchandise financed hereunder shall be for
the sole purpose of storing and exhibiting the same for sale or lease in the
ordinary course of Dealer's business. Dealer shall keep such merchandise brand
new and subject to inspection by Ford Credit and free from all taxes, liens and
encumbrances, and any sum of money that may be paid by Ford Credit in release or
discharge of any taxes, liens or encumbrances on any such merchandise or on any
documents executed in connection therewith shall be paid by Dealer to Ford
Credit upon demand. Except as may be necessary to remove or transport the same
from a freight depot to Dealer's place of business, Dealer shall not use or
operate, or permit the use of operation of, any merchandise financed hereunder
for demonstration or otherwise without the express prior written consent of Ford
Credit in each case, and shall not in any event use such merchandise illegally,
improperly or for hire. Dealer shall not mortgage, pledge or loan any of such
merchandise, and shall not transfer or otherwise dispose of the same except by
sale or lease in the ordinary course of Dealer's business. Any and all proceeds
of any sale, lease or other disposition of such merchandise by Dealer shall be
received and held by Dealer in trust for Ford Credit and shall be fully,
faithfully and promptly accounted for and remitted by Dealer to Ford Credit to
the extent of Dealer's obligation to Ford Credit with respect to such
merchandise. As used in this paragraph 5, "sale in the ordinary course of
Dealer's business" shall include (i) a bona fide retail sale to a purchaser for
his own use at the fair market value of the merchandise sold, and (ii) an
occasional sale of such merchandise to another dealer at a price not less than
Dealer's cost of the merchandise sold, provided such sale is not a part of a
plan or scheme to liquidate all or any portion of Dealer's business, and "lease
in the ordinary course of Dealer's business" shall include only a bona fide
lease to a lessee for his own use at a fair rental value of the merchandise
leased.
<PAGE>
6. Risk of Loss and Insurance Requirements
Except to the extent of any insurance proceeds actually received by Ford
Credit with respect thereto under insurance obtained by Ford Credit pursuant to
the Plan, all merchandise financed hereunder shall be at Dealer's sole risk of
any loss or damage to the same. Dealer shall indemnify Ford Credit against all
claims for injury or damage to persons or property caused by the use, operation
or holding of such merchandise, and if requested to do so by Ford Credit, Dealer
shall maintain at its own expense liability insurance in connection therewith in
such form and amounts as Ford Credit may reasonably require from time to time.
In addition, Dealer shall insure all merchandise financed hereunder that is or
may be used for demonstration or operated for any other purpose against loss due
to collision, subject in each case to the deductible amounts and limitations set
forth in the Plan. If Dealer so elects, Ford Credit will obtain collision
insurance on Wholesale Demonstrators only, as defined in the Plan, and bill
Dealer therefor. Dealer hereby elects to provide collision insurance on such
Wholesale Demonstrators in the following manner:
[ ] Dealer hereby requests that Ford Credit obtain collision insurance at
Dealer's expense covering each motor vehicle for which Dealer requests Ford
Credit's permission to use as a Wholesale Demonstrator (as defined in the Plan)
subject to the deductible amounts and limitations set forth in the Plan.
[X] Dealer proposes to make its own arrangements for collision insurance on
Wholesale Demonstrators and agrees to advise Ford Credit at the time any motor
vehicle is placed in use if Dealer has obtained collision insurance on such
motor vehicle through its own carrier, in which event Dealer agrees to furnish
to Ford Credit in connection therewith acceptable evidence of such insurance.
If Dealer fails to furnish acceptable evidence of any insurance required
hereunder, Ford Credit may, but shall not be required to, obtain such insurance
at Dealer's expense.
7. Credits
All funds or other property belonging to Ford Credit and received by Dealer
shall be received by Dealer in trust for Ford Credit and shall be remitted to
Ford Credit forthwith. Ford Credit, at all times, shall have a right to offset
and apply any and all credits, monies or properties of Dealer in Ford Credit's
possession or control against any obligation of Dealer to Ford Credit.
8. Information Concerning Dealer
To induce Ford Credit to extend financing accommodations hereunder, Dealer
has submitted information concerning its business organization and financial
condition, and certifies that the same is complete, true and correct in all
respects and that the financial information contained therein and any that may
be furnished to Ford Credit from time to time hereafter does and shall fairly
present the financial condition of Dealer in accordance with generally accepted
accounting principles applied on a consistent basis. Dealer agrees to notify
Ford Credit promptly of any material change in its business
organization or financial condition or in any information relating thereto
previously furnished to Ford Credit. Dealer acknowledges and intends that Ford
Credit shall rely, and shall have the right to rely, on such information in
extending and continuing to extend financing accommodations to Dealer. Dealer
hereby authorizes Ford Credit from time to time and at all reasonable times to
examine, appraise and verify the existence and condition of all merchandise,
documents, commercial or other paper and other property in which Ford Credit has
or has had any title, title retention, lien, security or other interest, and all
of Dealer's books and records in any way relating to its business.
9. Default
In the event Dealer shall fail to promptly pay any amount now or hereafter
owning to Ford Credit as and when the same shall become due and payable or
Dealer shall fail to duly observe or perform any other obligation secured
hereby, or any representation made by Dealer to Ford Credit shall prove to have
been false or misleading in any material respect as of the date on which the
same was made, or a proceeding in bankruptcy, insolvency or receivership shall
be instituted by or against Dealer or Dealer's property, Ford Credit may take
immediate possession of all property in which it has a security interest
hereunder, without demand or other notice and without legal process. For this
purpose and in furtherance thereof, Dealer shall, if Ford Credit so requests,
assemble such property and make it available to Ford Credit at a reasonably
convenient place designated by Ford Credit, and Ford Credit shall have the
right, and Dealer hereby authorizes and empowers Ford Credit, its agents or
representatives, to enter upon the premises wherever such property may be and
remove same. In the event Ford Credit shall acquire possession of such
property or any portion thereof, as hereinbefore provided, Ford Credit may, in
its sole discretion (i) sell the same, or any portion thereof, after five days'
written notice at public or private sale for the account of Dealer, or (ii)
declare this agreement, all wholesale transactions and Dealer's obligations in
connection therewith to be terminated and cancelled and retain any sums of money
that may have been paid by Dealer in connection therewith, or (iii) enforce any
other remedy that Ford Credit may have under applicable law. Dealer agrees that
the sale by Ford Credit of any new and unused property repossessed by Ford
Credit to the manufacturer, distributor or seller thereof, or to any person
designated by such manufacturer, distributor or seller thereof, or to any person
designated by such manufacturer, distributor or seller, at the invoice cost
thereof to Dealer less any credits granted to Dealer with respect thereto and
reasonable costs of transportation and reconditioning, shall be deemed to be a
commercially reasonable means of disposing of the same. Dealer further agrees
that if Ford Credit shall solicit bids from three or more other dealers in the
type of property repossessed by Ford Credit hereunder, any sale by Ford Credit
of such property in bulk or in parcels to the bidder submitting the highest cash
bid therefor also shall be deemed to be a commercially reasonable means of
disposing of the same. Notwithstanding the foregoing, it is expressly understood
that such means of disposal shall not be exclusive, and that Ford Credit shall
have the right to dispose of any property repossessed hereunder by any
commercially reasonable means. Dealer agrees to pay reasonable attorneys' fees
and legal expenses incurred by Ford Credit in connection with the repossession
and sale of any such property. Ford Credit's remedies hereunder are cumulative
and may be enforced successively or concurrently.
10. General
Dealer waives the benefit of all homestead and exemption laws and agrees
that the acceptance by Ford Credit of any payment after it may have become due
or the waiver by Ford Credit of any other default shall not be deemed to alter
or affect Dealer's obligations or Ford Credit's right with respect to any
subsequent payment or default.
Neither this agreement, nor any other agreement between Dealer and Ford
Credit, nor any funds payable by Ford Credit to Dealer, shall be assigned by
Dealer without the express prior written consent of Ford Credit in each case.
Any provision hereof prohibited by any applicable law shall be ineffective
to the extent of such prohibition without invalidating the remaining provisions
hereof. Except as herein provided, no modification hereof may be made except by
a written instrument duly executed by, or pursuant to the express written
authority of, an executive officer of Ford Credit.
Dealer shall execute and deliver to Ford Credit promissory notes or other
evidences of Dealer's indebtedness hereunder, security agreements, trust
receipts, chattel mortgages or other security instruments and any other
documents which Ford Credit may reasonably request to confirm Dealer's
obligations to Ford Credit and to confirm Ford Credit's security interest in any
merchandise financed by Ford Credit under the Plan or in any other property as
provided hereunder, and in such event the terms and conditions hereof shall be
deemed to be incorporated therein. Ford Credit's security or other interest in
any such merchandise shall not be impaired by the delivery to Dealer of such
merchandise or of bills of lading, certificates of origin, invoices or other
documents pertaining thereto or by the payment by Dealer of any curtailment,
security or other deposit or portion of the amount financed. The execution
by Dealer or on Dealer's behalf of any document for the amount of any credit
extended shall be deemed evidence of Dealer's obligation and not payment
thereof. Ford Credit may, for in the name of Dealer, endorse and assign any
obligation transferred to Ford Credit by Dealer and any check or other medium of
payment intended to apply upon such obligation. Ford Credit may complete any
blank space and fill in omitted information on any document or paper furnished
to it by Dealer.
Unless the context otherwise clearly requires, the terms used herein shall
be given the same meaning as ascribed to them under the provisions of the
Uniform Commercial Code. Section headings are inserted for convenience only and
shall not affect any construction or interpretation of this agreement.
This agreement shall be interpreted in accordance with the laws of the
state of the Dealer's place of business indicated above.
11. Acceptance and Termination
Dealer waives notice of Ford Credit's acceptance hereof, and this agreement
shall be deemed accepted by Ford Credit at the time it shall first extend credit
to Dealer under the Plan and shall be binding on Dealer and Ford Credit and
their respective successors and assigns from the date thereof until terminated
by receipt of written notice by either party from the other, provided, however,
that any such termination shall not relieve either party from any obligation
incurred prior to the effective date thereof.
O. K. MARKS FORD, INC.
- ------------------------------
(DEALER'S EXACT BUSINESS NAME)
Witness or Attest: By /s/ O. K. Marks Title President
--------------- ---------
/s/ Katherine M. Goreth O. K. Marks
- -----------------------
<PAGE>
POWER OF ATTORNEY FOR WHOLESALE
KNOW ALL MEN BY THESE PRESENTS: That the undersigned dealer does hereby
make, constitute and appoint S. L. Owens, C.A. Glaub and E. O. Kero, ?? of
Dearborn, Michigan and each of them and any other officer or employe of Ford
Motor Credit Company, a Delaware corporation of Dearborn, Michigan, its true
and lawful attorneys with full power of substitution, for and in its name, stead
and behalf, to prepare, make, execute, acknowledge and deliver to Ford Motor
Credit Company, from time to time promissory notes or other evidences of
indebtedness, bearing such rate of interest as Ford Motor Credit Company may
require from time to time, and trust receipts, chattel mortgages and other title
retention or security instruments necessary or appropriate in connection ??
the wholesale financing by Ford Motor Credit Company of merchandise for the
undersigned dealer under the terms of the Ford Motor Credit Company including
the making of affidavits and the acknowledging of instruments, as if fully done
by the undersigned dealer, and each of the said attorneys hereby is further
authorized and empowered in the discharge of the power hereby conferred to
execute any instruments by means of either a manual, imprinted or other
facsimile signature or by completing a printed from to which an imprinted or
other facsimile signature is then affixed.
This Power of Attorney is executed by the undersigned dealer, to induce
Ford Motor Credit Company to make advances for merchandise to be acquired by the
undersigned dealer and recognizes that such advances are made to manufacturers,
distributors and other sellers of such merchandise at places other than the
undersigned dealer's place of business, and that it is impractical for the
undersigned dealer to execute the promissory notes, trust receipts, chattel
mortgages and other title retention or security instruments necessary or
appropriate in connection with such advances without unduly delaying the
delivery of such merchandise to the undersigned dealer. Accordingly, this Power
of Attorney may be revoked by the undersigned dealer only by notice in writing
addressed to Ford Motor Credit Company, Dearborn, Michigan by registered mail,
return receipt requested, stating an effective date on or after the receipt
thereof by Ford Motor Credit Company.
Dated this 29th day of June 1982.
Witness or Attest: O. K. MARKS FORD, INC.
----------------------------------
(DEALER'S EXACT BUSINESS NAME)
/s/ KATHERINE M. GORETH By /s/ O. K. MARKS Title President
- ------------------------ ---------------- ----------
O. K. Marks
State of Florida } ss.
County of Hillsborough}
On this 29th day of June 1982, before me, the undersigned Notary Public,
personally appeared O. K. Marks who acknowledged himself to
--------------------------
(PERSON SIGNING FOR DEALER)
be the President of O. K. MARKS FORD, INC., the grantor of the foregoing
-------------- ----------------------
(TITLE) (DEALER'S NAME)
Power of Attorney, and that he, being authorized so to do, executed the
foregoing Power of Attorney for the purposes therein contained, by signing the
name of the said grantor by himself in the capacity indicated.
WITNESS WHEREOF I have hereunto set may hand and official seal.
/s/ KATHERINE M. GORETH
- ----------------------------------
NOTARY PUBLIC
My commission expires Notary Public, State of Florida at Large (NOTARY'S
My Commission Expires June 25, 1986 SEAL)
------------------------------------------
CERTIFIED COPY OF RESOLUTION OF BOARD OF DIRECTORS
The undersigned hereby certifies that he is the Secretary
of O. K. MARKS FORD, INC., of 814 Cleveland Street, Clearwater, Florida 33515,
----------------------- ----------------------------------------------
(DEALER'S EXACT CORPORATE NAME) (DEALER'S ADDRESS)
and that the following is a true, correct and complete copy of resolutions
adopted by the board of directors of the said corporation at a meeting duly
called and held on June 29, 1982 at which a quorum was present and voting,
and that said resolutions are unchanged and are now in full force and effect:
RESOLVED, That the officers of this corporation be, and each hereby is,
authorized and empowered to execute and deliver on behalf of this corporation
an Application for Wholesale Financing to Ford Motor Credit Company of
Dearborn, Michigan in such form and upon such terms and conditions as the
said Ford Motor Credit Company may require, and to execute and deliver from time
to time promissory notes or other evidences of indebtedness, bearing such rate
of interest as the said Ford Motor Credit Company may require from time to
time, and trust receipts, chattel mortgages and other title retention or
security instruments as, and in such form as, the said Ford Motor Credit Company
may require, evidencing any financing extended by the said Ford Motor Credit
Company to this corporation under the terms of the Ford Motor Credit Company
Automotive Wholesale Plan.
FURTHER RESOLVED, That S. L. Owens, C. A. Glaub and E. O. Kero, all of Dearborn,
Michigan, and each of them and any other officer or employe of the said Ford
Motor Credit Company be and each of them hereby is constituted and appointed an
attorney-in-fact of this corporation for the purposes set forth in the Power of
Attorney presented to this board of directors this date, with full power of
substitution, and the officers of this corporation are, and each of them hereby
is, authorized and empowered to execute a formal Power of Attorney in such form.
FURTHER RESOLVED, That the officers of this corporation be, and each hereby is,
authorized and empowered to do all other things and to execute all ???
instruments and documents necessary or appropriate in the premises.
IN WITNESS WHEREOF I have hereunto set my hand and affixed the corporate seal
of the said corporation this 29th day of June, 1982.
/s/ JOHN C. VOGT, JR. (O. K. MARKS
- ------------------------ FORD, INC.
John C. Vogt, Jr. CORPORATE SEAL
(Secretary) GOES HERE)
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
Sonic Automotive, Inc.
We consent to the use in this Amendment No. 3 to the Registration Statement
relating to shares of Class A Common Stock of Sonic Automotive, Inc. on Form S-1
of (i) our report dated September 29, 1997 (October 16, 1997 as to Notes 1 and
2) on the combined financial statements of Sonic Automotive, Inc. and Affiliated
Companies as of December 31, 1995 and 1996 and for each of the three years in
the period ended December 31, 1996; (ii) our report dated August 7, 1997 on the
financial statements of Dyer & Dyer, Inc. as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996; (iii) our
report dated August 7, 1997 (October 16, 1997 as to Note 1) on the combined
financial statements of Bowers Dealerships and Affiliated Companies as of
December 31, 1995 and 1996 and for the years then ended; (iv) our report dated
August 7, 1997 (September 29, 1997 as to Note 1) on the combined financial
statements of Lake Norman Dodge, Inc. and Affiliated Companies as of and for the
year ended December 31, 1996; and (v) our report dated August 26, 1997 (October
15 as to Note 1) on the financial statements of Ken Marks Ford, Inc. as of and
for the year ended April 30, 1997 appearing in the Prospectus, which is a part
of this Amendment No. 3 to the Registration Statement, and to the reference to
us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
October 17, 1997
