<PAGE>
PROSPECTUS
5,000,000 Shares
(Sonic 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"). Of the 5,000,000 shares of Class A
Common Stock offered hereby, 4,000,000 shares are being offered for sale
initially in the United States and Canada by the U.S. Underwriters (as defined
herein) and 1,000,000 shares are being offered for sale initially in a
concurrent offering outside the United States and Canada by the International
Managers (as defined herein). The initial public offering price and the
aggregate underwriting discount per share are identical for both the U.S.
Offering and the International Offering. See "Underwriting."
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 Offerings, there has been no public market for the Class A
Common Stock. For a discussion of factors 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........................................... $12.00 $.84 $11.16
Total (3)........................................... $60,000,000 $4,200,000 $55,800,000
</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 U.S. Underwriters and the International
Managers options to purchase up to an additional 600,000 and 150,000 shares
of Class A Common Stock, respectively, in each case exercisable within 30
days of the date hereof and solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $69,000,000, $4,830,000 and
$64,170,000, 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 November 17, 1997.
------------------------
Merrill Lynch & Co.
NationsBanc Montgomery Securities, Inc.
Wheat First Butcher Singer
------------------------
The date of this Prospectus is November 10, 1997.
<PAGE>
(map 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
------------------------
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.
2
<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 4,000,000 shares of Class A Common Stock made hereby in the United
States and Canada by the U.S. Underwriters (the "U.S. Offering") and to the
concurrent offering of 1,000,000 shares of Class A Common Stock outside the
United States and Canada by the International Managers (the "International
Offering"), collectively. References to the "Underwriters" are to the U.S.
Underwriters and the International Managers, collectively. 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 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 are among those dealerships that 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
3
<PAGE>
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 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 five 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)
Class A Common Stock initially offered in:
The U.S. Offering (1)............................... 4,000,000 shares
The International Offering (1)...................... 1,000,000 shares
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 600,000 and 150,000 shares of Class A
Common Stock, respectively, that may be sold by the Company upon exercise of
the over-allotment options granted to the U.S. Underwriters and the
International Managers. 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 U.S.
Underwriters' and the International Managers' over-allotment options are
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 3,567 184 269
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 13,456 2,858 2,503
Provision for income taxes........... 27 723 2,118 2,176 1,924 5,360 1,093 916
-------- -------- -------- -------- -------- -------- -------- --------
Income before minority interest...... 2,533 2,591 3,691 3,260 3,097 8,096 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 $ 8,096 $ 1,724 $ 1,540
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Net income per share (4)............. $ 0.72
--------
--------
<CAPTION>
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.............. 1,872
Other income......................... 1,247
--------
Income before income taxes and
minority interest.................. 7,321
Provision for income taxes........... 2,741
--------
Income before minority interest...... 4,580
Minority interest in earnings (loss)
of subsidiary...................... --
--------
Net income........................... $ 4,580
--------
--------
Net income per share (4)............. $ 0.41
--------
--------
</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 June 30, 1997
December 31, ----------------------------
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 41,630
Total liabilities............................................................ 84,367 91,978 212,892
Minority interest............................................................ 314 -- --
Stockholders' equity......................................................... 26,295 28,406 82,247
</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.
RECENT DEVELOPMENTS
The Company's unaudited total revenues and gross profit for the nine months
ended September 30, 1997 were $339.8 million and $39.2 million, respectively,
representing increases of $56.4 million or 19.9% and $5.2 million or 15.4%,
respectively, from the comparable 1996 period. These increases were primarily
due to increases in sales from retail vehicles and parts, service, collision and
repair services, along with additional revenues from the acquisitions of the
Fort Mill Chrysler-Plymouth-Dodge, Lake Norman Chrysler-Plymouth-Jeep and Lake
Norman Dodge dealerships. Operating income and net income for the nine months
ended September 30, 1997 were $8.7 million and $2.5 million, respectively,
representing increases of $0.8 million or 10.0% and $46,000 or 1.9%,
respectively, primarily due to the increase in gross profit and the stability of
selling, general and administrative expenses as a percentage of total revenues.
Total revenues and gross profit for the third quarter ended September 30,
1997 were $127.1 million and $14.8 million, respectively, representing increases
of $33.3 million or 35.4% and $3.3 million or 29.0%, respectively, from the
comparable 1996 period. These increases were primarily due to increases in sales
from retail vehicles and parts, service, collision and repair services, along
with additional revenue from the acquisitions of the Fort Mill
Chrysler-Plymouth-Dodge, Lake Norman Chrysler-Plymouth-Jeep and Lake Norman
Dodge dealerships. Operating income and net income for the quarter ended
September 30, 1997 were $3.2 million and $0.9 million, respectively,
representing increases of $0.7 million or 30.4% and $0.2 million or 33.4%,
respectively, primarily due to the increase in gross profit and a decrease in
selling, general and administrative expenses as a percentage of total revenues.
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 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.
9
<PAGE>
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, 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
10
<PAGE>
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; Possible
Inability 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. 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. After consummation of the Offering, Sonic
Financial will be required at the time the
11
<PAGE>
borrowing limit under the Revolving Facility is increased 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 (including the proceeds, if any,
from the exercise of the Underwriters' over-allotment option). In addition, Mr.
Smith may be required to continue his guarantee, provide additional credit
support or make additional debt or equity contributions to the Company (to the
extent the Company does not otherwise receive a minimum amount of net proceeds
from the Offering). 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;
Possible Inability 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 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
12
<PAGE>
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" above, 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 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.
13
<PAGE>
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."
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
14
<PAGE>
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 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
15
<PAGE>
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.
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.
16
<PAGE>
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 was 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 $11.00 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 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."
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<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 five 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).................................................. $ 8.0
The Revolving Facility..................................................... 26.0
The Bowers Note (as defined below)......................................... 4.0
Class A Common Stock offered hereby(b)..................................... 53.8
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)
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- ---------------
(a) The Company initially borrowed $20 million under this facility to fund the
Lake Norman Acquisition and the Williams Acquisition, approximately $12.0
million of which is anticipated to be repaid with the proceeds of the
Offering.
(b) Represents net proceeds.
(c) Pursuant to the Ken Marks Acquisition, the Lake Norman Acquisition, the
Bowers 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 Company's
promissory notes that will be payable in 28 equal quarterly installments and
will bear interest at NationsBank's
19
<PAGE>
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
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.
20
<PAGE>
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 $41.0 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 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; Possible
Inability to Refinance Existing Debt" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
21
<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 approximately $53.8 million ($62.2 million if
the Underwriters' over-allotment option is exercised in full), 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 in the aggregate amount of approximately $38.3 million, 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 $12.0 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."
22
<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 $ 41,630
------- ------------
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 68,168
Retained earnings and members' and partners' equity................................................. 14,023 14,064
Unrealized loss on marketable equity securities..................................................... (97) (97)
------- ------------
Total stockholders' equity....................................................................... 28,406 82,247
------- ------------
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 has been effected in the form of a stock dividend).
23
<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 estimated $53.8 million of net proceeds from the Offering, pro forma net
tangible book value of the Company at June 30, 1997 would have been $1.00 per
share. This represents an immediate increase in pro forma net tangible book
value of $7.81 per share to existing stockholders and an immediate dilution of
$11.00 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>
Initial public offering price per share............................................... $12.00
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......................................................................... 7.81
--------
Pro forma net tangible book value per share after giving effect to the Offering....... 1.00
------
Dilution per share to new investors................................................... $11.00
------
------
</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>
Shares Purchased Total Consideration Average
--------------------- ---------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).......................................... 6,250,000 55.6% $16,604,170 21.7% $ 2.66
New investors (2).................................................. 5,000,000 44.4 60,000,000 78.3 12.00
---------- ------- ----------- -------
Total......................................................... 11,250,000 100.0% $76,604,170 100.0% $ 6.81
---------- ------- ----------- -------
---------- ------- ----------- -------
</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, $69.0 million, 80.6% and $7.13, respectively.
24
<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)
25
<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.
26
<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.
27
<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)
2,678(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 2,871
Provision for income taxes.... 1,924 (30)(9) 61 546 955 1,233(18)
1,627(19)
79(20)
(955)(21)
---------- ----------- ------------- ----------- --------- ------- ---------------
Income before minority
interest.................... 3,097 (45) 1,273 245 730 2,030 887
Minority interest in earnings
of subsidiary............... 114 (114)(8)
---------- ----------- ------------- ----------- --------- ------- ---------------
Net income.................... $ 2,983 $ 69 $ 1,273 $ 245 $ 730 $ 2,030 $ 887
---------- ----------- ------------- ----------- --------- ------- ---------------
---------- ----------- ------------- ----------- --------- ------- ---------------
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).... 3,567
Other income.................. 2,222
----------- ------------
Income before income taxes and
minority interest........... (201) 13,456
Provision for income taxes.... (80)(23) 5,360
----------- ------------
Income before minority
interest.................... (121) 8,096
Minority interest in earnings
of subsidiary...............
----------- ------------
Net income.................... $ (121) $ 8,096
----------- ------------
----------- ------------
Pro forma net income per
share(7).................... $ 0.72
------------
------------
Weighted average shares
outstanding (000's)......... 11,250
------------
------------
</TABLE>
28
<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 1,339(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 1,091
Provision for income taxes... 916 (15)(9) 31 147 362(18)
1,285(19)
83(20)
--------- -------------- ------------- ----------- -------- ------ -----------
Income before minority
interest................... 1,587 (21) 1,405 736 208 1,407 (639)
Minority interest in earnings
of subsidiary.............. 47 (47)(8)
--------- -------------- ------------- ----------- -------- ------ -----------
Net income................... $ 1,540 $ 26 $ 1,405 $ 736 $ 208 $1,407 $ (639)
--------- -------------- ------------- ----------- -------- ------ -----------
--------- -------------- ------------- ----------- -------- ------ -----------
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)........................ 1,872
Other income................. 1,247
----------- -----------------
Income before income taxes
and minority interest...... (171) 7,321
Provision for income taxes... (68) (23) 2,741
----------- -----------------
Income before minority
interest................... (103) 4,580
Minority interest in earnings
of subsidiary..............
----------- -----------------
Net income................... $ (103) $ 4,580
----------- -----------------
----------- -----------------
Pro forma net income per
share (7).................. $ 0.41
-----------------
-----------------
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)
29
<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)
30
<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 $31.5
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 the per share price of the Offering of $12.00.
(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)
31
<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%.
32
<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)
31,500(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 (46,983)
Property and equipment, net.............. 13,270 4,106 567 489 1,156 (2,311)(4)
61,550(2)
Goodwill, net............................ 9,463 8,286 (8,286)(5)
Other assets............................. 263 658(2) 462 14 297
-------- ----------- ----------- --------- ---------- --------
Total assets....................... $120,384 $54,192 $30,053 $20,918 $ 15,322 $ 3,970
-------- ----------- ----------- --------- ---------- --------
-------- ----------- ----------- --------- ---------- --------
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)
31,500(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 6,817(3)
partners' equity..................... (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 $ 3,970
equity..................................
-------- ----------- ----------- --------- ---------- --------
-------- ----------- ----------- --------- ---------- --------
<CAPTION>
Pro Forma
Adjustments for
Assets the Offering Total
--------------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.............. $ 53,800(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............... 50,300 205,155
Property and equipment, net.............. 17,277
Goodwill, net............................ 71,013
Other assets............................. 1,694
--------------- --------
Total assets....................... $ 50,300 $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........................... 41,630
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........................ 53,750(7) 68,168
Treasury stock.........................
Retained earnings and members' and 14,064
partners' equity.....................
Unrealized loss on marketable (97)
equity securities....................
--------------- --------
Total stockholders' equity......... 53,800 82,247
--------------- --------
Total liabilities and stockholders' $ 50,300 $295,139
equity..................................
--------------- --------
--------------- --------
</TABLE>
(footnotes on following page)
33
<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 at the per
share price of the Offering of $12.00, 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 have been shown as a non-current liability
in the accompanying pro forma combined and consolidated balance sheet based
upon the anticipated terms of the Revolving Facility under the Maximum Loan
Commitment.
(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.
34
<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
35
<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 $3.0 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 (as defined herein),
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.
36
<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
37
<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.
38
<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. These manufacturer purchase discounts are standard
in the industry, typically occur on all new vehicle purchases, and are not used
to offset the related floor plan liability. These discounts are aggregated and
generally paid to the Company by the manufacturer on a quarterly basis. The
related floor plan liability becomes due as vehicles are sold.
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.
39
<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 a secured, revolving acquisition line of
credit (the "Revolving Facility") from Ford Motor Credit 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") pursuant to a commitment from Ford Motor
Credit. 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"). Under the terms of the Revolving Facility governing
the Initial Loan Commitment, the Revolving Facility will mature on December 15,
1997, unless the Revolving Facility is increased to the Maximum Loan Commitment.
After the increase to the Maximum Loan Commitment, 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, including that the Company receive a minimum amount of net
proceeds from the Offering. There is no assurance that this condition (which
would require the Underwriters' exercise of their over-allotment option, which
may not occur) will be met or that it will be waived or otherwise modified by
Ford Motor Credit. 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. After consummation of
the Offering, Sonic Financial will be required at the time the Revolving
Facility is increased to the Maximum Loan Commitment 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 (including the proceeds, if any, from
the exercise of the Underwriters' over-allotment option). In addition, Mr. Smith
may be required to continue his guarantee, provide additional credit support or
make additional debt or equity contributions to the Company (to the extent the
Company does not otherwise receive a minimum amount of net proceeds from the
Offering). 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. 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;
Possible Inability 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,
40
<PAGE>
(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, 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; Possible Inability 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.
41
<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 are among those dealerships that 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.
42
<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.
43
<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
44
<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
45
<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>
46
<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
47
<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
Ended
Year Ended June 30,
December 31, 1996 (1) 1997 (1)
---------------------------- -----------
Percentage of
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>
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>
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
48
<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>
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.
49
<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>
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>
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.
50
<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."
51
<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.
52
<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."
53
<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
54
<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."
55
<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)
Nelson Bowers Ford................... Lease Cleveland Properties LLC (1) $ 14,000 2011(3 ) Main Bldg.
717 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
Cleveland Lease Robert G. Card, Jr. $ 8,900 Month to ) Main Bldg.
Chrysler-Plymouth-Jeep-Eagle....... Month(3
2496 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
Nelson Bowers Ford................... 17,750 5.60
717 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
Cleveland 19,725 1.40
Chrysler-Plymouth-Jeep-Eagle.......
2496 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)
56
<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.
57
<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.
58
<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
59
<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.
60
<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.
61
<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 price 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
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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
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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.
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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"). After
consummation of the Offering, Sonic Financial, a company controlled by Mr.
Smith, will be required at the time the Revolving Facility is increased to the
Maximum Loan Commitment 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 (including the proceeds, if
any, from the exercise of the Underwriters' over-allotment option). In addition,
Mr. Smith may be required to continue his guarantee, provide additional credit
support or make additional debt or equity contributions to the Company (to the
extent the Company does not otherwise receive a minimum amount of net proceeds
from the Offering). 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.
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Current minimum rent payments are $409,000 annually ($34,083 monthly) through
1999, and will be decreased to $340,833 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 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.
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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 Volvo 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
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.
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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.
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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
Common Stock
Number of Shares Number of Shares ----------------------
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."
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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,
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<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.
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<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
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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."
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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) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option to purchase, right or warrant 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, directly or indirectly, the
economic consequences of ownership of the Class A Common Stock, whether any such
swap or transaction described above is to be settled by delivery of Class A
Common Stock or such other securities, in cash or otherwise, 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.
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CERTAIN UNITED STATES FEDERAL TAX
CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax considerations with respect to the ownership and
disposition of Class A Common Stock applicable to Non-U.S. Holders. In general,
a "Non-U.S. Holder" is any holder other than (i) a citizen or resident of the
United States, (ii) a corporation or partnership created or organized in the
United States or under the laws of the United States or of any state (other than
any partnership treated as foreign under U.S. Treasury regulations), or (iii) an
estate or trust, the income of which is includable in gross income for United
States federal income tax purposes regardless of its source. This discussion is
based on current law, which is subject to change (possibly with retroactive
effect), and is for general information only. This discussion does not address
aspects of United States federal taxation other than income and estate taxation
and does not address all aspects of income and estate taxation or any aspects of
state, local or non-United States taxes, nor does it consider any specific facts
or circumstances that may apply to a particular Non-U.S. Holder (including
certain U.S. expatriates), and including the fact that in the case of a Non-U.S.
Holder that is a partnership, the U.S. tax consequences of holding and disposing
of shares of Common Stock may be affected by certain determinations made at the
partner level. This discussion also does not consider the tax consequences to
any person who is a shareholder, partner or beneficiary of a holder of Common
Stock. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES
INCOME AND OTHER TAX CONSIDERATIONS OF HOLDING AND DISPOSING OF SHARES OF CLASS
A COMMON STOCK.
An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a non-resident alien) by virtue of being present
in the United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three year period ending in the current
calendar year (counting for such purposes all of the days present in the current
year, one-third of the days present in the immediately preceding year, and
one-sixth of the days present in the second preceding year). Resident aliens are
subject to U.S. federal income tax as if they were U.S. citizens.
Dividends
In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate of the gross amount (or a lower rate
prescribed by an applicable income tax treaty) unless the dividends are either
(i) effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States, or (ii) if certain income tax treaties apply,
attributable to a permanent establishment in the United States maintained by the
Non-U.S. Holder. Dividends effectively connected with such a United States trade
or business or attributable to such a United States permanent establishment
generally will not be subject to United States withholding tax if the Non-U.S.
Holder files certain forms, including Internal Revenue Service Form 4224, with
the payor of the dividend, and generally will be subject to United States
federal income tax on a net income basis, in the same manner as if the Non-U.S.
Holder were a resident of the United States. A Non-U.S. Holder that is a
corporation may be subject to an additional branch profits tax at a rate of 30%
(or such lower rate as may be specified by an applicable income tax treaty) on
the repatriation from the United States of its "effectively connected earnings
and profits," subject to certain adjustments. To determine the applicability of
a tax treaty providing for a lower rate of withholding, dividends paid to an
address in a foreign country are presumed under current Treasury regulations to
be paid to a resident of that country absent knowledge to the contrary. Recently
finalized Treasury regulations (the "Final Regulations"), which are to be
effective for payments made after December 31, 1998, however, generally would
require Non-U.S. Holders to file an I.R.S. Form W-8 to obtain the benefit of any
applicable tax treaty providing for a lower rate of withholding tax on
dividends. In addition, under the Final Regulations, in the case of Common Stock
held by a foreign partnership, (i) the certification requirements would
generally be applied to each partner, and (ii) the partnership would be required
to provide certain information, including a U.S. taxpayer identification number.
A look through rule will apply in the case of tiered partnerships. A Non-U.S.
Holder that is eligible for a reduced rate of U.S. withholding tax pursuant to a
tax treaty may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund with the Internal Revenue Service.
Gain on Sale or Other Disposition of Class A Common Stock
In general, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the sale or other disposition of such
holder's shares of Class A Common Stock unless (i) the gain either is effective
connected with a trade or business carried on by the non-U.S. Holder within the
United States or, if certain income tax treaties apply, is attributable to a
permanent establishment in the United States maintained by the Non-U.S. Holder
(and, in either case, the branch profits tax discussed above may also apply if
the Non-U.S. Holder is a corporation); (ii) the Non-U.S. Holder is an individual
who holds shares of Class A Common Stock as a capital asset and is present in
the United States for 183 days or
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more in the taxable year of disposition, and either (a) such individual has a
"tax home" (as defined for United States federal income tax purposes) in the
United States (unless the gain from the disposition is attributable to an office
or other fixed place of business maintained by such Non-U.S. Holder in a foreign
country and such gain has been subject to a foreign income tax equal to at least
10% of the gain derived form such disposition), or (b) the gain is attributable
to an office or other fixed place of business maintained by such individual in
the United States; or (iii) the Company is or has been a United States real
property holding corporation (a "USRPHC") for United States federal income tax
purposes (which the Company does not believe that it is or is likely to become)
at any time within the shorter of the five year period preceding such
disposition or such Non-U.S. Holder's holding period. If the Company were or
were to become a USRPHC at any time during this period, gains realized upon a
disposition of Class A Common Stock by a Non-U.S. Holder which did not directly
or indirectly own more than 5% of the Class A Common Stock during this period
generally would not be subject to United States federal income tax, provided
that the Class A Common Stock is regularly traded on an established securities
market.
Estate Tax
Class A Common Stock owned or treated as owned by an individual who is not
a citizen or resident (as defined for United States federal estate tax purposes)
of the United States at the time of death will be includable in the individual's
gross estate for United States federal estate tax purposes unless an applicable
estate tax treaty provides otherwise, and therefore may be subject to United
States federal estate tax.
Backup Withholding, Information Reporting and Other Reporting Requirements
The Company must report annually to the Internal Revenue Service and to
each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced or eliminated by an applicable tax treaty.
Copies of this information also may be made available under the provisions of a
specific treaty or agreement with the tax authorities in the country in which
the Non-U.S. Holder resides or is established.
Under certain circumstances, the IRS requires additional information
reporting and "backup withholding" at a rate of 31% with respect to certain
payments on Common Stock. Non-U.S. Holders of Common Stock generally would be
exempt from these IRS information reporting requirements and backup withholding
with respect to dividends payable on Common Stock.
Under the Final Regulations (which are to be effective for payments made
after December 31, 1998) as a general matter, a withholding agent (whether U.S.
or foreign) must ascertain whether the payee is a U.S. or foreign person.
Determinations of payee status are generally made at each level of the chain of
payment, until, ultimately, the payment is made to the beneficial owner. In the
case of dividends and gross proceeds from publicly traded stocks, special rules
address the treatment of payments to foreign intermediaries (nominees, agents,
etc.) which govern when and how intermediaries can certify as to payee status on
behalf of a beneficial owner. If, under the Final Regulations, the withholding
agent must treat the payee as a foreign person, the withholding provisions
discussed above under "Dividends" (i.e., the 30% withholding tax regime) will
apply. Generally, to the extent such withholding is required, or is excused
based on documentation that must be provided, the information reporting and the
backup withholding requirements will not apply. See the discussion above under
"Dividends" with respect to the rules applicable to foreign partnerships under
the Final Regulations.
Under current regulations, the payment of proceeds from the disposition of
Class A Common Stock to or through a United States office of a broker will be
subject to information reporting and backup withholding unless the beneficial
owner, under penalties of perjury, certifies, among other things, its status as
a Non-U.S. Holder or otherwise establishes an exemption. The payment of proceeds
from the disposition of Class A Common Stock to or through a non-U.S. office of
a non-U.S. broker generally will not be subject to backup withholding and
information reporting. However, in the case of proceeds from a disposition of
Class A Common Stock paid to or through a non-U.S. office of a broker that is
(i) a United States person, (ii) a "controlled foreign corporation" for United
States federal income tax purposes, or (iii) a foreign person 50% or more of
whose gross income from certain periods is effectively connected with a United
States trade or business, information reporting (but not backup withholding)
will apply unless the broker has documentary evidence in its files that the
owner is a Non-U.S. Holder (and the broker has no actual knowledge to the
contrary).
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder will be refunded or
credited against the Non-U.S. Holder's United States federal income tax
liability, if any, provided that the required information is furnished to the
Internal Revenue Service in a timely manner.
76
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. are
acting as representatives (the "U.S. Representatives") of each of the
Underwriters named below (the "U.S. Underwriters"). Subject to the terms and
conditions set forth in a U.S. purchase agreement (the "U.S. Purchase
Agreement") among the Company and the U.S. Underwriters, and concurrently with
the sale of 1,000,000 shares of Class A Common Stock to the International
Managers (as defined below), the Company has agreed to sell to the U.S.
Underwriters, and each of the U.S. Underwriters severally and not jointly has
agreed to purchase from the Company, the number of shares of Class A Common
Stock set forth opposite its name below.
<TABLE>
<CAPTION>
Number of
U.S. Underwriter Shares
----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................................................ 885,000
NationsBanc Montgomery Securities, Inc........................................................................... 885,000
Wheat, First Securities, Inc..................................................................................... 885,000
BancAmerica Robertson Stephens................................................................................... 75,000
J.C. Bradford & Co............................................................................................... 75,000
Donaldson, Lufkin & Jenrette Securities Corporation.............................................................. 75,000
Furman Selz LLC.................................................................................................. 75,000
Goldman, Sachs & Co.............................................................................................. 75,000
Interstate/Johnson Lane Corporation.............................................................................. 75,000
J.P. Morgan Securities Inc....................................................................................... 75,000
Morgan Stanley & Co. Incorporated................................................................................ 75,000
The Robinson-Humphrey Company, LLC............................................................................... 75,000
Smith Barney Inc................................................................................................. 75,000
Stephens Inc..................................................................................................... 75,000
Sanford C. Bernstein & Co., Inc.................................................................................. 40,000
Dain Bosworth Incorporated....................................................................................... 40,000
Doft & Co., Inc.................................................................................................. 40,000
EVEREN Securities, Inc........................................................................................... 40,000
Allen C. Ewing & Co.............................................................................................. 40,000
First Analysis Securities Corporation............................................................................ 40,000
Morgan Keegan & Company, Inc..................................................................................... 40,000
Pacific Crest Securities......................................................................................... 40,000
Rauscher Pierce Refsnes, Inc..................................................................................... 40,000
Raymond James & Associates, Inc.................................................................................. 40,000
RedWine & Company, Inc........................................................................................... 40,000
Scott & Stringfellow, Inc........................................................................................ 40,000
The Williams Capital Group, L.P.................................................................................. 40,000
----------
Total............................................................................................... 4,000,000
----------
----------
</TABLE>
The Company has also entered into an international purchase agreement (the
"International Purchase Agreement") with certain underwriters outside the United
States and Canada (the "International Managers" and, together with the U.S.
Underwriters, the "Underwriters") for whom Merrill Lynch International,
NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. are
acting as lead managers (the "Lead Managers"). Subject to the terms and
conditions set forth in the International Purchase Agreement, and concurrently
with the sale of 4,000,000 shares of Class A Common Stock to the U.S.
Underwriters pursuant to the U.S. Purchase Agreement, the Company has agreed to
sell to the International Managers, and the International Managers severally and
not jointly have agreed to purchase from the Company, an aggregate of 1,000,000
shares of Class A Common Stock. The initial public offering price per share and
the underwriting discount per share of Class A Common Stock are identical under
the U.S. Purchase Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Class A Common Stock being sold
pursuant to each such agreement if any of the shares of Class A Common Stock
being sold pursuant to such agreement are purchased. Under certain
circumstances, under the U.S. Purchase Agreement
77
<PAGE>
and the International Purchase Agreement, the commitments of non-defaulting
Underwriters may be increased. The closings with respect to the sale of shares
of Class A Common Stock to be purchased by the U.S. Underwriters and
International Managers are conditioned upon one another.
The U.S. Representatives have advised the Company that the U.S.
Underwriters 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 $.45 per share of Class A Common Stock. The U.S. Underwriters may
allow, and such dealers may reallow, a discount not in excess of $.10 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) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option to purchase, right or warrant 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, directly or indirectly, the
economic consequence of ownership of the Class A Common Stock, whether any such
swap or transaction described above is to be settled by delivery of Class A
Common Stock or such securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the Underwriters, 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 U.S. Underwriters, exercisable
within 30 days after the date of this Prospectus, to purchase up to an aggregate
of 600,000 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 U.S. Underwriters may exercise this option only to
cover over-allotments, if any, made on the sale of the Class A Common Stock
offered hereby. To the extent that the U.S. Underwriters exercise this option,
each U.S. Underwriter will be obligated, subject to certain conditions, to
purchase a number of additional shares of Class A Common Stock proportionate to
such U.S. Underwriter's initial amount reflected in the foregoing table. The
Company also has granted an option to the International Managers, exercisable
within 30 days after the date of this Prospectus, to purchase up to an aggregate
of 150,000 additional shares of Class A Common Stock to cover over-allotments,
if any, on terms similar to those granted to the U.S. Underwriters.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares of
Class A Common Stock to each other for purposes of resale at the initial public
offering price, less an amount not greater than the selling concession. Under
the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer
to whom they sell shares of Class A Common Stock will not offer to sell or sell
shares of Class A Common Stock to persons who are non-U.S. or non-Canadian
persons or to persons they believe intend to resell to persons who are non-U.S.
or non-Canadian persons, and the International Managers and any dealer to whom
they sell shares of Class A Common Stock will not offer to sell or sell shares
of Class A Common Stock to U.S. persons or to Canadian persons or to persons
they believe intend to resell to U.S. or Canadian persons, except in the case of
transactions pursuant to the Intersyndicate Agreement.
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 was
determined by negotiation among the Company, the U.S. Representatives and the
Lead Managers. 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 U.S. Representatives and the Lead Managers
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, 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
78
<PAGE>
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 U.S. Underwriters and the
International Managers against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments which the U.S. Underwriters and
the International Managers 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 U.S.
Underwriters and the International Managers have undertaken to sell lots of 100
or more shares to a minimum of 2,000 beneficial holders.
The U.S. Underwriters and the International Managers 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 U.S. 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 U.S.
Representatives may reduce that short position by purchasing Class A Common
Stock in the open market. The U.S. Representatives may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
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 U.S. 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 Acquisition. 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 Class A 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.
79
<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.
80
<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-17
FINANCIAL STATEMENTS:
Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997...................................... F-18
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-19
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-20
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-21
Notes to Financial Statements.................................................................................... F-22
BOWERS DEALERSHIPS AND AFFILIATED COMPANIES:
INDEPENDENT AUDITORS' REPORT........................................................................................ F-26
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997............................. F-27
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-28
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-29
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-30
Notes to Combined Financial Statements........................................................................... F-31
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES:
INDEPENDENT AUDITORS' REPORT........................................................................................ F-38
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets at December 31, 1996 and unaudited at June 30, 1997...................................... F-39
Combined Statements of Income for the year ended December 31, 1996 and unaudited for the six months ended June
30, 1996 and 1997............................................................................................... F-40
Combined Statements of Stockholders' Equity for the year ended December 31, 1996 and unaudited for the six months
ended June 30, 1997............................................................................................. F-41
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-42
Notes to Combined Financial Statements........................................................................... F-43
KEN MARKS FORD, INC.:
INDEPENDENT AUDITORS' REPORT........................................................................................ F-47
FINANCIAL STATEMENTS:
Balance Sheets at April 30, 1997 and unaudited at July 31, 1997.................................................. F-48
Statements of Income for the year ended April 30, 1997 and unaudited for the three months ended July 31, 1996 and
1997............................................................................................................ F-49
Statements of Stockholders' Equity for the year ended April 30, 1997 and unaudited for the three months ended
July 31, 1997................................................................................................... F-50
Statements of Cash Flows for the year ended April 30, 1997 and unaudited for the three months ended July 31, 1996
and 1997........................................................................................................ F-51
Notes to Financial Statements.................................................................................... F-52
</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
October 16, 1997
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>
Class B Unrealized Loss
Common Stock (Note 1) on Marketable
------------------------- 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. See Note 5 for additional
information regarding this line of credit.
In conjunction with the Ken Marks Acquisition, the Company obtained an
additional line of credit with an initial aggregate principal availability of
$26 million maturing (unless extended by the lender) on October 15, 1999. The
Company borrowed $25.5 million against this line to fund the purchase of Ken
Marks. See note 5 for additional information regarding this line of credit.
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. These manufacturer purchase discounts are standard in the industry,
typically occur on all new vehicle purchases, and are not used to offset the
related floor plan liability. These discounts are aggregated and generally paid
by the manufacturer on a quarterly basis. The related floor plan liability
becomes due as vehicles are sold.
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>
On August 28, 1997 the Company obtained a short term line of credit in an
aggregate principal amount of up to $20 million that matures no later than
February 15, 1998. This line of credit is payable upon maturity, bears interest
at a fixed rate of
F-12
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued
5. LONG-TERM DEBT -- Continued
7.75% per annum and is secured by certain assets of the Company's Chairman and
Chief Executive Officer. The Company borrowed $18.2 million on this line of
credit in connection with the Lake Norman Acquisition.
On October 15, 1997 the Company obtained a two year line of credit with an
initial aggregate principal availability of $26 million that matures (unless
extended by the lender) on October 15, 1999. This revolving line of credit is
payable upon maturity, bears interest at a variable rate equal to the prime rate
(currently 8.5% per annum) and is secured by certain assets of the Company's
Chairman and Chief Executive Officer. The Company borrowed $25.5 million on this
line of credit in connection with the Ken Marks Acquisition.
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>
F-13
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued
6. INCOME TAXES -- Continued
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.
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 ($2,123,328 as of June 30, 1997). In
preparation for the Reorganization, a demand promissory note by Sonic Financial
evidencing certain of 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
F-14
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued
7. RELATED PARTIES -- Continued
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 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 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.
F-15
<PAGE>
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued
9. EMPLOYEE BENEFIT PLANS -- Continued
On October 9, 1997 the Company adopted the 1997 Stock Option Plan (the
"Plan"). Under the provisions of the Plan, options to purchase 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. 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. On or before consummation of the
Offering, the Board of Directors intends to grant options to purchase an
aggregate of 587,509 shares of Class A Common Stock under the Plan. 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.
On October 9, 1997 the Company adopted 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 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. Options will expire on the last
exercise date of the calendar year in which granted. A total of 150,000 shares
of Class A Common Stock have been reserved for purchase under the ESPP.
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-16
<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-17
<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-18
<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-19
<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-20
<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 June
Year ended December 31, 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-21
<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 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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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 Six months ended June 30,
December 31, --------------------------
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-40
<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>
Common Stock Total
-------------------- 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-41
<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>
Six months ended June 30,
Year ended --------------------------
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-42
<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-43
<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 generally reduced by the manufacturer's purchase discounts and such reduction
is not reflected in the related floor plan
F-44
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOORPLAN -- Continued
liability. These manufacturer purchase discounts are standard in the industry,
typically occur on all new vehicle purchases, and are not used to offset the
related floor plan liability. These discounts are aggregated and generally paid
by the manufacturer on a quarterly basis. The related floor plan liability
becomes due as vehicles are sold.
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
F-45
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
5. OPERATING LEASES -- Continued
insurance relating to these facilities. Total payments made to related parties
under these leases in 1996 were $786,000 exclusive of operating costs.
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-46
<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-47
<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-48
<PAGE>
KEN MARKS FORD, INC.
STATEMENTS OF INCOME
Year ended April 30, 1997 and three months ended July 31, 1996 and 1997
<TABLE>
<CAPTION>
Three months ended July
Year Ended 31,
April 30, --------------------------
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-49
<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-50
<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>
Three months ended July 31,
Year ended ---------------------------
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>
1997
---------------------------
<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-51
<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-52
<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. These
manufacturer purchase discounts are standard in the industry, typically occur on
all new vehicle purchases, and are not used to offset the related floor plan
liability. These discounts are aggregated and generally paid by the manufacturer
on a quarterly basis. The related floor plan liability becomes due as vehicles
are sold.
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>
F-53
<PAGE>
KEN MARKS FORD, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
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.
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-54
<PAGE>
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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................................... 18
The Acquisitions..................................... 18
Use of Proceeds...................................... 22
Dividend Policy...................................... 22
Capitalization....................................... 23
Dilution............................................. 24
Selected Combined And Consolidated Financial Data.... 25
Pro Forma Combined and Consolidated Financial Data... 27
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 35
Business............................................. 42
Management........................................... 58
Certain Transactions................................. 65
Principal Stockholders............................... 69
Description of Capital Stock......................... 70
Shares Eligible for Future Sale...................... 74
Certain United States Federal Tax Considerations for
Non-United States Holders.......................... 75
Underwriting......................................... 77
Legal Matters........................................ 80
Experts.............................................. 80
Additional Information............................... 80
Index to Financial Statements........................ F-1
</TABLE>
Until December 5, 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 logo appears here)
Class A Common Stock
-----------------
PROSPECTUS
-----------------
Merrill Lynch & Co.
NationsBanc Montgomery Securities, Inc.
Wheat First Butcher Singer
November 10, 1997
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<PAGE>
