<PAGE>
As filed with the Securities and Exchange Commission on November 3, 1998
Registration No. 333-64397
Registration Nos. 333-64397-001 through 333-64397-044
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO.1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SONIC AUTOMOTIVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
Delaware 5511 56-2010790
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
5401 East Independence Boulevard
P.O. Box 18747
Charlotte, North Carolina 28212
Telephone (704) 532-3320
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
---------------
Mr. O. Bruton Smith
Chairman and Chief Executive Officer
5401 East Independence Boulevard
P.O. Box 18747
Charlotte, North Carolina 28212
Telephone (704) 532-3320
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
Copies to:
Peter J. Shea, Esq.
Parker, Poe, Adams & Bernstein L.L.P.
2500 Charlotte Plaza
Charlotte, North Carolina 28244
Telephone (704) 372-9000
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
---------------
The Registrants hereby amend this Registration Statement on such dates as
may be necessary to delay its effective date until the Registrants shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
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Primary
State or other Standard
Jurisdiction of Industrial
Exact Name of Registrant as Specified in its Incorporation Classification
Charter or Organization Code Number
- --------------------------------------------------------------------------------
<S> <C> <C>
Capital Chevrolet and Imports, Inc. Alabama 5511
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Casa Ford of Houston, Inc. Texas 5511
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Fort Mill Chrysler-Plymouth-Dodge Inc. South Carolina 5511
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Fort Mill Ford, Inc. South Carolina 5511
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Freedom Ford, Inc. Florida 5511
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Frontier Oldsmobile-Cadillac, Inc. North Carolina 5511
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Lone Star Ford, Inc. Texas 5511
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Marcus David Corporation North Carolina 5511
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Sonic Automotive of Chattanooga, LLC Tennessee 5511
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Sonic Automotive - Clearwater, Inc. Florida 5511
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Sonic Automotive Collision Center of Florida 5511
Clearwater, Inc.
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Sonic Automotive of Georgia, Inc. Georgia 5511
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Sonic Automotive - Hwy. 153 at Tennessee 5511
Shallowford Road,
Chattanooga, Inc.
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Sonic Automotive of Nashville, LLC Tennessee 5511
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Sonic Automotive of Nevada, Inc. Nevada 5511
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Sonic Automotive of Tennessee, Inc. Tennessee 5511
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Sonic Automotive - Florida 5511
1307 N. Dixie Hwy., NSB, Inc.
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Sonic Automotive - Ohio 5511
1400 Automall Drive, Columbus, Inc.
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Sonic Automotive - Ohio 5511
1455 Automall Drive, Columbus, Inc.
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Sonic Automotive - Ohio 5511
1495 Automall Drive, Columbus, Inc.
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Sonic Automotive - Ohio 5511
1500 Automall Drive, Columbus, Inc.
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Sonic Automotive - Florida 5511
1720 Mason Ave., DB, Inc.
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Sonic Automotive - Florida 5511
1720 Mason Ave., DB, LLC
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Sonic Automotive - Florida 5511
1919 N. Dixie Hwy., NSB, Inc.
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Sonic Automotive - Florida 5511
21699 U.S. Hwy 19 N., Inc.
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Sonic Automotive - Florida 5511
241 Ridgewood Ave., HH, Inc.
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Sonic Automotive South Carolina 5511
2424 Laurens Rd., Greenville, Inc.
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Sonic Automotive - Tennessee 5511
2490 South Lee Highway, LLC
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<CAPTION>
I.R.S.
Employer Address, Including Zip Code, and
Exact Name of Registrant as Specified in its Identification Telephone Number, Including Area Code,
Charter Number of Registrant's Principal Executive Office
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<S> <C> <C>
Capital Chevrolet and Imports, Inc. 63-1204447 711 Eastern Blvd. Montgomery, AL
36117; 334-272-8700
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Casa Ford of Houston, Inc. 76-0430684 4701 I-10 East Baytown, TX 77521;
281-471-5550
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Fort Mill Chrysler-Plymouth-Dodge Inc. 58-2285505 3310 Highway 51, Carowinds Blvd. Fort
Mill, SC 29715; 704-375-4799
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Fort Mill Ford, Inc. 62-1289609 788 Gold Hill Rd., Fort Mill, SC 29715;
704-377-8877
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Freedom Ford, Inc. 59-2214873 24825 US Highway 19 N. Clearwater, FL
34623; 813-797-2277
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Frontier Oldsmobile-Cadillac, Inc. 56-1621461 2501 Roosevelt Blvd. West Monroe, NC
28110; 704-283-7594
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Lone Star Ford, Inc. 76-0191708 8477 North Freeway, Houston, TX
77037; 281-931-3300
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Marcus David Corporation 56-1708384 9101 South Blvd., Charlotte, NC 28273;
704-552-7600
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Sonic Automotive of Chattanooga, LLC 62-1708471 5949 Brainerd Rd, Chattanooga, TN
37421; 423-894-5660
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Sonic Automotive - Clearwater, Inc. 59-3501017 21799 US Highway 19 North Clearwater,
FL 33765; 813-799-1234
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Sonic Automotive Collision Center of 59-3501024 2300 Drew St., Clearwater, FL 34625;
Clearwater, Inc. 813-797-6335
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Sonic Automotive of Georgia, Inc. 58-2399219 5260 Peachtree Industrial Blvd.,
Chamblee, GA 30341; 770-452-0077
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Sonic Automotive - Hwy. 153 at (*) Hwy 153 at Shallowford Road
Shallowford Road, Chattanooga, TN 37042;
Chattanooga, Inc.
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Sonic Automotive of Nashville, LLC 62-1708481 4040 Armory Oaks Drive, Nashville, TN
37204; 615-254-5641
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Sonic Automotive of Nevada, Inc. 88-0378636 3773 Howard Hughes Parkway Suite 300
North Las Vegas, NV 89109;
702-866-2222
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Sonic Automotive of Tennessee, Inc. 62-1710960 5915 Brainard Rd., Chattanooga, TN
37421; 423-899-8934
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Sonic Automotive - 59-3523302 1307 N. Dixie Hwy. New Smyrna Beach,
1307 N. Dixie Hwy., NSB, Inc. FL 32168; 904-428-9094
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Sonic Automotive - 31-1604259 1400 Automall Dr. Columbus, OH 43228;
1400 Automall Drive, Columbus, Inc. 614-870-9559
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Sonic Automotive - 31-1604276 1455 Automall Dr. Columubs, OH 43228;
1455 Automall Drive, Columbus, Inc. 614-870-5425
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Sonic Automotive - 31-1604281 1495 Automall Dr. Columbus, OH 43228;
1495 Automall Drive, Columbus, Inc. 614-870-1495
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Sonic Automotive - 31-1604285 1500 Automall Dr. Columbus, OH 43228;
1500 Automall Drive, Columbus, Inc. 614-870-8200
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Sonic Automotive - 59-3523303 1720 Mason Ave. Daytona Beach, FL
1720 Mason Ave., DB, Inc. 32117; 904-274-4775
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Sonic Automotive - 57-1072509 1720 Mason Ave. Daytona Beach, FL
1720 Mason Ave., DB, LLC 32117; 904-274-4775
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Sonic Automotive - 59-3523301 1919 N. Dixie Hwy. New Smyrna Beach,
1919 N. Dixie Hwy., NSB, Inc. FL 32168; 904-427-1313
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Sonic Automotive - 59-3501021 21699 US Hwy. 19 N. Clearwater, FL
21699 U.S. Hwy 19 N., Inc. 33765; 813-799-6400
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Sonic Automotive - 59-3523304 241 Ridgewood Ave. Holly Hill, FL
241 Ridgewood Ave., HH, Inc. 32117; 904-254-8441
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Sonic Automotive 58-2384994 2424 Laurens Rd. Greenville, SC 29607;
2424 Laurens Rd., Greenville, Inc. 864-234-6400
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Sonic Automotive - 62-1708486 2490 South Lee Highway Cleveland, OH
2490 South Lee Highway, LLC 37311; 423-478-5301
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</TABLE>
(*) Entity has no I.R.S. Employer Identification Number because either it is
currently dormant with no operation or has no employees.
<PAGE>
<TABLE>
<CAPTION>
Primary
State or other Standard
Jurisdiction of Industrial
Exact Name of Registrant as Specified in its Incorporation Classification
Charter or Organization Code Number
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<S> <C> <C>
Sonic Automotive South Carolina 5511
2752 Laurens Rd., Greenville, Inc.
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Sonic Automotive - Ohio 5511
3700 West Broad Street, Columbus,
Inc.
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Sonic Automotive - Florida 5511
3741 S. Nova Rd., PO, Inc.
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Sonic Automotive - Ohio 5511
4000 West Broad Street, Columbus,
Inc.
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Sonic Automotive Georgia 5511
5260 Peachtree Industrial Blvd., LLC
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Sonic Automotive - Georgia 5511
5585 Peachtree Industrial Blvd., LLC
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Sonic Automotive - Tennessee 5511
6025 International Drive, LLC
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Sonic Chrysler-Plymouth-Jeep-Eagle, North Carolina 5511
LLC
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Sonic Dodge, LLC North Carolina 5511
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Sonic Peachtree Industrial Blvd., L.P. Georgia 5511
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Town and Country Chrysler- Tennessee 5511
Plymouth-Jeep, LLC
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Town and Country Chrysler- South Carolina 5511
Plymouth-Jeep of Rock Hill, Inc.
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Town and Country Dodge of Tennessee 5511
Chattanooga, LLC
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Town and Country Ford, Incorporated North Carolina 5511
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Town and Country Ford of Cleveland, Tennessee 5511
LLC
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Town and Country Jaguar, LLC Tennessee 5511
<CAPTION>
I.R.S.
Employer Address, Including Zip Code, and
Exact Name of Registrant as Specified in its Identification Telephone Number, Including Area Code,
Charter Number of Registrant's Principal Executive Office
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<S> <C> <C>
Sonic Automotive 58-2384996 2752 Laurens Rd. Greenville, SC 29607;
2752 Laurens Rd., Greenville, Inc. 864-234-6437
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Sonic Automotive - 31-1604296 3700 West Broad St. Columbus, OH
3700 West Broad Street, Columbus, 43228; 612-272-8100
Inc.
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Sonic Automotive - 59-3532504 3741 S. Nova Rd. Port Orange, FL
3741 S. Nova Rd., PO, Inc. 32199; 940-322-1020
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Sonic Automotive - 31-1604301 4000 W. Broad St. Columbus, OH 43228;
4000 West Broad Street, Columbus, 614-272-0000
Inc.
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Sonic Automotive 62-1716095 5260 Peachtree Industrial Blvd.
5260 Peachtree Industrial Blvd., LLC Chamblee, GA 30341; 770-452-0077
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Sonic Automotive - (*) 5585 Peachtree Industrial Blvd.
5585 Peachtree Industrial Blvd., LLC Chamblee, GA 30341
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Sonic Automotive - 62-1708490 6025 International Drive Chattanooga,
6025 International Drive, LLC TN 37421; 423-855-4981
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Sonic Chrysler-Plymouth-Jeep-Eagle, 56-2044997 20435 Chartwell Center Drive Cornelius,
LLC NC 28031; 704-896-3800
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Sonic Dodge, LLC 56-2044965 20700 Torrence Chapel Rd. Cornelius,
NC 28031; 704-892-7800
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Sonic Peachtree Industrial Blvd., L.P. (*) 5260 Peachtree Industrial Blvd.,
Chamblee, GA 30341; 770-452-0077
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Town and Country Chrysler- 62-1708483 2496 South Lee Highway Cleveland, TN
Plymouth-Jeep, LLC 37311; 432-339-8756
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Town and Country Chrysler- 56-2044964 380 North Anderson Rd. Rock Hill, SC
Plymouth-Jeep of Rock Hill, Inc. 29730; 803-324-4042
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Town and Country Dodge of 62-1708487 402 W. Martin Luther King Blvd.
Chattanooga, LLC Chattanooga, TN 37402; 423-265-0505
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Town and Country Ford, Incorporated 56-0887416 5401 E. Independence Blvd. Charlotte,
NC 28212; 704-536-5600
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Town and Country Ford of Cleveland, 62-1708484 717 South Lee Highway Cleveland, TN
LLC 37311; 423-472-5454
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Town and Country Jaguar, LLC 62-1708491 5915 Brainard Rd. Chattanooga, TN
37421; 423-899-8934
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</TABLE>
(*) Entity has no I.R.S. Employer Identification Number because either it is
currently dormant with no operation or has no employees.
<PAGE>
PROSPECTUS
(Sonic Automotive Inc. Logo TM appears here)
Offer to Exchange
All Outstanding
11% Senior Subordinated Notes Due 2008, Series A
($125,000,000 Principal Amount Outstanding)
for
11% Senior Subordinated Notes Due 2008, Series B
---------------
This Exchange Offer (as defined below) and all withdrawal rights hereunder will
expire at 5:00 p.m., New York
City time, on December 7, 1998 (as such date may be extended from time to time,
the "Expiration Date").
---------------
Sonic Automotive, Inc., a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying letter of transmittal (the
"Letter of Transmittal"), to exchange $1,000 in principal amount of its 11%
Senior Subordinated Notes Due 2008, Series A (the "New Notes") for each $1,000
in principal amount of its currently outstanding 11% Senior Subordinated Notes
Due 2008, Series B (the "Old Notes") (the Old Notes and the New Notes are
collectively referred to herein as the "Notes"). An aggregate principal amount
of $125.0 million of Old Notes is currently outstanding. See "The Exchange
Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has agreed
that, starting on the Expiration Date and ending on the close of business one
year after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The Company will accept for exchange any and all Old Notes that are
validly tendered prior to 5:00 p.m., New York City time, on the Expiration
Date. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. The Exchange Offer is not conditioned
upon any minimum principal amount of the Old Notes being tendered for exchange.
However, the Exchange Offer is subject to the terms and provisions of the
Registration Rights Agreement dated as of July 31, 1998 (the "Registration
Rights Agreement"), among the Company, each of the Company's existing
subsidiaries (the "Guarantors") and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, BancAmerica Robertson Stephens and NationsBanc
Montgomery Securities LLC (the "Initial Purchasers"). The Old Notes may be
tendered only in multiples of $1,000. See "The Exchange Offer."
The Old Notes were issued in a transaction (the "Prior Offering") pursuant
to which the Company issued an aggregate of $125.0 million principal amount of
the Old Notes to the Initial Purchasers on July 31, 1998 pursuant to a Purchase
Agreement dated as of July 28, 1998 (the "Purchase Agreement") among the
Company, the Guarantors and the Initial Purchasers. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act. The Company, the Guarantors and the Initial Purchasers also entered into
the Registration Rights Agreement, pursuant to which the Company and the
Guarantors granted certain registration rights for the benefit of the holders
of the Old Notes. The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement with respect to
the Old Notes. See "The Exchange Offer -- Purpose and Effect."
The Old Notes were, and the New Notes will be, issued under the Indenture
dated as of July 1, 1998 (the "Indenture") among the Company, the Company's
existing domestic subsidiaries and U.S. Bank Trust National Association, as
trustee (in such capacity, the "Trustee"). The form and terms of the New Notes
will be identical in all material respects to the form and terms of the Old
Notes, except that (i) the New Notes have been registered under the Securities
Act and, therefore, will not bear legends restricting the transfer thereof, and
(ii) holders of New Notes will not be entitled to certain rights under the
Registration Rights Agreement intended for the holders of unregistered
securities. The Exchange Offer shall be deemed consummated upon the occurrence
of the delivery by the Company to U.S. Bank Trust National Association, as
registrar of the Old Notes (in such capacity, the "Registrar"), under the
Indenture of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are (cover continued on next page)
See "Risk Factors" beginning on page 15 for a discussion of certain
factors that should be considered in evaluating the Exchange Offer.
---------------
THE NEW NOTES 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.
---------------
The date of this Prospectus is November 5, 1998.
<PAGE>
validly tendered by holders thereof pursuant to the Exchange Offer. See "The
Exchange Offer -- Termination of Certain Rights," " -- Procedures for Tendering
Old Notes" and "Description of the New Notes."
The Notes will bear interest at a rate equal to 11% per annum. Interest on
the Notes is payable semiannually, commencing February 1, 1999, on February 1
and August 1 of each year (each an "Interest Payment Date") and shall accrue
from July 31, 1998 or from the most recent Interest Payment Date with respect
to the Old Notes to which interest was paid or duly provided for. The Notes
will mature on August 1, 2008. See "Description of Notes."
The Notes will be redeemable for cash at the option of the Company, in
whole or in part, at any time on or after August 1, 2003 at the redemption
prices set forth herein, together with accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time on or prior to August 1, 2001,
the Company may redeem up to 35% of the aggregate principal amount of the Notes
originally issued with the net proceeds of one or more Public Equity Offerings
(as defined herein), at a redemption price in cash equal to 111% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of redemption; provided that at least 65% of the aggregate principal amount of
the Notes originally issued remains outstanding immediately after such
redemption. See "Description of the New Notes -- Optional Redemption." Upon the
occurrence of a Change of Control (as defined herein), the Company will be
required to make an offer to repurchase all outstanding Notes at 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon,
if any, to the date of repurchase. There is no assurance that the Company will
have adequate funds to repurchase the Notes upon a Change of Control. See
"Description of the New Notes -- Purchase of Notes Upon a Change of Control."
The Notes will be unsecured senior subordinated obligations of the Company
and, as such, will be subordinated in right of payment to all other existing
and future senior indebtedness of the Company, and will rank pari passu in
right of payment with all other existing and future senior subordinated
indebtedness of the Company. The Notes will be guaranteed, jointly and
severally, on a senior subordinated basis (the "Guarantees") by the Guarantors.
The Guarantees will be unsecured senior subordinated obligations of the
Guarantors and will be subordinated in right of payment to all existing and
future senior indebtedness of the Guarantors. As of June 30, 1998, on a pro
forma basis after giving effect to the 1998 Acquisitions (as defined herein)
and the Prior Offering and the application of the net proceeds therefrom, (i)
the Company and the Guarantors would have had $4.3 million in aggregate
principal amount of indebtedness outstanding which would have ranked senior in
right of payment to the Notes ($2.9 million of which would have been secured)
and no indebtedness pari passu to the Notes or the Guarantees, as the case may
be, (ii) the Company would also have had $3.7 million of indebtedness senior
to, and $5.5 million of indebtedness subordinated to, the Notes and (iii) the
Guarantors would also have had $199.0 million of floor plan indebtedness and
$3.2 million of additional indebtedness which would have ranked senior in right
of payment to the Guarantees ($3.0 million of which would have been secured).
Based on existing interpretations of the Securities Act by the staff of
the Securities and Exchange Commission (the "Commission") set forth in
"no-action" letters issued to third parties, the Company believes that New
Notes issued pursuant to the Exchange Offer to any holder of Old Notes in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by such holder (other than (i) a broker-dealer who purchased Old
Notes directly from the Company for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act or
(ii) a person that is an affiliate of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such holder
is acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution of the New Notes. Holders wishing to accept the
Exchange Offer must represent to the Company, as required by the Registration
Rights Agreement, that such conditions have been met. In addition, if such
holder is not a broker-dealer, it must represent that it is not engaged in, and
does not intend to engage in, a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "The Exchange Offer -- Resales of the
New Notes" and "Plan of Distribution." This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making or other
trading activities.
As of October 30, 1998, Cede & Co. ("Cede"), as nominee for The Depository
Trust Company, New York, New York ("DTC"), was the sole registered holder of
the Old Notes and held the Old Notes for certain of its participants. The
Company believes that no such participant is an affiliate (as such term is
defined in Rule 405 of the Securities Act) of the Company. There has previously
been only a limited secondary market, and no public market, for the Old Notes.
The Old Notes are eligible for trading in the Private Offering, Resales and
Trading through Automatic Linkages ("PORTAL") market. In addition, the Initial
Purchasers have advised the Company that they currently intend to make a market
in the New Notes; however, the Initial Purchasers are not obligated to do so
and any market making activities may be discontinued by the Initial Purchasers
at any time. Therefore, there can be no assurance that an active market for the
New Notes will develop. If such a trading market develops for the New Notes,
future trading prices will depend on many factors, including, among other
things, prevailing interest rates, the Company's results of operations and the
market for similar securities. Depending on such factors, the New Notes may
trade at a discount from their principal amount. See "Risk Factors -- Absence
of a Public Market for the Notes."
The Company and the Guarantors will not receive any proceeds from this
Exchange Offer, and no underwriter is being utilized in connection with the
Exchange Offer. Pursuant to the Registration Rights Agreement, the Company will
bear certain registration expenses.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
<PAGE>
The Old Notes were issued originally in global form (the "Global Old
Note"). The Global Old Note was deposited with, or on behalf of, DTC, as the
initial depository with respect to the Old Notes (in such capacity, the
"Depositary"). The Global Old Note is registered in the name of Cede, as
nominee of DTC, and beneficial interests in the Global Old Note are shown on,
and transfers thereof are effected only through, records maintained by the
Depositary and its participants. The use of the Global Old Note to represent
certain of the Old Notes permits the Depositary's participants, and anyone
holding a beneficial interest in an Old Note registered in the name of such a
participant, to transfer interests in the Old Notes electronically in
accordance with the Depositary's established procedures without the need to
transfer a physical certificate. New Notes issued in exchange for the Global
Old Note also will be issued initially as a note in global form (the "Global
New Note," and, together with the Global Old Note, the "Global Notes") and
deposited with, or on behalf of, the Depositary. After the initial issuance of
the Global New Note, New Notes in certificated form will be issued in exchange
for a holder's proportionate interest in the Global New Note only as set forth
in the Indenture.
<PAGE>
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED
STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A
TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH
THE PROVISION OF THIS PARAGRAPH.
---------------
THE INFORMATION CONTAINED IN THIS PROSPECTUS HAS BEEN FURNISHED BY THE
COMPANY AND OTHER SOURCES BELIEVED BY THE COMPANY TO BE RELIABLE. THIS
PROSPECTUS CONTAINS SUMMARIES, BELIEVED TO BE ACCURATE, OF CERTAIN TERMS OF
CERTAIN DOCUMENTS BUT REFERENCE IS MADE TO THE ACTUAL DOCUMENTS, CERTAIN OF
WHICH HAVE BEEN FILED AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART, FOR THE COMPLETE INFORMATION CONTAINED THEREIN. ALL SUCH
SUMMARIES ARE QUALIFIED IN THEIR ENTIRETY BY THIS REFERENCE. ---------------
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
These statements appear in a number of places in this Prospectus and include
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers with respect to, among other things: (i)
potential acquisitions by the Company; (ii) the Company's financing plans;
(iii) trends affecting the Company's financial condition or results of
operations; and (iv) the Company's business and growth strategies. Investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors. Among others, factors that could adversely affect
actual results and performance include local and regional economic conditions
in the areas served by the Company, the level of consumer spending,
relationships with manufacturers, competition, site selection and related
traffic and demographic patterns, inventory management and turnover levels,
realization of cost savings, and the Company's success in integrating recent
and potential future acquisitions. The accompanying information contained in
this Prospectus, including, without limitation, the information set forth under
the headings "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" identifies important
additional factors that could materially adversely affect actual results and
performance. Prospective investors are urged to carefully consider such
factors.
All forward-looking statements attributable to the Company are expressly
qualified in their entirety by the foregoing cautionary statement.
AVAILABLE INFORMATION
The Company is subject to the informational and reporting requirements of
the Exchange Act, and in accordance therewith is required to file periodic
reports, proxy statements and other information with the Commission relating to
its business, financial condition and other matters. Such reports, proxy
statements and other information, may be inspected and copied at the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. The Commission maintains an Internet Web
site that contains reports, proxy and information statements and other
information regarding the Company and other registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov. Copies of all or any part of such materials may be obtained
from any such office upon payment of the fees prescribed by the Commission.
Such information may also be inspected and copied at the offices of the New
York Stock Exchange at 20 Broad Street, New York, New York 10005. The Company's
Class A common stock, par value $.01 per share, is traded on the New York Stock
Exchange under the symbol "SAH.".
This Prospectus constitutes a part of a registration statement (the
"Registration Statement") filed by the Company with the Commission under the
Securities Act. As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information contained in the
Registration Statement and the exhibits and schedules thereto and reference is
hereby made to the Registration Statement and the exhibits and schedules
thereto for further information with respect to the Company and the securities
offered hereby. Statements contained herein concerning the provisions of any
documents filed as an exhibit to the Registration Statement or otherwise filed
with the Commission are not necessarily complete, and in each instance
reference is made to the copy of such document so filed. Each such statement is
qualified in its entirety by such reference.
The Indenture (as defined herein) provides that the Company will furnish
copies of the periodic reports required to be filed with the Commission under
the Exchange Act to the holders of the Notes. If the Company is not subject to
the periodic reporting and informational
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requirements of the Exchange Act, it will, to the extent such filings are
accepted by the Commission, and whether or not the Company has a class of
securities registered under the Exchange Act, file with the Commission, and
provide the Trustee and the holders of the Notes within 15 days after such
filings with, annual reports containing the information required to be
contained in Form 10-K promulgated under the Exchange Act, quarterly reports
containing the information required to be contained in Form 10-Q promulgated
under the Exchange Act and from time to time such other information as is
required to be contained in Form 8-K promulgated under the Exchange Act. If
filing such reports with the Commission is not accepted by the Commission or
prohibited by the Exchange Act, the Company will also provide copies of such
reports, at its cost, to prospective purchasers of the Notes promptly upon
written request. In addition, the Company has agreed that, for so long as any
Old Notes remain outstanding as Old Notes it will furnish to the holders and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act until such time
as the Company has either exchanged the Old Notes for the New Notes or until
such time as the holders thereof have disposed of such Notes pursuant to an
effective registration statement under the Securities Act. See "Description of
the New Notes -- Certain Covenants -- Provisions of Financial Statements." Any
such request and requests for the agreements summarized herein should be
directed to: Mr. Todd Atenhan, Director of Investor Relations of the Company,
at 5401 E. Independence Blvd., Charlotte, North Carolina 28212, telephone:
1-888-766-4218.
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(Sonic Automotive Inc. Logo TM appears here)
(Map of USA appears here with dealerships encircled within states.)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BMW and Volkswagen of Cleveland Village Honda Hatfield Volkswagen-Jeep Lake Norman Dodge
Nashville Dodge of Chattanooga Heritage Lincoln-Mercury Lone Star Ford
BMW and Volvo of Dyer Volvo Higginbotham Chevy-Olds Nelson Bowers Ford
Chattanooga Economy Honda Higginbotham Automobiles Town and Country Chrysler-
Capitol Chevrolet Fort Mill Chrysler- Infiniti of Chattanooga Plymouth-Jeep of
Capitol Imports Plymouth-Dodge Ken Marks Ford Rock Hill
Casa Ford Fort Mill Ford Kia and Volkswagen of Town and Country
Century BMW Frontier Oldsmobile-Cadillac Chattanooga Ford
Clearwater Mitsubishi Halifax Ford-Mercury Lake Norman Chrysler- Town and Country
Clearwater Toyota Hatfield Hyundai-Isuzu-Subaru Plymouth-Jeep Toyota
Cleveland Chrysler- Hatfield Lincoln-Mercury Toyota West
Plymouth-Jeep Trader Bud's
Westside
Chrysler-Plymouth
Trader Bud's
Westside Dodge
</TABLE>
Dealerships listed and locations shown above are on a pro forma basis
giving effect to the pending 1998 Acquisitions (as defined herein).
This Offering Memorandum includes statistical data regarding the retail
automotive industry. Unless otherwise indicated herein, such data is taken or
derived from information published by (i) The Wall Street Journal, (ii) a
division of Intertec Publishing Corp. in its "Ward's Dealer Business," (iii)
Crain's Communications, Inc. in its "Automotive News" and "1997 Market Data
Book" or (iv) the Industry Analysis Division of the National Automobile Dealers
Association ("NADA") in its "Industry Analysis and Outlook" and "Automotive
Executive Magazine" publications.
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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 herein to "Sonic" or the "Company" are to Sonic Automotive, Inc.
and, unless the context indicates otherwise, its consolidated subsidiaries and
their respective predecessors. Unless otherwise indicated, references to "pro
forma" give effect to (i) the 1997 Acquisitions and the 1998 Acquisitions (each
as defined herein and, collectively, the "Acquisitions"), (ii) the Company's
initial public offering of its Class A Common Stock in November 1997 (the
"IPO"), (iii) the reorganization of the Company in anticipation of its IPO (the
"Reorganization"), and (iv) the Prior Offering and the application of the net
proceeds therefrom. References to "pro forma" do not give effect to the Jordan
Acquisition, the Tampa Volvo Acquisition and the Craft Acquisitions (each as
defined herein).
The Company
The Company is one of the top ten automotive retailers in the United
States, operating 27 dealerships and ten collision repair centers, as of June
30, 1998, in eight metropolitan areas of 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 operated dealerships as of June 30, 1998 in
the Atlanta, Georgia, Charlotte, North Carolina, Chattanooga, Tennessee,
Greenville/Spartanburg, South Carolina, Houston, Texas, Montgomery, Alabama,
Nashville, Tennessee and Tampa/Clearwater, Florida markets, each of which the
Company believes is experiencing favorable demographic trends. As of June 30,
1998, Sonic sold the following 20 domestic and foreign brands: BMW, Cadillac,
Chevrolet, Chrysler, Dodge, Ford, Honda, Hyundai, Infiniti, Jaguar, Jeep, KIA,
Lincoln, Mercury, Mitsubishi, Oldsmobile, Plymouth, Toyota, Volkswagen and
Volvo. In several of its markets, the Company's dealerships have a significant
market share for new cars and light trucks. As of September 15, 1998, the
Company had acquired or entered into definitive agreements to acquire 12
additional dealerships in certain of the Company's existing markets and in new
markets including Columbus, Ohio and Daytona Beach, Florida (which includes a
total of two dealerships being acquired in the Jordan Acquisition and the Tampa
Volvo Acquisition). Upon consummation of these acquisitions, the Company will
sell the following four additional brands: Acura, Isuzu, Mercedes and Subaru.
For the year ended December 31, 1997, the Company would have had pro forma
revenues and EBITDA (as defined herein) of $1.8 billion and $42.8 million,
respectively.
Company Strengths
Leading Automotive Retailer. The Company is one of the top ten automotive
retailers in the United States, operating 37 dealerships in ten metropolitan
areas on a pro forma basis. The Company believes that its leading position in
the highly fragmented automotive retailing industry combined with its strong
reputation and management team, successful history of acquiring and integrating
dealerships and strong financial condition have positioned the Company as a
premier consolidator of automotive dealerships, thereby providing the Company
with increased attractive acquisition opportunities.
Proven Track Record of Integrating and Improving Acquisitions. In recent
years, the Company has grown primarily through the acquisition of well-managed
dealerships in growing metropolitan and suburban geographic markets. During
1996 and 1997, the Company acquired 16 dealerships in five states for total
consideration of $104.5 million. Senior management of the Company has,
collectively, acquired and integrated the operations of more than 75
dealerships during their careers. This acquisition experience allows management
to identify and capitalize on opportunities for improvement, determine and
implement necessary corrective actions, and minimize acquisition risk.
Experienced Management Team. The Company is led by a strong senior
management team with extensive automotive retailing and aftermarket products
and services experience, including O. Bruton Smith, Chief Executive Officer,
and Nelson E. Bowers, II, Executive Vice President. The members of the
Company's senior management team have on average 19 years of automotive
industry experience. As of June 30, 1998, the Company's senior management owned
approximately 52.8% of the Company's outstanding Class A Common Stock and 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").
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Consistent Record of Internal Growth. In addition to indentifying,
consummating and integrating attractive acquisitions, the Company continually
focuses on improving its existing dealership operations. As a result, the
Company has a history of strong internal growth with average same store sales
growth of 16.3%, 6.4% and 10.1% in 1995, 1996 and 1997, respectively.
Diverse Offering of Automotive Brands, Products and Services. The Company
sells on a pro forma basis a wide variety of 24 domestic and international
automotive brands (38.4% of pro forma gross profit in 1997) in ten metropolitan
areas which it believes (i) mitigates the effect of regional economic
conditions and changing consumer preferences and (ii) reduces its reliance on
any single manufacturer. In addition to selling a broad range of new vehicles,
the Company has a balanced portfolio of other automotive products and services
including used vehicles (16.9% of pro forma gross profit in 1997), F&I and
leasing (11.6%), and parts, service and collision repair services (33.1%). The
Company believes that this diverse offering of products and services improves
financial stability as sales of higher margin products and services offset in
part sales of lower margin new and used vehicles. In addition, sales of parts,
service and collision repair services are less cyclical than vehicle sales and
related product sales.
Economies of Scale. The Company's growth through acquisitions over the
past two years has resulted in increasing economies of scale as the Company
integrates acquired dealerships including (i) improved terms on bank and floor
plan financing, (ii) improved commissions on sales of finance and insurance
products, (iii) increased vendor consolidation opportunities, (iv) reduced
advertising and insurance costs as a percentage of sales, and (v) improved
inventory management.
Strategy
Acquire Dealerships. The Company believes that attractive acquisition
opportunities exist for dealership groups with significant equity capital and
experience in identifying, acquiring and professionally managing dealerships.
The automotive retailing industry is highly fragmented, with the largest 100
dealer groups generating approximately 10% of the industry's $640 billion of
total sales in 1996 and controlling less than 5% of all new vehicle dealerships
in the United States. 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. The
Company has implemented a "hub and spoke" acquisition strategy to acquire (i)
well-managed dealerships in new growing metropolitan and suburban geographic
markets, and (ii) additional dealerships in its existing markets that will
allow the Company to capitalize on regional economies of scale, offer a greater
breadth of products and services and/or increase brand diversity. In addition,
the Company selectively acquires dealerships which have underperformed the
industry average but which carry attractive product lines or have attractive
locations, thereby leveraging the Company's management infrastructure and
improving return on investment.
Increased Sales of Higher Margin Products and Services. The Company
intends to pursue opportunities to increase its sales of higher-margin products
and services by, for instance, expanding its collision repair business and
increasing sales of used vehicles. 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 small volume shops. The
Company further believes that the collision repair industry is undergoing a
period of consolidation and that it is well positioned to expand its collision
repair business. Sonic also believes that significant opportunities exist to
improve its used vehicle departments, which historically have generated higher
margins on sales than its new vehicle departments, to (i) increase the number
of used vehicles sold and (ii) increase gross profit margins on sales of used
vehicles. For example, the Company's ability to manage inventory levels more
effectively created increased gross profit margins on sales of used vehicles to
9.9% for the first six months of 1998 from 8.5% for the first six months of
1997.
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 has been able to negotiate with lending institutions
that purchase its financing contracts and insurance carriers that underwrite
its insurance policies to increase commissions on the origination of customer
vehicle financing and insurance policies, which the Company believes will
result in increased revenues and profitability.
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Train, Develop and Incentivize Qualified Management. The Company believes
that well trained dealership personnel are the key to the long-term performance
of the Company and to the profitability of its dealerships. Sonic requires all
of its employees, from service technicians to regional vice presidents, to
participate in in-house training programs. The Company's senior management,
along with third party trainers from manufacturers, industry affiliates and
vendors, formally train all employees. The Company believes that its
comprehensive training of all employees and the institution of a multi-tiered
management structure to supervise effectively its dealership operations provide
the Company with a competitive advantage over other dealership groups. In
addition, the Company employs an incentive compensation program for each
officer, vice president and executive manager, a portion of which 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, together with the opportunity for promotion and for
equity participation, serve as a strong motivation for its employees.
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 designed 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. To keep management focused
on customer satisfaction, the Company includes CSI results as a component of
its incentive compensation program.
The 1998 Acquisitions
In March 1998, the Company acquired two dealerships and a standalone
collision repair center located in Clearwater, Florida, for a total purchase
price of approximately $14.9 million, subject to adjustment based on the net
book value of the purchased assets and assumed liabilities as of the closing
date (the "Clearwater Acquisition"). The Clearwater Acquisition was financed
with $11.5 million in cash borrowed from Ford Motor Credit Company ("Ford Motor
Credit") under the Company's $75.0 million secured revolving line of credit
(the "Revolving Facility") and 3,960 shares of the Company's Class A
Convertible Preferred Stock, par value $.10 per share (the "Preferred Stock"
and, together with the Common Stock, the "Voting Stock"), with a liquidation
preference of approximately $4.0 million. By April 30, 1999, the Company will
be required to pay a contingent amount equal to 50% of the combined 1998
pre-tax earnings of the entities acquired, such amount not to exceed
approximately $1.8 million.
In July 1998, the Company acquired six dealerships located in Columbus,
Ohio for a total purchase price of approximately $48.6 million plus the
assumption of certain liabilities, subject to adjustment based on the value of
the net current assets of the sellers as of the closing date (the "Hatfield
Acquisition"). Of the total purchase price, the Company paid approximately
$34.6 million in cash ($26.2 million of which was financed by borrowings under
the Revolving Facility and the balance of which was financed by cash from the
Company's existing operations, which was subsequently replenished with a
portion of the net proceeds from the Prior Offering), and the balance of the
total purchase price was paid by the Company's issuance to the sellers of
14,025 shares of its Preferred Stock with a liquidation preference of
approximately $14.0 million.
Also in July 1998, the Company acquired one dealership located in
Greenville, South Carolina for a total purchase price of approximately $1.1
million plus the assumption of certain operating liabilities of the sellers
(the "Heritage Acquisition"). Of the total purchase price, the Company paid
approximately $0.7 million in cash (approximately $0.3 million of which was
financed by borrowings under the Revolving Facility and approximately $0.4
million of which was financed by cash from the Company's existing operations,
which was subsequently replenished with a portion of the net proceeds from the
Prior Offering), and the balance of the total purchase price was paid by the
Company's issuance to the sellers of 400 shares of its Preferred Stock with a
liquidation preference of $0.4 million. In connection with the Heritage
Acquisition, Chartown, a general partnership and an affiliate of the Company
through common control ("Chartown"), acquired the real property on which the
dealerships comprising the Heritage Acquisition are operated for approximately
$3.0 million, and the Company currently is leasing this real property from
Chartown. Chartown is expected to sell the real property underlying these
dealerships to Mar Mar Realty Trust, a real estate investment trust affiliated
with the Company through common control ("MMRT"), in the future. The Company
did not consummate the acquisition of the assets of the Jaguar franchise that
comprises a portion of the Heritage Acquisition because Jaguar Cars, a division
of Ford Motor Company ("Jaguar") declined to consent to this acquisition. See
"Risk Factors -- No Consent from Jaguar."
Also in July 1998, the Company acquired one dealership located in
Greenville, South Carolina and a satellite sales location in Spartanburg, South
Carolina for an aggregate purchase price of approximately $3.8 million in cash
(approximately $0.9 million of which was financed by borrowings under the
Revolving Facility and approximately $2.9 million of which was financed with a
portion of the net proceeds of the Prior Offering), warrants issued to the
seller to purchase 75,000 shares
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of the Company's Class A Common Stock at a purchase price equal to the market
value of the Class A Common Stock on the closing date and 2,166.5 shares of
Preferred Stock with a liquidation preference of approximately $2.2 million
(the "Century Acquisition"). The seller in the Century Acquisition is
affiliated with the seller in the Heritage Acquisition. In connection with the
acquisition, Chartown purchased the real property underlying the dealership and
the satellite sales location. Chartown is expected to sell the real property to
MMRT in the future.
Also in July 1998, the Company acquired one dealership located in Houston,
Texas for a total purchase price of approximately $11.3 million, subject to
adjustment at a later date based upon a final determination of the net working
capital of the acquired dealership as of the closing date (the "Casa Ford
Acquisition"). Of the price paid at closing, the Company paid approximately
$9.0 million in cash (all of which was financed with a portion of the net
proceeds of the Prior Offering), and the balance was paid to the seller by the
Company's issuance of 2,313 shares of Preferred Stock with a liquidation
preference of approximately $2.3 million. In addition, the Company agreed to
pay to the seller in the future an additional contingent payment equal to five
times the amount by which the dealership's pre-tax earnings for 1998, if any,
exceed $2.5 million, and five times the amount by which the dealership's 1999
pre-tax earnings, if any, exceed the greater of $2.5 million or the
dealership's 1998 pre-tax earnings.
Also in July 1998, the Company acquired two dealerships located in
Montgomery, Alabama for a purchase price of approximately $8.1 million paid to
the sellers at the closing (the "Montgomery Acquisition"). The total purchase
price paid at closing was paid with approximately $3.4 million in cash
(approximately $0.1 million of which was financed by cash from the Company's
existing operations and approximately $3.3 million of which was financed with a
portion of the net proceeds of the Prior Offering) and with 4,194.3 shares of
Preferred Stock with a liquidation preference of approximately $4.2 million.
The remaining $0.6 million of the cash portion of the purchase price is payable
to the sellers on the first and second anniversaries of the closing date. The
Company has also agreed to pay an additional payment to the sellers, not to
exceed $3.3 million, contingent upon the future performance of the acquired
dealerships.
In September 1998, the Company acquired three dealerships and related
assets located in the Daytona Beach, Florida area for a total purchase price of
approximately $27.0 million, including the repayment of approximately $2.7
million in indebtedness owed by one of the sellers to its sole shareholder,
subject to adjustment based on the net book value of the purchased assets as of
the closing date (the "Higginbotham Acquisition"). The total purchase price was
paid with approximately $18.2 million in cash (all of which was financed with a
portion of the net proceeds from the Prior Offering), and with the issuance to
the sellers of Class A Common Stock with a market value at the date of closing
of approximately $8.3 million. The remaining $0.5 million of the cash portion
of the purchase price is payable to the seller in December 1998. In addition,
the Company also assumed certain liabilities of the sellers at closing. In
connection with the Higginbotham Acquisition, it is anticipated that MMRT will
acquire the real property on which these dealerships and related assets are
operated in the future, and that the Company will lease these properties from
MMRT.
In addition, the Company has entered into a definitive agreement, which
contains certain closing conditions and purchase price adjustments, providing
for the Company's purchase of a dealership located in Chattanooga, Tennessee,
for a purchase price of approximately $7.5 million plus an amount equal to the
net book value of the assets of the dealership (the "Economy Honda
Acquisition"). The Company's consummation of the Economy Honda Acquisition is
subject to the approval of Honda, which has informed the Company that its
approval is contingent upon the Company divesting its ownership of the
Cleveland Village Honda dealership, which is also located in Chattanooga, prior
to acquiring the Economy Honda dealership. The Company is currently negotiating
with potential buyers for the sale of the Cleveland Village Honda dealership.
There can be no assurance that the Company will be able to sell the Cleveland
Village Honda dealership or that the approval of Honda to the Economy Honda
Acquisition will be obtained. See "Risk Factors -- No Consent from Honda."
Hereinafter the Clearwater Acquisition, the Hatfield Acquisition, the
Heritage Acquisition, the Century Acquisition, the Casa Ford Acquisition, the
Montgomery Acquisition, the Higginbotham Acquisition and the Economy Honda
Acquisition are collectively referred to as the "1998 Acquisitions." The
aggregate purchase price for the 1998 Acquisitions is approximately $127.6
million, which has been or will be paid with approximately $88.4 million in
cash, with approximately 32,159 shares of Preferred Stock having an aggregate
liquidation preference of approximately $32.2 million, and with 485,294 shares
of Class A Common Stock having a market value at date of issuance of
approximately $8.3 million. Of the $88.4 million cash portion of the aggregate
purchase price, approximately $38.9 million was financed with borrowings under
the Revolving Facility (which was subsequently repaid with a portion of the net
proceeds from the Prior Offering), approximately $33.4 million with a portion
of the net proceeds from the Prior Offering, and approximately $8.9 million
with cash generated from the Company's existing operations (approximately $8.7
million of which was subsequently replenished with a portion of the net
proceeds from the Prior Offering). The remaining $7.2 million of the cash
portion of the aggregate purchase price for the 1998 Acquisitions will be
financed with a combination of borrowings under the Revolving Facility and a
portion of the
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net proceeds of the Prior Offering. The 1998 Acquisitions have all been
consummated, except for the Economy Honda Acquisition for which the consent of
Honda has not yet been obtained. There can be no assurance that such consent
will be obtained. See "Risk Factors -- No Consent from Honda." In addition, the
Company did not consummate the acquisition of a Jaguar franchise representing a
portion of the Heritage Acquisition because Jaguar declined to consent to such
acquisition. See "Risk Factors -- No Consent from Jaguar." Any manufacturer who
does not consent to an acquisition may seek to terminate its franchise
agreement, although relevant state franchising laws impose limitations on a
manufacturer's ability to terminate a franchise. See "Risk Factors --
Manufacturers' Restrictions on Acquisitions" and "Business -- Relationships
with Manufacturers." Prior to their acquisition, the Company operated the
dealerships which comprise the Montgomery Acquisition, the Century Acquisition
and the Casa Ford Acquisition under separate management agreements. In
connection with the 1998 Acquisitions, the Company has or will acquire the
following additional or new dealership franchises: Acura, BMW, Chevrolet,
Chrysler, Dodge, Ford, Honda, Hyundai, Isuzu, Jeep, KIA, Lincoln, Mercedes,
Mercury, Mitsubishi, Oldsmobile, Plymouth, Subaru, Toyota and Volkswagen. For
additional information regarding the acquisitions described above, see "The
1998 Acquisitions."
Recent Developments
In August 1998, the Company entered into a definitive agreement for the
acquisition of the assets of an Infiniti dealership located in Charlotte, North
Carolina and the real estate upon which the dealership is operated, which real
estate the Company anticipates selling to MMRT in the future (the "Jordan
Acquisition"). In September 1998, the Company entered into a definitive
agreement for the acquisition of the assets of a Volvo dealership located in
Tampa, Florida (the "Tampa Volvo Acquisition"). In October 1998, the Company
entered into definitive agreements to acquire all of the assets of Ron Craft
Chrysler Plymouth Jeep, Inc. and the real property upon which such dealership
is operated, and to acquire all of the stock of Ron Craft
Chevrolet-Cadillac-Oldsmobile-Geo, Inc., each of which is located in Baytown,
Texas (the "Craft Acquisitions"). The pro forma information included in this
Prospectus does not give effect to the Jordan Acquisition, the Tampa Volvo
Acquisition or the Craft Acquisitions.
The Company was recently awarded two new Volvo franchises and a new
Oldsmobile franchise in the Atlanta market. The Company currently expects to
open these new dealerships in the first half of 1999.
On July 9, 1998, the Company entered into, subject to the approval of the
Company's Board of Directors and the Company's independent directors, a
Strategic Alliance Agreement and Agreement for the Mutual Referral of
Acquisition Opportunities (the "Alliance Agreement") with an operating
partnership controlled by MMRT. MMRT intends to acquire certain real estate
associated with various automobile dealerships, automotive aftermarket
retailers and other automotive related businesses and to lease such properties
to the business operators located thereon. Mr. Smith, the Company's Chairman
and Chief Executive Officer, serves as the chairman of MMRT's board of trustees
and is presently its largest shareholder. See "Risk Factors -- Potential
Conflicts of Interest" and "Certain Transactions -- Transactions with MMRT."
Under the Alliance Agreement, the Company has agreed to refer real estate
acquisition opportunities that arise in connection with its dealership
acquisitions to MMRT. In exchange, MMRT has agreed to refer dealership
acquisition opportunities to the Company and to provide to the Company, at the
Company's cost, certain real estate development, maintenance, survey and
inspection services. Pursuant to the Alliance Agreement, the Company has
entered into contracts to sell the real estate associated with Town and Country
Toyota and Fort Mill Ford, two of the Company's dealerships, for an aggregate
purchase price of approximately $10.3 million. In addition, the Alliance
Agreement provides for an agreed form of lease (the "Sonic Form Lease")
pursuant to which MMRT would lease real estate to the Company should MMRT
acquire real estate associated with any of the Company's operations. Presently,
the Company leases or intends to lease from MMRT 29 parcels of land associated
with 21 of its dealerships, including the real estate associated with Town and
Country Toyota and Fort Mill Ford that the Company will lease back from MMRT,
pursuant to leases substantially similar to the Sonic Form Lease. The aggregate
initial annual base rent to be paid by the Company for all 29 properties under
the leases with MMRT is approximately $7.8 million. MMRT has also entered into
new leases with each of Town and Country Ford and Lone Star Ford which provide
that the annual lease payments for their properties will each be increased to
approximately $1.1 million effective January 1, 2000, as compared to current
annual lease payments of approximately $0.4 million and $0.4 million,
respectively.
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The Prior Offering
The outstanding $125.0 million aggregate principal amount of Old Notes
were issued by the Company to the Initial Purchasers on July 31, 1997, pursuant
to the Purchase Agreement. The Initial Purchasers subsequently resold the Old
Notes in reliance on Rule 144A under the Securities Act. The Company, the
Guarantors and the Initial Purchasers also entered into the Registration Rights
Agreement pursuant to which the Company and the Guarantors granted certain
registration rights for the benefit of the holders of the Old Notes. The
Exchange Offer is intended to satisfy certain of the Company's obligations
under the Registration Rights Agreement with respect to the Old Notes. See "The
Exchange Offer -- Purpose and Effect."
The Exchange Offer
The Exchange Offer.............. The Company is offering upon the terms and
subject to the conditions set forth herein
and in the Letter of Transmittal to exchange
the New Notes for the outstanding Old Notes.
As of the date of this Prospectus, $125.0
million in aggregate principal amount of the
Old Notes is outstanding. As of September 15,
1998, there was one registered holder of the
Old Notes, Cede & Co., which held the Old
Notes for certain of its participants. See
"The Exchange Offer -- Terms of the Exchange
Offer."
Expiration Date................. 5:00 p.m., New York City time, on December
7, 1998 as the same may be extended from time
to time. See "The Exchange Offer --
Expiration Date; Extensions; Amendments."
Conditions of the
Exchange Offer.................. The Exchange Offer is not conditioned upon
any minimum principal amount of Old Notes
being tendered for exchange. The only
condition to the Exchange Offer is the
declaration by the Commission of the
effectiveness of the Registration Statement
of which this Prospectus constitutes a part
(the "Exchange Offer Registration
Statement"). See "The Exchange Offer --
Conditions of the Exchange Offer."
Termination of Certain Rights... Pursuant to the Registration Rights
Agreement and the Old Notes, holders of Old
Notes have certain rights intended for the
holders of unregistered securities. Holders
of New Notes will not be and, upon
consummation of the Exchange Offer, holders
of Old Notes will no longer be, entitled to
certain rights under the Registration Rights
Agreement intended for holders of
unregistered securities except in certain
limited circumstances. See "The Exchange
Offer -- Termination of Certain Rights" and "
-- Procedures for Tendering Old Notes."
Accrued Interest................ The New Notes will bear interest at a rate
equal to 11% per annum. Interest shall accrue
from July 31, 1998 or from the most recent
Interest Payment Date with respect to the Old
Notes to which interest was paid or duly
provided for. See "Description of the New
Notes -- General."
Procedures for Tendering
Old Notes....................... Unless a tender of Old Notes is effected
pursuant to the procedures for book-entry
transfer as provided herein, each holder
desiring to accept the Exchange Offer must
complete and sign the Letter of Transmittal,
have the signature thereon guaranteed if
required by the Letter of Transmittal, and
mail or deliver the Letter of Transmittal,
together with the Old Notes or a Notice of
Guaranteed Delivery (as defined in the Letter
of Transmittal) and any other required
documents (such as evidence of authority to
act, if the Letter of Transmittal is signed
by someone acting in a fiduciary or
representative capacity), to the Exchange
Agent (as defined herein) at the address set
forth on the back cover page of this
Prospectus prior to 5:00 p.m., New York City
time, on the Expiration Date. Any Beneficial
Owner (as defined herein) of the Old Notes
whose Old Notes are registered in the name of
a nominee, such as a broker, dealer,
commercial bank or trust company and who
wishes to tender
8
<PAGE>
Old Notes in the Exchange Offer, should
instruct such entity or person to tender
promptly on such Beneficial Owner's behalf.
See "The Exchange Offer -- Procedures for
Tendering Old Notes."
Guaranteed Delivery Procedures... Holders of Old Notes who wish to tender
their Old Notes and (i) whose Old Notes are
not immediately available or (ii) who cannot
deliver their Old Notes or any other
documents required by the Letter of
Transmittal to the Exchange Agent prior to
the Expiration Date (or complete the
procedure for book-entry transfer on a timely
basis), may tender their Old Notes according
to the guaranteed delivery procedures set
forth in the Letter of Transmittal. See "The
Exchange Offer -- Guaranteed Delivery
Procedures."
Acceptance of Old Notes and
Delivery of New Notes.......... Following effectiveness of the Exchange
Offer Registration Statement and the
consummation of the Exchange Offer
thereafter, the Company will accept any and
all Old Notes that are properly tendered in
the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The
New Notes issued pursuant to the Exchange
Offer will be delivered promptly after
acceptance of the Old Notes. See "The
Exchange Offer -- Acceptance of Old Notes for
Exchange; Delivery of New Notes."
Withdrawal Rights............... Tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City
time, on the Expiration Date. See "The
Exchange Offer -- Withdrawal Rights."
The Exchange Agent.............. U.S. Bank Trust National Association is the
exchange agent (in such capacity, the
"Exchange Agent"). The address and telephone
number of the Exchange Agent are set forth in
"The Exchange Offer -- The Exchange Agent;
Assistance."
Fees and Expenses............... All expenses incident to the Company's and
the Guarantors' consummation of the Exchange
Offer and compliance with the Registration
Rights Agreement will be borne by the
Company. The Company will also pay certain
transfer taxes applicable to the Exchange
Offer. See "The Exchange Offer -- Fees and
Expenses."
Resales of the New Notes........ Based on existing interpretations by the
staff of the Commission set forth in
"no-action" letters issued to third parties,
the Company believes that New Notes issued
pursuant to the Exchange Offer to any holder
of Old Notes in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by such holder (other than (i) a
broker-dealer who purchased the Old Notes
directly from the Company for resale pursuant
to Rule 144A under the Securities Act or any
other available exemption under the
Securities Act or (ii) a person that is an
affiliate of the Company within the meaning
of Rule 405 under the Securities Act),
without compliance with the registration and
prospectus delivery provisions of the
Securities Act, provided that such holder is
acquiring the New Notes in the ordinary
course of business and is not participating,
and has no arrangement or understanding with
any person to participate, in a distribution
of the New Notes. Each broker-dealer that
receives New Notes for its own account
pursuant to the Exchange Offer, where such
Old Notes were acquired by such broker as a
result of market-making or other trading
activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes. See "The Exchange
Offer -- Resales of the New Notes" and "Plan
of Distribution."
9
<PAGE>
Effect of Not Tendering Old Notes
for Exchange................... Old Notes that are not tendered or that are
not properly tendered will, following the
expiration of the Exchange Offer, continue to
be subject to the existing restrictions upon
transfer thereof. Except for certain limited
circumstances, the Company will have no
further obligations to provide for the
registration under the Securities Act of such
Old Notes following the expiration of the
Exchange Offer, and such Old Notes will, bear
interest at the same rate as the New Notes.
Description of New Notes
Notes Offered................... $125,000,000 aggregate principal amount of
11% Senior Subordinated Notes due 2008,
Series B.
Maturity Date................... August 1, 2008.
Interest Payment Dates.......... February 1 and August 1 of each year,
commencing February 1, 1999.
Optional Redemption............. The Notes are redeemable for cash at the
option of the Company, in whole or in part at
any time on or after August 1, 2003 at the
redemption prices set forth herein, together
with accrued and unpaid interest, if any, to
the date of redemption. In addition, at any
time prior to August 1, 2001, the Company may
redeem up to 35% of the original aggregate
principal amount of the Notes with the net
proceeds of one or more Public Equity
Offerings (as defined herein) at a redemption
price in cash equal to 111% of the principal
amount thereof, together with accrued and
unpaid interest, if any, to the redemption
date, provided that not less than 65% of the
aggregate principal amount of Notes
originally issued remain outstanding
immediately after such redemption. See
"Description of the New Notes -- Optional
Redemption."
Guarantees...................... The Old Notes are, and the New Notes will
be, guaranteed, jointly and severally, on a
senior subordinated basis, by all of the
Company's existing subsidiaries. See
"Description of the New Notes -- Guarantees."
Change of Control............... Upon the occurrence of a Change of Control,
each holder of the Notes may require the
Company to purchase all or a portion of such
holder's Notes at a cash purchase price equal
to 101% of the principal amount thereof,
together with accrued and unpaid interest, if
any, to the date of repurchase. See
"Description of the New Notes -- Purchase of
Notes Upon a Change of Control."
Ranking and Asset Encumbrances... The Notes will be unsecured senior
subordinated obligations of the Company and,
as such, will be subordinated in right of
payment to all other existing and future
senior indebtedness of the Company and will
rank pari passu in right of payment with all
other existing and future senior subordinated
indebtedness of the Company. The Guarantees
will be unsecured senior subordinated
obligations of the Guarantors and will be
subordinated in right of payment to all
existing and future senior indebtedness of
the Guarantors. As of June 30, 1998, on a pro
forma basis after giving effect to the 1998
Acquisitions and the Prior Offering and the
application of the net proceeds therefrom,
(i) the Company and the Guarantors would have
had $4.3 million in aggregate principal
amount of indebtedness outstanding which
would have ranked senior in right of payment
to the Notes ($2.9 million of which would
have been secured) and no indebtedness pari
passu to the Notes or the Guarantees, as the
case may be, (ii) the Company would also have
had $3.7 million of indebtedness senior to,
and $5.5 million of indebtedness
10
<PAGE>
subordinated to, the Notes and (iii) the
Guarantors would also have had $199.0
million of floor plan indebtedness and $3.2
million of additional indebtedness which
would have ranked senior in right of payment
to the Guarantees ($3.0 million of which
would have been secured).
Certain Covenants............... The indenture relating to the Notes (the
"Indenture") contains certain restrictive
covenants, including, but not limited to,
covenants with respect to the following
matters: (i) limitation on indebtedness; (ii)
limitation on restricted payments; (iii)
limitation on transactions with affiliates;
(iv) limitation on liens; (v) limitation on
disposition of proceeds of asset sales; (vi)
limitation on issuances of guarantees of and
pledges for indebtedness; (vii) limitation on
other senior subordinated indebtedness;
(viii) limitation on dividend and other
payment restrictions affecting subsidiaries;
(ix) limitation on unrestricted subsidiaries;
(x) limitation on the issuance of preferred
stock of subsidiaries; and (xi) restrictions
on mergers, consolidations and the transfer
of all or substantially all of the assets of
the Company. See "Description of the New
Notes -- Certain Covenants."
Use of Proceeds................. There will be no proceeds payable to the
Company or the Guarantors from this Exchange
Offer. The Company and the Guarantors are
conducting the Exchange Offer to satisfy
certain of their obligations under the
Registration Rights Agreement executed in
connection with the issuance of the Old
Notes. See "Use of Proceeds."
Registration Rights............. In connection with the sale of the Old
Notes, the Company and the Guarantors agreed,
at the Company's and the Guarantors' cost, to
use their reasonable best efforts to (i) file
within 60 days, and cause to become effective
within 135 days, of the date of original
issuance of the Old Notes, a registration
statement (the "Registration Statement"), of
which this Prospectus is a part, with respect
to a registered offer to exchange the Old
Notes for the New Notes with terms identical
in all material respects to the Old Notes
(except that the New Notes will not contain
terms with respect to transfer restrictions
or interest rate increases as described
below) and (ii) cause the Exchange Offer to
be consummated within 165 days of the
original issuance of the Old Notes. In the
event that any changes in law or the
applicable interpretations of the staff of
the Commission do not permit the Issuers to
effect the Exchange Offer, or if the Exchange
Offer Registration Statement is not declared
effective within 135 days or consummated
within 165 days following the date of
original issuance of the Old Notes, or upon
the request of any of the Initial Purchasers,
or if any holder of the Old Notes is not
permitted by applicable law to participate in
the Exchange Offer or elects to participate
in the Exchange Offer but does not receive
fully tradeable New Notes pursuant to the
Exchange Offer, the Issuers will use their
reasonable best efforts to cause a shelf
registration statement with respect to the
resale of the Old Notes (the "Shelf
Registration Statement") to become effective
within 165 days following the date of
original issuance of the Old Notes and to
keep the Shelf Registration Statement
effective for up to two years from the date
the Shelf Registration Statement is declared
effective by the Commission. The interest
rate on the Old Notes is subject to increase
under certain circumstances if the Company
and the Guarantors are not in compliance with
their obligations under the Registration
Rights Agreement. See "Exchange Offer."
11
<PAGE>
Absence of a Public Market for
the Notes...................... There is no public trading market for the
New Notes and the Company does not intend to
apply for listing of the New Notes on any
national securities exchange or for quotation
of the New Notes on any automated dealer
quotation system. The Company has been
advised by the Initial Purchasers that they
presently intend to make a market in the
Notes, although they are under no obligation
to do so and may discontinue any market
making activities at any time without any
notice. The Notes are eligible for trading in
the Private Offerings, Resale and Trading
through Automated Linkages ("PORTAL") market.
However, no assurance can be given as to the
liquidity of the trading market for the Notes
or that an active public market for the Notes
will develop. If an active trading market for
the Notes does not develop, the market price
and liquidity of the Notes may be adversely
affected. If the Notes are traded, they may
trade at a discount from their initial
offering price, depending on prevailing
interest rates, the market for similar
securities, the performance of the Company
and certain other factors. See "Risk Factors
-- Absence of Public Market for the Notes."
Risk Factors
See "Risk Factors" beginning on page 15 for a discussion of certain
factors that should be considered by prospective investors in evaluating an
investment in the Notes.
12
<PAGE>
Summary Historical and Pro Forma Consolidated Financial and Operating Data
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
--------------------------------------------------- -----------------------
Pro
Actual Forma Actual
----------------------------------- --------------- -----------------------
1995 1996(a) 1997(b) 1997(c) 1997(b) 1998
----------- ----------- ----------- --------------- ----------- -----------
(Unaudited)
---------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Income Statement Data:
Revenues ................................... $311,323 $376,867 $536,001 $ 1,806,453 $212,886 $648,840
Cost of sales .............................. 272,130 332,122 473,003 1,584,691 189,254 566,392
-------- -------- -------- ----------- -------- --------
Gross profit ............................... 39,193 44,745 62,998 221,762 23,632 82,448
Selling, general and administrative
expenses ................................. 28,091 32,602 46,770 161,038 17,532 59,622
Operating income ........................... 10,270 11,067 14,906 54,095 5,704 20,975
Interest expense, floor plan ............... 4,504 5,968 8,007 19,123 3,018 7,341
Interest expense, other .................... 436 433 1,199 15,163 318 2,745
Income before income taxes and
minority interest ........................ 5,436 5,021 5,998 20,997 2,503 10,904
Net income ................................. 3,238 2,983 3,702 12,678 1,540 6,804
Consolidated Balance Sheet Data:
Cash and cash equivalents .................. $ 8,993 $ 6,679 $ 18,304 $ 9,238 $ 27,228
Receivables, net ........................... 9,085 11,908 19,784 12,897 35,761
Inventories ................................ 51,348 71,550 156,514 73,410 175,515
Property and equipment, net ................ 8,527 12,467 19,081 13,270 22,040
Total assets ............................... 79,462 110,976 291,450 120,384 369,623
Notes payable -- floor plan ................ 45,151 63,893 133,236 67,855 149,670
Long-term debt, including current
portion (d) .............................. 6,950 6,719 49,563 9,979 65,538
Minority interest .......................... 200 314 -- -- --
Stockholders' equity ....................... 16,306 26,295 84,365 28,406 103,401
Other Consolidated Financial Data:
Revenues:
Vehicle sales ............................ $267,650 $327,674 $467,858 $ 1,592,802 $185,216 $567,279
Parts, service and collision repairs ..... 35,860 42,075 57,537 176,299 22,907 68,020
Finance and insurance .................... 7,813 7,118 10,606 37,352 4,763 13,541
EBITDAR(e) ................................. $ 7,681 $ 7,619 $ 10,668 $ 55,117 $ 3,760 $ 19,337
Rental expense ............................. 977 1,089 2,149 12,328 543 3,837
-------- -------- -------- ----------- -------- --------
EBITDA(f) .................................. $ 6,704 $ 6,530 $ 8,519 $ 42,789 $ 3,217 $ 15,500
======== ======== ======== =========== ======== ========
Depreciation and amortization .............. $ 832 $ 1,076 $ 1,322 $ 6,629 $ 396 $ 1,851
Capital expenditures ....................... 1,509 1,907 2,007 886 1,261
Ratio of EBITDA to interest expense,
other .................................... 2.8x
Ratio of long-term debt to EBITDA(g) .......
Other Operating Data:
Dealerships ................................ 4 5 20 37 6 26
New vehicles units sold(h) ................. 10,273 11,693 15,715 48,079 6,533 16,601
Used vehicles units sold(h) ................ 5,172 5,488 6,712 32,478 2,638 9,719
<CAPTION>
Six Months
Ended June
30, 30,
------------- -------------
Pro
Forma
-------------
1998(c)
-------------
(Unaudited)
-------------
<S> <C>
Consolidated Income Statement Data:
Revenues ................................... $ 963,509
Cost of sales .............................. 842,184
---------
Gross profit ............................... 121,325
Selling, general and administrative
expenses ................................. 87,797
Operating income ........................... 30,395
Interest expense, floor plan ............... 10,061
Interest expense, other .................... 7,651
Income before income taxes and
minority interest ........................ 13,031
Net income ................................. 8,019
Consolidated Balance Sheet Data:
Cash and cash equivalents .................. $ 37,589
Receivables, net ........................... 43,550
Inventories ................................ 228,549
Property and equipment, net ................ 23,583
Total assets ............................... 512,177
Notes payable -- floor plan ................ 199,037
Long-term debt, including current
portion (d) .............................. 140,843
Minority interest .......................... --
Stockholders' equity ....................... 130,776
Other Consolidated Financial Data:
Revenues:
Vehicle sales ............................ $ 848,235
Parts, service and collision repairs ..... 94,070
Finance and insurance .................... 21,204
EBITDAR(e) ................................. $ 29,965
Rental expense ............................. 6,150
---------
EBITDA(f) .................................. $ 23,815
=========
Depreciation and amortization .............. $ 3,133
Capital expenditures .......................
Ratio of EBITDA to interest expense,
other .................................... 3.1x
Ratio of long-term debt to EBITDA(g) ....... 3.3x
Other Operating Data:
Dealerships ................................ 37
New vehicles units sold(h) ................. 25,195
Used vehicles units sold(h) ................ 17,094
</TABLE>
- ---------
(a) The Company acquired Fort Mill Ford, Inc. in February 1996. The acquisition
was accounted for using the purchase method of accounting. As a result,
the actual financial data does not include the results of this dealership
prior to the date it was acquired by the Company. Accordingly, the actual
financial data for periods after the acquisition may not be comparable to
data presented for periods prior to the acquisition.
(b) The Company acquired Fort Mill Chrysler-Plymouth-Dodge in June 1997, Lake
Norman Chrysler/Plymouth/Jeep and Lake Norman Dodge in September 1997,
Williams Motors and Ken Marks Ford in October 1997, and the Bowers
Automotive Group and Dyer & Dyer Volvo in November 1997 (collectively, the
"1997 Acquisitions"). The 1997 Acquisitions were accounted for using the
purchase method of accounting. As a result, the actual financial data does
not include the results of operations of these dealerships prior to the
date they were acquired by the Company. Accordingly, the actual financial
data for periods after the acquisitions may not be comparable to data
presented for periods prior to the acquisitions.
(footnotes continued on following page)
13
<PAGE>
(c) For information regarding the unaudited pro forma adjustments made to the
Company's historical financial data, which give effect to the IPO, the
Reorganization, the 1997 Acquisitions and the 1998 Acquisitions
(collectively, the "Acquisitions"), and the Prior Offering and the
application of the net proceeds therefrom, see "Unaudited Pro Forma
Consolidated Financial Data."
(d) Long-term debt, including current portion, includes the payable to the
Company's Chairman and the payable to affiliates of the Company. See the
Company's Consolidated Financial Statements and the related notes included
elsewhere in this Prospectus.
(e) EBITDAR is defined as earnings before interest (other than interest expense
related to notes payable-floor plan), taxes, depreciation, amortization,
rent expense and other non-recurring charges. While EBITDAR should not be
construed as a substitute for operating income or as a better measure of
liquidity than cash flows from operating activities, which are determined
in accordance with generally accepted accounting principles, it is
included herein to provide additional information with respect to the
ability of the Company to meet future debt service, capital expenditures
and working capital requirements. This measure may not be comparable to
similarly titled measures reported by other companies.
(f) EBITDA is defined as earnings before interest (other than interest expense
related to notes payable-floor plan), taxes, depreciation, amortization
and other non-recurring charges which is consistent with the measure used
to calculate the Company's Consolidated Fixed Charge Coverage Ratio for
purposes of the limitations on indebtedness covenant in the Indenture.
While EBITDA should not be construed as a substitute for operating income
or as a better measure of liquidity than cash flows from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional
information with respect to the ability of the Company to meet future debt
service, capital expenditures and working capital requirements. This
measure may not be comparable to similarly titled measures reported by
other companies.
(g) Ratio of long-term debt to EBITDA for the pro forma six months ended June
30, 1998 is calculated by dividing pro forma long-term debt, including
current portion, at June 30, 1998 by EBITDA for the pro forma year ended
December 31, 1997.
(h) The number of units sold consists of retail sales to consumers as opposed
to wholesale sales.
14
<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.
Adverse Consequences of Financial Leverage
As of June 30, 1998, on a pro forma basis, the Company's total
consolidated long-term indebtedness (including certain affiliated payables),
total consolidated short-term indebtedness (including floor plan notes payable)
and total stockholders' equity would have been $139.6 million, $202.1 million
and $130.8 million, respectively. In addition, the Indenture and the Company's
and the Guarantors' other debt instruments will allow the Company and the
Guarantors to incur certain additional indebtedness, including secured
indebtedness. The Indenture permits the Company to incur inventory financing
without satisfaction of the fixed charge coverage test. See "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Description of the New Notes" and "Description of Certain Other
Indebtedness."
The degree to which the Company is leveraged could have important
consequences to the holders of Notes, including the following: (i) the
Company's ability to obtain additional financing for acquisitions, capital
expenditures, working capital or general corporate purposes may be impaired in
the future; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on the
Notes and borrowings under the Revolving Facility and a standardized floor plan
credit facility with Ford Motor Credit for each of the Company's dealership
subsidiaries (the "Floor Plan Facility" and, together with the Revolving
Facility, the "Ford Credit Facilities") and other indebtedness, thereby
reducing the funds available to the Company for its operations and other
purposes; (iii) certain of the Company's borrowings are and will continue to be
at variable rates of interest, which exposes the Company to the risk of
increased interest rates; (iv) the indebtedness outstanding under the Ford
Credit Facilities is secured by a pledge of substantially all the assets of the
Company's dealerships and will mature prior to the maturity of the Notes; and
(v) the Company may be substantially more leveraged than certain of its
competitors, which may place the Company at a relative competitive disadvantage
and make the Company more vulnerable to changing market conditions and
regulations. See "Description of the New Notes" and "Description of Certain
Other Indebtedness."
The Ford Credit Facilities and the Indenture contain numerous financial
and operating covenants that will limit the discretion of the Company's and the
Guarantors' management with respect to certain business matters. These
covenants will place significant restrictions on, among other things, the
ability of the Company or any of the Guarantors to incur additional
indebtedness, to create liens or other encumbrances, to make certain payments
and investments, and to sell or otherwise dispose of assets and merge or
consolidate with other entities. The Ford Credit Facilities also require the
Company and the Guarantors to meet certain financial ratios and tests. A
failure of the Company and the Guarantors to comply with the obligations
contained in the Ford Credit Facilities or the Indenture could result in an
event of default under the Ford Credit Facilities or the Indenture, which could
permit acceleration of the related debt and acceleration of debt under other
instruments that may contain cross acceleration or cross-default provisions.
See "Description of Certain Other Indebtedness." The Company did not meet the
specified debt to tangible equity ratio covenant of the Revolving Facility at
December 31, 1997, at March 31, 1998 and at June 30, 1998 and has obtained
waivers with regard to such requirement from Ford Motor Credit. The waivers are
subject to certain requirements to the effect that the Company meet modified
ratios. In connection with the issuance of the Old Notes, the Company and Ford
Motor Credit amended the Revolving Facility to provide that the Notes (which
are subordinated to the Revolving Facility) will be treated as equity capital
for purposes of this ratio and, accordingly, the Company is in compliance with
this covenant after giving effect to its issuance of the Old Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 12 to the Consolidated
Financial Statements.
The Company believes that, based on its current level of operations, it
will have sufficient capital to carry on its business, including acquisitions,
and will be able to meet its scheduled debt service requirements for the
forseeable future, although the Company may need to refinance the repayment of
principal of the Notes at maturity. However, there can be no assurance that the
future cash flow of the Company will be sufficient to meet the Company's
obligations and commitments. If the Company is unable to generate sufficient
cash flow from operations in the future to service its indebtedness and to meet
its other commitments, the Company will be required to adopt one or more
alternatives, such as refinancing or restructuring its debt or equity capital.
There can be no assurance that any of these actions could be effected on a
timely basis or on satisfactory terms or that these actions would enable the
Company to continue to satisfy its capital requirements. In addition, the terms
of existing or future franchise agreements or debt agreements, including the
Indenture and the Ford Credit Facilities, may prohibit the Company from
adopting any of these alternatives. See " -- Stock Ownership/Issuance Limits;
Limitation on Ability to Issue Additional Equity," and "Description of the New
Notes."
15
<PAGE>
Subordination of the Notes and the Guarantees; Asset Encumbrances; Change of
Control Offer
The payment of the principal of, premium, if any, and interest on the
Notes will be subordinated to the prior payment in full of all existing and
future senior indebtedness of the Company. Therefore, in the event of a
liquidation, dissolution, reorganization or any similar proceeding regarding
the Company, the assets of the Company will be available to pay obligations on
the Notes only after senior indebtedness has been paid in full, and there may
not be sufficient assets to pay amounts due on all or any of the Notes. In
addition, the Company may not pay principal of, premium, if any, interest on or
any other amounts owing in respect of the Notes, make any deposit pursuant to
defeasance provisions or purchase, redeem or otherwise retire the Notes, if any
senior indebtedness is not paid when due or any other default on senior
indebtedness occurs and the maturity of such indebtedness is accelerated in
accordance with its terms unless, in either case, such default has been cured
or waived, any such acceleration has been rescinded or such indebtedness has
been repaid in full. Moreover, under certain circumstances, if any non-payment
default exists with respect to Designated Senior Indebtedness (as defined
herein), the Company may not make any payments on the Notes for a specified
time, unless such default is cured or waived, any acceleration of such
indebtedness has been rescinded or such indebtedness has been repaid in full.
See "Description of the New Notes -- Ranking."
The Notes will be unsecured senior subordinated obligations of the Company
and, as such, will be subordinated in right of payment with all other existing
and future senior indebtedness of the Company and the Guarantors and pari passu
in right of payment to all existing and future senior subordinated indebtedness
of the Company and the Guarantors. As of June 30, 1998, on a pro forma basis
after giving effect to the 1998 Acquisitions and the Prior Offering and the
application of the net proceeds thereof, (i) the Company and the Guarantors
would have had $4.3 million in aggregate principal amount of indebtedness
outstanding which would have ranked senior in right of payment to the Notes
($2.9 million of which would have been secured) and no indebtedness pari passu
to the Notes or the Guarantees, as the case may be, (ii) the Company would also
have had $3.7 million of indebtedness senior to, and $5.5 million of
indebtedness subordinated to, the Notes and (iii) the Guarantors would also
have had $199.0 million of floor plan indebtedness and $3.2 million of
additional indebtedness which would have ranked senior in right of payment to
the Guarantees ($3.0 million of which would have been secured).
The Notes will not be secured by any assets of the Company or the
Guarantors. The indebtedness under the Ford Credit Facilities is secured by (i)
a pledge by the Company of all the capital stock, membership interests and
partnership interests of all of the Company's subsidiaries, (ii) guarantees by
all of the Company's subsidiaries that are, in turn, secured by a lien on all
of the assets of such subsidiaries (with the exception of the liens on the
assets of the Company's Ford dealership subsidiaries, which liens secure only
such Ford subsidiaries' obligations under the Floor Plan Facility) and (iii) a
lien on all of the Company's other assets, except for real estate owned by the
Company or its subsidiaries. In the event of a default on the Notes or a
bankruptcy, liquidation or reorganization of the Company, such assets will be
available to satisfy the obligations with respect to the indebtedness secured
thereby before any payment therefrom could be made on the Notes. In addition,
the Ford Credit Facilities are partially secured by a pledge of shares of
Speedway Motorsports, Inc. ("Speedway Motorsports") common stock owned by Sonic
Financial Corporation ("Sonic Financial"), a corporation controlled by Bruton
Smith. See "Certain Transactions -- The Smith Guarantees and Pledges."
Upon a Change of Control, the Company is required to offer to repurchase
all outstanding Notes at 101% of the principal amount thereof plus accrued and
unpaid interest to the repurchase date. However, there can be no assurance that
sufficient funds will be available at the time of any Change of Control to make
any required repurchases of Notes tendered. Moreover, the Revolving Facility
provides that certain change of control events with respect to the Company
would constitute a default thereunder. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to holders of Notes.
There can be no assurance that the Company will be able to obtain appropriate
consents under the Revolving Facility to enable it to fulfill such repurchase
obligations. Notwithstanding these provisions, the Company could enter into
certain transactions, including certain recapitalizations, that would not
constitute a Change of Control but would increase the amount of debt
outstanding at such time. See "Description of the New Notes -- Purchase of
Notes Upon a Change of Control."
Dependence Upon Operations of Subsidiaries; Possible Invalidity of Guarantees;
Potential Release of Guarantees; Fraudulent Conveyance
The Notes are the obligations of the Company. As of June 30, 1998,
substantially all of the consolidated assets of the Company were held by the
Guarantors and substantially all of the Company's cash flow and net income were
generated by the Guarantors. Therefore, the Company's ability to make interest
and principal payments when due to holders of the Notes is dependent, in part,
upon the receipt of sufficient funds from its subsidiaries.
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The Company's obligations under the Notes will be guaranteed on a senior
subordinated basis by the Guarantors. To the extent that a court were to find,
pursuant to federal or state fraudulent transfer laws or otherwise, that (i)
the Guarantees were incurred by the Guarantors with intent to hinder, delay or
defraud any present or future creditor or the Guarantors contemplated
insolvency with a design to prefer one or more creditors to the exclusion in
whole or in part of others; or (ii) a Guarantor did not receive fair
consideration or reasonably equivalent value for issuing its Guarantee and the
Guarantor (a) was insolvent, (b) was rendered insolvent by reason of the
issuance of the Guarantee, (c) was engaged or about to engage in a business or
transaction for which the remaining assets of the Guarantor constituted
unreasonably small capital to carry on its business, (d) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as
they matured or (e) was a defendant in an action for money damages or had a
judgment for money damages docketed against it (in either case, if after final
judgment, the judgment remained unsatisfied), the court could avoid or
subordinate the Guarantee in favor of the Guarantor's other creditors. Among
other things, a legal challenge of a Guarantee on fraudulent conveyance grounds
may focus on the benefits, if any, realized by the Guarantor as a result of the
issuance by the Company of the Notes. The measure of insolvency of the
Guarantor for purposes of the foregoing will vary depending upon the law of the
relevant jurisdiction. Generally, however, a company would be considered
insolvent for purposes of the foregoing if the sum of the company's debts is
greater than all of the company's property at a fair valuation, or if the
present fair saleable value of the company's assets is less than the amount
that will be required to pay its probable liability on its existing debts as
they become absolute and mature. There can be no assurance as to what standards
a court would apply to determine whether a Guarantor was solvent at the
relevant time. To the extent that a Guarantee were to be avoided as a
fraudulent conveyance or held unenforceable for any other reason, holders of
the Notes would cease to have any claim in respect of such Guarantor and would
be creditors solely of the Company and of the Guarantors whose Guarantees had
not been avoided or held unenforceable. In such event, the claims of the
holders of the Notes against the issuer of an invalid Guarantee would be
subject to the prior payment in full of all liabilities of such Guarantor
thereunder. There can be no assurance that, after providing for all prior
claims, there would be sufficient assets to satisfy the claims of the holders
of the Notes relating to the voided Guarantees.
Based upon financial and other information currently available to it, the
Company believes that the Notes and the Guarantees are being incurred for
proper purposes and in good faith and that each of the Company and the
Guarantors is solvent and will continue to be solvent after issuing the Notes
or the Guarantees, as the case may be, will have sufficient capital for
carrying on its business after such issuance and will be able to pay its debts
as they mature. See "Description of the New Notes," "Description of Certain
Other Indebtedness" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Guarantees may be released under certain circumstances upon resale,
exchange or transfer by the Company of the stock of the related Guarantor or
all or substantially all of the assets of such Guarantor to a non-affiliate.
See "Description of the New Notes -- Certain Covenants -- Limitation on
Issuances of Guarantees of and Pledges for Indebtedness."
In addition, the Company anticipates that some of the net proceeds of the
Offering will be applied to repay a portion of the indebtedness incurred by it
under the Revolving Facility, which was incurred to finance acquisitions by the
Company and its subsidiaries, and under the Floor Plan Facility. To the extent
that a court were to find that the issuance of the Notes violated federal or
state fraudulent transfer or conveyance laws, in the manner described above
with respect to the Guarantors, the court could avoid or modify the Company's
obligations to holders of the Notes in favor of the Company's other creditors.
To the extent that the issuance of the Notes were to be avoided as a fraudulent
conveyance or held unenforceable for any other reason, holders of the Notes
would cease to have any claim in respect of the Company and would be creditors
solely of the Guarantors whose Guarantees had not been avoided or held
unenforceable. In such event, the claims of the holders of the Notes against
the Company would be subject to the prior payment in full of all liabilities of
the Company. There can be no assurance that, after providing for all prior
claims, there would be sufficient assets to satisfy the claims of the holders
of the Notes.
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 relationships with such Manufacturers.
Vehicles manufactured by Ford Motor Company ("Ford"), Chrysler Corporation
("Chrysler"), Toyota Motor Sales (U.S.A.) ("Toyota") and General Motors
Corporation ("GM") accounted for approximately 42.4%, 18.6%, 10.9% and 6.7%,
respectively, of the Company's 1997 new vehicle revenues on a pro forma basis.
No other Manufacturer accounted for more than 5% of the pro forma new vehicle
sales of the Company during 1997. See "Business -- New Vehicle Sales," and " --
Relationships with Manufacturers." Accordingly, a significant decline in the
sale of Ford, Chrysler, Toyota or GM new cars could have a
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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 has no reason to
believe that it will not be able to renew all of its existing 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 Manufacturers, and Ford, Chrysler,
Toyota or GM in particular, could have a material adverse effect 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 affected
Manufacturer in order to carry an adequate level and mix of inventory.
Consequently, such events could materially adversely affect the financial
results of the Company. In June 1998, the United Auto Workers went on strike at
two GM facilities in Flint, Michigan. The strike lasted 53 days, causing 27 GM
manufacturing facilities to shut down during the strike and severely affecting
production of GM vehicles during the strike period. 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, except for
Jaguar's refusal to approve the acquisition of the Chattanooga Jaguar franchise
comprising a portion of the 1997 Acquisitions which Jaguar claimed was in part
due to CSI scores below the level expected of Jaguar dealership franchises.
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.
The Company must also obtain approvals by the applicable Manufacturer for
any of its acquisitions. See " -- Risks Associated with Acquisitions."
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 is
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."
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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 year ended December 31, 1997, industry retail
sales increased 0.1% as a result of retail car sales declines of 2.7% offset by
retail truck sales gains of 3.8% from the same period in 1996. As of May 31,
1998, industry retail sales for the year to date increased 1.1% as a result of
retail car sales declines of 3.2% offset by retail truck sale gains of 6.4%
from the same period in 1997. 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 Company's dealerships currently are located in
the Charlotte, Chattanooga, Daytona Beach, Nashville, Tampa/Clearwater,
Houston, Atlanta, Columbus, Greenville/Spartanburg and Montgomery markets.
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 and Columbus markets, as well as various other factors,
such as tax rates and state and local regulations, specific to North Carolina,
Tennessee, Florida, Texas, Georgia, Ohio, South Carolina and Alabama. 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 -- Strategy -- Acquire
Dealerships."
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 used car market faces increasing competition from non-traditional
outlets such as used-vehicle "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 many of the markets where
the Company has significant operations, used vehicle superstores operate in
competition with the Company. "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, Ford has announced that it is entering into joint ventures to acquire
dealerships in various cities in the United States and other manufacturers may
also 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 grant 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 businesses to be
purchased in the 1998 Acquisitions in light of the circumstances of each
transaction, certain unavoidable levels of risk remain regarding the actual
operating condition of these businesses. 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
any of the 1998 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.
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Risks of Consolidating Operations as a Result of Acquisitions
In connection with the 1998 Acquisitions, Sonic acquired or is acquiring
17 dealerships. Each of these dealerships 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. There can be no assurance that the management
group will be able to effectively and profitably integrate in a timely manner
any of the dealerships included in the 1998 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
1998 Acquisitions, into existing operations. In pursuing a strategy of
acquiring other dealerships, including the 1998 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 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. Failure to retain qualified management personnel at any acquired
dealership may increase the risk associated with integrating such acquired
dealership. 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 approximately six
months 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 1998 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 1998 Acquisitions,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Strategy -- Acquire Dealerships."
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. 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 be prohibited by the
Company's franchise agreements with Manufacturers. See " -- Stock
Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity."
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 1998 Acquisitions,"
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Strategy --
Acquire Dealerships."
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, 1998, the Company had approximately $149.7 million of
floor plan indebtedness outstanding, all of which is under the Floor Plan
Facility. 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. Ford Motor Credit is associated with Ford. Consequently,
deterioration of the Company's relationship with Ford could adversely affect
its relationship with Ford Motor Credit 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."
Bruton Smith initially guaranteed the obligations of the Company under the
Revolving Facility and such obligations were further secured with a pledge of
shares of common stock of Speedway Motorsports owned by Sonic Financial, a
corporation controlled by Mr. Smith, and having an estimated value at the time
of pledge of approximately $50.0 million (the "Revolving Pledge"). In December
1997, upon the increase of the borrowing limit under the Revolving Facility to
the maximum loan commitment of $75.0 million, Mr. Smith's personal guarantee of
the Company's obligations under the Revolving Facility was released, although
the Revolving Pledge remained in place and Mr. Smith was required to lend $5.5
million (the "Subordinated Smith Loan") to the Company to increase its
capitalization. The Subordinated Smith Loan was required by Ford Motor Credit
as a condition to its agreement to increase the borrowing limit under the
Revolving Facility because the net offering proceeds to the Company from its
IPO in November 1997 were significantly less than expected by the Company and
Ford Motor Credit. For further discussion of the Revolving Pledge and the
Subordinated Smith Loan, see "Certain Transactions -- The Smith Guarantees,
Pledges and Subordinated Loan." No assurance can be given that Mr. Smith or
Sonic Financial will provide similar or additional security or capitalization
for the benefit of the Company in connection with future refinancings of the
Company's debt or future additions or increases in financing sources of the
Company.
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. All of the Manufacturers of which
Company subsidiaries are franchisees, except for Jaguar, have agreed to permit
trading in the Class A Common Stock. A number of Manufacturers impose
restrictions upon the transferability of the Class A 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 the current holders of the Company's Class B
Common Stock and their lineal descendants and affiliates (collectively, 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")
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 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. See "Business --
Relationships with Manufacturers." In a similar manner, the Company's lending
arrangements 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."
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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. In the
course of acquiring Jaguar franchises associated with dealerships in
Chattanooga, Tennessee and Greenville, South Carolina, Jaguar declined to
consent to the Company's proposed acquisitions of those franchises.
Subsequently, the Company agreed with Jaguar not to acquire any Jaguar
franchise until August 3, 2001. See " -- No Consent from Jaguar." 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 1997 Acquisitions and the 1998 Acquisitions, other than Jaguar, which was
not obtained, took 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. Excluding Jaguar, the Company
has obtained Manufacturer consent to all of the 1998 Acquisitions other than
from Honda in the Economy Honda Acquisition. The Company currently expects to
receive the consent of Honda to the Economy Honda Acquisition prior to the
closing of this acquisition, although there can be no assurance that such
consent will be obtained. See " -- No Consent from Honda." If the Company
experiences delays in obtaining, or fails to obtain, approvals of the
Manufacturers for acquisitions of dealerships, the Company's growth strategy
could be materially adversely affected. In determining whether to approve an
acquisition, the Manufacturers may consider many factors, including the moral
character, business experience, financial condition, ownership structure and
CSI scores of the Company and its management. In addition, under an applicable
franchise agreement or under state law a Manufacturer may have a right of first
refusal to acquire a dealership in the event the Company seeks to acquire a
dealership franchise.
In addition, a Manufacturer may limit the number of such Manufacturers'
dealerships that may be owned by the Company or the number that may be owned in
a particular geographic area. For example, Ford currently limits the Company to
no more than the lesser of (i) 15 Ford and 15 Lincoln Mercury dealerships or
(ii) that number of Ford and Lincoln Mercury dealerships accounting for 2% of
the preceding year's retail sales of those brands in the United States. It also
limits the Company to owning only one Ford dealership in any market area, as
defined by Ford, having three or less Ford dealerships in it and no more than
25% of the Ford dealerships in a market area having four or more Ford
dealerships. Chrysler has asked the Company to defer any further acquisitions
of Chrysler or Chrysler division dealerships until it has established a proven
performance record with the Chrysler dealerships it owns. BMW has made a
similar request. Moreover, Chrysler has previously 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. The Economy Honda Acquisition would violate Honda's contiguous
dealership policy since it would result in the Company having two contiguous
dealership points in Chattanooga. See "No Consent from Honda." GM has limited
the number of GM dealerships that the Company may acquire during the next 12
months 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 1997 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
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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 will own, after giving effect to the 1998 Acquisitions, nine
Chrysler franchises, seven Ford franchises, four BMW franchises, four GM
franchises, three Toyota franchises, three Volkswagen franchises, three KIA
franchises, three Mercury franchises, two Honda franchises, two Lincoln
franchises, two Hyundai franchises, two Mitsubishi franchises, and one
franchise each of Acura, Infiniti, Isuzu, Mercedes and Subaru. See " -- No
Consent from Honda" and " -- No Consent from Jaguar."
No Consent from Honda
The Company has requested the consent of Honda to the acquisition of a
Honda dealership located in Chattanooga, Tennessee (the "Economy Honda
Dealership") by the Company relating to the Economy Honda Acquisition. Honda
has informed the Company that its acquisition of the Economy Honda Dealership
would violate Honda's policy against the ownership of contiguous dealerships,
which the Company has agreed to in its agreement with Honda, since the Company
already owns the Cleveland Village Honda dealership located in the Chattanooga
market. Therefore, Honda has further informed the Company that its approval of
the Company's acquisition of the Economy Honda Dealership is contingent upon
the Company divesting its ownership of the Cleveland Village Honda dealership
prior to such acquisition. The Company is currently negotiating with potential
buyers for the sale of the Cleveland Village Honda dealership. There can be no
assurance that the Company will be able to sell the Cleveland Village Honda
dealership or that the approval of Honda to the Economy Honda Acquisition will
be obtained. On a pro forma basis, the Cleveland Village Honda dealership
accounted for, and the Economy Honda Dealership would have accounted for,
approximately 1.9% and 2.7% of the Company's 1997 revenues and approximately
2.1% and 3.0% of gross profits, respectively.
No Consent from Jaguar
In the course of acquiring Jaguar franchises in Chattanooga, Tennessee and
Greenville, South Carolina, Jaguar declined to consent to the Company's
proposed acquisitions of these franchises. The Company is operating the
Chattanooga Jaguar franchise pursuant to a Service and Parts Agreement with
Jaguar and is providing management services to the present owners of the
Greenville Jaguar franchise pursuant to a Services Agreement. Both of these
arrangements will terminate upon the respective sales of these franchises to
third parties approved by Jaguar in the future. In settling legal actions
brought against Jaguar by the seller of the Chattanooga Jaguar franchise, the
Company agreed with Jaguar not to acquire any Jaguar franchise until August 3,
2001. The Chattanooga and Greenville Jaguar franchises, individually and in the
aggregate, would have accounted for less than 1% of the Company's 1997 revenues
and gross profits on a pro forma basis.
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 or Nelson Bowers or
other affiliates of the Company, including transactions with MMRT, a real
estate investment trust for which Mr. Smith serves as chairman of MMRT's board
of trustees and is presently its largest shareholder. The Company has recently
entered into certain transactions with MMRT. See "Prospectus Summary -- Recent
Developments" and "Certain Transactions -- Transactions with MMRT." The Company
believes that all of its existing arrangements are favorable to the Company and
were entered into on terms that, taken as a whole, reflect arm's-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. 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."
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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, and an used-car auction house. 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 and is only permitted
to maintain a passive investment in these enterprises.
Under the General Corporation Law of Delaware 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 arm's-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.
In addition, the terms of the Ford Credit Facilities restrict, and the terms of
the Indenture will restrict, certain transactions with affiliates. See
"Description of the New Notes -- Certain Covenants -- Limitation on
Transactions with Affiliates."
Lack of Majority of Independent Directors
Independent directors do 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. These and other
transactions could present the potential for a conflict of interest between the
Company and its minority stockholders 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 Bruton Smith, Bryan Scott Smith, Dennis D.
Higginbotham, 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 -- Strategy -- Acquire Dealerships," " --
Competition" and "Management."
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,
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particularly Germany, 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 wastes and the remediation of contamination associated with such
disposal or release. Certain of these laws and regulations may impose joint and
several liability on certain statutory classes of persons for the costs of
investigation and/or remediation of contaminated properties, regardless of
fault or the legality of the original disposal. These persons include the
present or former owner or operator of a contaminated property and companies
that generated, disposed of or arranged for the disposal of hazardous
substances found at the property.
Past and present business operations of the Company subject to such laws
and regulations include the use, storage handling and contracting for recycling
or disposal of hazardous or toxic substances or wastes, including
environmentally sensitive materials such as motor oil, waste motor oil and
filters, transmission fluid, antifreeze, freon, waste paint and lacquer
thinner, batteries, solvents, lubricants, degreasing agents, gasoline and
diesel fuels. The Company is subject to other laws and regulations as a result
of the past or present existence of underground storage tanks at many of the
Company's properties. The Company, like many of its competitors, has incurred,
and will continue to incur, capital and operating expenditures and other costs
in complying with such laws and regulations. In addition, soil and groundwater
contamination exist at certain of the Company's properties, and there can be no
assurance that other properties have not been contaminated by any leakage from
underground storage tanks or by any spillage or other releases of hazardous or
toxic substances or wastes. In addition, in connection with the Company's
recent or expected acquisitions, the Company could become subject to new or
unforeseen environmental costs or liabilities, certain of which could be
material.
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
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. As of October 23, 1998, the holders of Class B Common
Stock had approximately 89.7% of the combined voting power of the outstanding
Voting Stock, representing 52.8% of the outstanding shares of Voting Stock.
Consequently, holders of Class B Common Stock 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. See "Principal
Stockholders."
Year 2000 Compliance
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures and it has completed an
assessment of its own operations in this regard. The Company has determined
that its systems are currently Year 2000 compliant and that the costs
associated with making its systems Year 2000 compliant were immaterial.
However, many of the Company's lenders and suppliers, including the Company's
suppliers that provide finance and insurance products, may be impacted by Year
2000 complications. The Company is in the process of making inquiries to its
lenders and suppliers regarding their Year 2000 compliance efforts, and it is
reviewing the Year 2000 disclosures in documents filed
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with the Commission for those lenders and suppliers that are publicly-held
companies. The Company does not believe that failure of the Company's lenders
or suppliers to ensure that their computer systems are Year 2000 compliant will
have a material adverse impact on the Company's business, results of
operations, and financial condition, although no assurances can be given in
this regard. Furthermore, there can be no assurances that Year 2000
deficiencies on the part of dealerships to be acquired by the Company would not
have a material adverse impact on the Company's business, results of
operations, and financial condition.
The Company has not yet established a contingency plan in the event that
its expectations regarding Year 2000 problems are incorrect, but the Company
intends to create such a contingency plan within the next six months. At this
time, it is impossible to state with certainty whether Year 2000 computer
software or equipment failures on the part of the Company or third parties
involved with the Company will have a material adverse impact on the Company's
results of operations, liquidity and financial condition. However, based on the
Company's assessment of its own operations, the Company believes that it is
adequately prepared to deal with Year 2000 problems which may arise.
Significant Materiality of Goodwill
On a pro forma basis, goodwill would have represented approximately 32.8%
and 128.6% of the Company's total assets and stockholders' equity,
respectively, as of June 30, 1998. Goodwill arises when an acquiror pays more
for a business than the fair value of the tangible and separately measurable
intangible net assets. Generally accepted accounting principles require that
this and all other intangible assets be amortized over the period benefited.
The Company determined that the period benefited by the goodwill will be no
less than 40 years. If the Company were not to separately recognize a material
intangible asset having a benefit period less than 40 years, or were not to
give effect to shorter benefit periods of factors giving rise to a material
portion of the goodwill, earnings reported in periods immediately following the
acquisition would be overstated. In later years, the Company would be burdened
by a continuing charge against earnings without the associated benefit to
income valued by management in arriving at the consideration paid for the
businesses. Earnings in later years also could be significantly affected if
management determined then that the remaining balance of goodwill was impaired.
The Company reviewed with its independent accountants all of the factors and
related future cash flows which it considered in arriving at the amount
incurred in the 1998 Acquisitions. The Company concluded that the anticipated
future cash flows associated with intangible assets recognized in the
acquisitions will continue indefinitely, and there is no persuasive evidence
that any material portion will dissipate over a period shorter than 40 years.
Absence of a Public Market for the Notes
The Notes are new securities for which there currently is no trading
market and there can be no assurance as to the liquidity of any market for the
Notes that may develop, the ability of holders of the Notes to sell their
Notes, or the prices at which holders of the Notes would be able to sell their
Notes. If such markets were to exist, the Notes could trade at prices higher or
lower than their initial purchase prices depending on many factors, including
prevailing interest rates, the Company's operating results and the market for
similar securities. Although the Initial Purchasers have informed the Company
that they currently intend to make a market in the Notes, the Initial
Purchasers are not obligated to do so, and any such market making may be
discontinued at any time without notice. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Notes. The Notes are
eligible for trading in the PORTAL market. The Company does not intend to apply
for listing of the Notes, or if issued, the Exchange Notes on any securities
exchange or for quotation on the National Association of Securities Dealers
Automated Quotation System.
Consequences of Failure to Exchange
Untendered Old Notes that are not exchanged for New Notes pursuant to the
Exchange Offer will remain restricted securities. Old Notes will continue to be
subject to the following restrictions on transfer and limitation of rights: (i)
Old Notes may be resold only if registered pursuant to the Securities Act, if
an exemption from registration is available thereunder, or if neither such
registration nor such exemption is required by law, (ii) Old Notes shall bear a
legend restricting transfer in the absence of registration or an exemption
therefrom, (iii) a holder of Old Notes who desires to sell or otherwise dispose
of all or any part of its Old Notes under an exemption from registration under
the Securities Act, if requested by the Company, must deliver to the Company an
opinion of counsel reasonably satisfactory in form and substance to the
Company, that such exemption is available and (iv) the Old Notes may no longer
have rights under the Registration Rights Agreement. Consequently, the Old
Notes will have less liquidity than the New Notes but will bear interest at the
same rate as that borne by the New Notes.
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THE EXCHANGE OFFER
Purpose and Effect
The Old Notes were issued by the Company to the Initial Purchasers on July
31, 1998, pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act.
In connection with the sale of the Old Notes, the purchasers thereof
became entitled to the benefits of certain registration rights. Pursuant to the
Registration Rights Agreement, the Company and the Guarantors agreed, for the
benefit of the holders of the Old Notes, at the Company's and the Guarantors'
cost, to use their reasonable best efforts (i) to file with the Commission the
Registration Statement of which this Prospectus is a part within 60 days after
the date of original issue of the Old Notes, (ii) to cause the Registration
Statement to be declared effective under the Securities Act within 135 days of
the date of original issue of the Old Notes, (iii) to keep the Registration
Statement effective until the closing of the Exchange Offer, and (iv) to cause
the Exchange Offer to be consummated within 165 days of the original issue date
of the Old Notes.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Company and the Guarantors to
effect the Exchange Offer, or if for any other reason the Exchange Offer
Registration Statement is not declared effective within 135 days of the date of
original issue of the Old Notes or the Exchange Offer is not consummated within
165 days of the date of original issue of the Old Notes, or upon the request of
any of the Initial Purchasers, or if a holder of the Old Notes is not permitted
by applicable law to participate in the Exchange Offer or elects to participate
in the Exchange Offer but does not receive fully tradeable New Notes pursuant
to the Exchange Offer, the Company and the Guarantors will, in lieu of
effecting the registration of the New Notes pursuant to the Exchange Offer
Registration Statement and at the Company's and the Guarantors' cost, (a) as
promptly as practicable, file with the Commission the Shelf Registration
Statement covering resales of the Old Notes, (b) use their reasonable best
efforts to cause the Shelf Registration Statement to be declared effective
under the Securities Act by the 165th day after the original issue of the Old
Notes and (c) use their reasonable best efforts to keep effective the Shelf
Registration Statement for a period of two years after its effective date (or
for such shorter period that will terminate when all of the Notes covered by
the Shelf Registration Statement have been sold pursuant thereto or cease to be
outstanding). The Company will, in the event of the filing of a Shelf
Registration Statement, provide to each holder of the Old Notes copies of the
prospectus which is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement for the Notes has become
effective and take certain other actions as are required to permit unrestricted
resales of the Notes. A holder of Notes who sells such Notes pursuant to the
Shelf Registration Statement generally will be required to be named as a
selling security holder in the related prospectus and to deliver the prospectus
to purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
holder (including certain indemnification obligations).
In the event that (a) the Exchange Offer Registration Statement is not
filed with the Commission on or prior to the 60th calendar day following the
date of original issue of the Old Notes, (b) the Exchange Offer Registration
Statement is not declared effective on or prior to the 135th calendar day
following the date of original issue of the Old Notes, (c) the Exchange Offer
is not consummated or a Shelf Registration Statement is not declared effective,
in either case, on or prior to the 165th day following the date of original
issue of the Old Notes or (d) the Shelf Registration Statement is declared
effective but shall thereafter become unusable for more than 30 days in the
aggregate in any consecutive twelve-month period (each such event referred to
in clauses (a) through (d) above, a "Registration Default"), the interest rate
borne by the Notes shall be increased by one-quarter of one percent per annum
upon the occurrence of each Registration Default, which rate (as increased as
aforesaid) will increase by one quarter of one percent each 90-day period that
such additional interest continues to accrue under any such circumstance, with
an aggregate maximum increase in the interest rate equal to one percent (1%)
per annum. The Shelf Registration Statement will be required to remain
effective until the second anniversary of the Old Notes. Following the cure of
all Registration Defaults the accrual of additional interest will cease and the
interest rate will revert to the original rate.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company.
Consequences of Failure to Exchange Old Notes
In the event the Exchange Offer is consummated, the Company will not be
required to file a Shelf Registration Statement relating to any outstanding Old
Notes other than those held by persons not eligible to participate in the
Exchange Offer, and the interest rate on such Old Notes will remain at its
initial level of 11%. The Exchange Offer shall be deemed to have been
consummated upon the earlier to occur of (i) the Company having exchanged New
Notes for all outstanding Old Notes
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(other than Old Notes held by persons not eligible to participate in the
Exchange Offer) pursuant to the Exchange Offer and (ii) the Company having
exchanged, pursuant to the Exchange Offer, New Notes for all Old Notes that
have been tendered and not withdrawn on the Expiration Date. Upon consummation,
holders of Old Notes seeking liquidity in their investment would have to rely
on exemptions to registration requirements under the securities laws, including
the Securities Act. See "Risk Factors -- Consequences of Failure to Exchange."
Terms of the Exchange Offer
The Company hereby offers, upon the terms and subject to the conditions
set forth herein and in the accompanying Letter of Transmittal, to exchange
$1,000 in principal amount of the New Notes for each $1,000 in principal amount
of the outstanding Old Notes. The Company will accept for exchange any and all
Old Notes that are validly tendered on or prior to 5:00 p.m., New York City
time, on the Expiration Date. Tenders of the Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange. However, the Exchange Offer is subject to
the terms and provisions of the Registration Rights Agreement. See " --
Conditions of the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders of Old Notes may tender less than the aggregate principal
amount represented by the Old Notes held by them, provided that they
appropriately indicate this fact on the Letter of Transmittal accompanying the
tendered Old Notes (or so indicate pursuant to the procedures for book-entry
transfer).
As of the date of this Prospectus, $125.0 million in aggregate principal
amount of the Old Notes is outstanding. As of October 30, 1998, there was one
registered holder of the Old Notes, Cede, as nominee for DTC, which held the
Old Notes for certain of its participants. Solely for reasons of
administration, the Company has fixed the close of business on November 3, 1998
as the record date (the "Record Date") for purposes of determining the persons
to whom this Prospectus and the Letter of Transmittal will be mailed initially.
Only a holder of the Old Notes (or such holder's legal representative or
attorney-in-fact) may participate in the Exchange Offer. There will be no fixed
record date for determining holders of the Old Notes entitled to participate in
the Exchange Offer. The Company believes that, as of the date of this
Prospectus, no such holder is an affiliate (as defined in Rule 405 under the
Securities Act) of the Company.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes and for the purposes of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Expiration Date; Extensions; Amendments
The Expiration Date shall be December 7, 1998 at 5:00 p.m., New York City
time, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the Expiration Date shall be the latest date and time to which
the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will make a
public announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion (subject to the
terms and provisions of the Registration Rights Agreement), (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under " -- Conditions of the Exchange Offer" shall
not have been satisfied, to terminate the Exchange Offer, by giving oral or
written notice of such delay, extension, or termination to the Exchange Agent,
and (iv) to amend the terms of the Exchange Offer in any manner. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of
a prospectus supplement that will be distributed to the registered holders of
the Old Notes. Modification of the Exchange Offer, including, but not limited
to, (i) extension of the period during which the Exchange Offer is open and
(ii) satisfaction of the conditions set forth below under " -- Conditions of
the Exchange Offer", may require that at least ten business days remain in the
Exchange Offer.
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Conditions of the Exchange Offer
The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, the Exchange Offer is
conditioned upon the declaration by the Commission of the effectiveness of the
Exchange Offer Registration Statement of which this Prospectus constitutes a
part.
Termination of Certain Rights
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default, holders of Old Notes are
entitled to receive additional interest on their Notes. See " -- Purpose and
Effect." Holders of New Notes will not be and, upon consummation of the
Exchange Offer, holders of Old Notes will no longer be, entitled to (i) the
right to receive additional interest provided for in the event of a
Registration Default or (ii) certain other rights under the Registration Rights
Agreement intended for holders of Old Notes, except in certain limited
circumstances. The Exchange Offer shall be deemed consummated upon the delivery
by the Company to the Registrar under the Indenture of New Notes in the same
aggregate principal amount as the aggregate principal amount of Old Notes that
are tendered by holders thereof pursuant to the Exchange Offer.
Accrued Interest
The New Notes will bear interest at a rate equal to 11% per annum, which
interest shall accrue from July 31, 1998 or from the most recent interest
payment date with respect to the Old Notes to which interest was paid or duly
provided for. See "Description of Notes -- Principal, Maturity and Interest."
Procedures for Tendering Old Notes
The tender of a holder's Old Notes as set forth below and the acceptance
thereof by the Company will constitute a binding agreement between the
tendering holder and the Company upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal.
Except as set forth below, a holder who wishes to tender Old Notes for exchange
pursuant to the Exchange Offer must transmit such Old Notes, together with a
properly completed and duly executed Letter of Transmittal (or comply with the
procedure for book-entry transfer if delivery of such Old Notes is to be made
by book-entry transfer to an account maintained by the Exchange Agent at DTC as
set forth below), including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth on the back cover
page of this Prospectus prior to 5:00 p.m., New York City time, on the
Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF
SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL,
IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
Each signature on a Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed unless the Old Notes surrendered for
exchange pursuant hereto are tendered (i) by a registered holder of the Old
Notes who has not completed either the box entitled "Special Exchange
Instructions" or the box entitled "Special Delivery Instructions" in the Letter
of Transmittal, or (ii) by an Eligible Institution (as defined herein). In the
event that a signature on a Letter of Transmittal or a notice of withdrawal, as
the case may be, is required to be guaranteed, such guarantee must be by a firm
which is a member of a registered national securities exchange or the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or otherwise be an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (collectively, "Eligible Institutions"). If the Letter of
Transmittal is signed by a person other than the registered holder of the Old
Notes, the Old Notes surrendered for exchange must either (i) be endorsed by
the registered holder, with the signature thereon guaranteed by an Eligible
Institution, or (ii) be accompanied by a bond power, in satisfactory form as
determined by the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution. The term "registered holder" as used herein with respect to the
Old Notes means any person in whose name the Old Notes are registered on the
books of the Registrar.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account in
accordance with DTC's ATOP procedures for such transfer, and in such case no
Letter of Transmittal is required to be transmitted to the Exchange Agent.
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All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects
or irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. The Company
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, corporation or other person acting in a fiduciary or
representative capacity, such person should so indicate when signing and,
unless waived by the Company, proper evidence satisfactory to the Company, in
its sole discretion, of such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender Old Notes in the Exchange
Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior
to completing and executing the Letter of Transmittal and tendering Old Notes,
make appropriate arrangements to register ownership of the Old Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
By tendering, each registered holder will represent to the Company that,
among other things (i) the New Notes to be acquired in connection with the
Exchange Offer by the holder and each Beneficial Owner of the Old Notes are
being acquired by the holder and each Beneficial Owner in the ordinary course
of business of the holder and each Beneficial Owner, (ii) the holder and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, (iii) the holder and each Beneficial Owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and
cannot rely on the position of the staff of the Commission set forth in
"no-action" letters that are discussed herein under " -- Resales of the New
Notes," (iv) that if the holder is a broker-dealer that acquired Old Notes as a
result of market making or other trading activities, it will deliver a
prospectus in connection with any resale of New Notes acquired in the Exchange
Offer, (v) the holder and each Beneficial Owner understand that a secondary
resale transaction described in clause (iii) above should be covered by an
effective registration statement containing the selling security holder
information required by Item 507 of Regulation S-K of the Securities Act, and
(vi) neither the holder nor any Beneficial Owner is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company except as otherwise
disclosed to the Company in writing.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date (or complete the procedure for book-entry transfer on a
timely basis), may tender their Old Notes according to the guaranteed delivery
procedures set forth in the Letter of Transmittal. Pursuant to such procedures:
(i) such tender must be made by or through an Eligible Institution and a Notice
of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed
by such holder, (ii) on or prior to the Expiration Date, the Exchange Agent
must have received from the holder and the Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder, the certificate number or numbers of the tendered Old Notes, and the
principal amount of tendered Old Notes, stating that the tender is being made
thereby and guaranteeing that, within four business days after the date of
delivery of the Notice of Guaranteed Delivery, the tendered Old Notes, a duly
executed Letter of Transmittal and any other required documents will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) such
properly completed and executed documents required by the Letter of Transmittal
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and the tendered Old Notes in proper form for transfer must be received by the
Exchange Agent within four business days after the date of delivery of the
Notice of Guaranteed Delivery. Any Holder who wishes to tender Old Notes
pursuant to the guaranteed delivery procedures described above must ensure that
the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of
Transmittal relating to such Old Notes prior to 5:00 p.m., New York City time,
on the Expiration Date.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered promptly
after acceptance of the Old Notes. For purposes of the Exchange Offer, the
Company shall be deemed to have accepted validly tendered Old Notes, when, as,
and if the Company has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents, or after completion of
the procedure for book-entry transfer, as the case may be; provided, however,
that the Company reserves the absolute right to waive any defects or
irregularities in the tender or conditions of the Exchange Offer. If any
tendered Old Notes are not accepted for any reason, such unaccepted Old Notes
will be returned without expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
Withdrawal Rights
Tenders of the Old Notes may be withdrawn by delivery of a written notice
to the Exchange Agent at its address set forth on the back cover page of this
Prospectus at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by a bond power in the name of the
person withdrawing the tender, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder, with
the signature thereon guaranteed by an Eligible Institution together with any
other documents required upon transfer by the Indenture, and (iv) specify the
name in which such Old Notes are to be re-registered, if different from the
Depositor, pursuant to such documents of transfer. Any questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, in its sole discretion. The Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are withdrawn will be returned to the holder thereof without
cost to such holder as soon as practicable after withdrawal. Properly withdrawn
Old Notes may be re-tendered by following one of the procedures described under
"The Exchange Offer -- Procedures for Tendering Old Notes" at any time on or
prior to the Expiration Date.
The Exchange Agent; Assistance
U.S. Bank Trust National Association is the Exchange Agent. All tendered
Old Notes, executed Letters of Transmittal and other related documents should
be directed to the Exchange Agent. Questions and requests for assistance and
requests for additional copies of this Prospectus, the Letter of Transmittal
and other related documents should be addressed to the Exchange Agent as
follows:
BY REGISTERED OR CERTIFIED MAIL:
U.S. Bank Trust National Association
180 East Fifth Street
Mail Code: SPFT0210
St. Paul, Minnesota 55101
Attn: Specialized Finance
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BY HAND OR OVERNIGHT COURIER:
U.S. Bank Trust National Association
180 East Fifth Street
Mail Code: SPFT0210
St. Paul, Minnesota 55101
Attn: Specialized Finance
BY FACSIMILE:
(612) 244-1537 (MN)
Confirm by Telephone: (612) 244-5011 (MN)
Fees and Expenses
All expenses incident to the Company's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Company including, without limitation: (i) all registration and filing fees and
expenses (including fees and expenses of compliance with state securities or
Blue Sky laws), (ii) printing expenses (including expenses of printing
certificates for the New Notes in a form eligible for deposit with DTC and of
printing Prospectuses), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company, and (v) fees and
disbursements of independent certified public accountants.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of Old Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
Accounting Treatment
The New Notes will be recorded at the same carrying value as the Old
Notes, as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss will be recognized by the Company for
accounting purposes. The expenses of the Exchange Offer will be amortized over
the term of the New Notes.
Resales of the New Notes
Based on an interpretation by the staff of the Commission set forth in
"no-action" letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer to a holder in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by such
holder (other than (i) a broker-dealer who purchased Old Notes directly from
the Company for resale pursuant to Rule 144A under the Securities Act or any
other available exemption under the Securities Act, or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such holder is acquiring the
New Notes in the ordinary course of business and is not participating, and has
no arrangement or understanding with any person to participate, in a
distribution of the New Notes. The Company has not requested or obtained an
interpretive letter from the Commission staff with respect to this Exchange
Offer, and the Company and the holders are not entitled to rely on interpretive
advice provided by the staff to other persons, which advice was based on the
facts and conditions represented in such letters. However, the Exchange Offer
is being conducted in a manner intended to be consistent with the facts and
conditions represented in such letters. If any holder acquires New Notes in the
Exchange Offer for the purpose of distributing or participating in a
distribution of the New Notes, such holder cannot rely on the position of the
staff of the Commission enunciated in Morgan Stanley & Co., Incorporated
(available June 5, 1991), Exxon Capital Holdings Corporation (available April
13, 1989), Mary Kay Cosmetics, Inc. (available June 5, 1991) and Warnaco, Inc.
(available October 11, 1991), or interpreted in the Commission's letter to
Shearman & Sterling (available July 2, 1993), or similar "no-action" or
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes
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were acquired by such broker-dealer as a result of market making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
It is expected that the New Notes will be freely transferable by the
holders thereof, subject to the limitations described in the immediately
preceding paragraph. Sales of New Notes acquired in the Exchange Offer by
holders who are "affiliates" of the Company within the meaning of the
Securities Act will be subject to certain limitations on resale under Rule 144
of the Securities Act. Such persons will only be entitled to sell New Notes in
compliance with the volume limitations set forth in Rule 144, and sales of New
Notes by affiliates will be subject to certain Rule 144 requirements as to the
manner of sale, notice and the availability of current public information
regarding the Company. Any such persons must consult their own legal counsel
for advice as to any restrictions that might apply to the resale of their
Notes.
USE OF PROCEEDS
There will be no proceeds payable to the Company or the Guarantors from
the Exchange Offer. The Company and the Guarantors are conducting the Exchange
Offer to satisfy certain of their obligations under the Registration Rights
Agreement executed in connection with the issuance of the Old Notes.
THE 1998 ACQUISITIONS
The Clearwater Acquisition. In March 1998, the Company completed the
Clearwater Acquisition effective January 1, 1998, which is comprised of a
Toyota dealership, a Mitsubishi dealership and a collision repair center, each
located in Clearwater, Florida, for a total purchase price of approximately
$14.9 million, subject to adjustment based on the net book value of the
purchased assets and assumed liabilities as of the closing date. The Clearwater
Acquisition was financed with $11.5 million in cash borrowed from Ford Motor
Credit under the Revolving Facility and 3,960 shares of Preferred Stock with a
liquidation preference of approximately $4.0 million as of the date of the
acquisition. By April 30, 1999, the Company will be required to pay a
contingent amount equal to 50% of the combined 1998 pre-tax earnings of the
entities acquired, such amount not to exceed approximately $1.8 million.
The Hatfield Acquisition. In July 1998, the Company completed the Hatfield
Acquisition, which is comprised of six individual dealerships located in
Columbus, Ohio selling Chrysler, Plymouth, Dodge, Hyundai, Isuzu, Jeep, KIA,
Lincoln, Mercury, Subaru, Toyota and Volkswagen brands of vehicles, for a total
purchase price of approximately $48.6 million plus the assumption of certain
liabilities, subject to adjustment based on the value of the net current assets
of the sellers as of the closing date. Of the total purchase price, the Company
paid approximately $34.6 million in cash ($26.2 million of which was financed
by borrowings under the Revolving Facility and the balance of which was
financed by cash from the Company's existing operations, which was subsequently
replenished with a portion of the net proceeds from the Prior Offering), and
the balance of the total purchase price was paid by the Company's issuance to
the sellers of 14,025 shares of its Preferred Stock with a liquidation
preference of approximately $14.0 million.
The Heritage Acquisition. In July 1998, the Company completed the Heritage
Acquisition, which is comprised of a Lincoln-Mercury dealership located in
Greenville, South Carolina, for a total purchase price of approximately $1.1
million plus the assumption of certain operating liabilities of the sellers. Of
the total purchase price, the Company paid approximately $0.7 million in cash
(approximately $0.3 million of which was financed by borrowings under the
Revolving Facility and approximately $0.4 million of which was financed by cash
from the Company's existing operations, which was subsequently replenished with
a portion of the net proceeds from the Prior Offering), and the balance of the
total purchase price was paid by the Company's issuance to the sellers of 400
shares of its Preferred Stock with a liquidation preference of $0.4 million. In
connection with the Heritage Acquisition, Chartown acquired the real property
on which the dealerships comprising the Heritage Acquisition are operated for
approximately $3.0 million, and the Company currently is leasing this real
property from Chartown. Chartown is expected to sell this real property to MMRT
in the future. The Company did not consummate the acquisition of the assets of
the Jaguar franchise that comprises a portion of the Heritage Acquisition
because Jaguar declined to consent to this acquisition. See "Risk Factors -- No
Consent from Jaguar."
The Century Acquisition. Also in July 1998, the Company completed the
Century Acquisition, which is comprised of a BMW dealership located in
Greenville, South Carolina and a satellite sales location in Spartanburg, South
Carolina. The total consideration paid by the Company for the Century
Acquisition consisted of approximately $3.8 million in cash (approximately $0.9
million of which was financed by borrowings under the Revolving Facility and
approximately $2.9 million of which was financed with a portion of the net
proceeds of the Prior Offering), the issuance to the seller of warrants to
purchase 75,000 shares of the Company's Class A Common Stock at a purchase
price equal to the market value of the Class A Common
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Stock on the closing date and the issuance to the seller of 2,166.5 shares of
Preferred Stock with a liquidation preference of approximately $2.2 million.
The seller under the Century Acquisition is affiliated with the seller under
the Heritage Acquisition. In connection with the Century Acquisition, Chartown
acquired the real property on which the dealership and satellite sales location
comprising the Century Acquisition are operated for approximately $5.0 million,
and the Company is currently leasing this real property from Chartown. Chartown
is expected to sell the real property to MMRT in the future.
The Casa Ford Acquisition. Also in July 1998, the Company completed the
Casa Ford Acquisition, which is comprised of a Ford dealership located in the
Houston, Texas area, for a total purchase price paid at closing of
approximately $11.3 million. The price paid at closing is subject to adjustment
at a later date based upon a final determination of the net working capital of
the acquired dealership as of the closing date. Of the price paid at closing,
the Company paid approximately $9.0 million in cash (all of which was financed
with a portion of the net proceeds of the Prior Offering), and the balance was
paid to the seller by the Company's issuance of 2,313 shares of Preferred Stock
with a liquidation preference of approximately $2.3 million. In addition, the
Company agreed to pay to the seller in the future an additional contingent
payment equal to five times the amount by which the dealership's pre-tax
earnings for 1998, if any, exceed $2.5 million, and five times the amount by
which the dealership's 1999 pre-tax earnings, if any, exceed the greater of
$2.5 million or the dealership's 1998 pre-tax earnings.
The Montgomery Acquisition. Also in July 1998, the Company completed the
Montgomery Acquisition, which is comprised of a Chevrolet dealership, a KIA
dealership, a Mitsubishi dealership and a Hyundai dealership located in
Montgomery, Alabama, for a total purchase price of approximately $8.1 million
paid to the sellers at the closing. Of the purchase price paid at the closing,
the Company paid approximately $3.4 million in cash (approximately $0.1 million
of which was financed by cash from the Company's existing operations and
approximately $3.3 million of which was financed with a portion of the net
proceeds of the Prior Offering), and issued 4,194.3 shares of Preferred Stock
to the sellers having an aggregate liquidation preference of approximately $4.2
million. The remaining $0.6 million of the cash portion of the purchase price
is payable to the sellers on the first and second anniversaries of the closing
date. The Company has also agreed to pay an additional payment to the sellers,
not to exceed $3.3 million, contingent upon the future performance of the
acquired dealerships. The Company has agreed to pay 51% of this additional
payment, if any, to the sellers in the form of Preferred Stock, and 49% of such
payments in cash.
The Higginbotham Acquisition. In September 1998, the Company completed the
Higginbotham Acquisition, which is comprised of three individual dealerships
selling Acura, Chevrolet, Ford, Mercedes, Mercury and Oldsmobile brands of
vehicles, as well as two standalone used vehicle dealerships and an automobile
financing company, located in the Daytona Beach, Florida area for a total
purchase price of approximately $27.0 million, including the repayment of
approximately $2.7 million in indebtedness owed by one of the sellers to its
sole shareholder, subject to adjustment based on the net book value of the
purchased assets as of the closing date. The total purchase price was paid with
approximately $18.2 million in cash (all of which was financed with a portion
of the net proceeds from the Prior Offering), and with the issuance to the
sellers of Class A Common Stock with a market value at the date of closing of
approximately $8.3 million. The remaining $0.5 million of the cash portion of
the purchase price is payable to the seller in December 1998. In addition, the
Company also assumed certain liabilities of the sellers at closing. In
connection with the Higginbotham Acquisition, it is anticipated that MMRT will
acquire the real property on which these dealerships and related assets are
operated in the future, and that the Company will lease these properties from
MMRT.
The Economy Honda Acquisition. In March 1998, the Company signed a stock
purchase agreement regarding the Economy Honda Acquisition, which is comprised
of one Honda dealership located in Chattanooga, Tennessee. The Company has
agreed to pay a total price of $7.5 million plus an amount equal to the net
book value of the assets of the Economy Honda dealership. Preferred Stock will
be issued for 51% of the total purchase price, not to exceed $5.1 million in
liquidation preference as of the closing of the acquisition. The Company's
consummation of the Economy Honda Acquisition is subject to the approval of
Honda, which has informed the Company that its approval is contingent upon the
Company divesting its ownership of the Cleveland Village Honda dealership,
which is also located in Chattanooga, prior to acquiring the Economy Honda
dealership. The Company is currently negotiating with potential buyers for the
sale of the Cleveland Village Honda dealership. There can be no assurance that
the Company will be able to sell the Cleveland Village Honda dealership or that
the approval of Honda to the Economy Honda Acquisition will be obtained. See
"Risk Factors -- No Consent from Honda."
The 1998 Acquisitions. The aggregate purchase price for the 1998
Acquisitions is approximately $127.6 million, which has been or will be paid
with approximately $88.4 million in cash, with approximately 32,159 shares of
Preferred Stock having an aggregate liquidation preference of approximately
$32.2 million, and with 485,294 shares of Class A Common Stock having a market
value at date of issuance of approximately $8.3 million. Of the $88.4 million
cash portion of the aggregate purchase price, approximately $38.9 million was
financed with borrowings under the Revolving Facility (which
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was subsequently repaid with a portion of the net proceeds from the Prior
Offering), approximately $33.4 million with a portion of the net proceeds from
the Prior Offering and approximately $8.9 million with cash generated from the
Company's existing operations (approximately $8.7 million of which was
subsequently replenished with a portion of the net proceeds from the Prior
Offering). The remaining $7.2 million of the cash portion of the aggregate
purchase price for the 1998 Acquisitions will be financed with a combination of
borrowings under the Revolving Facility and a portion of the net proceeds of
the Prior Offering. The 1998 Acquisitions have all been consummated, except for
the Economy Honda Acquisition for which the consent of Honda has not yet been
obtained. There can be no assurance that such consent will be obtained. See
"Risk Factors -- No Consent from Honda." In addition, the Company did not
consummate the acquisition of a Jaguar franchise representing a portion of the
Heritage Acquisition because Jaguar declined to consent to such acquisition.
See "Risk Factors -- No Consent from Jaguar." Any Manufacturer who does not
consent to an acquisition may seek to terminate its franchise agreement,
although relevant state franchising laws impose limitations on a Manufacturer's
ability to terminate a franchise. See "Risk Factors -- Manufacturers'
Restrictions on Acquisitions" and "Business -- Relationships with
Manufacturers." Prior to their acquisition, the Company operated the
dealerships which comprise the Montgomery Acquisition, the Century Acquisition
and the Casa Ford Acquisition under separate management agreements.
Future Acquisitions. The Company intends to pursue additional acquisitions
in the future that will be financed with cash, debt or equity financing or a
combination thereof. See "Prospectus Summary -- Recent Developments." Although
the Company has identified and has held preliminary discussions with several
potential acquisition candidates, some of which may be material, at this time
the Company has no agreements to effect any such acquisitions other than the
Economy Honda Acquisition, the Jordan Acquisition and the Tampa Volvo
Acquisition. There is no assurance that the Company will consummate any future
acquisition, that any future acquisition will be on favorable terms to the
Company or that financing for such acquisitions will be available. Under the
Company's acquisition agreements, it is a condition (which condition may be
waived) to the Company's obligation to close an acquisition that the consent of
the applicable Manufacturer be obtained. No assurance can be given that any
such consents will be obtained. 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."
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1998, (i) on an actual basis and (ii) as adjusted on a pro forma basis
for the pending 1998 Acquisitions and the Prior Offering and the application of
the net proceeds therefrom. See "Use of Proceeds" and the Company's
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of June 30, 1998
---------------------------------
Actual As Adjusted
---------------- ----------------
(In thousands)
<S> <C> <C>
Short-term debt: (a) $ 1,234 $ 3,034
========== ==========
Long-term debt:
Revolving Facility (b) .......... $ 48,758 $ --
Mortgage notes .................. 3,914 3,914
Notes offered hereby ............ -- 124,063(c)
Subordinated Smith Loan ......... 5,500 5,500
Other debt ...................... 6,132 6,132
---------- ----------
Total long-term debt .................. 64,304 139,609
---------- ----------
Stockholders' equity ............. 103,401(d) 130,776(e)
---------- ----------
Total capitalization .................. $ 167,705 $ 270,385
========== ==========
</TABLE>
- ---------
(a) Includes current maturities of long-term debt and excludes $149.7 million
(actual) and $199.0 million (as adjusted) of short-term notes
payable-floor plan.
(b) As adjusted, the Company would have had $75.0 million of availability under
the Revolving Facility, subject to the satisfaction of certain conditions.
(c) Represents the $125.0 million principal amount of the Notes less
unamortized discount of $937,000.
(d) Includes Class A Common Stock, $.01 par value, 50,000,000 shares
authorized, 5,027,452 shares issued and outstanding; Class B Common Stock,
$.01 par value, 15,000,000 shares authorized, 6,250,000 shares issued and
outstanding; and preferred stock, $.10 par value, 3,000,000 shares
authorized, 13,034 shares issued and outstanding.
(e) In connection with the Hatfield Acquisition and the Economy Honda
Acquisition, the Company has issued or intends to issue approximately
19,125 additional shares of Preferred Stock with an aggregate liquidation
preference of approximately $19.1 million. The actual number of shares of
Preferred Stock to be so issued may vary depending on purchase price
adjustments in certain of the 1998 Acquisitions. In connection with the
Higginbotham Acquisition, the Company has issued Class A Common Stock
having a market value at the date of issuance of approximately $8.3
million.
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended
December 31, 1995, 1996 and 1997 and the selected consolidated balance sheet
data as of December 31, 1996 and 1997 are derived from the Company's audited
financial statements together with the notes thereto, included elsewhere in
this Prospectus. The selected consolidated statement of operations data for the
year ended December 31, 1994 and the selected consolidated balance sheet data
as of December 31, 1995 are derived from the Company's audited financial
statements not included herein. The selected consolidated statement of
operations data for the year ended December 31, 1993 and the selected
consolidated balance sheet data as of December 31, 1993 and 1994 are derived
from the Company's unaudited financial statements not included herein. The
selected consolidated statement of operations data for the six months ended
June 30, 1997 and June 30, 1998, and the selected balance sheet data as of June
30, 1998, are derived from the Company's unaudited financial statements
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 unaudited pro forma
consolidated financial data for the year ended December 31, 1997 and as of and
for the six month period ended June 30, 1998, are derived from the Unaudited
Pro Forma Consolidated Financial Data included elsewhere in this Prospectus.
The selected consolidated financial data should be read in conjunction with
"Unaudited Pro Forma Consolidated Financial Data", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements for the year ended December 31, 1997 and the unaudited
Consolidated Financial Statements for the six months ended June 30, 1998, and
related notes included elsewhere in this Prospectus.
37
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
Actual
---------------------------------------------------------------------
1993 1994 1995 1996(a) 1997(b)
------------- ------------- ------------- ------------- -------------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Income
Statement Data:
Revenues .......................... $ 238,291 $ 267,734 $ 311,323 $ 376,867 $ 536,001
Cost of sales ..................... 209,113 233,833 272,130 332,122 473,003
--------- --------- --------- --------- ---------
Gross profit ...................... 29,178 33,901 39,193 44,745 62,998
Selling, general and adminis-
trative expenses ................. 22,070 23,810 28,091 32,602 46,770
Operating income .................. 6,320 9,253 10,270 11,067 14,906
Interest expense, floor plan ...... 2,743 3,001 4,504 5,968 8,007
Interest expense, other ........... 263 443 436 433 1,199
Income before income taxes
and minority interest ............ 3,314 5,809 5,436 5,021 5,998
Net income ........................ 2,613 3,676 3,238 2,983 3,702
Diluted net income per share ...... N/A N/A N/A N/A 0.53
Weighted average common
shares outstanding
(000's) .......................... N/A N/A N/A N/A 6,949
Consolidated Balance
Sheet Data:
Cash and cash equivalents ......... $ 3,507 $ 4,723 $ 8,993 $ 6,679 $ 18,304
Receivables, net .................. 7,020 8,645 9,085 11,908 19,784
Inventories ....................... 35,870 46,266 51,348 71,550 156,514
Property and equipment, net ....... 7,546 8,226 8,527 12,467 19,081
Total assets ...................... 54,917 69,061 79,462 110,976 291,450
Notes payable -- floor plan ....... 32,231 41,626 45,151 63,893 133,236
Long-term debt, including
current portion(e) ............... 4,142 3,773 6,950 6,719 49,563
Minority interest ................. 139 177 200 314 --
Stockholders' equity .............. 2,543 5,343 16,306 26,295 84,365
Other Consolidated
Financial Data:
Revenues:
Vehicle sales .................... $ 204,243 $ 228,569 $ 267,650 $ 327,674 $ 467,858
Parts, service and collision
repairs ......................... 30,337 33,984 35,860 42,075 57,537
Finance and
insurance ....................... 3,711 5,181 7,813 7,118 10,606
EBITDAR(f) ........................ $ 5,462 $ 8,086 $ 7,681 $ 7,619 $ 10,668
Rental expense .................... 1,097 996 977 1,089 2,149
--------- --------- --------- --------- ----------
EBITDA(g) ......................... $ 4,365 $ 7,090 $ 6,704 $ 6,530 $ 8,519
========= ========= ========= ========= ==========
Depreciation and amortization ..... $ 788 $ 838 $ 832 $ 1,076 $ 1,322
Capital expenditures .............. 2,559 1,260 1,509 1,907 2,007
Ratio of EBITDA to interest
expense, other ...................
Ratio of long-term debt to
EBITDA(h) ........................
Ratio of earnings to fixed
charges(i) ....................... 6.3x 8.5x 8.1x 7.3x 4.1 x
Other Operating Data:
Dealerships ....................... 4 4 4 5 20
New vehicles units sold(j) ........ 9,429 9,686 10,273 11,693 15,715
Used vehicles units sold(j) ....... 4,104 4,374 5,172 5,488 6,712
<CAPTION>
Year Ended
December 31, Six Months Ended June 30,
---------------- ------------------------------------------
Pro Pro
Forma Actual Forma
---------------- --------------------------- --------------
1997(c) 1997(b) 1998 1998(c)
---------------- ------------- ------------- --------------
(Unaudited)
-----------------------------------------------------------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Consolidated Income
Statement Data:
Revenues .......................... $1,806,453 $ 212,886 $ 648,840 $ 963,509
Cost of sales ..................... 1,584,691 189,254 566,392 842,184
---------- --------- --------- ----------
Gross profit ...................... 221,762 23,632 82,448 121,325
Selling, general and adminis-
trative expenses ................. 161,038 17,532 59,622 87,797
Operating income .................. 54,095 5,704 20,975 30,395
Interest expense, floor plan ...... 19,123 3,018 7,341 10,061
Interest expense, other ........... 15,163 318 2,745 7,651
Income before income taxes
and minority interest ............ 20,997 2,503 10,904 13,031
Net income ........................ 12,678 1,540 6,804 8,019
Diluted net income per share ...... 0.88(d) N/A 0.58 0.55(d)
Weighted average common
shares outstanding
(000's) .......................... 14,415(d) N/A 11,637 14,658(d)
Consolidated Balance
Sheet Data:
Cash and cash equivalents ......... $ 9,238 $ 27,228 $ 37,589
Receivables, net .................. 12,897 35,761 43,550
Inventories ....................... 73,410 175,515 228,549
Property and equipment, net ....... 13,270 22,040 23,583
Total assets ...................... 120,384 369,623 512,177
Notes payable -- floor plan ....... 67,855 149,670 199,037
Long-term debt, including
current portion(e) ............... 9,979 65,538 140,843
Minority interest ................. -- -- --
Stockholders' equity .............. 28,406 103,401 130,776
Other Consolidated
Financial Data:
Revenues:
Vehicle sales .................... $1,592,802 $ 185,216 $ 567,279 $ 848,235
Parts, service and collision
repairs ......................... 176,299 22,907 68,020 94,070
Finance and
insurance ....................... 37,352 4,763 13,541 21,204
EBITDAR(f) ........................ $ 55,117 $ 3,760 $ 19,337 $ 29,965
Rental expense .................... 12,328 543 3,837 6,150
---------- --------- ---------- ----------
EBITDA(g) ......................... $ 42,789 $ 3,217 $ 15,500 $ 23,815
========== ========= ========== ==========
Depreciation and amortization ..... $ 6,629 $ 396 $ 1,851 $ 3,133
Capital expenditures .............. 886 1,261
Ratio of EBITDA to interest
expense, other ................... 2.8 x 3.1 x
Ratio of long-term debt to
EBITDA(h) ........................ 3.3 x
Ratio of earnings to fixed
charges(i) ....................... 2.1 x 6.0x 3.7 x 2.3 x
Other Operating Data:
Dealerships ....................... 37 6 26 37
New vehicles units sold(j) ........ 48,079 6,553 16,601 25,195
Used vehicles units sold(j) ....... 32,478 2,638 9,719 17,094
</TABLE>
(footnotes on following page)
38
<PAGE>
- ---------
(a) The Company acquired Fort Mill Ford, Inc. in February 1996. This
acquisition was accounted for using the purchase method of accounting. As
a result, the actual financial data does not include the results of this
dealership prior to the date it was acquired by the Company. Accordingly,
the actual financial data for periods after the acquisition may not be
comparable to data presented for periods prior to the acquisition.
(b) The Company acquired Fort Mill Chrysler-Plymouth-Dodge in June 1997, Lake
Norman Chrysler/Plymouth/Jeep and Lake Norman Dodge in September 1997,
Williams Motors and Ken Marks Ford in October 1997, and the Bowers
Automotive Group and Dyer & Dyer Volvo in November 1997. The 1997
Acquisitions were accounted for using the purchase method of accounting.
As a result, the actual financial data does not include the results of
operations of these dealerships prior to the date they were acquired by
the Company. Accordingly, the actual financial data for periods after the
acquisitions may not be comparable to data presented for periods prior to
the acquisitions.
(c) For information regarding the unaudited pro forma adjustments made to the
Company's historical financial data, which give effect to the IPO, the
Reorganization, the Acquisitions, and the Prior Offering and the
application of the net proceeds therefrom, see "Unaudited Pro Forma
Consolidated Financial Data."
(d) Weighted average common shares outstanding assumes a Class A Common Stock
price of $12.00 per share (the price per share of Class A Common Stock in
the IPO) for the Preferred Stock conversion factor. Had the Company used a
Class A Common Stock price of $16.44 (the June 30, 1998 closing price for
shares of Class A Common Stock on the NYSE), the pro forma weighted
average common shares outstanding would have been 13,691,000 and
13,934,000 resulting in a pro forma diluted net income per share of $0.93
and $0.58 for the pro forma twelve months ended December 31, 1997 and the
pro forma six months ended June 30, 1998, respectively.
(e) Long-term debt, including current portion, includes the payable to the
Company's Chairman and the Company's payable to affiliates of the Company.
See the Company's Consolidated Financial Statements and the related notes
thereto included elsewhere in this Prospectus.
(f) EBITDAR is defined as earnings before interest (other than interest expense
related to notes payable-floor plan), taxes, depreciation, amortization,
rent expense and other non-recurring charges. While EBITDAR should not be
construed as a substitute for operating income or as a better measure of
liquidity than cash flows from operating activities, which are determined
in accordance with generally accepted accounting principles, it is
included herein to provide additional information with respect to the
ability of the Company to meet future debt service, capital expenditures
and working capital requirements. This measure may not be comparable to
similarly titled measures reported by other companies.
(g) EBITDA is defined as earnings before interest (other than interest expense
related to notes payable-floor plan), taxes, depreciation, amortization
and other non-recurring charges which is consistent with the measure used
to calculate the Company's Consolidated Fixed Charge Coverage Ratio for
purposes of the limitation on indebtedness covenant in the Indenture.
While EBITDA should not be construed as a substitute for operating income
or as a better measure of liquidity than cash flows from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional
information with respect to the ability of the Company to meet future debt
service, capital expenditures and working capital requirements. This
measure may not be comparable to similarly titled measures reported by
other companies.
(h) Ratio of long-term debt to EBITDA for the pro forma six months ended June
30, 1998 is calculated by dividing pro forma long-term debt, including
current portion, at June 30, 1998 by EBITDA for the pro forma year ended
December 31, 1997.
(i) Fixed charges is defined as interest (other than interest expense related
to notes payable-floor plan) and such portion of rent expense determined
to be representative of the interest factor. The ratio of earnings to
fixed charges is calculated by adding fixed charges to income before
income taxes and minority interest and dividing the sum by fixed charges.
(j) The number of units sold consists of retail sales to consumers as opposed
to wholesale sales.
39
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of operations for
the year ended December 31, 1997 reflects the historical accounts of the
Company for that period, adjusted giving effect to the Acquisitions, the IPO,
the Reorganization, and the Prior Offering and the application of the net
proceeds therefrom, as if those events had occurred on the first day of the
period presented. The following unaudited pro forma combined and consolidated
statement of operations for the six months ended June 30, 1998 reflects the
historical accounts of the Company for that period, adjusted to give effect to
the 1998 Acquisitions (other than the Clearwater Acquisition which was
effective as of January 1, 1998), and the Prior Offering and the application of
the net proceeds therefrom, as if those events had occurred on the first day of
the period presented. The following unaudited pro forma consolidated balance
sheet as of June 30, 1998 reflects the historical accounts of the Company as of
that date as adjusted to give pro forma effect to the 1998 Acquisitions (other
than the Clearwater Acquisition, the Heritage Acquisition, the Montgomery
Acquisition, the Century Acquisition, and the Casa Ford Acquisition, which are
included in the historical accounts of the Company) and the Prior Offering and
the application of the net proceeds therefrom, as if those events had occurred
on June 30, 1998.
The unaudited pro forma consolidated financial data and accompanying notes
should be read in conjunction with the Consolidated Financial Statements and
related notes of the Company as well as the financial statements and related
notes of the Clearwater Dealerships and Affiliated Companies, the Hatfield
Automotive Group, Economy Honda Cars, Casa Ford of Houston, Inc., Higginbotham
Automotive Group, the Bowers Dealerships and Affiliated Companies, Lake Norman
Dodge Inc. and Affiliated Companies, Ken Marks Ford Inc. and Dyer and Dyer,
Inc., all of which are included elsewhere in this Prospectus. Such unaudited
pro forma consolidated data and accompanying notes do not give effect to the
Fort Mill Acquisition, the Williams Acquisition or the financing thereof
because such transactions are not required to be presented in this Prospectus
on a pro forma basis in accordance with SEC rules. The Company believes that
the assumptions used in the following statements provide a reasonable basis on
which to present the unaudited pro forma financial data. The unaudited pro
forma consolidated financial data are provided for informational purposes only
and should not be construed to be indicative of the Company's financial
condition, results of operations or covenant compliance 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.
40
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1997
<TABLE>
<CAPTION>
The Acquisition -----------------
----------------------------s (a) Pro Forma
------------------ Hatfield Higginbotham ------------------ Adjustments
1997 Automotive Automotive Other 1998 for the
Actual(b) Acquisitions(c) Group(d) Group Acquisitions(e) Acquisitions
----------- ----------------- ------------ -------------- ----------------- -----------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Vehicle sales .................. $467,858 $364,756 $251,981 $102,594 $405,613 $
Parts, service and
collision repair .............. 57,537 42,164 16,400 10,496 49,702
Finance and insurance 10,606 7,723 6,899 3,060 8,505 559 (f)
-------- -------- -------- -------- -------- ----------
Total revenues ................. 536,001 414,643 275,280 116,150 463,820 559
Cost of sales ................... 473,003 361,902 244,330 98,430 407,905 (879)(g)
-------- -------- -------- -------- -------- ----------
Gross profit .................... 62,998 52,741 30,950 17,720 55,915 1,438
Selling, general and
administrative
expenses ....................... 46,770 40,801 20,193 13,099 43,151 (5,925)(h)
2,658 (j)
Management bonus ................ 7,121 (7,121)(h)
Depreciation and
amortization ................... 1,322 914 221 338 1,245 (436)(l)
(601)(j)
3,611 (m)
----------
Operating income ................ 14,906 11,026 3,415 4,283 11,519 9,252
Interest expense, floor
plan ........................... 8,007 4,722 3,663 1,208 4,258 (2,608)(n)
Interest expense, other ......... 1,199 234 303 1,969 (923)(j)
267 (p)
(698)(q)
Other income .................... 298 180 224 20 466
-------- -------- -------- -------- --------
Income before income
taxes and minority
interest ....................... 5,998 6,250 (24) 2,792 5,758 13,214
Provision for income
taxes .......................... 2,249 178 1,140 5,401 (r)
4,211 (t)
----------
Income before minority
interest ....................... 3,749 6,072 (24) 2,792 4,618 3,602
Minority interest in
earnings of subsidiary 47
--------
Net income ...................... $ 3,702 $ 6,072 $ (24) $ 2,792 $ 4,618 $ 3,602
======== ======== ======== ======== ======== ==========
Pro forma basic net
income per share ...............
Pro forma weighted
average common
shares
outstanding -- basic
(000's) ........................
Pro forma diluted net
income per share (v) ...........
Pro forma weighted
average common
shares
outstanding -- diluted
(000's) (v) ....................
<CAPTION>
Pro Forma Pro Forma
Adjustments for the
for the Reorganization,
Reorganization, the Acquisitions,
the IPO and the IPO and
the Prior Offering the Prior Offering
-------------------- -------------------
(in thousands except
per share
data)
<S> <C> <C>
Revenues:
Vehicle sales .................. $ $1,592,802
Parts, service and
collision repair .............. 176,299
Finance and insurance 37,352
----------
Total revenues ................. 1,806,453
Cost of sales ................... 1,584,691
----------
Gross profit .................... 221,762
Selling, general and
administrative
expenses ....................... 291 (i) 161,038
Management bonus ................
Depreciation and
amortization ................... 15 (k) 6,629
Operating income ................ (306) 54,095
Interest expense, floor
plan ........................... (127)(o) 19,123
Interest expense, other ......... 12,812 (o) 15,163
Other income .................... 1,188
----------
Income before income
taxes and minority
interest ....................... (12,991) 20,997
Provision for income
taxes .......................... 6 (s) 8,319
(4,866) (u)
-----------
Income before minority
interest ....................... (8,131) 12,678
Minority interest in
earnings of subsidiary (47) (k)
-----------
Net income ...................... $ (8,084) $ 12,678
=========== ==========
Pro forma basic net
income per share ............... $ 1.08
==========
Pro forma weighted
average common
shares
outstanding -- basic
(000's) ........................ 11,735
==========
Pro forma diluted net
income per share (v) ........... $ 0.88
==========
Pro forma weighted
average common
shares
outstanding -- diluted
(000's) (v) .................... 14,415
==========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Operations)
41
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
The 1998 Acquisitions (a)
---------------------------------------------------
Higginbotham
Hatfield Automotive Other 1998
Actual(b) Automotive Group Group Acquisitions(e)
----------- ------------------ -------------- -----------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Revenues:
Vehicle sales ................... $567,279 $133,661 $57,829 $ 89,466
Parts, service and collision
repair ......................... 68,020 8,774 5,363 11,913
Finance and insurance ........... 13,541 4,190 1,583 1,819
-------- -------- ------- --------
Total revenues .................. 648,840 146,625 64,775 103,198
Cost of sales .................... 566,392 130,221 55,166 90,480
-------- -------- ------- --------
Gross profit ..................... 82,448 16,404 9,609 12,718
Selling, general and adminis-
trative expenses ................ 59,622 11,308 6,948 10,014
Management bonus ................. 3,181
Depreciation and
amortization .................... 1,851 158 144 269
Operating income ................. 20,975 1,757 2,517 2,435
Interest expense, floor plan ..... 7,341 1,245 566 948
Interest expense, other .......... 2,745 145 264
Other income ..................... 15 244 20 69
-------- -------- ------- --------
Income before income taxes ....... 10,904 756 1,826 1,292
Provision for income taxes ....... 4,100 298
Net income ....................... $ 6,804 $ 756 $ 1,826 $ 994
======== ======== ======= ========
Pro forma basic net income
per share .......................
Pro forma weighted average
common shares
outstanding -- basic
(000's) .........................
Pro forma diluted net income
per share (v) ...................
Pro forma weighted average
common shares
outstanding -- diluted
(000's) (v) .....................
<CAPTION>
Pro Forma Pro Forma Pro Forma
Adjustments Adjustments for the
for the for the Acquisitions and
Acquisitions Prior Offering the Prior Offering
----------------- ---------------- -------------------
(in thousands except per share
data)
<S> <C> <C> <C>
Revenues:
Vehicle sales ................... $ $ $ 848,235
Parts, service and collision
repair ......................... 94,070
Finance and insurance ........... 71 (f) 21,204
---------- ---------
Total revenues .................. 71 963,509
Cost of sales .................... (75)(g) 842,184
---------- ---------
Gross profit ..................... 146 121,325
Selling, general and adminis-
trative expenses ................ (661)(h) 87,797
566 (j)
Management bonus ................. (3,181)(h)
Depreciation and
amortization .................... (149)(j) 3,133
(68)(l)
928 (m)
----------
Operating income ................. 2,711 30,395
Interest expense, floor plan ..... 24 (n) (63)(o) 10,061
Interest expense, other .......... (79)(j) 4,765 (o) 7,651
(189)(q)
Other income ..................... 348
---------
Income before income taxes ....... 2,955 (4,702) 13,031
Provision for income taxes ....... 1,146 (r) (1,763)(w) 5,012
1,231 (t)
----------
Net income ....................... $ 578 $ (2,939) $ 8,019
========== ========== =========
Pro forma basic net income
per share ....................... $ 0.68
=========
Pro forma weighted average
common shares
outstanding -- basic
(000's) ......................... 11,749
=========
Pro forma diluted net income
per share (v) ................... $ 0.55
=========
Pro forma weighted average
common shares
outstanding -- diluted
(000's) (v) ..................... 14,658
=========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Operations)
42
<PAGE>
- ---------
(a) The Company has obtained Manufacturer consent to all of the 1998
Acquisitions other than from Honda in the Economy Honda Acquisition, which
the Company expects to receive prior to the closing of the acquisition.
There can be no assurance that such consent will be obtained. The
Company's request for consent to the acquisition of a Jaguar franchise
included in the 1997 Acquisitions and a Jaguar franchise included in the
Heritage Acquisition was denied. The two Jaguar franchises and the Economy
Honda Dealership, which are included in the Unaudited Pro Forma
Consolidated Financial Data, represented in the aggregate 3.2% and 3.3% of
the Company's pro forma revenues and gross profit for 1997, and 2.8% and
2.7% of the Company's pro forma revenues and gross profit for the first
six months of 1998. See "Risk Factors -- No Consent from Jaguar" and " --
No Consent from Honda."
(b) The actual consolidated statement of operations data for the Company for
the year ended December 31, 1997 includes the results of operations of the
following dealerships and dealership groups acquired during the year ended
December 31, 1997 (the "1997 Acquisitions") from their respective dates of
acquisition:
<TABLE>
<CAPTION>
Date
Dealership Acquired of Acquisition
- ------------------------------------- ------------------
<S> <C>
Fort Mill Chrysler-Plymouth-Dodge June 3, 1997
Lake Norman Dealerships September 1, 1997
Ken Marks Ford October 1, 1997
Williams Motors October 10, 1997
Dyer Volvo November 1, 1997
Bowers Dealerships November 1, 1997
</TABLE>
The actual consolidated statement of operations data for the Company the
six months ended June 30, 1998 includes the results of operations of the
following dealerships and dealership groups acquired during the first six
months of 1998 from their respective dates of acquisition:
<TABLE>
<CAPTION>
Date
Dealership Acquired of Acquisition
- -------------------------------------------------- ----------------
<S> <C>
Clearwater Dealerships and Affiliate Companies January 1, 1998
Casa Ford of Houston, Inc. May 1, 1998
Capitol Chevrolet and Imports April 1, 1998
Century BMW April 1, 1998
Heritage Lincoln Mercury April 1, 1998
</TABLE>
(c) Reflects the results of operations of the 1997 Acquisitions for the period
from January 1, 1997 to their respective dates of acquisition. Pro forma
adjustments have not been presented to include the results of (i) Fort
Mill Chrysler-Plymouth-Dodge for the period from January 1, 1997 to June
3, 1997, the effective date of the acquisition or (ii) Williams Motors for
the period from January 1, 1997 to October 10, 1997, the effective date of
acquisition, because management believes such results are not material.
(d) The combined statement of operations data for Hatfield Automotive Group
include the results of Trader Bud's Westside Chrysler-Plymouth from May 1,
1997, the effective date of the acquisition by Hatfield Automotive Group.
Pro forma adjustments have not been presented to include the results of
operations of Trader Bud's Westside Chrysler-Plymouth for the four month
period ended April 30, 1997 because management believes such results are
not material.
(e) Reflects the results of operations of the 1998 Acquisitions (other than the
Hatfield Acquisition and the Higginbotham Acquisition) for the year ended
December 31, 1997 and reflects the results of operations of the 1998
Acquisitions (other than the Hatfield Acquisition, the Higginbotham
Acquisition and the Clearwater Acquisition) from January 1, 1998 to their
respective dates of acquisition. Certain historical amounts have been
reclassified to conform to the Company's method of presentation.
(f) Reflects finance and insurance revenues generated by the 1997 Acquisitions
and the 1998 Acquisitions in the amounts of $252,000 and $307,000,
respectively for the year ended December 31, 1997, and by the 1998
Acquisitions (other than the Clearwater Acquisition) in the amount of
$71,000 for the six months ended June 30, 1998, that were paid directly to
the dealership owners or wholly-owned management companies and excluded
from revenue in the historical financial statements of the acquired
dealerships. No adjustment has been made to reflect such amounts for the
Economy Honda Acquisition, the Montgomery Acquisition, the Hatfield
Acquisition, the Century Acquisition or the Heritage Acquisition as such
amounts could not be reasonably ascertained.
(footnotes continued on following pages)
43
<PAGE>
(g) Adjustment reflects the conversion from the LIFO Method of inventory
accounting to the FIFO Method of inventory accounting for the 1997
Acquisitions and the 1998 Acquisitions (other than the Hatfield
Acquisition and the Clearwater Acquisition) in the amounts of $371,000 and
$508,000, respectively, for the year ended December 31, 1997 and for the
1998 Acquisitions (other than the Hatfield Acquisition and the Clearwater
Acquisition) in the amount of $75,000 for the six months ended June 30,
1998, to conform to the Company's method of accounting for vehicle
inventories.
(h) Reflects the net decrease in selling, general and administrative expenses
related to the net reduction in salaries, bonuses, fringe benefits and
related expenses of owners and officers of the acquired dealerships who
have become or will become employees, consistent with reduced salaries
pursuant to employment agreements with the Company, or whose positions
have been or will be eliminated as part of the Acquisitions.
(i) Reflects the increase in salaries of existing officers who entered into
employment agreements with the Company, effective upon consummation of the
IPO.
(j) Reflects the increase in rent expense related to lease agreements entered
into with the sellers of certain acquired dealerships for the dealerships'
real property that will not be acquired by the Company, and the decreases
in depreciation expense and interest expense related to mortgage
indebtedness encumbering such property of approximately $9.5 million
bearing interest at rates from 7.0% to 9.5%.
(k) Reflects the elimination of minority interest in earnings as a result of
the acquisition of the 31% minority interest in Town & Country Toyota for
$3.2 million of Class B Common Stock in connection with the
Reorganization, and the amortization over 40 years of approximately $1.2
million in goodwill arising from such acquisition.
(l) Reflects the elimination of amortization expense related to goodwill that
arose in previous acquisitions in certain of the acquired dealerships from
the effective date of the acquisitions.
(m) Reflects the amortization over an assumed useful life of 40 years, of
intangible assets, consisting primarily of goodwill, resulting from the
Acquisitions which were assumed to occur on January 1, 1997. Certain of
the 1998 Acquisitions have purchase agreements which require the Company
to pay additional amounts in cash or Preferred Stock based on future
operating results. Amount includes amortization of the additional goodwill
associated with the $1.8 million contingent purchase price related to the
Clearwater Acquisition. Should the Company be required to pay the maximum
additional amounts contingent in the purchase agreements for the pending
1998 Acquisitions (other than Casa Ford), the Company would incur goodwill
amortization charges in addition to the amounts recorded in the Unaudited
Pro Forma Consolidated Statements of Operations of approximately $81,000
in 1997 and $40,000 for the six months ended June 30, 1998, respectively.
The Company's purchase agreement for Casa Ford does not provide a maximum
contingent amount to be paid based on future operating results, therefore
a maximum additional amount of amortization expense cannot be estimated.
See "The 1998 Acquisitions" and "Unaudited Pro Forma Consolidated Balance
Sheet."
(n) Reflects the decrease in interest expense, floor plan resulting from the
refinancing of the notes payable, floor plan arrangements of the Company
and the dealerships being acquired, under the Floor Plan Facility as if
such refinancing had occurred at the beginning of the period presented.
The aggregate balance of notes payable, floor plan arrangements of the
Company and the dealerships being acquired was $232.3 million and $200.6
million at December 31, 1997 and June 30, 1998, respectively, prior to the
assumed repayment by the Company reflected in (o) below. The average
interest rate under the Floor Plan Facility is approximately 7.6% compared
to historical interest rates ranging from 7.8% to 9.5%.
(o) Reflects the increase in interest expense associated with the Notes issued
in the Prior Offering and the decrease in interest expense as a result of
the assumed repayment of approximately $48.8 million of debt outstanding
under the Revolving Facility and $1.5 million of debt outstanding under
the Floor Plan Facility with the net proceeds from the Prior Offering not
used to finance the pending 1998 Acquisitions. See "Use of Proceeds."
(p) In connection with the Bowers Acquisition, the Company issued a promissory
note to the former owner in the amount of $4.0 million bearing 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% as if the note was issued at the beginning of the period
presented.
(q) Reflects the decrease in interest expense related to debt, other than
mortgage indebtedness, which has not or will not be assumed of
approximately $7.4 million bearing interest at rates from 8.5% to 10.0%.
(footnotes continued on following page)
44
<PAGE>
(r) Reflects the net increase in provision for income taxes resulting from pro
forma adjustments above, computed using a combined statutory income tax
rate of approximately 39%.
(s) 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 combined
statutory income tax rate of 39.9%.
(t) Certain of the acquired dealerships were not subject to federal and state
income taxes because they were either S corporations, partnerships, or
limited liability companies during the period indicated. Upon completion
of these acquisitions, these dealerships will be subject to federal and
state income tax as C corporations. This adjustment reflects the resulting
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%.
(u) Reflects the net decrease in the provision for income taxes resulting from
adjustments (i) and (o), computed using a combined statutory income tax
rate of 37.5%.
(v) Pro forma basic and diluted net income per share and the related weighted
average shares outstanding for the year ended December 31, 1997 have been
adjusted to reflect the issuance of 5 million shares of Class A Common
Stock in connection with the IPO and the issuance of 485,294 shares of
Class A Common Stock in connection with the Higginbotham Acquisition as if
such shares had been issued on January 1, 1997. Pro forma diluted net
income per share and the related weighted average shares outstanding for
the year ended December 31, 1997 includes the dilutive effect of the
issuance of 32,159 shares of Preferred Stock in connection with the 1998
Acquisitions. Warrants to purchase 44,391 shares of Class A Common Stock
issued in January 1998 in connection with the consummation of the 1997
Acquisitions and warrants to purchase 75,000 shares of Class A Common
Stock to be issued in connection with the 1998 Acquisitions were not
included in the reported amounts because they were anti-dilutive. Pro
forma net income per share and the related weighted average shares
outstanding for the six months ended June 30, 1998 includes the dilutive
effect of the issuance of 32,159 shares of Preferred Stock in connection
with the 1998 Acquisitions and warrants to purchase 75,000 shares of Class
A Common Stock issued in connection with the Century Acquisition as if
such shares and warrants had been issued on January 1, 1998. The following
is a reconciliation of the pro forma weighted average shares for the year
ended December 31, 1997 and the six months ended June 30, 1998:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, 1997 June 30, 1998
------------------- --------------
<S> <C> <C>
Weighted Average Shares -- Basic (actual) .............. 6,949 11,264
Issuance of Common Stock in connection with IPO ........ 4,301 --
Issuance of Common Stock in connection with Higginbotham
Acquisition ........................................... 485 485
----- ------
Weighted Average Shares -- Basic (pro forma) ........... 11,735 11,749
====== ======
Weighted Average Shares -- Diluted (actual) ............ 6,949 11,637
Issuance of Common Stock in connection with Higginbotham
Acquisition ........................................... 485 485
Issuance of common Stock in connection with IPO ........ 4,301 --
Class A Convertible Preferred Stock .................... 2,680 2,518
Warrants ............................................... -- 18
------ ------
Weighted Average Shares -- Diluted (pro forma) ......... 14,415 14,658
====== ======
</TABLE>
(w) Reflects the net decrease in the provision for income taxes resulting from
adjustment (o) computed using a combined statutory income tax rate of
37.5%.
45
<PAGE>
Unaudited Pro Forma Consolidated Balance Sheet
As of June 30, 1998
<TABLE>
<CAPTION>
The 1998 Acquisitions
------------------------------------------
Pro Forma Pro Forma
Hatfield Higginbotham Adjustments Adjustments
Automotive Automotive Other 1998 for the 1998 for the
Actual Group Group Acquisitions Acquisitions Prior Offering
---------- ------------ -------------- -------------- ------------------- ------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 27,228 $14,200 $ 4,628 $ 7,266 $ (58,950)(a) $ 120,126(b)
4,300 (h)
(15,733)(c) (65,476)(d)
Receivables ................... 35,761 3,294 2,292 496 (2,292)(c)
Inventories ................... 175,515 33,733 9,893 4,023 3,866 (e)
1,519 (a)
Finance notes receivable ...... 2,480 (41)(c)
Deferred incomes taxes ........ 669
Due from affiliates ........... 1,084 --
Other current assets .......... 3,854 480 557 57 (512)(c)
-------- ------- ------- ------- -----------
Total current assets ....... 244,111 51,707 19,850 11,842 (67,843) 54,650
Property and equipment, net 22,040 952 2,922 1,731
(4,062)(f)
Finance notes receivable ....... 1,564 (4)(c)
Goodwill, net .................. 102,948 971 847 65,308 (a)
(1,818)(g)
Other assets ................... 524 374 (374)(c) 3,937 (b)
-------- ------- ----------- ----------
Total assets ............... $369,623 $53,630 $25,557 $13,573 $ (8,793) $ 58,587
======== ======= ======= ======= =========== ==========
Liabilities and
Stockholders' Equity
Current Liabilities:
Notes payable-floor plan ...... $149,670 $35,343 $11,033 $ 4,300(h) $ (1,542)(d)
233 (a)
Trade accounts payable ........ 7,971 1,374 980 205 (980)(c)
Accrued interest .............. 1,584 156 10 (10)(c)
Other accrued liabilities ..... 17,949 1,195 1,896 902 (1,607)(c)
Dividends payable ............. 250 (250)(c)
Payable for Acquisitions ...... 15,726 1,250 (a) (15,176)(d)
Payable to affiliates ......... 445 609 3,035 (3,644)(c)
Current maturities of
long-term debt ............... 789 112 (112)(f)
-------- ------- -----------
Total current
liabilities ............... 194,134 38,677 17,316 1,107 (820) (16,718)
Long-term debt ................. 54,644 1,064 (20)(c) 124,063 (b)
(1,044)(f) (48,758)(d)
Payable to the Company's
Chairman ....................... 5,500
Payable to affiliates .......... 4,160 8,325 (8,325)(c)
Deferred income taxes .......... 1,079 78
Income tax payable ............. 6,705 234 (e)
Stockholders' Equity:
Receivable from
stockholder .................. -- -- --
Common Stock of
combined companies ........... 2,825 3,064 50 (5,939)(a)
Preferred Stock ............... 11,763 19,125 (a)
Class A Common Stock .......... 50 8,250 (a)
Class B Common Stock .......... 63
Paid-in capital ............... 68,535 1,744 (1,744)(a)
Retained earnings and
members' and partners'
equity ....................... 22,990 2,059 4,113 12,338 (13,258) (a)
(4,160)(c)
3,632 (e)
(2,906)(f)
(1,818)(g)
Total stockholders' equity ..... 103,401 6,628 7,177 12,388 1,182
-------- ------- ------- ------- -----------
Total liabilities and
stockholders' equity ........... $369,623 $53,630 $25,557 $13,573 $ (8,793) $ 58,587
======== ======= ======= ======= =========== ==========
<CAPTION>
Pro Forma
for the 1998
Acquisitions and
the Prior Offering
-------------------
<S> <C>
Assets
Current Assets:
Cash and cash equivalents $ 37,589
Receivables ................... 39,551
Inventories ................... 228,549
Finance notes receivable ...... 2,439
Deferred incomes taxes ........ 669
Due from affiliates ........... 1,084
Other current assets .......... 4,436
--------
Total current assets ....... 314,317
Property and equipment, net 23,583
Finance notes receivable ....... 1,560
Goodwill, net .................. 168,256
Other assets ................... 4,461
--------
Total assets ............... $512,177
========
Liabilities and
Stockholders' Equity
Current Liabilities:
Notes payable-floor plan ...... $199,037
Trade accounts payable ........ 9,550
Accrued interest .............. 1,740
Other accrued liabilities ..... 20,335
Dividends payable .............
Payable for Acquisitions ...... 1,800
Payable to affiliates ......... 445
Current maturities of
long-term debt ............... 789
--------
Total current
liabilities ............... 233,696
Long-term debt ................. 129,949
Payable to the Company's
Chairman ....................... 5,500
Payable to affiliates .......... 4,160
Deferred income taxes .......... 1,157
Income tax payable ............. 6,939
Stockholders' Equity:
Receivable from
stockholder .................. --
Common Stock of
combined companies ...........
Preferred Stock ............... 30,888
Class A Common Stock .......... 8,300
Class B Common Stock .......... 63
Paid-in capital ............... 68,535
Retained earnings and
members' and partners'
equity ....................... 22,990
Total stockholders' equity ..... 130,776
--------
Total liabilities and
stockholders' equity ........... $512,177
========
</TABLE>
(See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet)
46
<PAGE>
- ---------
(a) Reflects the preliminary allocation of the aggregate purchase price of the
1998 Acquisitions (other than the Clearwater Acquisition, the Heritage
Acquisition, the Montgomery Acquisition, the Century Acquisition, and the
Casa Ford Acquisition, which are included in the historical accounts of
the Company) 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 a significant
adjustment to the carrying amount of those net assets. The amount of
goodwill and the corresponding amortization actually recorded may
ultimately be different from amounts estimated here, depending on the
actual fair value of tangible net assets acquired at closing of the 1998
Acquisitions. The estimated purchase price allocation consists of the
following:
<TABLE>
<CAPTION>
Hatfield Higginbotham
Automotive Automotive Other 1998
Group Group Acquisitions Total
------------ ------------- -------------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Estimated total consideration:
Cash .................................... $34,525 $18,244 $ 6,181 $58,950
Payable for acquisitions ................ -- 500 1,300 1,800
Class A Common Stock .................... -- 8,250 -- 8,250
Preferred Stock ......................... 14,025 -- 5,100 19,125
------- ------- ------- -------
Total .................................. 48,550 26,994 12,581 88,125
------- ------- ------- -------
Less: Estimated fair value of tangible net
assets acquired ......................... 10,752 7,734 4,331 22,817
------- ------- ------- -------
Excess of purchase price over fair value of
net tangible assets acquired ............ $37,798 $19,260 $ 8,250 $65,308
======= ======= ======= =======
</TABLE>
The Company has obtained Manufacturer consent to all of the 1998
Acquisitions other than from Honda in the Economy Honda Acquisition, which
the Company expects to receive prior to the closing of the acquisition.
There can be no assurance that such consent will be obtained. The Company's
request for consent to the acquisition of a Jaguar franchise included in the
1997 Acquisitions and a Jaguar franchise included in the Heritage
Acquisition was denied. The two Jaguar franchises and the Economy Honda
Dealership, which are included in the Unaudited Pro Forma Consolidated
Financial Data, represented in the aggregate 3.2% and 3.3% of the Company's
pro forma revenues and gross profit for 1997, and 2.8% and 2.7% of the
Company's pro forma revenues and gross profit for the first six months of
1998. See "Risk Factors -- No Consent from Jaguar" and " -- No Consent from
Honda."
(b) Reflects the proceeds (net of estimated debt issuance costs of $3.9
million) to the Company from the issuance of $125.0 million of the Notes
in the Prior Offering, less unamortized discount of $937,000.
(c) Reflects the elimination of certain assets and liabilities other than
goodwill, real property and related mortgage indebtedness of the acquired
dealerships that will not be acquired.
(d) Reflects the net proceeds from the Prior Offering in excess of amounts
required to consummate the 1998 Acquisitions (other than the Clearwater
Acquisition) that will be used to repay amounts outstanding under the
Revolving Facility, the Floor Plan Facility and the Payable for
Acquisitions.
(e) Reflects the conversion from the LIFO Method of inventory accounting to the
FIFO Method of inventory accounting at certain of the acquired
dealerships, including the resulting tax liability calculated at the
applicable statutory income tax rate ranging from 37.9% to 38.9%.
(f) Reflects the elimination of real property and related mortgage indebtedness
at certain of the dealerships which are not being acquired.
(g) Reflects the elimination of goodwill that arose in previous acquisitions of
certain of the acquired dealerships.
(h) Reflects the proceeds received from the issuance of floor plan notes
payable used to finance vehicles acquired in the Economy Honda
Acquisition.
47
<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 the Sonic Automotive, Inc. and
Subsidiaries Consolidated Financial Statements and the related notes thereto
included elsewhere herein.
Overview
The Company is one of the leading automotive retailers in the United
States, operating 27 dealerships and ten collision repair centers in the
southeastern and southwestern United States as of June 30, 1998. 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 Atlanta, Charlotte, Chattanooga,
Greenville/Spartanburg, Houston, Montgomery, Nashville and Tampa/Clearwater
markets as of June 30, 1998. Sonic sold 20 domestic and foreign brands as of
June 30, 1998, consisting of BMW, Cadillac, Chevrolet, Chrysler, Dodge, Ford,
Honda, Hyundai, Infiniti, Jaguar, Jeep, KIA, Lincoln, Mercury, Mitsubishi,
Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo.
New vehicle revenues include both the sale and lease of new vehicles. Used
vehicle revenues include amounts received for used vehicles sold to retail
customers, other dealers and wholesalers. Other operating revenues include
parts and services revenues, fees and commissions for arranging 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 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, reduce 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") as well as the amount of
indebtedness incurred for acquisitions.
The Company has 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 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, 1998. As a result of the effects of the Acquisitions, the
historical 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 Acquisitions occurred
at the beginning of the periods presented in the Consolidated Financial
Statements.
48
<PAGE>
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.
The Company's profit margins are primarily impacted by changes in the
percentage of revenues attributed to new vehicle sales.
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
Three Months Ended Six Months Ended
Year Ended December 31, June 30, June 30,
----------------------------------- --------------------- ---------------------
1995 1996 1997 1997 1998 1997 1998
----------- ----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
New vehicle sales .................... 60.0 % 62.0 % 64.2 % 65.1% 60.7% 64.5% 59.7%
Used vehicle sales ................... 26.0 % 24.9 % 23.1 % 22.2% 27.2% 22.5% 27.7%
Parts, service and collision repair .. 11.5 % 11.2 % 10.7 % 10.5% 10.1% 10.8% 10.5%
Finance and insurance ................ 2.5 % 1.9 % 2.0 % 2.2% 2.0% 2.2% 2.1%
Total revenues. ...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................ 87.4% 88.1% 88.2% 88.8% 87.5% 88.9% 87.3%
Gross profit ......................... 12.6% 11.9% 11.8% 11.2% 12.5% 11.1% 12.7%
Selling, general and administrative .. 9.3% 8.9% 9.0% 8.2% 9.1% 8.4% 9.5%
Operating income ..................... 3.2 % 2.9 % 2.8 % 3.0% 3.4% 2.7% 3.2%
Interest expense ..................... 1.6 % 1.7 % 1.7 % 1.6% 1.5% 1.6% 1.6%
Income before income taxes ........... 1.7 % 1.3 % 1.5 % 1.4% 1.9% 1.2% 1.7%
</TABLE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues. Revenues grew in each of the Company's primary revenue areas for
the first six months of 1998 as compared with the first six months of 1997,
causing total revenues to increase 204.8% to $648.8 million. New vehicle sales
revenue increased 182.4% to $387.5 million in the first six months of 1998,
compared with $137.2 million in the first six months of 1997. The increase was
due primarily to an increase in new vehicle unit sales of 153.3% to 16,601, as
compared with 6,553 in the first six months of 1997 resulting principally from
additional unit sales contributed by the acquisitions of Jeff Boyd
Chrysler-Plymouth-Dodge in June 1997; Lake Norman Dodge and Affiliates in
September 1997; Ken Marks Ford in October 1997; Dyer Volvo and the Bowers
Dealerships and Affiliated Companies in November 1997; Clearwater Toyota,
Clearwater Mitsubishi, and Clearwater Collision Center in January 1998; Century
BMW, Heritage Lincoln Mercury, and Capitol Chevrolet and Imports in April 1998;
and Casa Ford in May 1998 (the "Closed Acquisitions"). The remainder of the
increase was due to an 11.5% increase in the average selling price of new
vehicles resulting principally from sales of higher priced import vehicles
contributed by the Closed Acquisitions.
Used vehicle revenues from retail sales increased 305.6% to $132.5 million
in the first six months of 1998 from $32.7 million in the first six months of
1997. The increase was due primarily to an increase in used vehicle unit sales
of 268.4% to 9,719, as compared with 2,638 in the first six months of 1997,
resulting from additional unit sales contributed by the Closed Acquisitions.
The remainder of the increase was due to a 10.1% increase in the average
selling price of used vehicles resulting principally from sales of higher
priced luxury and import vehicles contributed by the Closed Acquisitions along
with an increase in used vehicle revenues of 15.2% in the first six months of
1998 compared to the first six months of 1997 from used vehicle revenues from
stores owned for longer than one year.
The Company's parts, service and collision repair revenue increased 196.9%
to $68.0 million in the first six months of 1998 compared to $22.9 million in
the first six months of 1997, due principally to the Closed Acquisitions.
Finance and insurance revenue increased $8.8 million, or 184.3%, due
principally to increased new vehicle sales and related financing.
Gross Profit. Gross profit increased 248.9% to $82.4 million in the first
six months of 1998 from $23.6 million in the first six months of 1997 due
principally to increases in revenues contributed by dealerships acquired. Gross
profit as a percentage of sales increased to 12.7% from 11.1% due to increases
in new vehicle gross margins resulting from sales of higher margin import
vehicles contributed by acquired dealerships, as well as improved gross margins
of used vehicles
49
<PAGE>
resulting from efforts made to improve management of used vehicle inventories.
Additionally, gross margin percentages for each profit center are affected by
the mix of revenues within each profit center, correspondingly. Used vehicle
revenues increased and new vehicle revenues decreased as a percentage of total
revenues from 15.3% and 64.4% in the first six months of 1997, respectively,
compared to 20.4% and 59.7% for the first six months of 1998, respectively. The
revenue mix resulted in increased used vehicle gross profits and decreased new
vehicle gross profits as a percentage of the total gross profits from 11.7% and
38.0%, respectively, in the first six months of 1997 to 16.0% and 36.3% in the
first six months of 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, including depreciation and amortization, increased
242.9% to $61.5 million in the first six months of 1998 from $17.9 million in
the first six months of 1997. Such expenses as a percentage of revenues
increased to 9.5% from 8.4% due principally to expenses inherent with the
initial growth and formation of the Company. Additionally, as gross profits and
gross profit margins increase expenses related to employees commissions for
sales of related products increase, respectively.
Interest Expense, Floorplan. Interest expense, floorplan increased 143.3%
to $7.3 million from $3.0 million, due primarily to floorplan interest incurred
by the Closed Acquisitions. As a percentage of total revenues, floor plan
interest decreased from 1.4% to 1.1% primarily due to decreased interest rates
under the Company's floor plan financing arrangements, as well as improved
management of inventory levels.
Interest Expense, Other. Interest expense, other increased 764.2% to $2.7
million from $0.3 million, due primarily to interest incurred on acquisition
related indebtedness.
Net Income. As a result of the factors noted above, the Company's net
income increased by $5.3 million in the first six months of 1998 compared to
the first six months of 1997.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30,
1997
Revenues. Revenues grew in each of the Company's primary revenue areas for
the three months ended June 30, 1998 as compared with the three months ended
June 30, 1997, causing total revenues to increase 237.8% to $385.5 million. New
vehicle sales revenue increased 214.5% to $233.7 million for the three months
ended June 30, 1998, compared with $74.3 million for the three months ended
June 30, 1997. The increase was due primarily to an increase in new vehicle
unit sales of 182.6% to 9,984, as compared with 3,533 for the three months
ended June 30, 1997 resulting principally from additional unit sales
contributed by the Closed Acquisitions. The remainder of the increase was due
to a 11.3% increase in the average selling price of new vehicles resulting
principally from sales of higher priced import vehicles contributed by the
Closed Acquisitions.
Used vehicle revenues from retail sales increased 344.5% to $76.0 million
for the three months ended June 30, 1998 from $17.1 million for the comparable
period of 1997. The increase was due primarily to an increase in used vehicle
unit sales of 293.4% to 5,386 as compared with 1,369 for the three months ended
June 30, 1997, resulting from additional unit sales contributed by the Closed
Acquisitions. The remainder of the increase was due to a 13.0% increase in the
average selling price of used vehicles resulting principally from sales of
higher priced luxury and import vehicles contributed by the Closed Acquisitions
along with an increase in used vehicle revenues of 12.1% for the three months
ended June 30, 1998 compared to the three months ended June 30, 1997 from used
vehicle revenues on a same store basis
The Company's parts, service and collision repair revenue increased 227.2%
to $39.0 million for the three months ended June 30, 1998 compared to $11.9
million for the same period of the prior year, due principally to the Closed
Acquisitions. Finance and insurance revenue increased $5.2 million, or 201.2%,
due principally to increased new vehicle sales and related financing.
Gross Profit. Gross profit increased 276.7% to $48.2 million for the three
months ended June 30, 1998 from $12.8 million for the three months ended June
30, 1997 due principally to increases in revenues contributed by dealerships
acquired. Gross profit as a percentage of sales increased to 12.5% from 11.2%
due to increases in new vehicle gross margins resulting from sales of higher
margin import vehicles contributed by acquired dealerships, as well as improved
gross margins of used vehicles resulting from efforts made to improve
management of used vehicle inventories.
Additionally, gross margin percentages for each profit center are affected
by the mix of revenues within each profit center, correspondingly. Used vehicle
revenues increased and new vehicle revenues decreased as a percentage of total
revenues from 14.9% and 65.1% for the three months ended June 30, 1997,
respectively, compared to 19.7% and 60.6% for the three months ended June 30,
1998, respectively. The revenue mix resulted in increased used vehicle gross
profits and decreased new vehicle gross profits as a percentage of the total
gross profits from 11.9% and 39.7%, respectively, for the three months ended
June 30, 1997 to 16.1% and 37.0% for the three months ended June 30, 1998.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses, including depreciation and amortization, increased
273.3% to $35.0 million for the three months ended June 30, 1998 from $9.4
million for the same period in the prior year. Such expenses as a percentage of
revenues increased to 9.1% from 8.2% due principally to expenses inherent with
the initial growth and formation of the Company. Additionally, as gross profits
and gross profit margins increase expenses related to employees commissions for
sales of related products increase, respectively.
Interest Expense, Floorplan. Interest expense, floorplan increased 144.4%
to $4.1 million from $1.7 million, due primarily to floorplan interest incurred
by the Closed Acquisitions. As a percentage of total revenues, floor plan
interest decreased from 1.5% to 1.1% primarily due to decreased interest rates
under the Company's floor plan financing arrangements, as well as improved
management of inventory levels.
Interest Expense, Other. Interest expense, other increased 932.3% to $1.7
million from $0.2 million, due primarily to interest incurred on acquisition
related indebtedness.
Net Income. As a result of the factors noted above, the Company's net
income increased by $3.7 million for the three months ended June 30, 1998
compared to comparable period of 1997.
Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended
December 31, 1996
Revenues. Revenues grew in each of the Company's primary revenue areas for
1997 as compared with 1996, causing total revenues to increase 42.2% to $536.0
million. New vehicle sales revenue increased 47.0% to $343.9 million, compared
with $233.9 million. New vehicle unit sales increased from 11,693 to 15,715,
accounting for 34.4% of the increase in vehicle sales revenues. The remainder
of the increase was primarily due to a 9.4% 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, and
additional revenues from the 1997 Acquisitions.
Used vehicle revenues from retail sales increased 25.1% from $68.0 million
in 1996 to $85.1 million in 1997. The increase in used vehicle revenues was due
principally to additional revenues contributed from the 1997 Acquisitions in
the fourth quarter of 1997.
The Company's parts, service and collision repair revenue increased 36.7%
to $57.5 million from $42.1 million, and declined as a percentage of revenue to
10.7% from 11.2%. 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 and additional revenues from the 1997
Acquisitions in the fourth quarter 1997. F&I revenue increased $3.5 million,
due principally to increased new vehicle sales and related financings.
Gross Profit. Gross profit increased 40.8% in 1997 to $63.0 million from
$44.7 million in 1996 due to increases in new vehicle sales revenues
principally at the Company's Lone Star Ford and Fort Mill Ford locations and
additional revenues from the 1997 Acquisitions in the third and fourth quarters
of 1997. Parts and service revenue increases also contributed to the increase
in gross profit.
Selling, General and Administrative Expenses. SG&A expenses, including
depreciation and amortization, increased 42.8% from $33.7 million to $48.1
million. These expenses increased due to increases in sales volume as well as
expenses associated with the 1997 Acquisitions and the Company's IPO.
Interest Expense, floor plan. Interest expense, floor plan increased 34.2%
to $8.0 million from $6.0 million, primarily due to the 1997 Acquisitions. As a
percentage of total revenues, floor plan interest decreased from 1.6% to 1.5%.
Interest Expense, other. Interest expense, other increased 176.9% from
$0.4 million to $1.2 million. The increase in interest expense was due to
funding of the 1997 Acquisitions in the fourth quarter.
Net Income. As a result of the factors noted above, the Company's net
income increased by $0.7 million in 1997 compared to 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. The Company's total revenue increased 21.2% to $376.9 million in
1996 from $311.3 million in 1995. New vehicle sales increased 25.2% to $234.0
million in 1996 from $186.9 million in 1995, primarily because of the
acquisition in February 1996 of the Company's Fort Mill Ford dealership. The
inclusion of the results of the Fort Mill Ford dealership accounted for 69.0%
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 10.0% which the
Company believes was primarily due to
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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 17.3%
to $42.1 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 14.2% in 1996 to $44.7 million from
$39.2 million in 1995 primarily due to the addition of the Fort Mill Ford
dealership. Gross profit decreased from 12.6% to 11.9% 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 $4.8 million, or 16.4%, from $28.9 million in 1995 to $33.7 million
in 1996. However, as a percentage of revenue, SG&A expenses decreased from 9.3%
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, floor plan. The Company's interest expense, floor plan
in 1996 increased 32.5% to $6.0 million from $4.5 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 an increase in floor plan interest rates during
1996.
Interest Expense, other. The Company's interest expense, other was $0.4
million in 1996 and 1995.
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.
Liquidity and Capital Resources
The Company's principal needs for capital resources are to finance
acquisitions and fund debt service and working capital requirements.
Historically, the Company has relied primarily upon internally generated cash
flows from operations, borrowings under its various credit facilities and
borrowings and capital contributions from its stockholders to finance its
operations and expansion. On November 10, 1997, the Company completed its IPO
providing approximately $53.7 million of additional capital resources for the
consummation of the 1997 Acquisitions.
On July 31, 1998, the Company completed the Prior Offering of the Old
Notes receiving approximately $120.1 million in net proceeds. These proceeds
were used to pay the cash portions of the purchase prices for certain 1998
Acquisitions and repay indebtedness under the Revolving Facility. The Notes
bear interest at 11% per annum and will mature on August 1, 2008. The Notes are
unsecured senior subordinated obligations of the Company and, as such, are
subordinated in right of payment to all other existing and future senior
indebtedness. In the Indenture, the Company and the Guarantors have agreed to
certain negative covenants, including covenants restricting or prohibiting the
payment of dividends, the incurrence of additional indebtedness, investment of
funds, sales of assets as well as other customary covenants.
The Company currently has in place the Floor Plan Facility, a standardized
floor plan credit facility with Ford Motor Credit for each of the Company's
dealership subsidiaries. As of June 30, 1998, there was an aggregate of $149.7
million outstanding under the Floor Plan Facility. The Floor Plan Facility at
June 30, 1998 had an effective rate of prime less 0.9%, subject to certain
incentives and other adjustments, which was 7.6%. 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
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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 Facility but is not required to make loan principal repayments
prior to the sale of the vehicles. The underlying notes are due when the
related vehicles are sold and are collateralized by vehicle inventories and
other assets of the relevant dealership subsidiary. The Floor Plan Facility
contains a number of covenants including, among others, covenants restricting
the Company with respect to the creation of liens and changes in ownership,
officers and key management personnel.
The Company generated net cash of $2.1 million and $7.8 million from
operating activities in 1996 and 1997, respectively. The 1997 increase was
attributable principally to a decrease in receivables, inventory levels and
increased net income.
During the first six months of 1998, the Company generated net cash of
$3.0 million from operating activities, compared to $4.0 million in the first
six months of 1997. The decrease was attributable principally an increase in
receivables due to additional acquisitions and revenue growth.
Cash used in investing activities, excluding amounts paid in acquisitions,
was approximately $1.2 million for the year ended December 31, 1997 and related
primarily to acquisitions of property and equipment. Cash used in investing
activities was $1.5 million, $6.7 million and $86.8 million in 1995, 1996 and
1997 respectively, including $1.5 million, $1.9 million and $2.0 million of
capital expenditures during such periods.
Cash used for investing activities, excluding amounts paid in
acquisitions, was approximately $1.3 million for the first six months of 1998
and related primarily to acquisitions of property and equipment.
In 1996, cash provided by financing activities of $2.3 million primarily
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 capital stock by a stockholder of Town & Country Ford. Cash
provided by financing activities for the year ended December 31, 1997 was $90.7
million principally due to proceeds of the IPO and debt incurred for certain
acquisitions.
Cash provided by financing activities for the first six months of 1998 of
$15.0 million primarily reflects amounts borrowed under the Revolving Facility
to finance acquisitions.
In August 1997, the Company obtained a $20 million loan from NationsBank,
N.A. (the "NationsBank Facility"). The proceeds from the NationsBank Facility
were used in the consummation of the acquisition of the two Lake Norman
dealerships and of the Fort Mill Chrysler-Plymouth-Dodge dealership. The
NationsBank Facility was guaranteed by Mr. Bruton Smith personally, which
guarantee was released in February 1998. The NationsBank Facility matured in
February 1998 and was repaid in full with proceeds of the IPO and the Revolving
Facility.
In October 1997, the Company obtained the Revolving Facility from Ford
Motor Credit in the principal amount of $26.0 million. In December 1997, the
Company increased the aggregate amount available to borrow under this facility
to a maximum of $75.0 million pursuant to the Revolving Facility's terms. The
Revolving Facility bears interest at the Revolving Facility Prime Rate and will
mature in December 1999, unless the Company requests that such term be
extended, at the option of Ford Motor Credit, for additional one-year terms. No
assurance can be given that such extensions will be granted. The proceeds from
the Revolving Facility were used in the consummation of the acquisition of Ken
Marks Ford in 1997, the Clearwater Acquisition in March 1998 and the repayment
in February 1998 of $8.2 million of the amount borrowed under the NationsBank
Facility. Amounts to be drawn under the Revolving Facility are anticipated by
the Company to be used for the acquisition of additional dealership
subsidiaries in the future and to provide general working capital needs of the
Company not to exceed $10 million. At June 30, 1998 the balance outstanding on
the Revolving Facility was $48.8 million and the Revolving Credit Facility
Prime Rate was 8.5% per annum. All of the indebtedness outstanding under the
Revolving Facility was repaid with a portion of the net proceeds of the Prior
Offering on July 31, 1998.
The Company agreed under the Revolving Facility 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). The Revolving Facility also contains 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. Additional
negative covenants include specified ratios of (i) total debt to tangible
equity (as defined in the Revolving Facility), (ii) current assets to current
liabilities, (iii) earnings before interest, taxes, depreciation and
amortization (EBITDA) to fixed charges, (iv) EBITDA to interest expense, (v)
EBITDA to total debt and (vi) the current lending commitment under the
Revolving Facility to scaled assets (as defined in the Revolving Facility).
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,
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membership or partnership interests in its dealership subsidiaries will
constitute an event of default under the Revolving Facility. The Company did
not meet the specified debt to tangible equity ratios required by the Revolving
Facility at December 31, 1997, at March 31, 1998 and at June 30, 1998 and has
obtained waivers with regard to such requirement from Ford Motor Credit. The
waivers are subject to certain requirements to the effect that the Company must
meet modified ratios. In connection with the issuance of the Old Notes, the
Company and Ford Motor Credit amended the Revolving Facility to provide that
the Notes (which are subordinated to the Revolving Facility) will be treated as
equity capital for purposes of this ratio and, accordingly, the Company is
currently in compliance with this covenant after its issuance of the Old Notes.
See "Description of Certain Other Indebtedness."
Capital expenditures, excluding amounts paid in acquisitions, were $1.5
million, $1.9 million and $2.0 million in 1995, 1996 and 1997, respectively.
The Company's principal capital expenditures typically include building
improvements and equipment for use in the Company's dealerships. Capital
expenditures in 1995 and 1996 were primarily attributable to expenditures for
the addition of a standalone used car lot in 1996 and other capital
improvements at the Lone Star Ford dealership. During 1997, the Company
completed its previously announced acquisitions of Fort Mill
Chrysler-Plymouth-Dodge, Williams Motors, Dyer Volvo, the Bowers Dealerships
and Affiliated Companies and Ken Marks Ford, Inc. with an aggregate purchase
price, net of cash purchased, of $85.6 million.
Capital expenditures, excluding amounts paid in acquisitions, were $0.9
million and $1.3 million for the six months ended June 30, 1997 and 1998,
respectively. The Company expects total capital expenditures for 1998 to
approximate $2.5 million. The Company's principal capital expenditures
typically include building improvements and equipment for use in the Company's
dealerships.
In 1997, the Company authorized 3 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. In March 1998, the
Board of Directors designated 300,000 shares of preferred stock as Preferred
Stock, which was divided into 100,000 of Series I Convertible Preferred Stock,
par value $0.10 per share (the "Series I Preferred Stock"), 100,000 shares of
Series II Convertible Preferred Stock, par value $0.10 per share (the "Series
II Preferred Stock"), and 100,000 shares of Series III Convertible Preferred
Stock, par value $0.10 per share (the "Series III Preferred Stock").
The Preferred Stock has a liquidation preference of $1,000 per share. Each
share of Preferred Stock is convertible, at the option of the holder, into that
number of shares of Class A Common Stock as is determined by dividing $1,000 by
the average closing price for the Class A Common Stock on the NYSE for the 20
days preceding the date of issuance of the shares of Preferred Stock (the
"Market Price"). Conversion of Series II Preferred Stock and Series III
Preferred Stock is subject to certain adjustments which have the effect of
limiting increases and decreases in the value of the Class A Common Stock
receivable upon conversion by 10% of the original value of the shares of Series
II Preferred Stock or Series III Preferred Stock.
The Preferred Stock is redeemable at the Company's option at any time
after the date of issuance. The redemption price of the Series I Preferred
Stock is $1,000 per share. The redemption price for the Series II Preferred
Stock and Series III Preferred Stock is as follows: (i) prior to the second
anniversary of the date of issuance, the redemption price is the greater of
$1,000 per share or the aggregate Market Price of the Class A Common Stock into
which it could be converted at the time of redemption, and (ii) after the
second anniversary of the date of issuance, the redemption price is the
aggregate Market Price of the Class A Common Stock into which it could be
converted at the time of redemption.
Each share of Preferred Stock entitles its holder to a number of votes
equal to that number of shares of Class A Common Stock into which it could be
converted as of the record date for the vote. Holders of preferred stock are
entitled to participate in dividends payable on the Class A Common Stock on an
"as-if-converted" basis. The Preferred Stock has no preferential dividends.
In July 1998, the Company completed the Hatfield Acquisition for a total
purchase price of $48.6 million, paid with $34.6 million in cash and with
14,025 shares of Series I Preferred Stock having a liquidation preference of
approximately $14.0 million. Of the cash portion of the purchase price,
approximately $26.2 million was financed with borrowings under the Revolving
Facility, which was subsequently repaid with a portion of the net proceeds from
the Prior Offering, and approximately $8.4 million was financed with cash from
the Company's existing operations, which was subsequently replenished with a
portion of the net proceeds from the Prior Offering.
On January 1, 1998, the Company began operation and obtained control of
Clearwater Toyota, Clearwater Mitsubishi and Clearwater Collision Center. On
April 1, 1998, the Company began operation and obtained control of Capitol
Chevrolet and Imports, Century BMW and Heritage Lincoln-Mercury. On May 1,
1998, the Company began operation and obtained
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control of Casa Ford of Houston, Inc. The aggregate purchase price for the
Clearwater Acquisition, the Montgomery Acquisition, the Century Acquisition,
the Heritage Acquisition, and the Casa Ford Acquisition was approximately $40.7
million, paid with approximately $29.0 million in cash and with 13,034 shares
of Preferred Stock (381 shares of Series I Preferred Stock, 6,380 shares of
Series II Preferred Stock, and 6,273 shares of Series III Preferred Stock)
having an aggregate liquidation preference of approximately $13.0 million and
an estimated fair value of approximately $11.7 million. Of the $29.0 million
cash portion of the aggregate purchase price, approximately $12.7 million was
financed with borrowings under the Revolving Facility, which was subsequently
repaid with a portion of the net proceeds from the Prior Offering,
approximately $15.6 million was financed with a portion of the net proceeds
from the Prior Offering, and approximately $0.1 million was paid with cash
generated from the Company's existing operations. The remaining $0.6 million of
the cash portion of the purchase price is payable to the seller of the
Montgomery Acquisition on the first and second anniversaries of the closing
date of the Montgomery Acquisition. In addition, the Company granted to the
seller of the Century Acquisition warrants to purchase 75,000 shares of the
Company's Class A Common Stock at a purchase price equal to the market value of
the Class A Common Stock on the date of grant. In accordance with terms of the
Clearwater Acquisition and the Montgomery Acquisition, the Company may be
required to pay additional amounts up to $5.1 million contingent on the future
performance of the dealerships acquired in such acquisitions. In addition, in
accordance with the terms of the Casa Ford Acquisition, the Company may be
required to pay additional amounts to the seller equal to five times the amount
by which the dealership's pre-tax earnings for 1998, if any, exceed $2.5
million, and five times the amount by which the dealership's pre-tax earnings
for 1999, if any, exceed the greater of $2.5 million or the dealership's 1998
pre-tax earnings. Any additional amounts paid will be accounted for as
additional goodwill. The Payable for Acquisitions in the amount of $15.7
million included in the accompanying consolidated financial statements
represents the consideration to be paid for the Montgomery Acquisition, Century
Acquisition, Heritage Acquisition, and Casa Ford Acquisition, which were closed
in July 1998. The Company did not consummate the acquisition of the assets of
the Jaguar franchise that comprises a portion of the Heritage Acquisition.
In September 1998, the Company completed the Higginbotham Acquisition for
a total purchase price of approximately $27.0 million, including the repayment
of approximately $2.7 million in indebtedness owed by one of the sellers to its
sole shareholder, subject to adjustment based on the net book value of the
purchased assets as of the closing date. The total purchase price was paid with
approximately $18.2 million in cash (all of which was financed with a portion
of the net proceeds from the Prior Offering), and with the issuance to the
sellers of Class A Common Stock with a market value at the date of closing of
approximately $8.3 million. The remaining $0.5 million of the cash portion of
the purchase price is payable to the seller in December 1998. In addition, the
Company also assumed certain liabilities of the sellers at closing. In
connection with the Higginbotham Acquisition, MMRT is anticipated to acquire
the real property on which these dealerships and related assets are operated,
and the Company will then lease these properties from MMRT.
In March 1998, the Company signed a stock purchase agreement regarding the
Economy Honda Acquisition. The Company has agreed to pay a total price of $7.5
million plus an amount equal to the net book value of the assets of the Economy
Honda Acquisition dealership. Preferred Stock will be issued for 51% of the
total purchase price, not to exceed $5.1 million in liquidation preference as
of the closing of the acquisition. The Company's consummation of the Economy
Honda Acquisition is subject to the approval of Honda, which has informed the
Company that its approval is contingent upon the Company divesting its
ownership of the Cleveland Village Honda dealership prior to acquiring the
Economy Honda dealership. The Company is currently negotiating with potential
buyers for the sale of the Cleveland Village Honda dealership.
Of the approximately $88.4 million cash portion of the aggregate purchase
price for the 1998 Acquisitions, approximately $38.9 million was obtained from
borrowings under the Revolving Facility (which was subsequently repaid with a
portion of the net proceeds from the Prior Offering), approximately $33.4
million was obtained with a portion of the net proceeds from the Prior
Offering, and approximately $8.9 million was obtained with cash generated from
the Company's existing operations (approximately $8.7 million of which was
subsequently replenished with a portion of the net proceeds from the Prior
Offering). The remaining $7.2 million of the cash portion of the aggregate
purchase price will be financed with a combination of borrowings under the
Revolving Facility and a portion of the net proceeds of the Prior Offering. The
Economy Honda Acquisition is expected to be consummated, subject to certain
closing conditions, in the fourth quarter of 1998.
The Company incurred a tax liability of approximately $7.1 million in
connection with the change in its tax basis of accounting for inventory from
LIFO to FIFO, which is payable over a six-year period beginning in January
1998. In addition, in connection with the Montgomery Acquisition and the Casa
Ford Acquisition, the Company will incur an additional estimated tax liability
in the amount of approximately $2.2 million as a result of the change in
accounting for the inventory from LIFO to FIFO, which will be a payable over a
six year period. As of June 30, 1998, the remaining cumulative balance of the
LIFO tax liability was $8.8 million. The Company expects to be pay such
obligation with cash provided by operations.
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The Company believes that the net proceeds from the Prior Offering,
together with funds generated through future operations and availability of
borrowings under its floor plan financing (or any replacements thereof) and its
other credit arrangements will be sufficient to fund its debt service and
working capital requirements and any seasonal operating requirements, including
its currently anticipated internal growth, for the foreseeable future. The
Company expects to fund any future acquisitions from its future cash flow from
operations, additional debt financing (including the Revolving Facility) or the
issuance of Class A Common Stock or the issuance of Preferred Stock or other
convertible instruments.
Year 2000 Compliance
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures and it has completed an
assessment of its own operations in this regard. The Company has determined
that its systems are currently Year 2000 compliant and the costs associated
with making its systems Year 2000 compliant were immaterial. However, many of
the Company's lenders and suppliers, including suppliers that provide finance
and insurance products, may be impacted by Year 2000 complications. The Company
is in the process of making inquiries to its lenders and suppliers regarding
their Year 2000 compliance efforts, and it is reviewing the Year 2000
disclosures in documents filed with the Commission for those lenders and
suppliers that are publicly-held companies. The Company does not believe that
failure of the Company's lenders or suppliers to ensure that their computer
systems are Year 2000 compliant will have a material adverse impact on the
Company's business, results of operations, and financial condition, although no
assurances can be given in this regard. Furthermore, there can be no assurances
that Year 2000 deficiencies on the part of dealerships to be acquired by the
Company would not have a material adverse impact on the Company's business,
results of operations, and financial condition.
The Company has not yet established a contingency plan in the event that
its expectations regarding Year 2000 problems are incorrect, but the Company
intends to create such a contingency plan within the next six months. At this
time, it is impossible to state with certainty whether Year 2000 computer
software or equipment failures on the part of the Company or third parties
involved with the Company will have a material adverse impact on the Company's
results of operations, liquidity and financial condition. However, based on the
Company's assessment of its own operations, the Company believes that it is
adequately prepared to deal with Year 2000 problems which may arise.
Significant Materiality of Goodwill
Goodwill represents the excess purchase price over the estimated fair
value of the tangible and separately measurable intangible net assets acquired.
The cumulative amount of goodwill at December 31, 1997 and June 30, 1998 was
$75.0 million and $104.5 million, respectively. As a percentage of total assets
and stockholders' equity, goodwill, net of accumulated amortization,
represented 25.5% and 88.1%, respectively, at December 31, 1997, and 27.8% and
99.6%, respectively, at June 30, 1998. Generally accepted accounting principles
require that goodwill and all other intangible assets be amortized over the
period benefited. The Company has determined that the period benefited by the
goodwill will be no less than 40 years and, accordingly, is amortizing goodwill
over a 40 year period. If the Company were not to separately recognize a
material intangible asset having a benefit period of less than 40 years, or
were not to give effect to shorter benefit periods of factors giving rise to a
material portion of the goodwill, earnings reported in periods immediately
following the acquisition would be overstated. In later years, the Company
would be burdened by a continuing charge against earnings without the
associated benefit to income valued by management in arriving at the
consideration paid for the businesses acquired. Earnings in later years also
could be significantly affected if management then determined that the
remaining balance of goodwill was impaired. The Company periodically compares
the carrying value of goodwill with the anticipated undiscounted future cash
flows from operations of the businesses acquired in order to evaluate the
recoverability of goodwill. The Company has concluded that the anticipated
future cash flows associated with intangible assets recognized in its
acquisitions will continue indefinitely, and these is no pervasive evidence
that any material portion will dissipate over a period shorter than 40 years.
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 the timing of manufacturer incentive programs and model
changeovers.
Effects of Inflation
Due to the relatively low levels of inflation in 1995, 1996 and 1997,
inflation did not have a significant effect on the Company's results of
operations for those periods.
56
<PAGE>
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
Standard establishes standards of reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. 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 $2.4 million, $2.1 million and $3.8 million
for the years ended December 31, 1995, 1996 and 1997, respectively. The Company
adopted the interim-period reporting requirements of this standard for the six
months ended June 30, 1998. Comprehensive income amounted to $1.5 million and
$6.8 million for the six months ended June 30, 1997 and June 30, 1998,
respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Standard redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. This Statement
will be effective for the Company's fiscal year ending December 31, 1998, and
need not be applied to interim financial statements in the initial year of its
application. The Company has not yet completed its analysis of which operating
segments it will disclose, if any.
Recent Developments
In August 1998, the Company entered into a definitive agreement for the
acquisition of the assets of the Jordan Acquisition. In September 1998, the
Company entered into a definitive agrement for the acquisition of the assets of
the Tampa Volvo Acquisition. In October 1998, the Company entered into
definitive agreements to acquire all of the assets of Ron Craft Chrysler
Plymouth Jeep, Inc. and all of the stock of Ron Craft
Chevrolet-Cadillac-Oldsmobile-Geo, Inc.
The Company was recently awarded two new Volvo franchises and a new
Oldsmobile franchise in the Atlanta market. The Company currently expects to
open these new dealerships in the first half of 1999.
On July 9, 1998, the Company entered into, subject to the approval of the
Company's Board of Directors and the Company's independent directors, the
Alliance Agreement with an operating partnership controlled by MMRT. MMRT
intends to acquire certain real estate associated with various automobile
dealerships, automotive aftermarket retailers and other automotive related
businesses and to lease such properties to the business operators located
thereon. Mr. Smith, the Company's Chairman and Chief Executive Officer, serves
as the chairman of MMRT's board of trustees and is presently its largest
shareholder. See "Risk Factors -- Potential Conflicts of Interest" and "Certain
Transactions -- Transactions with MMRT."
Under the Alliance Agreement, the Company has agreed to refer real estate
acquisition opportunities that arise in connection with its dealership
acquisitions to MMRT. In exchange, MMRT has agreed to refer dealership
acquisition opportunities to the Company and to provide to the Company, at the
Company's cost, certain real estate development, maintenance, survey and
inspection services. Pursuant to the Alliance Agreement, the Company has
entered into contracts to sell the real estate associated with Town and Country
Toyota and Fort Mill Ford, two of the Company's dealerships, for an aggregate
purchase price of approximately $10.3 million. In addition, the Alliance
Agreement provides for an agreed form of lease (the "Sonic Form Lease")
pursuant to which MMRT would lease real estate to the Company should MMRT
acquire real estate associated with any of the Company's operations. Presently,
the Company leases or intends to lease from MMRT 29 parcels of land associated
with 21 of its dealerships, including the real estate associated with Town and
Country Toyota and Fort Mill Ford that the Company will lease back from MMRT,
pursuant to leases substantially similar to the Sonic Form Lease. The aggregate
initial annual base rent to be paid by the Company for all 29 properties under
the leases with MMRT is approximately $7.8 million. MMRT has also entered into
new leases with each of Town and Country Ford and Lone Star Ford which provide
that the annual lease payments for their properties will each be increased to
approximately $1.1 million effective January 1, 2000, as compared to current
annual lease payments of approximately $0.4 million and $0.4 million,
respectively.
57
<PAGE>
BUSINESS
The Company is one of the top ten automotive retailers in the United
States, operating 27 dealerships and ten collision repair centers, as of June
30, 1998, in eight metropolitan areas of 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
operated dealerships as of June 30, 1998 in the Atlanta, Charlotte,
Chattanooga, Greenville/Spartanburg, Houston, Montgomery, Nashville and
Tampa/Clearwater markets, each of which the Company believes is experiencing
favorable demographic trends. As of June 30, 1998, Sonic sold the following 20
domestic and foreign brands: BMW, Cadillac, Chevrolet, Chrysler, Dodge, Ford,
Honda, Hyundai, Infiniti, Jaguar, Jeep, KIA, Lincoln, Mercury, Mitsubishi,
Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo. In several of its markets,
the Company's dealerships have a significant market share for new cars and
light trucks. As of September 15, 1998, the Company had acquired or entered
into definitive agreements to acquire 12 additional dealerships in certain of
the Company's existing markets and in new markets including Columbus and
Daytona Beach (which includes a total of two dealerships being acquired in the
Jordan Acquisition and the Tampa Volvo Acquisition). Upon consummation of these
acquisitions, the Company will sell the following four additional brands:
Acura, Isuzu, Mercedes and Subaru. For the year ended December 31, 1997, the
Company would have had pro forma revenues and EBITDA of $1.8 billion and $42.8
million, respectively.
Company Strengths
Leading Automotive Retailer. The Company is one of the top ten automotive
retailers in the United States, operating 37 dealerships in ten metropolitan
areas on a pro forma basis. The Company believes that its leading position in
the highly fragmented automotive retailing industry combined with its strong
reputation and management team, successful history of acquiring and integrating
dealerships and strong financial condition have positioned the Company as a
premier consolidator of automotive dealerships, thereby providing the Company
with increased attractive acquisition opportunities.
Proven Track Record of Integrating and Improving Acquisitions. In recent
years, the Company has grown primarily through the acquisition of well-managed
dealerships in growing metropolitan and suburban geographic markets. During
1996 and 1997, the Company acquired 16 dealerships in five states for total
consideration of $104.5 million. Senior management of the Company has,
collectively, acquired and integrated the operations of more than 75
dealerships during their careers. This acquisition experience allows management
to identify and capitalize on opportunities for improvement, determine and
implement necessary corrective actions, and minimize acquisition risk.
Experienced Management Team. The Company is led by a strong senior
management team with extensive automotive retailing and aftermarket products
and services experience, including O. Bruton Smith, Chief Executive Officer,
and Nelson E. Bowers, II, Executive Vice President. The members of the
Company's senior management team have on average 19 years of automotive
industry experience. As of June 30, 1998, the Company's senior management and
employees owned approximately 52.8% of the Company's outstanding Common Stock.
Consistent Record of Internal Growth. In addition to identifying,
consummating and integrating attractive acquisitions, the Company continually
focuses on improving its existing dealership operations. As a result, the
Company has a history of strong internal growth with average same store sales
growth of 16.3%, 6.4% and 10.1% in 1995, 1996 and 1997, respectively.
Diverse Offering of Automotive Brands, Products and Services. The Company
sells on a pro forma basis a wide variety of 24 domestic and international
automotive brands (38.4% of pro forma gross profit in 1997) in ten metropolitan
areas which it believes (i) mitigates the effect of regional economic
conditions and changing consumer preferences and (ii) reduces its reliance on
any single manufacturer. In addition to selling a broad range of new vehicles,
the Company has a balanced portfolio of other automotive products and services
including used vehicles (16.9% of pro forma gross profit in 1997), F&I and
leasing (11.6%), and parts, service and collision repair services (33.1%). The
Company believes that this diverse offering of products and services improves
financial stability as sales of higher margin products and services offset in
part sales of lower margin new and used vehicles. In addition, sales of parts,
service and collision repair services are less cyclical than vehicle sales and
related product sales.
Economies of Scale. The Company's growth through acquisitions over the
past two years has resulted in increasing economies of scale as the Company
integrates acquired dealerships including (i) improved terms on bank and floor
plan financing, (ii) improved commissions on sales of finance and insurance
products, (iii) increased vendor consolidation opportunities, (iv) reduced
advertising and insurance costs as a percentage of sales, and (v) improved
inventory management.
58
<PAGE>
Strategy
Acquire Dealerships. The Company believes that attractive acquisition
opportunities exist for dealership groups with significant equity capital and
experience in identifying, acquiring and professionally managing dealerships.
The automotive retailing industry is highly fragmented, with the largest 100
dealer groups generating approximately 10% of the industry's $640 billion of
total sales in 1996 and controlling less than 5% of all new vehicle dealerships
in the United States. 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. The
Company has implemented a "hub and spoke" acquisition strategy to acquire (i)
well-managed dealerships in new growing metropolitan and suburban geographic
markets, and (ii) additional dealerships in its existing markets that will
allow the Company to capitalize on regional economies of scale, offer a greater
breadth of products and services and/or increase brand diversity. In addition,
the Company selectively acquires dealerships which have underperformed the
industry average but which carry attractive product lines or have attractive
locations, thereby leveraging the Company's management infrastructure and
improving return on investment.
Increased Sales of Higher Margin Products and Services. The Company
intends to pursue opportunities to increase its sales of higher-margin products
and services by, for instance, expanding its collision repair business and
increasing sales of used vehicles. 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 small volume shops. The
Company further believes that the collision repair industry is undergoing a
period of consolidation and that it is well positioned to expand its collision
repair business. Sonic also believes that significant opportunities exist to
improve its used vehicle departments, which historically have generated higher
margins on sales than its new vehicle departments, to (i) increase the number
of used vehicles sold and (ii) increase gross profit margins on sales of used
vehicles. For example, the Company's ability to manage inventory levels more
effectively created increased gross profit margins on sales of used vehicles to
9.9% for the first six months of 1998 from 8.5% for the first six months of
1997.
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 has been able to negotiate with lending institutions
that purchase its financing contracts and insurance carriers that underwrite
its insurance policies to increase commissions on the origination of customer
vehicle financing and insurance policies, which the Company believes will
result in increased revenues and profitability.
Train, Develop and Incentivize Qualified Management. The Company believes
that well trained dealership personnel are the key to the long-term performance
of the Company and to the profitability of its dealerships. Sonic requires all
of its employees, from service technicians to regional vice presidents, to
participate in in-house training programs. The Company's senior management,
along with third party trainers from manufacturers, industry affiliates and
vendors, formally train all employees. The Company believes that its
comprehensive training of all employees and the institution of a multi-tiered
management structure to supervise effectively its dealership operations provide
the Company with a competitive advantage over other dealership groups. In
addition, the Company employs an incentive compensation program for each
officer, vice president and executive manager, a portion of which 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, together with the opportunity for promotion and for
equity participation, serve as a strong motivation for its employees.
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 designed 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 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. To keep management focused on customer
satisfaction, the Company includes CSI results as a component of its incentive
compensation program.
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
59
<PAGE>
$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.
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
--------------- ---------- ---------- ---------- ---------
(Units in millions; dollars in billions)
<S> <C> <C> <C> <C> <C>
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. As of
the date of this Prospectus, NADA has not published information for 1997
similar to that presented in the table.
(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.
For the year ended December 31, 1997, industry retail sales increased by
0.1% as a result of retail car sales declines of 2.7% offset by retail truck
sale gains of 3.8% from the same period in 1996. As of May 31, 1998, industry
retail sales for the year to date increased 1.1% as a result of retail car
sales declines of 3.2% offset by retail truck sale gains of 6.4% from the same
period in 1997.
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 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 dealership's
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
approximately 10% of total sales revenues and controlling less than 5% of all
franchised dealerships.
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<PAGE>
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
After giving effect to the 1998 Acquisitions, the Company will own eight
dealerships in the Charlotte market, ten dealerships in the
Nashville/Chattanooga market, two dealerships in the Greenville/Spartanburg
market, six dealerships in the Columbus market, three dealerships in the
Daytona Beach market, three dealerships in the Tampa/Clearwater market, two
dealerships in the Montgomery market, two dealerships in the Houston market,
and one dealership in the Atlanta market.
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 its predecessors since 1990 and the dealership to be
acquired by the Company pursuant to the pending Economy Honda Acquisition:
<TABLE>
<CAPTION>
Year
Acquired Location
Dealerships and Brands ---------- -----------------
<S> <C> <C>
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
Town & Country Chrysler-Plymouth-Jeep of Rock Hill 1997 Charlotte
Freedom Ford ...................................... 1997 Tampa/Clearwater
Infiniti of Chattanooga ........................... 1997 Chattanooga
Town & Country Ford of Cleveland .................. 1997 Chattanooga
Cleveland Village Honda ........................... 1997 Chattanooga
Cleveland Chrysler-Plymouth-Jeep-Eagle ............ 1997 Chattanooga
European Motors of Nashville
"BMW, Volkswagen" ............................... 1997 Nashville
European Motors
"BMW, Volvo" .................................... 1997 Chattanooga
Dodge of Chattanooga .............................. 1997 Chattanooga
KIA - VW of Chattanooga ........................... 1997 Chattanooga
Dyer Volvo ........................................ 1997 Atlanta
Hatfield Volkswagen-Jeep .......................... 1998 Columbus
Trader Bud's Westside Chrysler Plymouth
"KIA" ........................................... 1998 Columbus
Hatfield Lincoln Mercury .......................... 1998 Columbus
Trader Bud's Westside Dodge ....................... 1998 Columbus
Toyota West ....................................... 1998 Columbus
Hatfield Hyundai-Isuzu-Subaru ..................... 1998 Columbus
Century BMW ....................................... 1998 Greenville/
Spartanburg
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Year
Acquired Location
Dealerships and Brands ---------- -----------------
<S> <C> <C>
Heritage Lincoln Mercury .......... 1998 Greenville/
Spartanburg
Economy Honda1 .................... 1998 Chattanooga
Capitol Chevrolet
"KIA" ........................... 1998 Montgomery
Capitol Imports
"Hyundai, Mitsubishi" ........... 1998 Montgomery
Casa Ford ......................... 1998 Houston
Clearwater Mitsubishi ............. 1998 Tampa/Clearwater
Clearwater Toyota ................. 1998 Tampa/Clearwater
Higginbotham Automobiles
"Acura, Mercedes" ............... 1998 Daytona Beach
Higginbotham Chevy-Olds
"Chevrolet, Oldsmobile" ......... 1998 Daytona Beach
Halifax Ford-Mercury .............. 1998 Daytona Beach
</TABLE>
- ---------
1 The Company has not obtained the consent of Honda to the acquisition of the
Economy Honda dealership. See "Risk Factors -- No Consent from Honda."
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 who 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.
The Company's Regional Vice Presidents are 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 .......... 36 Mid-South (Tennessee, Georgia, Kentucky and Alabama)
Ivan A. Tufty .............. 57 Texas
William Sullivan ........... 65 North Carolina and South Carolina
</TABLE>
New Vehicle Sales
As of June 30, 1998, the Company sold 20 brands of cars and light trucks,
24 brands on a pro forma basis (including Jaguar, which the Company sells
pursuant to an interim services agreement with the seller under the Heritage
Acquisition). See "Risk Factors -- No Consent from Jaguar." 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
reduces the risk of changes in customer preferences, product supply shortages
and aging products. Approximately 4.4% of new vehicle sales in 1997 were luxury
brands (for example, BMW, Cadillac, Infiniti and Volvo). See "Risk Factors --
Dependence on Automobile Manufacturers."
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<PAGE>
The following table presents information with respect to the Company's new
vehicle sales:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------------------------------- ---------------------------
1993 1994 1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Unit sales ............. 9,429 9,686 10,273 11,693 15,715 6,553 16,601
Sales revenue .......... $ 153,138 $ 164,970 $ 186,859 $ 233,979 $ 343,941 $ 137,208 $ 387,466
Gross profit ........... $ 11,087 $ 12,103 $ 13,926 $ 18,001 $ 26,427 $ 8,977 $ 29,919
Gross profit margin .... 7.2% 7.3% 7.5% 7.7% 7.7% 6.5% 7.7%
</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 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. 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 following table sets forth information on the Company's used vehicle
sales:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------------------------------------------- --------------------------
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------ ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Retail unit sales ........... 4,104 4,374 5,172 5,488 6,712 2,638 9,719
Retail sales revenue ........ $ 37,742 $ 47,537 $60,766 $68,054 $85,132 $32,666 $132,508
Retail gross profit ......... 3,964 5,182 5,792 5,748 7,294 2,772 13,162
Retail gross margin ......... 10.5% 10.9% 9.5% 8.4% 8.6% 8.5% 9.9%
Wholesale unit sales ........ 4,189 4,656 5,009 5,344 7,287 2,750 9,011
Wholesale sales revenue ..... $ 13,363 $ 16,062 $20,025 $25,642 $38,785 $15,342 $ 47,305
Wholesale gross profit ...... 27 43 (45) (23) (599) (145) (193)
Wholesale gross margin ...... 0.2% 0.3% (0.2)% (0.1)% (1.5)% (0.9)% (0.4)%
Total unit sales ............ 8,293 9,030 10,181 10,832 13,999 5,388 18,730
Total revenue ............... $ 51,105 $ 63,599 $80,791 $93,696 $123,917 $48,008 $179,813
Total gross profit .......... 3,991 5,225 5,747 5,725 6,695 2,627 12,969
Total gross margin .......... 7.8% 8.2% 7.1% 6.1% 5.5% 5.5% 7.2%
</TABLE>
Service and Part Sales
As of June 30, 1998, the Company provided service and parts at each of its
franchised dealerships. The Company also provided maintenance and repair
services at its 27 new vehicle dealership facilities (37 on a pro forma basis),
offering both warranty and non-warranty services. Service and parts sales
provide higher gross margins than vehicle sales.
The following table sets forth information regarding the Company's service
and parts sales:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales revenue .............. $ 27,243 $ 30,298 $ 31,958 $ 37,132 $ 51,033 $ 20,220 $ 60,687
Gross profit ............... 9,540 10,344 11,003 12,593 18,118 6,821 24,427
Gross profit margin ........ 35.0% 34.1% 34.4% 33.9% 35.5% 33.7% 40.3%
</TABLE>
63
<PAGE>
Collision Repair
As of June 30, 1998, the Company operated collision repair centers, or
body shops, at ten of its dealership locations (13 on a pro forma basis). 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 following table sets forth information regarding the Company's
collision repair operations:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales revenue ............... $ 3,094 $ 3,686 $ 3,903 $ 4,942 $ 6,504 $ 2,687 $ 7,333
Gross profit ................ 1,516 1,870 1,956 2,452 3,092 1,283 3,797
Gross profit margin ......... 49.0% 50.7% 50.1% 49.6% 47.5% 47.8% 51.8%
</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 additionally 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 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 90
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. Finance and insurance commission revenue is recorded
net of such chargebacks. Commission expense related to finance and insurance
commission revenue is charged to cost of sales upon recognition of such
revenue.
The following table sets forth information regarding the Company's finance
and insurance operations:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Commission revenue ......... 3,711 5,181 7,813 7,118 10,606 4,763 13,541
Gross profit ............... 3,043 4,359 6,561 6,043 8,856 3,931 11,344
Gross margin ............... 82.0% 84.1% 84.0% 84.9% 83.5% 82.5% 83.8%
</TABLE>
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 also utilizes computer technology to aid sales people in prospecting
for customers. Under arrangements with certain Manufacturers, the Company
receives a subsidy for a portion of its advertising expenses incurred in
connection with a manufacturer's vehicles.
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 the related 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
64
<PAGE>
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, the 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.
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."
The Company has received notice from Jaguar in which Jaguar has declined
to consent to the acquisition of the assets of two Jaguar dealerships, one in
Chattanooga and another in Greenville. On a pro forma basis, each of the Jaguar
dealerships on an individual basis and in the aggregate would have accounted
for less than 1% of the Company's 1997 revenues and gross profits. See "Risk
Factors -- No Consent from Jaguar."
The Company has received notice from Honda that its approval of the
Company's acquisition of the Economy Honda Dealership is contingent upon the
Company divesting its ownership of the Cleveland Village Honda dealership prior
to such acquisition. Honda's stated reason for this condition is that the
Company's ownership of the Economy Honda Dealership and the Cleveland Village
Honda dealership would violate Honda's policy against the ownership of
contiguous dealerships, and the Company agreed to comply with this policy
pursuant to its agreement with Honda. The Company is currently negotiating with
potential buyers for the sale of the Cleveland Village Honda dealership. There
can be no assurance that the Company will be able to sell the Cleveland Village
Honda dealership or that the approval of Honda to the Economy Honda Acquisition
will be obtained. On a pro forma basis, the Cleveland Village Honda dealership
accounted for, and the Economy Honda Dealership would have accounted for,
approximately 1.9% and 2.7% of the Company's 1997 revenues and approximately
2.1% and 3.0% of gross profits, respectively. See "Risk Factors -- No Consent
from Honda."
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 approved the sale of no more than 25% of the
voting control of Sonic in its IPO, 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.
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
65
<PAGE>
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.
Alabama law prohibits manufacturers from terminating or refusing to
continue or renew a franchise agreement except for "good cause." "Good cause"
to discontinue a relationship may exist if, for example, a dealer violates a
material term of, or fails to perform its duties under, a franchise agreement.
In addition, a manufacturer is prohibited from interfering with the transfer of
a dealership unless the transfer is to a person who would not qualify for a
dealer's license under Alabama law. Finally, a manufacturer may not
unreasonably establish a new dealership within the market area of an existing
dealer. A manufacturer who violates Alabama law may be required to pay the
dealer for the damages incurred, as well as the costs of suing the manufacturer
for damages including attorneys fees.
Under Ohio law, a dealer must obtain manufacturer approval before it can
sell or transfer an interest in a dealership. The manufacturer may only
prohibit the sale or transfer, however, for "good cause" after considering,
among other things, the proposed new owner's business experience and financing.
Similarly, a manufacturer may terminate or refuse to continue or renew a
franchise agreement only for "good cause" considering, for example, the
dealership's sales, the dealer's investment in the business, and the dealer's
satisfaction of its warranty obligations. Finally, a manufacturer may not site
a new dealership in a relevant market area without either the consent of the
local dealers or by showing "good cause." Dealers may protest a manufacturer's
actions to the Ohio Motor Vehicle Dealers Board, and eventually the courts, if
there is no "good cause" for the transfer restriction or termination or siting
of a new dealership. If the manufacturer violates Ohio's automobile franchise
law, a dealer may be entitled to double its actual damages, as well as court
costs and attorneys fees, from a manufacturer.
South Carolina law forbids a manufacturer from imposing unreasonable
restrictions on a dealer's rights to transfer, sell, or renew a franchise
agreement unless the dealer is compensated. A manufacturer may not terminate or
refuse to renew a franchise agreement without due cause. Further, although a
dealer must obtain the manufacturer's consent to transfer a dealership, the
manufacturer may not unreasonably withhold its consent. Finally, manufacturers
are generally prohibited from acting in bad faith or engaging in arbitrary or
unconscionable conduct. Manufacturers who violate South Carolina's law may be
liable for double the actual damages incurred by the dealer and/or punitive
damages in limited circumstances.
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<PAGE>
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 lines 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 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 the Internet 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. The used vehicle superstores generally offer a greater
and more varied selection of vehicles than the Company's dealerships. In
addition, Ford has announced that it is entering into joint ventures to acquire
dealerships in various cities in the United States and other manufacturers may
also directly enter the retail market in the future, which could have a
material adverse effect on the Company. 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."
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, Atlanta,
Columbus, Daytona Beach, Greenville/Spartanburg and Montgomery 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, Texas,
Ohio and Alabama 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
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<PAGE>
imported, as classified pursuant to the Harmonized Tariff Schedule of the
United States. See "Risk Factors -- Imported Product Restrictions and Foreign
Trade Risk."
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
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. In addition, the Company may assume environmental
liabilities, some of which may be material, in connection with its
acquisitions. 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."
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 each of the
properties to be utilized by the Company's operations and their respective
locations, after giving effect to the pending Economy Honda Acquisition:
<TABLE>
<CAPTION>
Dealership Location
- -------------------------------------- --------------------------------
<S> <C>
Town & Country Ford 5401 East Independence Blvd.
Charlotte, NC
Lone Star Ford 8477 North Freeway
Houston, TX
Fort Mill Ford 788 Gold Hill Rd.
Fort Mill, SC
Fort Mill Chrysler-Plymouth-Dodge 3310 Hwy. 51
Fort Mill, SC
Town & Country Toyota 9101 South Blvd.
Charlotte, NC
Frontier Oldsmobile-Cadillac 2501 Roosevelt Blvd.
Monroe, NC
Freedom Ford 24825 US Hwy. 19 North,
Clearwater & 3925 Tampa Rd.,
Oldsmar, FL
Dyer Volvo 5260 Peachtree Industrial Blvd.
Atlanta, GA
Lake Norman Chrysler-Plymouth-Jeep Chartwell Center Dr.
Cornelius, NC
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Dealership Location
- ------------------------------------------- ----------------------------------
<S> <C>
Lake Norman Dodge I-77 & Torrence Chapel Rd.
Cornelius, NC
KIA/VW of Chattanooga 6015 International Dr.
Chattanooga, TN
BMW/VW of Nashville 630 Murfreeboro Pike
Nashville, TN
BMW/Volvo of Chattanooga 5949 Brainard Rd
Chattanooga, TN
Infiniti of Chattanooga 5915 Brainard Rd.
Chattanooga, TN
Town & Country Ford of Cleveland 2496 South Lee Hwy.
Cleveland, TN
Dodge of Chattanooga 402 West Martin Luther King Blvd.
Chattanooga, TN
Cleveland Village Imports 2490 & 2492 South Lee Hwy.
Cleveland, TN
Cleveland Chrysler-Plymouth-Jeep 717 South Lee Hwy.
Cleveland, TN
Town & Country Chrysler-Plymouth- 803 North Anderson Rd.
Jeep of Rock Hill Rock Hill, SC
Volkswagen West & 1455 Automall Dr.
Jeep Eagle West Columbus, OH
Hatfield KIA & 3700 West Broad St.
Trader Bud's Westside Columbus, OH
Chrysler-Plymouth
Hatfield Lincoln Mercury 1495 Automall Dr.
Columbus, OH
Trader Bud's Westside Dodge 4000 West Broad
Columbus, OH
Toyota West 1500 Automall Dr.
Columbus, OH
Hatfield Hyundai & 1400 Automall Dr.
Hatfield Isuzu & Columbus, OH
Hatfield Subaru
Century BMW 2752 Laurens Rd.
Greenville, SC
Heritage Lincoln Mercury 2424 Laurens Rd.
Greenville, SC
Economy Honda Hwy 153 Shallowford Rd
Chattanooga, TN
Capital Chevrolet 711 Eastern Blvd.
Montgomery, AL
Capital KIA 845 Eastern Blvd.
Montgomery, AL
Capital Hyundai & 190 Eastern Blvd.
Capital Mitsubishi Montgomery, AL
Casa Ford 4701 I-10 East
Baytown, TX
Clearwater Mitsubishi 21699 US Hwy 19N
Clearwater, FL
Clearwater Toyota 21799 US Hwy 19N
Clearwater, FL
Clearwater Collision Center 2300 Drew Street
Clearwater, FL
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Dealership Location
- ---------------------------- ---------------------
<S> <C>
Halifax Ford-Mercury 1307 N. Dixie Hwy.
New Smyrna Beach, FL
Higginbotham Chevy-Olds 1919 N. Dixie Hwy.
New Smyrna Beach, FL
Higginbotham Automobiles 1720 Mason Ave.
Daytona Beach, FL
Sunrise Auto World 241 Ridgewood Ave.
Holly Hill, FL
HMC Finance 3741 S. Nova Rd.
Port Orange, FL
</TABLE>
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. The Company believes that its
facilities are adequate for its current needs. In connection with its
acquisition strategy, the Company generally intends to lease the real estate
associated with a particular dealership whenever practicable.
On July 9, 1998, the Company entered into, subject to the approval of the
Company's Board of Directors and the Company's independent directors, the
Alliance Agreement with MMRT. MMRT owns certain real estate associated with
various automobile dealerships, automotive aftermarket retailers and other
automotive related businesses and leases such properties to the business
operators located thereon. Mr. Smith, the Company's Chairman and Chief
Executive Officer, serves as the chairman of MMRT's board of trustees and is
presently its controlling shareholder. See "Certain Transactions --
Transactions with MMRT."
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, 1998, the Company employed approximately 3,600 people, of
whom approximately 570 were employed in managerial positions, 1,230 were
employed in non-managerial sales positions, 760 were employed in non-managerial
parts and service positions and 1,040 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 provides 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 is 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.
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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 ......... 71 Chairman, Chief Executive Officer and Director*
Bryan Scott Smith ....... 31 President, Chief Operating Officer and Director*
Dennis D. Higginbotham .. 47 President of Retail Operations*
Nelson E. Bowers, II .... 53 Executive Vice President and Director*
Theodore M. Wright ...... 36 Chief Financial Officer, Vice President -- Finance, Treasurer,
Secretary and Director*
William P. Benton ....... 74 Director
William R. Brooks ....... 48 Director
William I. Belk ......... 49 Director
Jeffrey C. Rachor ....... 36 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. Mr. Smith currently is,
and since their acquisition by either the Company or 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. Additionally, Mr. Smith serves as chairman of the board
of trustees of Mar Mar Realty Trust, a Maryland real estate investment trust.
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 an
executive officer of Town and Country Ford since 1993, and was a minority owner
of both Town and Country Ford and Fort Mill Ford prior to the acquisition by
the Company of those dealerships in 1997. 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 term as a
director of the Company will expire at the annual meeting of stockholders of
the Company to be held in 1998.
Dennis D. Higginbotham has been the President of Retail Operations of the
Company since September 1998. Prior to joining the Company, Mr. Higginbotham
owned a controlling interest in, and served as the president of, Higginbotham
Chevrolet-Oldsmobile (from 1976 until September 1998), Halifax Ford-Mercury
(from 1987 until September 1998) and Higginbotham Automobiles (from 1995 until
September 1998), each of which was acquired by the Company in September 1998.
Mr. Higginbotham has worked in the automobile industry since 1965.
Nelson E. Bowers, II has been the Executive Vice President and a director
of the Company since December 1997. Prior to joining the Company, Mr. Bowers
owned a controlling interest in the Bowers automobile dealership group (the
"Bowers Dealerships") which were acquired by the Company in 1997, and he 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 previously owned by Mr.
Bowers have been awarded the highest awards available from manufacturers for
customer satisfaction. Mr. Bowers' term as a director of the Company will
expire at the annual meeting of stockholders to be held in 1999.
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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 term as a director of the Company will expire at the annual meeting of
stockholders to be held in 1999.
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'
term as a director of the Company will expire at the annual meeting of
stockholders to be held in 2000.
William P. Benton became a director of the Company in December 1997. Since
January 1997, Mr. Benton has been the Executive Director of Ogilvy & Mather, a
world-wide advertising agency. Mr. Benton has been a director of Speedway
Motorsports, Inc. since February 1995 and a director of Allied Holdings, Inc.
since February 1998. He is also a consultant to the Chairman and Chief
Executive Officer of TI Group. Prior to his appointment at Ogilvy & Mather, Mr.
Benton served as Vice Chairman of Wells, Rich, Greene/BDDP, Inc., an
advertising agency with offices in New York and Detroit. Mr. Benton retired
from Ford Motor Company as its Vice President of Marketing Worldwide in 1984
after a 37-year career with that company. Mr. Benton's term as a director of
the Company will expire at the annual meeting of stockholders to be held in
1998.
William I. Belk became a director of the Company in March 1998. Mr. Belk
is currently the Vice President and Director for Monroe Hardware Company,
Director for Piedmont Ventures, Inc., and Treasurer and Director for Old Well
Water, Inc. Mr. Belk previously held the position of Chairman and Director for
certain Belk stores (a privately held retail department store chain). Mr.
Belk's term as a director of the Company will expire at the annual meeting of
stockholders to be held in 1998.
Jeffrey C. Rachor is a Regional Vice President of the Company and has held
this position since the Company's acquisition of the Bowers Dealerships in
1997. Mr. Rachor has over 13 years experience in automobile retailing and was
the chief operating officer of the Bowers Dealerships from 1989 until their
acquisition by the Company in 1997. 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. is a Regional Vice President of the Company and has held
this position since the Company's acquisition of Ken Marks Ford in 1997. Prior
to joining the Company, Mr. Marks owned a controlling interest in Ken Marks
Ford and 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.
Ivan A. Tufty is a Regional Vice President of the Company and has held
this position since the consummation of the Company's IPO in 1997. Mr. Tufty
also is the Executive Manager of Lone Star Ford, a position he has held since
1990. 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 is a Regional Vice President of the Company and has
held this position since the consummation of the Company's IPO in 1997. Mr.
Sullivan also is the Vice-President of Town & Country Ford, a position he has
held since prior to 1992. Mr. Sullivan has over 25 years experience in auto
retailing as an Executive Manager, head of F&I and in other roles.
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 at the Company's annual shareholder meeting each year.
Messrs. Bruton Smith and Brooks belong to the class of directors whose term
expires in 2000, Messrs. Bowers and Wright belong to the
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class of directors whose term expires in 1999, and Messrs. Scott Smith, Benton
and Belk belong to the class of directors whose term expires in 1998. The
executive officers are elected annually by, and serve at the discretion of, the
Company's Board of Directors.
Committees of the Board
There are two standing committees of the Board of Directors of the
Company, the Audit Committee and the Compensation Committee. The Audit
Committee was appointed on March 20, 1998 and consists of Messrs. Benton, Belk
and Brooks. The Compensation Committee currently has no members and its
functions are being performed by the full Board of Directors. The Board of
Directors intends to select members for its Compensation Committee at the
annual Board of Directors meeting to occur after the 1998 annual meeting of the
Company's stockholders. Set forth below is a summary of the principal functions
of each committee. There were no meetings held for either of the committees
during 1997.
Audit Committee. The Audit Committee recommends the appointment of the
Company's independent auditors, determines the scope of the annual audit to be
made, reviews the conclusions of the auditors and reports the findings and
recommendations thereof to the Board, reviews the Company's auditors, the
adequacy of the Company's system of internal control and procedures and the
role of management in connection therewith, reviews transactions between the
Company and its officers, directors and principal stockholders, and performs
such other functions and exercises such other powers as the Board from time to
time may determine.
Compensation Committee. The Compensation Committee administers certain
compensation and employee benefit plans of the Company, annually reviews and
determines executive officer compensation, including annual salaries, bonus
performance goals, bonus plan allocations, stock option grants and other
benefits, direct and indirect, of all executive officers and other senior
officers of the Company. The Compensation Committee administers the Company's
Stock Option Plan and the Company's Employee Stock Purchase Plan, and
periodically reviews the Company's executive compensation programs and takes
action to modify programs that yield payments or benefits not closely related
to the Company or executive performance. The policy of the Compensation
Committee's program for executive officers is to link pay to business strategy
and performance in a manner which is effective in attracting, retaining and
rewarding key executives while also providing performance incentives and
awarding equity-based compensation to align the long-term interests of
executive officers with those of Company stockholders. It is the Compensation
Committee's objective to offer salaries and incentive performance pay
opportunities that are competitive in the marketplace.
The Company currently has no standing nominating committee.
During 1997, there was one meeting of the Board of Directors of the
Company, with each director attending the meeting.
Executive Compensation
The following table sets forth compensation paid by or on behalf of the
Company to the Chief Executive Officer of the Company and to its other
executive officer with earnings greater than $100,000 during the year for
services rendered during the Company's fiscal years ended December 31, 1995,
1996 and 1997:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------ Long-Term
Compensation Awards
Number of
Other Shares
Annual Underlying All Other
Name and Principal Position(s) Year Salary (1) Bonus(2) Compensation(3) Options(4) Compensation(5)
- -------------------------------- ------ ------------ ---------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
O. Bruton Smith 1997 $326,704 -- $15,000 -- --
Chairman, Chief Executive 1996 164,750 -- 33,350 -- --
Officer and Director 1995 142,200 -- 41,350 -- --
Bryan Scott Smith 1997 273,767 $ 18,331 (5) 99,875 --
President, Chief Operating 1996 48,000 230,714 (5) -- --
Officer and Director 1995 48,000 168,670 (5) -- --
</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.
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<PAGE>
(3) The Company provides Bruton 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
or 1995.
(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.
Employment Agreements
The Company entered into employment agreements in 1997 with Messrs. Bruton
Smith, Scott Smith, Bowers, Wright, Marks and Rachor in 1997, and with Mr.
Higginbotham in 1998 (the "Employment Agreements"), which provide for an annual
base salary and certain other benefits. Pursuant to the Employment Agreements,
the 1998 base salaries of Messrs. Bruton Smith, Scott Smith, Bowers, Wright,
Marks, Rachor and Higginbotham will be $350,000, $300,000, $400,000, $180,000,
$48,000, $150,000 and $400,000, respectively. The executives will also receive
such additional increases as may be determined by the Compensation Committee.
The Employment Agreements, except those of Messrs. Higginbotham, 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
Agreement for Mr. Higginbotham provides for the payment of bonuses as may be
determined and ratified from time to time 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. Under the terms of his
Employment Agreement, 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. Under the terms of his Employment Agreement, the
Company will employ Mr. Higginbotham for three years or until his Employment
Agreement is terminated by the Company or by him. 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 IPO price, vesting in three equal
annual installments beginning October 1998 and expiring in October 2007. Mr.
Higginbotham's Employment Agreement provides that he will receive options to
purchase Class A Common Stock in an amount and on terms consistent with the
grants of options for similar employees of the Company. To date, no options
have been granted to Mr. Higginbotham.
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 the 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.
With respect to Mr. Higginbotham, the territorial restrictions apply only in
the SMSA's for Atlanta, Charlotte, Chattanooga, Columbus, Daytona Beach,
Houston, Montgomery, Nashville and Tampa-St. Petersburg-Clearwater.
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CERTAIN TRANSACTIONS
Registration Rights Agreement
In connection with the acquisition by the Company of Town & Country Ford,
Lone Star Ford, Fort Mill Ford, Town & Country Toyota and Frontier
Oldsmobile-Cadillac in 1997, the Company entered into a Registration Rights
Agreement dated as of June 30, 1997 (the "Class B Registration Rights
Agreement") 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 Class B Registration Rights Agreement provides 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, included in any
registration statement pertaining to the registration of Class A Common Stock
for issuance by the Company or for resale by them or 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. The Class B Registration Rights Agreement
expires in November 2007. Sonic Financial is controlled by the Company's
Chairman and Chief Executive Officer, Bruton Smith.
The Smith Advance
In connection with the acquisition by the Company of Fort Mill
Chrysler-Plymouth-Dodge, Bruton 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 this acquisition at closing. The
Smith Advance was evidenced by a demand note bearing interest at the minimum
statutory rate of 3.83% per annum. The Company repaid in full the principal of
and interest on the Smith Advance from the proceeds of the IPO in November
1997. Shortly following the Company's repayment of the Smith Advance, Mr. Smith
made the Subordinated Smith Loan to the Company in the amount of $5.5 million.
The financial effect to the Company from the repayment of the Smith Advance and
the subsequent Subordinated Smith Loan was substantially the same as if the
Smith Advance had not been repaid but instead had been increased from $3.5
million to $5.5 million. See "The Smith Guarantees, Pledges and Subordinated
Loan."
The Smith Guarantees, Pledges and Subordinated Loan
Under the NationsBank Facility, Bruton Smith guaranteed the obligations of
the Company and secured his guarantee with a pledge of shares of common stock
of Speedway Motorsports, owned directly by him. In February 1998, the Company
repaid in full the amounts owed under the NationsBank Facility and Mr. Smith's
guarantee was released.
Mr. Smith initially guaranteed the obligations of the Company under the
Revolving Facility and such obligations were further secured with the Revolving
Pledge of shares of common stock of Speedway Motorsports, owned by Sonic
Financial, a corporation controlled by Mr. Smith, and having an estimated value
at the time of pledge of approximately $50.0 million.
In December 1997, upon the increase of the borrowing limit under the
Revolving Facility to the maximum loan commitment of $75.0 million, Mr. Smith's
personal guarantee of the Company's obligations under the Revolving Facility
was released, although the Revolving Pledge remained in place and Mr. Smith was
required to lend the Subordinated Smith Loan of $5.5 million to the Company to
increase its capitalization. The Subordinated Smith Loan was required by Ford
Motor Credit as a condition to its agreement to increase the borrowing limit
under the Revolving Facility because the net offering proceeds to the Company
from its IPO in November 1997 were significantly less than expected by the
Company and Ford Motor Credit. The Subordinated Smith Loan is evidenced by the
Company's Subordinated Promissory Note dated December 1, 1997 in favor of Mr.
Smith, bears interest at NationsBank's announced prime rate plus 0.5% and
matures on November 30, 2000. All amounts owed by the Company to Mr. Smith
under the Subordinated Smith Loan are subordinate in right of payment to all
amounts owed by the Company under the Ford Credit Facilities pursuant to the
terms of a Subordination Agreement dated as of December 15, 1997 between Mr.
Smith and Ford Motor Credit. For further discussion of these lending
arrangements, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Transactions with MMRT
The Company has entered into, subject to the approval of the Company's
Board of Directors and the Company's independent directors, the Alliance
Agreement with MMRT. Mr. Smith, the Company's Chairman and Chief Executive
Officer, serves as the chairman of MMRT's board of trustees and is presently
its controlling shareholder. Under the Alliance Agreement, the
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Company has agreed to refer real estate acquisition opportunities that arise in
connection with its dealership acquisitions to MMRT. In exchange, MMRT has
agreed to refer dealership acquisition opportunities to the Company and to
provide certain real estate development and maintenance services to the
Company. MMRT will also arrange for property inspections and environmental
reports for prospective dealership properties at the Company's cost. Pursuant
to the Alliance Agreement, the Company has entered into contracts to sell the
real estate associated with Town and Country Toyota and Fort Mill Ford, two of
the Company's dealerships, for an aggregate purchase price of approximately
$10.3 million. In addition, the Alliance Agreement provides for an agreed form
of lease (the "Sonic Form Lease") pursuant to which MMRT would lease real
estate to the Company in connection with MMRT's future acquisitions of real
estate associated with the Company's operations. Presently, the Company leases
or intends to lease from MMRT 29 parcels of land associated with 21 of its
dealerships, including the real estate associated with Town and Country Toyota
and Fort Mill Ford that the Company will lease back from MMRT pursuant to
leases substantially similar to the Sonic Form Lease. The aggregate initial
annual base rent to be paid by the Company for all 29 properties under the
leases with MMRT is approximately $7.8 million.
The Company entered into the Alliance Agreement with MMRT rather than with
an unaffiliated third party for purposes consistent with the Company's
acquisition strategy. The Company is familiar with MMRT's growth and operating
strategy and believes that MMRT is well-positioned to identify and refer
attractive dealership acquisition opportunities for the Company in the course
of MMRT's acquisitions of real property. In addition, the Company's
relationship with MMRT will assist the Company in negotiating transactions with
sellers of dealerships that the Company has identified for acquisition. Many
dealership sellers who own their dealership's real property wish to sell the
dealership real property as well as dealership businesses. Inclusion of real
estate in a transaction may allow the Company to negotiate an acquisition on
more favorable terms. Finally, MMRT will provide development assistance to the
Company which will enable the Company to avoid additional costs associated with
hiring employees with real estate development expertise. For these reasons, the
Company feels that MMRT's growth and operating strategies are closely-aligned
with the Company's dealership acquisition strategy and that the Alliance
Agreement with MMRT will provide significant benefits to the Company on an
ongoing basis.
For acquisitions identified by the Company, the Alliance Agreement is
intended to operate in two different contexts, depending on whether the
dealership seller owns the dealership real property or leases the dealership
real property from an unaffiliated third party. For acquisitions where the
dealership seller owns the dealership real property, the Company will negotiate
acquisition of the real property from the seller on an arms'-length basis and
will assign its negotiated purchase rights to MMRT. MMRT will then acquire the
real property from the seller. The Company and MMRT will subsequently enter
into a lease agreement regarding the dealership real property using the Sonic
Form Lease to satisfy all non-economic terms of the lease agreement. The
economic terms of the lease agreement will be negotiated between the Company
and MMRT and will depend on several factors, including the projected earnings
capacity of the dealership, the quality, age and condition of the dealership
structure(s), the location of the dealership property and the rent paid for
comparable commercial properties. In accordance with the requirements of the
Company's Amended and Restated Certificate of Incorporation, the terms of any
lease agreement with MMRT involving aggregate payments in excess of $500,000
will be subject to the approval of the Company's Board of Directors and of the
Company's independent directors to ensure that such terms are no less favorable
to the Company than would be available to the Company in an arms'-length
transaction dealing with an unrelated third party. In addition, where
necessary, the Company will obtain independent appraisals to determine the
fairness of lease terms to the Company.
For acquisitions where the dealership real property is owned by an
unaffiliated third party and is leased to the dealership seller, MMRT will
negotiate with the unaffiliated third party to acquire the dealership real
property. If MMRT is successful in acquiring the dealership real property and
the Company completes its acquisition of the dealership business, then the
Company and MMRT will enter into a lease agreement regarding the dealership
real property using the Sonic Form Lease and will determine the economic terms
of the Lease Agreement according to the principles described in the paragraph
above.
The Company has agreed to sell the dealership real properties for the Town
and Country Toyota and Fort Mill Ford dealerships, which the Company currently
owns, to MMRT for approximately $5.7 million and $4.6 million, respectively.
The sales price for each of these parcels of real property was determined in
negotiations between the Company and MMRT based on the projected earnings
capacity of the dealership, from which a monthly lease payment was calculated.
Using this rent calculation, the Company and MMRT agreed to a capitalization
rate for the lease payments in order to determine a purchase price for the
properties themselves. This capitalization rate was based on several factors,
including the quality, age and condition of the dealership structure(s), the
location of the dealership property, the value of the properties for
alternative uses, the availability of similar properties in the area and recent
sales prices for comparable commercial properties in the area. An additional
factor in determining the sales price for each of the properties were
independent appraisals obtained by the Company for the Town and Country Toyota
and Fort Mill Ford properties in December 1997 and February 1996, respectively.
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These appraisals, after giving effect to the passage of time, indicate that the
sales price payable to the Company by MMRT for each of the properties exceeds
the appraised fair value of such properties determined in the independent
appraisals. The Company's Chief Executive Officer determined the sales price
for each of these properties, such determination being subject to the approval
by the Company's Board of Directors and the Company's independent directors to
ensure that the sales are on terms no less favorable to the Company than would
be available to the Company in an arms'-length transaction dealing with an
unrelated third party. In giving their approval for these sales, the Company's
directors are expected to evaluate the earnings capacities of the dealerships
and the capitalization rates for the related leases through an analysis of the
factors stated above as well as the previously mentioned independent
appraisals.
MMRT has entered into new leases with each of Town and Country Ford and
Lone Star Ford which provide that the annual lease payments for their
properties will each be increased to approximately $1.1 million effective
January 1, 2000, as compared to current annual lease payments of approximately
$0.4 million and $0.3 million, respectively. The lease rates for Town and
Country Ford and Lone Star Ford are currently at below market rates, as
supported by independent appraisal. Accordingly, MMRT, as a condition to its
agreement to purchase these properties, required that the Company agree to
enter into new lease agreements with MMRT that would reflect fair market rent
payments beginning January 1, 2000. The increase in lease rates for Town and
Country Ford and Lone Star Ford effective January 1, 2000 is subject to the
approval of the Company's Board of Directors and of the Company's independent
directors. As required by the Company's Amended and Restated Certificate of
Incorporation, the terms of these transactions must be no less favorable to the
Company than those available from an unrelated third party.
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 1995 and 1996, and $409,200 in 1997. Current minimum rent payments are
$409,000 annually ($34,083 monthly) through 1999. In connection with the
Alliance Agreement between MMRT and the Company, MMRT has agreed to purchase
the real property on which Town & Country Ford is operated from STC and has
entered into a lease with Town & Country Ford whereby the annual lease payment
by Town & Country Ford will be increased to approximately $1.1 million
effective January 1, 2000.
Lone Star Ford operates, in part, at facilities leased from Viking
Investments Associates, a Texas association ("Viking"), which is controlled by
Mr. Bruton Smith. Annual payments under the Viking lease were $331,302,
$360,000 and $360,000 for 1995, 1996 and 1997, respectively. Minimum annual
rents under this lease are $360,000 ($30,000 monthly), such amount being below
market. In connection with the Alliance Agreement, MMRT has agreed to purchase
the real property on which Lone Star Ford is operated from Viking and has
entered into a lease with Lone Star Ford whereby the annual lease payment by
Lone Star Ford will be increased to approximately $1.1 million effective
January 1, 2000.
KIA of Chattanooga operates at facilities leased from KIA Land
Development, a company in which Nelson Bowers, the Company's Executive Vice
President and a director, maintains an ownership interest. The Company
negotiated this lease in connection with the Bowers Acquisition. This triple
net lease expires in 2007 and the rent will be $11,070 per month. Annual
payments under this lease were $22,140 for 1997. 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 $23,320. Annual payments under this lease were $46,640 for
1997. This lease also provides for renewals on terms identical to the KIA of
Chattanooga lease.
Infiniti 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. Annual
payments under this lease were $55,704 for 1997. This triple net lease expires
in 2017 and provides for monthly rent of $27,852. 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
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Acquisition. This triple net lease expires in 2011, provides for monthly rent
of $23,452 and may be renewed on terms identical to the KIA of Chattanooga
lease. Annual payments under this lease were $46,904 for 1997.
Cleveland Village Honda operates at facilities leased from Nelson Bowers
and another individual. Mr. Bowers owns a 75% undivided interest in the land
and buildings leased by Cleveland Village Honda, 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 in October 2000 with rent of
$12,858 per month and the other, pertaining to a used car lot, is a
month-to-month lease with rent of $3,000 per month. Annual payments under this
lease were $31,716 for 1997.
In September 1998, MMRT entered into agreements to acquire all of the
foregoing properties in which Mr. Bowers has an interest subject to the
existing leases with the Company.
In July 1998, simultaneously with the closing of the Heritage Acquisition,
Chartown, a general partnership controlled by Mr. Bruton Smith and an affiliate
of the Company ("Chartown"), acquired the real property upon which the Heritage
Lincoln-Mercury dealership is operated for approximately $3.0 million. Chartown
and the Company's subsidiary that acquired the assets of the Heritage
Lincoln-Mercury dealership then entered into a lease agreement pursuant to
which the subsidiary leases the real property from Chartown. The lease is for a
ten year term with an option on the part of the lessee to extend for two
additional five-year terms. The annual base rental under this lease is
$349,860, adjusted every five years based on the consumer price index. The
Company anticipates that Chartown will sell this real estate property to MMRT
in the future.
Also in July 1998, simultaneously with the closing of the Century
Acquisition, Chartown acquired two separate parcels of real property upon which
the BMW dealership and the satellite sales location are operated, respectively,
for approximately $5.0 million. Chartown and the Company's subsidiary that
acquired the assets of Century BMW then entered into separate two lease
agreements for the BMW dealership property and the satellite sales location
property, respectively, pursuant to which the subsidiary leases each of these
properties from Chartown. Each of the leases is for a ten year term with an
option on the part of the lessee to extend for two additional five-year terms.
The annual base rentals under the BMW dealership lease and the satellite sales
location lease are $420,000 and $112,805, respectively, adjusted every five
years based on the consumer price index. The Company anticipates that Chartown
will sell each of these real estate properties to MMRT in the future.
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"). Bruton
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.
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 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 financed
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 is secured by Mr. Bowers'
interest in Chattanooga Volvo.
The Bowers Volvo Note is for a principal amount of $900,000 and bears
interest at the lowest applicable federal rate as published by the U.S.
Treasury Department in effect on November 17, 1997. Accrued interest is payable
annually. The operating agreement of Chattanooga Volvo provides 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.
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Other Transactions
Beginning in early 1997, certain of the Sonic Dealerships entered into
arrangements to sell to their customers credit life insurance policies
underwritten by American Heritage Life Insurance Company, an insurer
unaffiliated with the Company ("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 $576,000 to American Heritage in
premiums for these policies for the year ended December 31, 1997. The Company
terminated this arrangement with American Heritage in 1997. Provident American
is a wholly owned subsidiary of Sonic Financial.
Town & Country Ford and Lone Star Ford had each made several non-interest
bearing advances to Sonic Financial, a company controlled by Bruton Smith. In
preparation for the Reorganization, a demand promissory note by Sonic Financial
evidencing $2.1 million of these advances was canceled in June 1997 in exchange
for the redemption of certain shares of the capital stock of Town & Country
Ford held by Sonic Financial. In addition, a demand promissory note by Sonic
Financial evidencing of $0.5 million of these advances was canceled in June
1997 pursuant to a dividend. Approximately $0.5 million remain outstanding
under these arrangements at December 31, 1997.
As part of the purchase price in connection with the Company's acquisition
of the Bowers Automotive Group in November 1997, the Company issued its
promissory note in the original principal amount of $4.0 million in favor of
Nelson Bowers (the "Bowers Acquisition Note"). The Bowers Acquisition Note is
payable in 28 equal quarterly installments and bears interest at the prime rate
less 0.5%.
The Company made certain advances to its shareholder, Sonic Financial, in
1997, which amounts are currently outstanding. As of December 31, 1997, the
amounts receivable from Sonic Financial with respect to such advances totalled
$622,000.
Town and Country Toyota has an amount payable to Bruton Smith, which
payable totals approximately $0.8 million as of December 31, 1997. This loan
bears interest at 8.75% per annum.
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 joined 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.
The Company acquired Town & Country Ford, Lone Star Ford, Town & Country
Toyota, Fort Mill Ford and Frontier Oldsmobile-Cadillac (the "Initial
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 Initial Dealerships
from Sonic Financial, Bruton 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 Consolidated Financial Statements of Sonic and for
the businesses being acquired in the 1998 Acquisitions, see "The 1998
Acquisitions" and the Consolidated Financial Statements of the dealerships
being acquired in the pending 1998 Acquisitions contained elsewhere herein.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Voting Stock as of October 23, 1998, by
(i) each stockholder who is known to the Company to own beneficially five
percent or more of each class of the outstanding Voting Stock, (ii) each
director of Sonic, (iii) each executive officer of Sonic (including the Chief
Executive Officer), and (iv) all directors and executive officers of Sonic as a
group. 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. Holders of Preferred Stock are entitled to one vote per each
share of Class A Common Stock into which such Preferred Stock is convertible
into as of the record date of the Annual Meeting on all matters submitted to a
vote of the stockholders of the Company. Except as otherwise indicated below,
each of the persons named in the table has sole voting and investment power
with respect to the securities beneficially owned by him or it as set forth
opposite his or its name subject to community property laws where applicable.
<TABLE>
<CAPTION>
Number of
Number of Percentage of Shares of
Shares of Outstanding Class B
Class A Class A Common
Common Stock Common Stock
Beneficial Owner Owned Stock Owned
- ------------------------------------------- -------------- --------------- -----------
<S> <C> <C> <C>
O. Bruton Smith (2)(3) .................... 12,700 * 5,476,250
Sonic Financial Corporation (2) ........... -- -- 4,440,625
Bryan Scott Smith (2) ..................... 33,292 (4) * 478,125
Nelson E. Bowers, II ...................... 26,438 (5) * --
Theodore M. Wright ........................ 12,729 (6) * --
William R. Brooks ......................... 10,000 (7) * --
William P. Benton ......................... 10,000 (7) * --
William I. Belk ........................... 10,000 (7) * --
Citicorp (8)(10) .......................... 500,000 8.95% --
Citibank, N.A. (9)(10) .................... 500,000 8.95% --
Wellington Management Company,
LLP (11)(13) ............................. 497,000 8.89% --
Wellington Trust Company, N.A.
(12)(13) ................................. 308,300 5.52% --
Scott Fink (14) ........................... -- -- --
Michael S. Cohen (15) ..................... -- -- --
Dan E. Hatfield (16) ...................... -- -- --
Bud C. Hatfield (16) ...................... -- -- --
Century Auto Sales, Inc. (17) ............. -- -- --
Aldo B. Paret (18) ........................ -- -- --
Frank McGough (19) ........................
Dennis D. Higginbotham (20) ............... 485,294 8.68% --
All directors and executive officers as
a group (8 persons) (1) .................. 600,453 10.73% 5,954,375
<CAPTION>
Percentage of
Outstanding Number of Percentage of Percentage of
Class B Shares of Outstanding all Outstanding
Common Preferred Stock Preferred Voting
Beneficial Owner Stock Owned Stock Stock (1)
- ------------------------------------------- -------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
O. Bruton Smith (2)(3) .................... 88.33% -- -- 46.45%
Sonic Financial Corporation (2) ........... 71.62% -- -- 37.58%
Bryan Scott Smith (2) ..................... 7.71% -- -- 4.32%
Nelson E. Bowers, II ...................... -- -- -- *
Theodore M. Wright ........................ -- -- -- *
William R. Brooks ......................... -- -- -- *
William P. Benton ......................... -- -- -- *
William I. Belk ........................... -- -- -- *
Citicorp (8)(10) .......................... -- -- -- 4.23%
Citibank, N.A. (9)(10) .................... -- -- -- 4.23%
Wellington Management Company,
LLP (11)(13) ............................. -- -- -- 4.21%
Wellington Trust Company, N.A.
(12)(13) ................................. -- -- -- 2.61%
Scott Fink (14) ........................... -- 1,980 7.32% *
Michael S. Cohen (15) ..................... -- 1,980 7.32% *
Dan E. Hatfield (16) ...................... -- 3,750 13.86% *
Bud C. Hatfield (16) ...................... -- 8,971 33.15% *
Century Auto Sales, Inc. (17) ............. -- 2,166.5 8.01% *
Aldo B. Paret (18) ........................ -- 2,313 8.55% *
Frank McGough (19) ........................ 4,194.3 15.50% *
Dennis D. Higginbotham (20) ............... -- -- -- 4.11%
All directors and executive officers as
a group (8 persons) (1) .................. 96.04% -- -- 55.46%
</TABLE>
- ---------
* Less than one percent
(1) The percentage of total voting power is as follows: O. Bruton Smith,
79.19%, Sonic Financial Corporation, 64.21%. Bryan Scott Smith, 6.96%, and
Citicorp, Citibank, N.A.,Wellington Management Company, LLP, Wellington
Trust Company, N.A., Century Auto Sales, Inc., and Messrs. Bowers, Wright,
Brooks, Benton, Belk, Fink, Cohen, Dan E. Hatfield, Bud C. Hatfield,
Paret, McGough and Higginbotham, less than 1%.
(2) The address of such person or group is 5401 East Independence Boulevard,
Charlotte, North Carolina 28218.
(footnotes continued on following page)
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<PAGE>
(3) The Schedule 13D filed by the beneficial owner indicates that the shares of
Common Stock shown as owned by such person or group include all of the
shares shown as owned by Sonic Financial Corporation ("Sonic Financial")
elsewhere in the table. Bruton Smith owns the substantial majority Sonic
Financial's outstanding capital stock.
(4) Represents one-third of 99,875 shares that underlie options to purchase
shares of Class A Common Stock granted by the Company pursuant to the
Company's 1997 Stock Option Plan, which became exercisable in three equal
installments beginning in October 1998.
(5) Represents one-third of 79,313 shares that underlie options to purchase
shares of Class A Common Stock granted by the Company pursuant to the
Company's Stock Option Plan, which became exercisable in three equal
installments beginning in October 1998.
(6) Represents one-third of 38,188 shares that underlie options to purchase
shares of Class A Common Stock granted by the Company pursuant to the
Company's Stock Option Plan, which became exercisable in three equal
installments beginning in October 1998.
(7) Represents 10,000 shares that underlie options to purchase shares of Class
A Common Stock granted by the Company pursuant to the Directors Plan,
which become exercisable in December 1998 subject to shareholder approval
of the Director's Plan.
(8) The Schedule 13D filed by the beneficial owner indicates that the shares of
Common Stock shown as owned by such entity or group include all the shares
shown as owned by Citibank, N.A. elsewhere in the table. Citicorp owns all
of the outstanding capital stock of Citibank, N.A.
(9) The Schedule 13D filed by the beneficial owner indicates that Citibank,
N.A. has sole voting power as to 72,000 shares of the 500,000 shares shown
with no voting power as to the remainder and has shared dispositive power
over all 500,000 shares.
(10) The address of such entity is 399 Park Avenue, New York, New York 10043.
(11) The Schedule 13D filed by the beneficial owner indicates that Wellington
Management Company has shared voting power as to 223,700 shares of the
497,000 shares shown with no voting power as to the remainder and has
shared dispositive power over all 497,000 shares.
(12) The Schedule 13D filed by the beneficial owner indicates that Wellington
Trust Company, N.A. has shared voting power as to 84,600 shares of the
308,300 shares shown with no voting power as to the remainder and has
shared dispositive power over all 308,300 shares.
(13) The address of such entity is 75 State Street, Boston, Massachusetts
02109.
(14) The address of such person is 3030 Turtle Brooke, Clearwater, Florida
33761.
(15) The address of such person is 49 Rolling Hill Lane, Old Westbury, New York
11568.
(16) The address of such person is 1500 Automall Drive, Columbus, Ohio 43228.
(17) The address of such entity is 2323 Laurens Road, Greenville, South
Carolina 29607.
(18) The address of such person is 4615 Southwest Freeway, Suite 600, Houston,
Texas 77027.
(19) The address of such person is 711 Eastern Blvd., Montgomery, Alabama
36117.
(20) The address of such person is 104 South Riverside Dr., New Smyrna Beach,
Florida 32168
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<PAGE>
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
The Revolving Facility
In October 1997, the Company obtained the Revolving Facility from Ford
Motor Credit in the principal amount of $26.0 million. In December 1997, the
Company increased the aggregate amount available to borrow under this facility
to a maximum $75.0 million pursuant to the Revolving Facility's terms. The
Revolving Facility bears interest at the Revolving Facility Prime Rate and
matures in December 1999, unless the Company requests that such term be
extended, at the option of Ford Motor Credit, for additional one year terms. No
assurance can be given that such extensions will be granted. The proceeds from
the Revolving Facility were used in the consummation of the acquisition of Ken
Marks Ford in 1997, the Clearwater Acquisition, the Hatfield Acquisition and
the repayment in February 1998 of $8.2 million of the amount borrowed under the
NationsBank Facility. Amounts to be drawn under the Revolving Facility are
anticipated by the Company to be used for paying a portion of the cash purchase
price of the pending 1998 Acquisitions, to refinance designated indebtedness,
for the acquisition of additional dealership subsidiaries in the future and to
provide general working capital needs of the Company not to exceed $10 million.
At September 15, 1998, no amounts were outstanding under the Revolving
Facility.
The Company agreed under the Revolving Facility 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). The Revolving Facility also contains 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. Additional
covenants include specified ratios of (i) total debt to tangible equity (as
defined in the Revolving Facility) no greater than 14 to 1 before December 31,
1998 and thereafter no greater than 8 to 1 (the "Total Base Capital Ratio"),
(ii) total adjusted debt (as defined in the Revolving Facility) to tangible
equity no greater than 4 to 1 before December 31, 1998 and thereafter no
greater than 2.5 to 1 (the "Adjusted Total Base Capital Ratio"), (iii) current
assets to current liabilities of at least 1.25 to 1, (iv) earnings before
interest, taxes, depreciation, amortization and rent expense (EBITDAR) less
capital expenditures to fixed charges of at least 1.3 to 1 for each fiscal
quarter, (v) earnings before interest, taxes, depreciation and amortization
(EBITDA) to interest expense of at least 2 to 1 for each fiscal quarter, (vi)
EBITDA to total adjusted debt of more than 1 to 2.25 and (vii) the current
lending commitment under the Revolving Facility to scaled assets (as defined in
the Revolving Facility) of more than 3.5 to 1. 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. The Company did not meet the Total
Base Capital Ratio and the Adjusted Total Base Capital Ratio covenants at
December 31, 1997, at March 31, 1998 and at June 30, 1998 and has obtained
waivers with regard to such requirement from Ford Motor Credit. The waivers are
subject to the requirement that the Company meet a Total Base Capital Ratio and
Adjusted Total Base Capital Ratio of 16 to 1 and 4 to 1, respectively, after
June 30, 1998 and 8 to 1 and 2.5 to 1, respectively, after December 31, 1998.
The Company and Ford Motor Credit have amended the Revolving Credit Facility to
provide that the Notes (which are subordinated to the Revolving Facility) will
be treated as equity capital for purposes of these ratios and, accordingly, the
Company is in compliance with these covenants after giving effect to the
issuance of the Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The indebtedness under the Ford Credit Facilities is secured by (i) a
pledge by the Company of all the capital stock, membership interests and
partnership interests of all of the Company's subsidiaries, (ii) guaranties by
all of the Company's subsidiaries that are, in turn, secured by a lien on all
of the assets of such subsidiaries (with the exception of the liens on the
assets of the Company's Ford dealership subsidiaries, which liens only secure
such Ford subsidiaries' obligations under the Floor Plan Facility) and (iii) a
lien on all of the Company's other assets, except for real estate owned by the
Company or its subsidiaries. In addition, the Revolving Facility is partially
secured by a pledge of shares of SMI common stock owned by Sonic Financial, a
corporation controlled by Bruton Smith. See "Certain Transactions -- The Smith
Guarantees and Pledges."
The Floor Plan Facility
The Company currently has in place the Floor Plan Facility, a standardized
floor plan credit facility with Ford Motor Credit for each of the Company's
dealership subsidiaries. Each dealership subsidiary has its own agreement with
Ford Motor Credit for its inventory financing needs. As of June 30, 1998, there
was an aggregate of $149.7 million outstanding under the Floor Plan Facility.
The Floor Plan Facility at September 15, 1998 had an effective rate of prime
less 0.9%, subject to certain incentives and other adjustments, which was 7.6%.
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
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<PAGE>
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 Facility but is not required to make loan principal repayments
prior to the sale of the vehicles. The underlying notes are due when the
related vehicles are sold and are collateralized by vehicle inventories and
other assets of the applicable dealership subsidiary. For a description of the
security for repayment of the indebtedness of the Company and its subsidiaries
under the Floor Plan Facility, see " -- The Revolving Facility."
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<PAGE>
DESCRIPTION OF THE NEW NOTES
The Old Notes were, and the New Notes will be, issued under an Indenture
dated as of July 1, 1998 (the "Indenture") among the Company, the Guarantors
and U.S. Bank Trust National Association, as trustee (the "Trustee"), a copy of
the form of which will be made available to prospective purchasers of the Notes
upon request to the Company. Upon the issuance of the New Notes, the Indenture
will be subject to and governed by the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"). References to ("Section ") mean the applicable
Section of the Indenture.
EXCEPT AS OTHERWISE INDICATED BELOW, THE FOLLOWING SUMMARY APPLIES TO BOTH
THE OLD NOTES AND THE NEW NOTES. AS USED HEREIN, THE TERM "NOTES" SHALL MEAN
THE OLD NOTES AND THE NEW NOTES, UNLESS OTHERWISE INDICATED.
The form and terms of the New Notes are substantially identical to the
form and terms of the Old Notes, except that (i) the New Notes will have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof and (ii) holders of New Notes will not be, and
upon consummation of the Exchange Offer, holders of the Old Notes will no
longer be, entitled to certain rights under the Registration Rights Agreement
intended for the holders of unregistered securities, except in certain limited
circumstances. The New Notes will be issued solely in exchange for an equal
principal amount of Old Notes. As of the date hereof, $125.0 million aggregate
principal amount of Old Notes is outstanding. See "The Exchange Offer."
The following summary of the material provisions of the Indenture does not
purport to be complete, and where reference is made to particular provisions of
the Indenture, such provisions, including the definitions of certain terms, are
qualified in their entirety by reference to all of the provisions of the
Indenture and those terms made a part of the Indenture by the Trust Indenture
Act. For definitions of certain capitalized terms used in the following
summary, see " -- Certain Definitions" or "The Exchange Offer."
General
The Notes will mature on August 1, 2008, will be limited to $125,000,000
aggregate principal amount, and will be unsecured senior subordinated
obligations of the Company. Each Note will bear interest at the rate of 11% per
annum from July 31, 1998 or from the most recent interest payment date to which
interest has been paid, payable semiannually in arrears on February 1 and
August 1 in each year, commencing February 1, 1999, to the Person in whose name
the Note (or any predecessor Note) is registered at the close of business on
the January 15 or July 15 next preceding such interest payment date. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. (Sections 202, 301 and 309).
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency of
the Company in The City of New York maintained for such purposes (which
initially will be the corporate trust office of the Trustee); provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the Person entitled thereto as shown on the security register.
(Sections 301, 305 and 1002) The Notes will be issued only in fully registered
form without coupons, in denominations of $1,000 and any integral multiple
thereof. (Section 302) No service charge will be made for any registration of
transfer, exchange or redemption of Notes, except in certain circumstances for
any tax or other governmental charge that may be imposed in connection
therewith. (Section 305)
As discussed under "The Exchange Offer," pursuant to the Registration
Rights Agreement, the Company and the Guarantors have agreed for the benefit of
the holders of the Old Notes, at the Company's and the Guarantors' cost to use
their reasonable best efforts, (i) to effect a registered Exchange Offer under
the Securities Act to exchange the Old Notes for the New Notes, which will have
terms identical in all material respects to the Old Notes (except that the New
Notes will not contain terms with respect to transfer restrictions or
requirements for exchange or registration) and (ii) in the event that any
changes in law or applicable interpretations of the staff of the Commission do
not permit the Company to effect the Exchange Offer, or if for any other reason
the Exchange Offer is not consummated within 165 calendar days after the
original issue of the Old Notes, or upon the request of any Initial Purchaser,
or if any holder of the Old Notes is not permitted by applicable law to
participate in the Exchange Offer or elects to participate in the Exchange
Offer but does not receive fully tradable New Notes, to register the Old Notes
for resale under the Securities Act through a shelf registration statement (the
"Shelf Registration Statement"). In the event that (a) the Registration
Statement of which this Prospectus is a part is not filed with the Commission
on or prior to the 60th calendar day following the date of original issue of
the Old Notes, (b) the Registration Statement has not been declared effective
on or prior to the 135th calendar day following the date of original issue of
the Old Notes, (c) the Exchange Offer is not consummated or a Shelf
Registration Statement is not declared effective, in either case, on or prior
to the 165th calendar day following the date of original issue of the Old Notes
or (d) the Shelf Registration Statement
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is declared effective but shall thereafter become unusable for more than 30
days in the aggregate (each such event referred to in clauses (a) through (d)
above, a "Registration Default"), the interest rate borne by the Old Notes
shall be increased by one-quarter of one percent per annum upon the occurrence
of each Registration Default, which rate (as increased as aforesaid) will
increase by an additional one quarter of one percent each 90-day period that
such additional interest continues to accrue under any such circumstance, with
an aggregate maximum increase in the interest rate equal to one percent (1%)
per annum. The Shelf Registration Statement will be required to remain
effective until the second anniversary of the issuance of the Old Notes.
Following the cure of all Registration Defaults the accrual of additional
interest will cease and the interest rate will revert to the original rate. See
"Exchange Offer; Registration Rights."
All payments of principal and interest will be made by the Company in same
day funds. The Notes will trade in the Same-Day Funds Settlement System of The
Depository Trust Company (the "Depositary" or "DTC") until maturity, and
secondary market trading activity for the Notes will therefore settle in same
day funds.
When issued, the New Notes will be a new issue of securities with no
established trading market. No assurance can be given as to the liquidity of
the trading market for the Notes. See "Risk Factors -- Absence of Public Market
for the Notes."
Guarantees
Payment of the Notes is guaranteed by the Guarantors jointly and
severally, fully and unconditionally, on a senior subordinated basis. The
Guarantors are comprised of all of the direct and indirect Restricted
Subsidiaries of the Company on the Issue Date. Substantially all of the
Company's operations are conducted through its subsidiaries. In addition, if
any Restricted Subsidiary of the Company becomes a guarantor or obligor in
respect of any other Indebtedness of the Company or any of the Restricted
Subsidiaries, the Company shall cause such Restricted Subsidiary to enter into
a supplemental indenture pursuant to which such Restricted Subsidiary shall
agree to guarantee the Company's obligations under the Notes. If the Company
defaults in payment of the principal of, premium, if any, or interest on the
Notes, each of the Guarantors will be unconditionally, jointly and severally
obligated to duly and punctually pay the same.
The obligations of each Guarantor under its Guarantee are limited to the
maximum amount which, after giving effect to all other contingent and fixed
liabilities of such Guarantor, and after giving effect to any collections from
or payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, will result in the obligations of
such Guarantor under its Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under Federal or state law. Each Guarantor that makes a
payment or distribution under its Guarantee shall be entitled to a contribution
from any other Guarantor in a pro rata amount based on the net assets of each
Guarantor determined in accordance with GAAP.
Notwithstanding the foregoing, in certain circumstances a Guarantee of a
Guarantor may be released pursuant to the provisions of subsection (c) under "
- -- Certain Covenants -- Limitation on Guarantees by Restricted Subsidiaries."
The Company also may, at any time, cause a Restricted Subsidiary to become a
Guarantor by executing and delivering a supplemental indenture providing for
the guarantee of payment of the Notes by such Restricted Subsidiary on the
basis provided in the Indenture.
Optional Redemption
The Notes will be subject to redemption at any time on or after August 1,
2003, at the option of the Company, in whole or in part, on not less than 30
nor more than 60 days' prior notice, in amounts of $1,000 or an integral
multiple thereof, at the following redemption prices (expressed as percentages
of the principal amount), if redeemed during the 12-month period beginning
August 1 of the years indicated below:
<TABLE>
<CAPTION>
Redemption
Year Price
- ---------------- -------------
<S> <C>
2003 ......... 105.500%
2004 ......... 103.667%
2005 ......... 101.833%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
rights of holders of record on relevant record dates to receive interest due on
an interest payment date).
In addition, at any time prior to August 1, 2001, the Company, at its
option, may use the net proceeds of one or more Public Equity Offerings to
redeem up to an aggregate of 35% of the aggregate principal amount of Notes
originally issued under the Indenture at a redemption price equal to 111% of
the aggregate principal amount thereof, plus accrued and unpaid
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interest thereon, if any, to the redemption date; provided that at least 65% of
the initial aggregate principal amount of Notes remains outstanding immediately
after the occurrence of such redemption. In order to effect the foregoing
redemption, the Company must mail a notice of redemption no later than 30 days
after the closing of the related Public Equity Offering and must consummate
such redemption within 60 days of the closing of the Public Equity Offering.
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed in compliance with the
requirements of the principal national security exchange, if any, on which the
Notes are listed, or if the Notes are not so listed, on a pro rata basis, by
lot or by any other method the Trustee shall deem fair and reasonable;
provided, that Notes redeemed in part shall be redeemed only in integral
multiples of $1,000; provided, further, that any such redemption pursuant to
the provisions relating to a Public Equity Offering shall be made on a pro rata
basis or on as nearly a pro rata basis as practicable (subject to the
procedures of The Depository Trust Company or any other Depositary). (Sections
203, 1101, 1105 and 1107)
Sinking Fund
The Notes will not be entitled to the benefit of any sinking fund.
Purchase of Notes Upon a Change of Control
If a Change of Control shall occur at any time, then each holder of Notes
shall have the right to require that the Company purchase such holder's Notes
in whole or in part in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash in an amount equal to 101% of the
principal amount of such Notes, plus accrued and unpaid interest, if any, to
the date of purchase (the "Change of Control Purchase Date"), pursuant to the
offer described below (the "Change of Control Offer") and in accordance with
the other procedures set forth in the Indenture.
Within 30 days of any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each
holder of Notes, by first-class mail, postage prepaid, at his address appearing
in the security register, stating, among other things, that a Change of Control
has occurred and the date of such event; the circumstances and relevant facts
regarding such Change of Control (including, but not limited to, information
with respect to pro forma historical income, cash flow and capitalization after
giving effect to such Change of Control); the purchase price and the purchase
date which shall be fixed by the Company on a business day no earlier than 30
days nor later than 60 days from the date such notice is mailed, or such later
date as is necessary to comply with requirements under the Exchange Act; that
any Note not tendered will continue to accrue interest; that, unless the
Company defaults in the payment of the Change of Control Purchase Price, any
Notes accepted for payment pursuant to the Change of Control Offer shall cease
to accrue interest after the Change of Control Purchase Date; and certain other
procedures that a holder of Notes must follow to accept a Change of Control
Offer or to withdraw such acceptance. (Section 1014)
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. See " -- Ranking." The
failure of the Company to make or consummate the Change of Control Offer or pay
the Change of Control Purchase Price when due will give the Trustee and the
holders of the Notes the rights described under "Events of Default."
In addition to the obligations of the Company under the Indenture with
respect to the Notes in the event of a Change of Control, all of the Company's
Indebtedness under the Floor Plan Facility and the Revolving Facility also
contain an event of default upon a Change of Control as defined therein which
obligates the Company to repay amounts outstanding under such indebtedness upon
an acceleration of the Indebtedness issued thereunder. In addition, a Change of
Control could result in a termination or nonrenewal of one or more of the
Company's franchise agreements or its agreements with the Manufacturers.
The term "all or substantially all" as used in the definition of "Change
of Control" has not been interpreted under New York law (which is the governing
law of the Indenture) to represent a specific quantitative test. As a
consequence, in the event the holders of the Notes elected to exercise their
rights under the Indenture and the Company elected to contest such election,
there could be no assurance as to how a court interpreting New York law would
interpret the phrase.
The existence of a holder's right to require the Company to repurchase
such holder's Notes upon a Change of Control may deter a third party from
acquiring the Company in a transaction which constitutes a Change of Control.
The provisions of the Indenture will not afford holders of the Notes the
right to require the Company to repurchase the Notes in the event of a highly
leveraged transaction or certain transactions with the Company's management or
its Affiliates, including a reorganization, restructuring, merger or similar
transaction (including, in certain circumstances, an acquisition
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of the Company by management or its affiliates) involving the Company that may
adversely affect holders of the Notes, if such transaction is not a transaction
defined as a Change of Control. A transaction involving the Company's
management or its Affiliates, or a transaction involving a recapitalization of
the Company, will result in a Change of Control if it is the type of
transaction specified by such definition.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
Ranking
The payment of the principal of, premium, if any, and interest on, the
Notes will be subordinated, as set forth in the Indenture, in right of payment,
to the prior payment in full of all Senior Indebtedness. The Notes will be
senior subordinated indebtedness of the Company ranking pari passu with all
other existing and future senior subordinated indebtedness of the Company and
senior to all existing and future Subordinated Indebtedness of the Company.
Upon the occurrence of any default in the payment of any Designated Senior
Indebtedness beyond any applicable grace period and after the receipt by the
Trustee from a representative of holders of any Designated Senior Indebtedness
(collectively, a "Senior Representative") of written notice of such default, no
payment (other than payments previously made pursuant to the provisions
described under " -- Defeasance or Covenant Defeasance of Indenture") or
distribution of any assets of the Company of any kind or character (excluding
certain permitted equity interests or subordinated securities) may be made on
account of the principal of, premium, if any, or interest on, the Notes or on
account of the purchase, redemption, defeasance or other acquisition of or in
respect of, the Notes unless and until such default shall have been cured or
waived or shall have ceased to exist or such Designated Senior Indebtedness
shall have been discharged or paid in full after which the Company shall resume
making any and all required payments in respect of the Notes, including any
missed payments.
Upon the occurrence and during the continuance of any non-payment default
with respect to any Designated Senior Indebtedness pursuant to which the
maturity thereof may then be accelerated immediately (a "Non-payment Default")
and after the receipt by the Trustee and the Company from a Senior
Representative of written notice of such Non-Payment Default, no payment (other
than payments previously made pursuant to the provisions described under " --
Defeasance or Covenant Defeasance of Indenture") or distribution of any assets
of the Company of any kind or character (excluding certain permitted equity
interests or subordinated securities) may be made by the Company on account of
the principal of, premium, if any, or interest on, the Notes or on account of
the purchase, redemption, defeasance or other acquisition of, or in respect of,
the Notes for the period specified below (the "Payment Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice of
the Non-payment Default by the Trustee and the Company from a Senior
Representative and shall end on the earliest of (i) the 179th day after such
commencement, (ii) the date on which such Non-payment Default (and all other
Non-payment Defaults as to which notice is given after such Payment Blockage
Period is initiated) is cured, waived or ceases to exist or on which such
Designated Senior Indebtedness is discharged or paid in full or (iii) the date
on which such Payment Blockage Period (and all Non-payment Defaults as to which
notice is given after such Payment Blockage Period is initiated) shall have
been terminated by written notice to the Company or the Trustee from the Senior
Representative initiating such Payment Blockage Period, after which, in the
case of clauses (i), (ii) and (iii), the Company will promptly resume making
any and all required payments in respect of the Notes, including any missed
payments. In no event will a Payment Blockage Period extend beyond 179 days
from the date of the receipt by the Company or the Trustee of the notice
initiating such Payment Blockage Period (such 179-day period referred to as the
"Initial Period"). Any number of notices of Non-payment Defaults may be given
during the Initial Period; provided that during any period of 365 consecutive
days only one Payment Blockage Period, during which payment of principal of,
premium, if any, or interest on, the Notes may not be made, may commence and
the duration of such period may not exceed 179 days. No Non-payment Default
with respect to Designated Senior Indebtedness that existed or was continuing
on the date of the commencement of any Payment Blockage Period will be, or can
be, made the basis for the commencement of a second Payment Blockage Period,
whether or not within a period of 365 consecutive days, unless such default has
been cured or waived for a period of not less than 90 consecutive days.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See " -- Events of Default."
The Indenture will provide that in the event of any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding in connection therewith, relative to the
Company or its assets, or any liquidation, dissolution or other winding up of
the Company, whether voluntary or involuntary, or whether or not
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involving insolvency or bankruptcy, or any assignment for the benefit of
creditors or other marshaling of assets or liabilities of the Company, all
Senior Indebtedness must be paid in full before any payment or distribution
(excluding distributions of certain permitted equity interests or subordinated
securities) is made on account of the principal of, premium, if any, or
interest on the Notes or on account of the purchase, redemption, defeasance or
other acquisition of or in respect of the Notes (other than payments previously
made pursuant to the provisions described under " -- Defeasance or Covenant
Defeasance of Indenture").
By reason of such subordination, in the event of liquidation or
insolvency, creditors of the Company who are holders of Senior Indebtedness may
recover more, ratably, than the holders of the Notes, and funds which would be
otherwise payable to the holders of the Notes will be paid to the holders of
the Senior Indebtedness to the extent necessary to pay the Senior Indebtedness
in full and the Company may be unable to meet its obligations fully with
respect to the Notes.
Each Guarantee of a Guarantor will be an unsecured senior subordinated
obligation of such Guarantor, ranking pari passu with, or senior in right of
payment to, all other existing and future Indebtedness of such Guarantor that
is expressly subordinated to Senior Guarantor Indebtedness. The Indebtedness
evidenced by the Guarantees will be subordinated to Senior Guarantor
Indebtedness to substantially the same extent as the Notes are subordinated to
Senior Indebtedness and during any period when payment on the Notes is blocked
by Designated Senior Indebtedness, payment on the Guarantees is similarly
blocked.
"Senior Indebtedness" means the principal of, premium, if any, and
interest (including interest, to the extent allowable, accruing after the
filing of a petition initiating any proceeding under any state, federal or
foreign bankruptcy law) on any Indebtedness of the Company (other than as
otherwise provided in this definition), whether outstanding on the Issue Date
or thereafter created, incurred or assumed, and whether at any time owing,
actually or contingent, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to the Notes. Notwithstanding the foregoing, "Senior
Indebtedness" shall (x) include the Floor Plan Facility and the Revolving
Facility to the extent the Company is a party thereto and (y) not include (i)
Indebtedness evidenced by the Notes, (ii) Indebtedness that is subordinate or
junior in right of payment to any Indebtedness of the Company, (iii)
Indebtedness which when incurred and without respect to any election under
Section 1111(b) of Title 11 United States Code, is without recourse to the
Company, (iv) Indebtedness which is represented by Redeemable Capital Stock,
(v) any liability for foreign, federal, state, local or other taxes owed or
owing by the Company to the extent such liability constitutes Indebtedness,
(vi) Indebtedness of the Company to a Subsidiary or any other Affiliate of the
Company or any of such Affiliate's Subsidiaries, (vii) to the extent it might
constitute Indebtedness, amounts owing for goods, materials or services
purchased in the ordinary course of business or consisting of trade accounts
payable owed or owing by the Company, and amounts owed by the Company for
compensation to employees or services rendered to the Company, (viii) that
portion of any Indebtedness which at the time of issuance is issued in
violation of the Indenture and (ix) Indebtedness evidenced by any guarantee of
any Subordinated Indebtedness or Pari Passu Indebtedness.
"Designated Senior Indebtedness" means (i) all Senior Indebtedness under
the Floor Plan Facility or the Revolving Facility and (ii) any other Senior
Indebtedness which at the time of determination has an aggregate principal
amount outstanding of at least $25 million and which is specifically designated
in the instrument evidencing such Senior Indebtedness or the agreement under
which such Senior Indebtedness arises as "Designated Senior Indebtedness" by
the Company.
"Senior Guarantor Indebtedness" means the principal of, premium, if any,
and interest (including interest, to the extent allowable, accruing after the
filing of a petition initiating any proceeding under any state, federal or
foreign bankruptcy law) on any Indebtedness of any Guarantor (other than as
otherwise provided in this definition), whether outstanding on the Issue Date
or thereafter created, incurred or assumed, and whether at any time owing,
actually or contingent, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to any Guarantee. Notwithstanding the foregoing, "Senior
Guarantor Indebtedness" shall (x) include the Floor Plan Facility and the
Revolving Facility to the extent any Guarantor is a party thereto and (y) not
include (i) Indebtedness evidenced by the Guarantees, (ii) Indebtedness that is
subordinated or junior in right of payment to any Indebtedness of any
Guarantor, (iii) Indebtedness which when incurred and without respect to any
election under Section 1111(b) of Title 11 United States Code, is without
recourse to any Guarantor, (iv) Indebtedness which is represented by Redeemable
Capital Stock, (v) any liability for foreign, federal, state, local or other
taxes owed or owing by any Guarantor to the extent such liability constitutes
Indebtedness, (vi) Indebtedness of any Guarantor to a Subsidiary or any other
Affiliate of the Company or any of such Affiliate's Subsidiaries, (vii) to the
extent it might constitute Indebtedness, amounts owing for goods, materials or
services purchased in the ordinary course of business or consisting of trade
accounts payable owed or owing by such Guarantor, and amounts owed by such
Guarantor for compensation to employees or services rendered to such Guarantor,
(viii) that portion of any Indebtedness which at the time of issuance
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is issued in violation of the Indenture and (ix) Indebtedness evidenced by any
guarantee of any Subordinated Indebtedness or Pari Passu Indebtedness.
The Indenture will limit, but not prohibit, the incurrence by the Company
and its Subsidiaries of additional Indebtedness, and the Indenture will
prohibit the incurrence by the Company of Indebtedness that is subordinated in
right of payment to any Senior Indebtedness of the Company and senior in right
of payment to the Notes.
As of June 30, 1998, on a pro forma basis, (i) the Company and the
Guarantors would have had $4.3 million in aggregate principal amount of
indebtedness outstanding which would have ranked senior in right of payment to
the Notes ($2.9 million of which would have been secured) and no indebtedness
pari passu to the Notes or the Guarantees, as the case may be, (ii) the Company
would also have had $3.7 million of indebtedness senior to, and $5.5 million of
indebtedness subordinated to, the Notes and (iii) the Guarantors would also
have had $199.0 million of floor plan indebtedness and $3.2 million of
additional indebtedness which would have ranked senior in right of payment to
the Guarantees ($3.0 million of which would have been secured). See "Risk
Factors -- Leverage" and "Capitalization".
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. The Company will not, and will not cause or
permit any of its Restricted Subsidiaries to, create, issue, incur, assume,
guarantee or otherwise in any manner become directly or indirectly liable for
the payment of or otherwise incur, contingently or otherwise (collectively,
"incur"), any Indebtedness (including any Acquired Indebtedness), unless such
Indebtedness is incurred by the Company or any Guarantor or constitutes
Acquired Indebtedness of a Restricted Subsidiary and, in each case, the
Company's Consolidated Fixed Charge Coverage Ratio for the most recent four
full fiscal quarters for which financial statements are available immediately
preceding the incurrence of such Indebtedness taken as one period is at least
equal to or greater than 2.00:1. (Section 1008)
Notwithstanding the foregoing, the Company and, to the extent specifically
set forth below, the Restricted Subsidiaries may incur each and all of the
following (collectively, the "Permitted Indebtedness"):
(i) Indebtedness of the Company and the Guarantors under the Company's
Revolving Facility (including any refinancing (as defined below) thereof)
in an aggregate principal amount at any one time outstanding not to exceed
the greater of (a) $75 million or (b) 30% of the Company's Consolidated
Tangible Assets, in any case under the Revolving Facility (including any
refinancing thereof) or in respect of letters of credit thereunder;
(ii) Indebtedness of the Company and the Guarantors under any Inventory
Facility;
(iii) Indebtedness of the Company pursuant to the Notes or the Exchange
Notes and Indebtedness of any Guarantor pursuant to a Guarantee of the
Notes or the Exchange Notes;
(iv) Indebtedness of the Company or any Restricted Subsidiary outstanding
on the Issue Date, listed on a schedule thereto and not otherwise referred
to in this definition of "Permitted Indebtedness;"
(v) Indebtedness of the Company owing to a Restricted Subsidiary;
provided that any Indebtedness of the Company owing to a Restricted
Subsidiary that is not a Guarantor is made pursuant to an intercompany note
in the form attached to the Indenture and is unsecured and is subordinated
in right of payment from and after such time as the Notes shall become due
and payable (whether at Stated Maturity, acceleration or otherwise) to the
payment and performance of the Company's obligations under the Notes;
provided, further, that any disposition, pledge or transfer of any such
Indebtedness to a Person (other than a disposition, pledge or transfer to a
Restricted Subsidiary) shall be deemed to be an incurrence of such
Indebtedness by the Company or other obligor not permitted by this clause
(v);
(vi) Indebtedness of a Wholly Owned Restricted Subsidiary owing to the
Company or another Wholly Owned Restricted Subsidiary; provided that any
such Indebtedness is made pursuant to an intercompany note in the form
attached to the Indenture; provided, further, that (a) any disposition,
pledge or transfer of any such Indebtedness to a Person (other than a
disposition, pledge or transfer to the Company or a Wholly Owned Restricted
Subsidiary) shall be deemed to be an incurrence of such Indebtedness by the
obligor not permitted by this clause (vi), and (b) any transaction pursuant
to which any Wholly Owned Restricted Subsidiary, which has Indebtedness
owing to the Company or any other Wholly Owned Restricted Subsidiary,
ceases to be a Wholly Owned Restricted Subsidiary shall be deemed to be the
incurrence of Indebtedness by such Wholly Owned Restricted Subsidiary that
is not permitted by this clause (vi);
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(vii) guarantees of any Restricted Subsidiary made in accordance with the
provisions of " -- Limitation on Issuances of Guarantees of and Pledges for
Indebtedness;"
(viii) obligations of the Company or any Guarantor entered into in the
ordinary course of business (a) pursuant to Interest Rate Agreements
designed to protect the Company or any Restricted Subsidiary against
fluctuations in interest rates in respect of Indebtedness of the Company or
any Restricted Subsidiary as long as such obligations do not exceed the
aggregate principal amount of such Indebtedness then outstanding, (b) under
any Currency Hedging Agreements, relating to (i) Indebtedness of the
Company or any Restricted Subsidiary and/or (ii) obligations to purchase or
sell assets or properties, in each case, incurred in the ordinary course of
business of the Company or any Restricted Subsidiary; provided, however,
that such Currency Hedging Agreements do not increase the Indebtedness or
other obligations of the Company or any Restricted Subsidiary outstanding
other than as a result of fluctuations in foreign currency exchange rates
or by reason of fees, indemnities and compensation payable thereunder or
(c) under any Commodity Price Protection Agreements which do not increase
the amount of Indebtedness or other obligations of the Company or any
Restricted Subsidiary outstanding other than as a result of fluctuations in
commodity prices or by reason of fees, indemnities and compensation payable
thereunder;
(ix) Indebtedness of the Company or any Restricted Subsidiary represented
by Capital Lease Obligations or Purchase Money Obligations or other
Indebtedness incurred or assumed in connection with the acquisition or
development of real or personal, movable or immovable, property in each
case incurred for the purpose of financing or refinancing all or any part
of the purchase price or cost of construction or improvement of property
used in the business of the Company, in an aggregate principal amount
pursuant to this clause (ix) not to exceed $20 million outstanding at any
time; provided that the principal amount of any Indebtedness permitted
under this clause (ix) did not in each case at the time of incurrence
exceed the Fair Market Value, as determined by the Company in good faith,
of the acquired or constructed asset or improvement so financed;
(x) obligations arising from agreements by the Company or a Restricted
Subsidiary to provide for indemnification, customary purchase price closing
adjustments, earn-outs or other similar obligations, in each case, incurred
in connection with the acquisition or disposition of any business or assets
of a Restricted Subsidiary;
(xi) Indebtedness evidenced by letters of credit in the ordinary course
of business to support the Company's or any Restricted Subsidiary's
insurance or self-insurance obligations for workers' compensation and other
similar insurance coverages;
(xii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (iii) and (iv) of this definition of "Permitted
Indebtedness," including any successive refinancings so long as the
borrower under such refinancing is the Company or, if not the Company, the
same as the borrower of the Indebtedness being refinanced and the aggregate
principal amount of Indebtedness represented thereby (or if such
Indebtedness provides for an amount less than the principal amount thereof
to be due and payable upon a declaration of acceleration of the maturity
thereof, the original issue price of such Indebtedness plus any accreted
value attributable thereto since the original issuance of such
Indebtedness) does not exceed the initial principal amount of such
Indebtedness plus the lesser of (I) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing and (A) in the case of
any refinancing of Indebtedness that is Subordinated Indebtedness, such new
Indebtedness is made subordinated to the Notes at least to the same extent
as the Indebtedness being refinanced and (B) in the case of Pari Passu
Indebtedness or Subordinated Indebtedness, as the case may be, such
refinancing does not reduce the Average Life to Stated Maturity or the
Stated Maturity of such Indebtedness; and
(xiii) Indebtedness of the Company and its Restricted Subsidiaries or any
Guarantor in addition to that described in clauses (i) through (xii) above,
and any renewals, extensions, substitutions, refinancings or replacements
of such Indebtedness, so long as the aggregate principal amount of all such
Indebtedness shall not exceed $10 million outstanding at any one time in
the aggregate.
For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness permitted by this
covenant, the Company in its sole discretion shall classify such item of
Indebtedness and only be required to include the amount of such Indebtedness as
one of such types.
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Limitation on Restricted Payments. (a) The Company will not, and will not
cause or permit any Restricted Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Company's Capital Stock (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or in
options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
(ii) purchase, redeem, defease or otherwise acquire or retire for value,
directly or indirectly, the Company's Capital Stock or any Capital Stock of
any Affiliate of the Company, including any Subsidiary of the Company
(other than Capital Stock of any Wholly Owned Restricted Subsidiary of the
Company), or options, warrants or other rights to acquire such Capital
Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Restricted Subsidiary to any Person (other than (a) to the Company or
any of its Wholly Owned Restricted Subsidiaries or (b) dividends or
distributions made by a Restricted Subsidiary (i) organized as a
partnership, limited liability company or similar pass-through entity to
the holders of its Capital Stock in amounts sufficient to satisfy the tax
liabilities arising from their ownership of such Capital Stock or (ii) on a
pro rata basis to all stockholders of such Restricted Subsidiary); or
(v) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (v), other than
any such action that is a Permitted Payment (as defined below), collectively,
"Restricted Payments") (the amount of any such Restricted Payment, if other
than cash, shall be the Fair Market Value of the assets proposed to be
transferred, as determined by the board of directors of the Company, whose
determination shall be conclusive and evidenced by a board resolution), unless
(1) immediately before and immediately after giving effect to such proposed
Restricted Payment on a pro forma basis, no Default or Event of Default shall
have occurred and be continuing and such Restricted Payment shall not be an
event which is, or after notice or lapse of time or both, would be, an "event
of default" under the terms of any Indebtedness of the Company or its
Restricted Subsidiaries; (2) immediately before and immediately after giving
effect to such Restricted Payment on a pro forma basis, the Company could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) under the
provisions described under " -- Limitation on Indebtedness;" and (3) after
giving effect to the proposed Restricted Payment, the aggregate amount of all
such Restricted Payments declared or made after the Issue Date and all
Designation Amounts does not exceed the sum of:
(A) $5 million;
(B) 50% of the aggregate Consolidated Net Income of the Company accrued on a
cumulative basis during the period beginning on the first day of the
Company's fiscal quarter in which the Issue Date occurs and ending on the
last day of the Company's last fiscal quarter ending prior to the date of
the Restricted Payment (or, if such aggregate cumulative Consolidated Net
Income shall be a loss, minus 100% of such loss);
(C) the aggregate Net Cash Proceeds received after the Issue Date by the
Company either (x) as capital contributions in the form of common equity
to the Company or (y) from the issuance or sale (other than to any of its
Subsidiaries) of Qualified Capital Stock of the Company or any options,
warrants or rights to purchase such Qualified Capital Stock of the
Company (except, in each case, to the extent such proceeds are used to
purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth below in clause (ii) or (iii) of paragraph (b)
below) (and excluding the Net Cash Proceeds from the issuance of
Qualified Capital Stock financed, directly or indirectly, using funds
borrowed from the Company or any Subsidiary until and to the extent such
borrowing is repaid);
(D) the aggregate Net Cash Proceeds received after the Issue Date by the
Company (other than from any of its Subsidiaries) upon the exercise of
any options, warrants or rights to purchase Qualified Capital Stock of
the Company (and excluding the Net Cash Proceeds from the exercise of any
options, warrants or rights to purchase Qualified Capital Stock financed,
directly or indirectly, using funds borrowed from the Company or any
Subsidiary until and to the extent such borrowing is repaid);
(E) the aggregate Net Cash Proceeds received after the Issue Date by the
Company from the conversion or exchange, if any, of debt securities or
Redeemable Capital Stock of the Company or its Restricted Subsidiaries
into or for Qualified Capital Stock of the Company plus, to the extent
such debt securities or Redeemable Capital Stock were issued after the
Issue Date, upon the conversion or exchange of such debt securities or
Redeemable Capital Stock,
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the aggregate of Net Cash Proceeds from their original issuance (and
excluding the Net Cash Proceeds from the conversion or exchange of debt
securities or Redeemable Capital Stock financed, directly or indirectly,
using funds borrowed from the Company or any Subsidiary until and to the
extent such borrowing is repaid); and
(F) (a) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the Issue Date, an amount
(to the extent not included in Consolidated Net Income) equal to the
lesser of the return of capital with respect to such Investment and the
initial amount of such Investment, in either case, less the cost of the
disposition of such Investment and net of taxes, and (b) in the case of
the designation of an Unrestricted Subsidiary as a Restricted Subsidiary
(as long as the designation of such Subsidiary as an Unrestricted
Subsidiary was deemed a Restricted Payment), the Fair Market Value of the
Company's interest in such Subsidiary provided that such amount shall not
in any case exceed the amount of the Restricted Payment deemed made at
the time the Subsidiary was designated as an Unrestricted Subsidiary.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through (iv)
below, so long as no Default or Event of Default is continuing or would arise
therefrom, the foregoing provisions shall not prohibit the following actions
(each of clauses (i) through (iv) and (viii) being referred to as a "Permitted
Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment shall have been deemed to have been paid on such date of
declaration and shall not have been deemed a "Permitted Payment" for
purposes of the calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement for
value of any shares of any class of Capital Stock of the Company in
exchange for (including any such exchange pursuant to the exercise of a
conversion right or privilege in connection with which cash is paid in lieu
of the issuance of fractional shares or scrip), or out of the Net Cash
Proceeds of a substantially concurrent issuance and sale for cash (other
than to a Subsidiary) of, other shares of Qualified Capital Stock of the
Company; provided that the Net Cash Proceeds from the issuance of such
shares of Qualified Capital Stock are excluded from clause (3)(C) of
paragraph (a) of this Section;
(iii) the repurchase, redemption, defeasance, retirement or acquisition for
value or payment of principal of any Subordinated Indebtedness or
Redeemable Capital Stock in exchange for, or in an amount not in excess of
the Net Cash Proceeds of, a substantially concurrent issuance and sale for
cash (other than to any Subsidiary of the Company) of any Qualified Capital
Stock of the Company, provided that the Net Cash Proceeds from the issuance
of such shares of Qualified Capital Stock are excluded from clause (3)(C)
of paragraph (a) of this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing")
through the substantially concurrent issuance of new Subordinated
Indebtedness of the Company, provided that any such new Subordinated
Indebtedness (1) shall be in a principal amount that does not exceed the
principal amount so refinanced (or, if such Subordinated Indebtedness
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, then such lesser amount
as of the date of determination), plus the lesser of (I) the stated amount
of any premium or other payment required to be paid in connection with such
a refinancing pursuant to the terms of the Indebtedness being refinanced or
(II) the amount of premium or other payment actually paid at such time to
refinance the Indebtedness, plus, in either case, the amount of expenses of
the Company incurred in connection with such refinancing; (2) has an
Average Life to Stated Maturity greater than the remaining Average Life to
Stated Maturity of the Notes; (3) has a Stated Maturity for its final
scheduled principal payment later than the Stated Maturity for the final
scheduled principal payment of the Notes; and (4) is expressly subordinated
in right of payment to the Notes at least to the same extent as the
Subordinated Indebtedness to be refinanced;
(v) the purchase, redemption, or other acquisition or retirement for value
of any class of Capital Stock of the Company from employees, former
employees, directors or former directors of the Company or any Subsidiary
pursuant to the terms of the agreements pursuant to which such Capital
Stock was acquired in an amount not to exceed $1.0 million in the aggregate
in any calendar year;
(vi) the repurchase, redemption or other acquisition or retirement for
value of Capital Stock of the Company issued pursuant to acquisitions by
the Company to the extent required by or needed to comply with the
requirements of any of the Manufacturers with which the Company or a
Restricted Subsidiary is a party to a franchise agreement;
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(vii) the repurchase, redemption, defeasance, retirement or acquisition for
value or payment of principal on the Smith Subordinated Loan; and
(viii) the payment of the contingent purchase price of an acquisition to
the extent such payment would be deemed a Restricted Payment. (Section
1009)
Limitation on Transactions with Affiliates. The Company will not, and will
not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into any transaction or series of related transactions
(including, without limitation, the sale, purchase, exchange or lease of
assets, property or services) with or for the benefit of any Affiliate of the
Company (other than the Company or a Wholly Owned Restricted Subsidiary) unless
such transaction or series of related transactions is entered into in good
faith and in writing and (a) such transaction or series of related transactions
is on terms that are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that would be available in a
comparable transaction in arm's-length dealings with an unrelated third party,
(b) with respect to any transaction or series of related transactions involving
aggregate value in excess of $500,000 the Company delivers either an officers'
certificate to the Trustee certifying that such transaction or series of
related transactions complies with clause (a) above or such transaction or
series of related transactions is approved by a majority of the Disinterested
Directors of the board of directors of the Company, or in the event there is
only one Disinterested Director, by such Disinterested Director, and (c) with
respect to any transaction or series of related transactions involving
aggregate value in excess of $1 million, either (i) such transaction or series
of related transactions has been approved by a majority of the Disinterested
Directors of the board of directors of the Company, or in the event there is
only one Disinterested Director, by such Disinterested Director, or (ii) the
Company delivers to the Trustee a written opinion of an investment banking firm
of national standing or other recognized independent expert with experience
appraising the terms and conditions of the type of transaction or series of
related transactions for which an opinion is required stating that the
transaction or series of related transactions is fair to the Company or such
Restricted Subsidiary from a financial point of view; provided, however, that
this provision shall not apply to (i) employee benefit arrangements with any
officer or director of the Company, including under any stock option or stock
incentive plans, entered into in the ordinary course of business; (ii) any
transaction permitted as a Restricted Payment pursuant to the covenant
described in " -- Limitation on Restricted Payments"; (iii) the payment of
customary fees to directors of the Company and its Restricted Subsidiaries;
(iv) any transaction with any officer or member of the Board of Directors of
the Company involving indemnification arrangements; and (v) loans or advances
to officers of the Company in the ordinary course of business not to exceed $1
million in any calendar year. (Section 1010)
Limitation on Liens. The Company will not, and will not cause or permit
any Restricted Subsidiary to, directly or indirectly, create, incur or affirm
any Lien of any kind securing any Pari Passu Indebtedness or Subordinated
Indebtedness (including any assumption, guarantee or other liability with
respect thereto by any Restricted Subsidiary) upon any property or assets
(including any intercompany notes) of the Company or any Restricted Subsidiary
owned on the Issue Date or acquired after the Issue Date, or assign or convey
any right to receive any income or profits therefrom, unless the Notes or a
Guarantee in the case of Liens of a Guarantor are directly secured equally and
ratably with (or, in the case of Subordinated Indebtedness, prior or senior
thereto, with the same relative priority as the Notes shall have with respect
to such Subordinated Indebtedness) the obligation or liability secured by such
Lien except for Liens (A) securing any Indebtedness which became Indebtedness
pursuant to a transaction permitted under " -- Consolidation, Merger, Sale of
Assets" or securing Acquired Indebtedness which was created prior to (and not
created in connection with, or in contemplation of) the incurrence of such Pari
Passu Indebtedness or Subordinated Indebtedness (including any assumption,
guarantee or other liability with respect thereto by any Restricted Subsidiary)
and which Indebtedness is permitted under the provisions of "-- Limitation on
Indebtedness" or (B) securing any Indebtedness incurred in connection with any
refinancing, renewal, substitutions or replacements of any such Indebtedness
described in clause (A), so long as the aggregate principal amount of
Indebtedness represented thereby (or if such Indebtedness provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration of the maturity thereof, the original issue price
of such Indebtedness plus any accreted value attributable thereto since the
original issuance of such Indebtedness) is not increased by such refinancing by
an amount greater than the lesser of (i) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (ii) the amount
of premium or other payment actually paid at such time to refinance the
Indebtedness, plus, in either case, the amount of expenses of the Company
incurred in connection with such refinancing, provided, however, that in the
case of clauses (A) and (B), any such Lien only extends to the assets that were
subject to such Lien securing such Indebtedness prior to the related
acquisition by the Company or its Restricted Subsidiaries. Notwithstanding the
foregoing, any Lien securing the Notes granted pursuant to this covenant shall
be automatically and unconditionally released and discharged upon the release
by the holders of the Pari Passu Indebtedness or Subordinated Indebtedness
described above of their Lien on the property or assets of the Company or any
Restricted Subsidiary (including any deemed release upon payment in full of all
obligations under such Indebtedness), at such time as the holders of all such
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Pari Passu Indebtedness or Subordinated Indebtedness also release their Lien on
the property or assets of the Company or such Restricted Subsidiary, or upon
any sale, exchange or transfer to any Person not an Affiliate of the Company of
the property or assets secured by such Lien, or of all of the Capital Stock
held by the Company or any Restricted Subsidiary in, or all or substantially
all the assets of, any Restricted Subsidiary creating such Lien. (Section 1011)
Limitation on Sale of Assets. (a) The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly,
consummate an Asset Sale unless (i) at least 80% of the consideration from such
Asset Sale consists of (A) cash or Cash Equivalents, (B) the assumption of
Senior Indebtedness or Senior Guarantor Indebtedness by the party acquiring the
assets from the Company of any Restricted Subsidiary, (C) Replacement Assets or
(D) a combination of any of the foregoing; and (ii) the Company or such
Restricted Subsidiary receives consideration at the time of such Asset Sale at
least equal to the Fair Market Value of the shares or assets subject to such
Asset Sale (as determined by the board of directors of the Company and
evidenced in a board resolution); provided that any notes or other obligations
received by the Company or any such Restricted Subsidiary from any transferee
of assets from the Company or such Restricted Subsidiary that are converted by
the Company or such Restricted Subsidiary into cash at Fair Market Value within
30 days after receipt shall be deemed to be cash for purposes of this
provision.
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness or Senior
Guarantor Indebtedness then outstanding as required by the terms thereof, or
the Company determines not to apply such Net Cash Proceeds to the permanent
prepayment of such Senior Indebtedness or Senior Guarantor Indebtedness or if
no such Senior Indebtedness or Senior Guarantor Indebtedness is then
outstanding, then the Company or a Restricted Subsidiary may within 365 days of
the Asset Sale invest the Net Cash Proceeds in Replacement Assets. The amount
of such Net Cash Proceeds not used or invested within 365 days of the Asset
Sale as set forth in this paragraph constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10 million or
more, the Company will apply the Excess Proceeds to the repayment of the Notes
and any other Pari Passu Indebtedness outstanding with similar provisions
requiring the Company to make an offer to purchase such Indebtedness with the
proceeds from any Asset Sale as follows: (A) the Company will make an offer to
purchase (an "Offer") from all holders of the Notes in accordance with the
procedures set forth in the Indenture in the maximum principal amount
(expressed as a multiple of $1,000) of Notes that may be purchased out of an
amount (the "Note Amount") equal to the product of such Excess Proceeds
multiplied by a fraction, the numerator of which is the outstanding principal
amount of the Notes, and the denominator of which is the sum of the outstanding
principal amount of the Notes and such Pari Passu Indebtedness (subject to
proration in the event such amount is less than the aggregate Offered Price (as
defined herein) of all Notes tendered) and (B) to the extent required by such
Pari Passu Indebtedness to permanently reduce the principal amount of such Pari
Passu Indebtedness, the Company will make an offer to purchase or otherwise
repurchase or redeem Pari Passu Indebtedness (a "Pari Passu Offer") in an
amount (the "Pari Passu Debt Amount") equal to the excess of the Excess
Proceeds over the Note Amount; provided that in no event will the Company be
required to make a Pari Passu Offer in a Pari Passu Debt Amount exceeding the
principal amount of such Pari Passu Indebtedness plus the amount of any premium
required to be paid to repurchase such Pari Passu Indebtedness. The offer price
for the Notes will be payable in cash in an amount equal to 100% of the
principal amount of the Notes plus accrued and unpaid interest, if any, to the
date (the "Offer Date") such Offer is consummated (the "Offered Price"), in
accordance with the procedures set forth in the Indenture. To the extent that
the aggregate Offered Price of the Notes tendered pursuant to the Offer is less
than the Note Amount relating thereto or the aggregate amount of Pari Passu
Indebtedness that is purchased in a Pari Passu Offer is less than the Pari
Passu Debt Amount, the Company may use any remaining Excess Proceeds for
general corporate purposes. If the aggregate principal amount of Notes and Pari
Passu Indebtedness surrendered by holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes to be purchased on a pro rata
basis. Upon the completion of the purchase of all the Notes tendered pursuant
to an Offer and the completion of a Pari Passu Offer, the amount of Excess
Proceeds, if any, shall be reset at zero.
(d) If the Company becomes obligated to make an Offer pursuant to clause
(c) above, the Notes and the Pari Passu Indebtedness shall be purchased by the
Company, at the option of the holders thereof, in whole or in part in integral
multiples of $1,000, on a date that is not earlier than 30 days and not later
than 60 days from the date the notice of the Offer is given to holders, or such
later date as may be necessary for the Company to comply with the requirements
under the Exchange Act.
(e) The Indenture will provide that the Company will comply with
applicable securities laws or regulations in connection with an Offer. (Section
1012)
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Limitation on Issuances of Guarantees of and Pledges for Indebtedness. (a)
The Company will not cause or permit any Restricted Subsidiary, other than a
Guarantor, directly or indirectly, to secure the payment of any Senior
Indebtedness of the Company and the Company will not, and will not permit any
Restricted Subsidiary to, pledge any intercompany notes representing
obligations of any Restricted Subsidiary (other than a Guarantor) to secure the
payment of any Senior Indebtedness unless in each case such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to the
Indenture providing for a guarantee of payment of the Notes by such Restricted
Subsidiary, which guarantee shall be on the same terms as the guarantee of the
Senior Indebtedness (if a guarantee of Senior Indebtedness is granted by any
such Restricted Subsidiary) except that the guarantee of the Notes need not be
secured and shall be subordinated to the claims against such Restricted
Subsidiary in respect of Senior Indebtedness to the same extent as the Notes
are subordinated to Senior Indebtedness of the Company under the Indenture.
(b) The Company will not cause or permit any Restricted Subsidiary (which
is not a Guarantor), directly or indirectly, to guarantee, assume or in any
other manner become liable with respect to any Indebtedness of the Company or
any Restricted Subsidiary unless such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for a
Guarantee of the Notes on the same terms as the guarantee of such Indebtedness
except that (A) such guarantee need not be secured unless required pursuant to
" -- Limitation on Liens," (B) if such Indebtedness is by its terms Senior
Indebtedness, any such assumption, guarantee or other liability of such
Restricted Subsidiary with respect to such Indebtedness shall be senior to such
Restricted Subsidiary's Guarantee of the Notes to the same extent as such
Senior Indebtedness is senior to the Notes and (C) if such Indebtedness is by
its terms expressly subordinated to the Notes, any such assumption, guarantee
or other liability of such Restricted Subsidiary with respect to such
Indebtedness shall be subordinated to such Restricted Subsidiary's Guarantee of
the Notes at least to the same extent as such Indebtedness is subordinated to
the Notes.
(c) Notwithstanding the foregoing, any Guarantee by a Restricted
Subsidiary of the Notes shall provide by its terms that it (and all Liens
securing the same) shall be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary, which transaction
is in compliance with the terms of the Indenture and such Restricted Subsidiary
is released from all guarantees, if any, by it of other Indebtedness of the
Company or any Restricted Subsidiaries or (ii) the release by the holders of
the Indebtedness of the Company of their security interest or their guarantee
by such Restricted Subsidiary (including any deemed release upon payment in
full of all obligations under such Indebtedness), at such time as (A) no other
Indebtedness of the Company has been secured or guaranteed by such Restricted
Subsidiary, as the case may be, or (B) the holders of all such other
Indebtedness which is secured or guaranteed by such Restricted Subsidiary also
release their security interest in or guarantee by such Restricted Subsidiary
(including any deemed release upon payment in full of all obligations under
such Indebtedness). (Section 1013)
Limitation on Senior Subordinated Indebtedness. The Company will not, and
will not permit or cause any Guarantor to, directly or indirectly, create,
incur, issue, assume, guarantee or otherwise in any manner become directly or
indirectly liable for or with respect to or otherwise permit to exist any
Indebtedness that is subordinate in right of payment to any Indebtedness of the
Company or such Guarantor, as the case may be, unless such Indebtedness is also
pari passu with the Notes or the Guarantee of such Guarantor or subordinated in
right of payment to the Notes or such Guarantee at least to the same extent as
the Notes or such Guarantee are subordinated in right of payment to Senior
Indebtedness or Senior Indebtedness of such Guarantor, as the case may be, as
set forth in the Indenture. (Section 1017)
Limitation on Subsidiary Preferred Stock. The Company will not permit (a)
any Restricted Subsidiary of the Company to issue, sell or transfer any
Preferred Stock, except for (i) Preferred Stock issued or sold to, held by or
transferred to the Company or a Wholly Owned Restricted Subsidiary, and (ii)
Preferred Stock issued by a Person prior to the time (A) such Person becomes a
Restricted Subsidiary, (B) such Person merges with or into a Restricted
Subsidiary or (C) a Restricted Subsidiary merges with or into such Person;
provided that such Preferred Stock was not issued or incurred by such Person in
anticipation of the type of transaction contemplated by subclause (A), (B) or
(C) or (b) any Person (other than the Company or a Wholly Owned Restricted
Subsidiary) to acquire Preferred Stock of any Restricted Subsidiary from the
Company or any Restricted Subsidiary, except, in the case of clause (a) or (b),
upon the acquisition of all the outstanding Capital Stock of such Restricted
Subsidiary in accordance with the terms of the Indenture. (Section 1015)
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
to exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary to (i) pay dividends or make any other
distribution on its Capital Stock or any other interest or participation in or
measured by its profits, (ii) pay any Indebtedness owed to the Company or any
other Restricted Subsidiary, (iii) make any Investment in the Company or any
other Restricted Subsidiary or (iv) transfer any of its properties or assets to
the Company or any other Restricted Subsidiary,
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except for: (a) any encumbrance or restriction pursuant to an agreement in
effect on the Issue Date; (b) any encumbrance or restriction, with respect to a
Restricted Subsidiary that is not a Restricted Subsidiary of the Company on the
Issue Date, in existence at the time such Person becomes a Restricted
Subsidiary of the Company and not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary, provided that
such encumbrances and restrictions are not applicable to the Company or any
Restricted Subsidiary or the properties or assets of the Company or any
Restricted Subsidiary other than such Subsidiary which is becoming a Restricted
Subsidiary; (c) customary provisions contained in an agreement that has been
entered into for the sale or other disposition of all or substantially all of
the Capital Stock or assets of a Restricted Subsidiary; provided however that
the restrictions are applicable only to such Restricted Subsidiary or assets;
(d) any encumbrance or restriction existing under or by reason of applicable
law; (e) customary provisions restricting subletting or assignment of any lease
governing any leasehold interest of any Restricted Subsidiary; (f) covenants in
franchise agreements with Manufacturers customary for franchise agreements in
the automobile retailing industry; (g) any encumbrance or restriction contained
in any Purchase Money Obligations for property to the extent such restriction
or encumbrance restricts the transfer of such property; (h) any encumbrances or
restrictions in security agreements securing Indebtedness (other than
Subordinated Indebtedness) of a Guarantor (including any Inventory Facility)
(to the extent that such Liens are otherwise incurred in accordance with
"-- Limitation on Liens") that restrict the transfer of property subject to
such agreements, provided that any such encumbrance or restriction is released
to the extent the underlying Lien is released or the related Indebtedness is
repaid; and (i) any encumbrance or restriction existing under any agreement
that extends, renews, refinances or replaces the agreements containing the
encumbrances or restrictions in the foregoing clauses (a) and (b), or in this
clause (i), provided that the terms and conditions of any such encumbrances or
restrictions are no more restrictive in any material respect than those under
or pursuant to the agreement evidencing the Indebtedness so extended, renewed,
refinanced or replaced. (Section 1016)
Limitation on Unrestricted Subsidiaries. The Company may designate after
the Issue Date any Subsidiary as an "Unrestricted Subsidiary" under the
Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) the Company would be permitted to make an Investment (other than a
Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the first paragraph of " --
Limitation on Restricted Payments" above in an amount (the "Designation
Amount") equal to the greater of (1) the net book value of the Company's
interest in such Subsidiary calculated in accordance with GAAP or (2) the
Fair Market Value of the Company's interest in such Subsidiary as
determined in good faith by the Company's board of directors;
(c) the Company would be permitted under the Indenture to incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under " -- Limitation on Indebtedness" at the time of
such Designation (assuming the effectiveness of such Designation);
(d) such Unrestricted Subsidiary does not own any Capital Stock in any
Restricted Subsidiary of the Company which is not simultaneously being
designated an Unrestricted Subsidiary;
(e) such Unrestricted Subsidiary is not liable, directly or indirectly,
with respect to any Indebtedness other than Unrestricted Subsidiary
Indebtedness, provided that an Unrestricted Subsidiary may provide a
Guarantee for the Notes; and
(f) such Unrestricted Subsidiary is not a party to any agreement,
contract, arrangement or understanding at such time with the Company or any
Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company or, in the event such
condition is not satisfied, the value of such agreement, contract,
arrangement or understanding to such Unrestricted Subsidiary shall be
deemed a Restricted Payment.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant "
- -- Limitation on Restricted Payments" for all purposes of the Indenture in the
Designation Amount.
The Indenture will also provide that the Company shall not and shall not
cause or permit any Restricted Subsidiary to at any time (x) provide credit
support for, or subject any of its property or assets (other than the Capital
Stock of any Unrestricted Subsidiary) to the satisfaction of, any Indebtedness
of any Unrestricted Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness) (other than Permitted Investments in
Unrestricted Subsidiaries) or (y) be directly or indirectly liable for any
Indebtedness of any Unrestricted Subsidiary. For purposes of the foregoing, the
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Designation of a Subsidiary of the Company as an Unrestricted Subsidiary shall
be deemed to be the Designation of all of the Subsidiaries of such Subsidiary.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation;
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture; and
(c) unless such redesignated Subsidiary shall not have any Indebtedness
outstanding (other than Indebtedness that would be Permitted Indebtedness),
immediately after giving effect to such proposed Revocation, and after
giving pro forma effect to the incurrence of any such Indebtedness of such
redesignated Subsidiary as if such Indebtedness was incurred on the date of
the Revocation, the Company could incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the covenant described
under " -- Limitation on Indebtedness."
All Designations and Revocations must be evidenced by a resolution of the
board of directors of the Company delivered to the Trustee certifying
compliance with the foregoing provisions. (Section 1018)
Provision of Financial Statements. Whether or not the Company is subject
to Section 13(a) or 15(d) of the Exchange Act, the Company and each Guarantor
(to the extent such Guarantor would be required if subject to Section 13(a) or
15(d) of the Exchange Act) will, to the extent permitted under the Exchange
Act, file with the Commission the annual reports, quarterly reports and other
documents which the Company and such Guarantor would have been required to file
with the Commission pursuant to Sections 13(a) or 15(d) if the Company or such
Guarantor were so subject, such documents to be filed with the Commission on or
prior to the date (the "Required Filing Date") by which the Company and such
Guarantor would have been required so to file such documents if the Company and
such Guarantor were so subject. The Company and any Guarantor will also in any
event (x) within 15 days of each Required Filing Date (i) transmit by mail to
all holders, as their names and addresses appear in the security register,
without cost to such holders and (ii) file with the Trustee copies of the
annual reports, quarterly reports and other documents which the Company and
such Guarantor would have been required to file with the Commission pursuant to
Sections 13(a) or 15(d) of the Exchange Act if the Company and such Guarantor
were subject to either of such Sections and (y) if filing such documents by the
Company and such Guarantor with the Commission is not permitted under the
Exchange Act, promptly upon written request and payment of the reasonable cost
of duplication and delivery, supply copies of such documents to any prospective
holder at the Company's cost. If any Guarantor's financial statements would be
required to be included in the financial statements filed or delivered pursuant
to the Indenture if the Company were subject to Section 13(a) or 15(d) of the
Exchange Act, the Company shall include such Guarantor's financial statements
in any filing or delivery pursuant to the Indenture. The Indenture also
provides that, so long as any of the Notes remain outstanding, the Company will
make available to any prospective purchaser of Notes or beneficial owner of
Notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act, until such time as the Company has either
exchanged the Notes for securities identical in all material respects which
have been registered under the Securities Act or until such time as the holders
thereof have disposed of such Notes pursuant to an effective registration
statement under the Securities Act. (Section 1019)
Additional Covenants. The Indenture also contains covenants with respect
to the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in The City of New York; (iii) arrangements
regarding the handling of money held in trust; (iv) maintenance of corporate
existence; (v) payment of taxes and other claims; (vi) maintenance of
properties; and (vii) maintenance of insurance.
Consolidation, Merger, Sale of Assets
The Company will not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person
or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets to any Person or group of
Persons, or permit any of its Restricted Subsidiaries to enter into any such
transaction or series of related transactions, if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposition of all or substantially all of the
properties and assets of the Company and its Restricted Subsidiaries on a
Consolidated basis to any other Person or group of Persons, unless at the time
and after giving effect thereto (i) either (a) the Company will be the
continuing corporation (in the case of a consolidation or merger involving the
Company) or (b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and its
Restricted Subsidiaries on a Consolidated basis (the
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"Surviving Entity") will be a corporation duly organized and validly existing
under the laws of the United States of America, any state thereof or the
District of Columbia and such Person expressly assumes, by a supplemental
indenture, in a form reasonably satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture and the
Registration Rights Agreement, as the case may be, and the Notes and the
Indenture and the Registration Rights Agreement will remain in full force and
effect as so supplemented; (ii) immediately before and immediately after giving
effect to such transaction on a pro forma basis (and treating any Indebtedness
not previously an obligation of the Company or any of its Restricted
Subsidiaries which becomes the obligation of the Company or any of its
Restricted Subsidiaries as a result of such transaction as having been incurred
at the time of such transaction), no Default or Event of Default will have
occurred and be continuing; (iii) immediately before and immediately after
giving effect to such transaction on a pro forma basis (on the assumption that
the transaction occurred on the first day of the four-quarter period for which
financial statements are available ending immediately prior to the consummation
of such transaction with the appropriate adjustments with respect to the
transaction being included in such pro forma calculation), the Company (or the
Surviving Entity if the Company is not the continuing obligor under the
Indenture) could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions of " -- Certain Covenants -- Limitation on
Indebtedness;" (iv) at the time of the transaction, each Guarantor, if any,
unless it is the other party to the transactions described above, will have by
supplemental indenture confirmed that its Guarantee shall apply to such
Person's obligations under the Indenture and under the Notes; (v) at the time
of the transaction if any of the property or assets of the Company or any of
its Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of " -- Certain Covenants -- Limitation on Liens" are complied
with; and (vi) at the time of the transaction the Company or the Surviving
Entity will have delivered, or caused to be delivered, to the Trustee, in form
and substance reasonably satisfactory to the Trustee, an officers' certificate
and an opinion of counsel, each to the effect that such consolidation, merger,
transfer, sale, assignment, conveyance, transfer, lease or other transaction
and the supplemental indenture in respect thereof comply with the Indenture and
that all conditions precedent therein provided for relating to such transaction
have been complied with. (Section 801)
Each Guarantor will not, and the Company will not permit a Guarantor to,
in a single transaction or through a series of related transactions,
consolidate with or merge with or into any other Person (other than the Company
or any Guarantor) or sell, assign, convey, transfer, lease or otherwise dispose
of all or substantially all of its properties and assets on a Consolidated
basis to any Person or group of Persons (other than the Company or any
Guarantor), or permit any of its Restricted Subsidiaries to enter into any such
transaction or series of transactions if such transaction or series of
transactions, in the aggregate, would result in a sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties
and assets of the Guarantor and its Restricted Subsidiaries on a Consolidated
basis to any other Person or group of Persons (other than the Company or any
Guarantor), unless at the time and after giving effect thereto: (i) either (a)
the Guarantor will be the continuing corporation (in the case of a
consolidation or merger involving the Guarantor) or (b) the Person (if other
than the Guarantor) formed by such consolidation or into which such Guarantor
is merged or the Person which acquires by sale, assignment, conveyance,
transfer, lease or disposition all or substantially all of the properties and
assets of the Guarantor and its Restricted Subsidiaries on a Consolidated basis
(the "Surviving Guarantor Entity") will be a corporation or limited liability
company duly organized and validly existing under the laws of the United States
of America, any state thereof or the District of Columbia and such Person
expressly assumes, by a supplemental indenture, in a form reasonably
satisfactory to the Trustee, all the obligations of such Guarantor under its
Guarantee of the Notes and the Indenture and the Registration Rights Agreement
and such Guarantee, Indenture and Registration Rights Agreement will remain in
full force and effect; (ii) immediately before and immediately after giving
effect to such transaction on a pro forma basis, no Default or Event of Default
will have occurred and be continuing; and (iii) at the time of the transaction
such Guarantor or the Surviving Guarantor Entity will have delivered, or caused
to be delivered, to the Trustee, in form and substance reasonably satisfactory
to the Trustee, an officers' certificate and an opinion of counsel, each to the
effect that such consolidation, merger, transfer, sale, assignment, conveyance,
lease or other transaction and the supplemental indenture in respect thereof
comply with the Indenture and that all conditions precedent therein provided
for relating to such transaction have been complied with; provided, however,
that this paragraph shall not apply to any Guarantor whose Guarantee of the
Notes is unconditionally released and discharged in accordance with paragraph
(b) under the provisions of " -- Certain Covenants -- Limitation on Issuances
of Guarantees of Indebtedness." (Section 801)
In the event of any transaction (other than a lease or a sale of
substantially all of the assets of the Company or a Guarantor that results in
the sale, assignment, conveyance, transfer or other disposition of assets
constituting or accounting for less than 95% of the consolidated assets,
revenues or Consolidated Net Income (Loss) of the Company or such Guarantor, as
the case may be) described in and complying with the conditions listed in the
two immediately preceding paragraphs in which the Company or any Guarantor, as
the case may be, is not the continuing corporation, the successor Person formed
or remaining or to which such transfer is made shall succeed to, and be
substituted for, and may exercise every right and
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power of, the Company or such Guarantor, as the case may be, and the Company or
any Guarantor, as the case may be, would be discharged from all obligations and
covenants under the Indenture and the Notes or its Guarantee, as the case may
be, and the Registration Rights Agreement. (Section 802)
Events of Default
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on any Note
when it becomes due and payable, and such default shall continue for a period
of 30 days (whether or not prohibited by the subordination provisions of the
Indenture);
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Note at its Maturity (upon acceleration, optional or
mandatory redemption, if any, required repurchase or otherwise) (whether or not
prohibited by the subordination provisions of the Indenture);
(iii) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under the Indenture or
any Guarantee (other than a default in the performance, or breach, of a
covenant or agreement which is specifically dealt with in clause (i), (ii) or
in clause (b), (c) or (d) of this clause (iii)) and such default or breach
shall continue for a period of 60 days after written notice (30 days in the
case of a default in the covenants described under " -- Certain Covenants --
Limitation on Indebtedness" or " -- Limitation on Restricted Payments") has
been given, by certified mail, (x) to the Company by the Trustee or (y) to the
Company and the Trustee by the holders of at least 25% in aggregate principal
amount of the outstanding Notes; (b) there shall be a default in the
performance or breach of the provisions described in " -- Consolidation,
Merger, Sale of Assets;" (c) the Company shall have failed to consummate an
Offer in accordance with the provisions of " -- Certain Covenants -- Limitation
on Sale of Assets;" or (d) the Company shall have failed to consummate a Change
of Control Offer in accordance with the provisions of "Purchase of Notes Upon a
Change of Control;"
(iv) one or more defaults, individually or in the aggregate, shall have
occurred under any of the agreements, indentures or instruments under which the
Company or any Restricted Subsidiary then has outstanding Indebtedness in
excess of $20 million in principal amount, individually or in the aggregate,
and either (a) such default results from the failure to pay such Indebtedness
at its stated final maturity or (b) such default or defaults resulted in the
acceleration of the maturity of such Indebtedness;
(v) any Guarantee shall for any reason cease to be, or shall for any
reason be asserted in writing by any Guarantor or the Company not to be, in
full force and effect and enforceable in accordance with its terms, except to
the extent contemplated by the Indenture and any such Guarantee;
(vi) one or more final judgments, orders or decrees (not subject to
appeal) of any court or regulatory or administrative agency for the payment of
money in excess of $20 million, either individually or in the aggregate
(exclusive of any portion of any such payment covered by insurance, if and to
the extent the insurer has acknowledged in writing its liability therefor),
shall be rendered against the Company, any Guarantor or any Subsidiary or any
of their respective properties and shall not be discharged or fully binded and
there shall have been a period of 60 consecutive days during which a stay of
enforcement of such judgment or order, by reason of an appeal or otherwise,
shall not be in effect;
(vii) any holder or holders of at least $20 million in aggregate principal
amount of Indebtedness of the Company, any Guarantor or any Restricted
Subsidiary after a default under such Indebtedness shall notify the Trustee of
the intended sale or disposition of any assets of the Company, any Guarantor or
any Restricted Subsidiary that have been pledged to or for the benefit of such
holder or holders to secure such Indebtedness or shall commence proceedings, or
take any action (including by way of set-off), to retain in satisfaction of
such Indebtedness or to collect on, seize, dispose of or apply in satisfaction
of Indebtedness, assets of the Company, any Guarantor or any Restricted
Subsidiary (including funds on deposit or held pursuant to lock-box and other
similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company or
any Significant Restricted Subsidiary in an involuntary case or proceeding
under any applicable Bankruptcy Law or (b) a decree or order adjudging the
Company or any Significant Restricted Subsidiary bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment or composition of or in respect
of the Company or any Significant Restricted Subsidiary under any applicable
federal or state law, or appointing a custodian, receiver, liquidator,
assignee, trustee, sequestrator (or other similar official) of the Company or
any Significant Restricted Subsidiary or of any substantial part of their
respective properties, or ordering the winding up or liquidation of their
affairs, and any such decree or order for relief shall continue to be in
effect, or any such other decree or order shall be unstayed and in effect, for
a period of 60 consecutive days; or
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(ix) (a) the Company or any Significant Restricted Subsidiary commences a
voluntary case or proceeding under any applicable Bankruptcy Law or any other
case or proceeding to be adjudicated bankrupt or insolvent, (b) the Company or
any Significant Restricted Subsidiary consents to the entry of a decree or
order for relief in respect of the Company or such Significant Restricted
Subsidiary in an involuntary case or proceeding under any applicable Bankruptcy
Law or to the commencement of any bankruptcy or insolvency case or proceeding
against it, (c) the Company or any Significant Restricted Subsidiary files a
petition or answer or consent seeking reorganization or relief under any
applicable federal or state law, (d) the Company or any Significant Restricted
Subsidiary (I) consents to the filing of such petition or the appointment of,
or taking possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of the Company or such Significant Restricted
Subsidiary or of any substantial part of their respective properties, (II)
makes an assignment for the benefit of creditors or (III) admits in writing its
inability to pay its debts generally as they become due or (e) the Company or
any Significant Restricted Subsidiary takes any corporate action in furtherance
of any such actions in this paragraph (ix). (Section 501)
If an Event of Default (other than as specified in clauses (viii) and (ix)
of the prior paragraph) shall occur and be continuing with respect to the
Indenture, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Notes then outstanding may, and the Trustee at the
request of such holders shall, declare all unpaid principal of, premium, if
any, and accrued interest on all Notes to be due and payable immediately, by a
notice in writing to the Company (and to the Trustee if given by the holders of
the Notes) and upon any such declaration, such principal, premium, if any, and
interest shall become due and payable immediately. If an Event of Default
specified in clause (viii) or (ix) of the prior paragraph occurs and is
continuing, then all the Notes shall ipso facto become and be due and payable
immediately in an amount equal to the principal amount of the Notes, together
with accrued and unpaid interest, if any, to the date the Notes become due and
payable, without any declaration or other act on the part of the Trustee or any
holder. Thereupon, the Trustee may, at its discretion, proceed to protect and
enforce the rights of the holders of Notes by appropriate judicial proceedings.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Notes outstanding by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes
then outstanding, (iii) the principal of and premium, if any, on any Notes then
outstanding which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes and (iv) to
the extent that payment of such interest is lawful, interest upon overdue
interest at the rate borne by the Notes; (b) the rescission would not conflict
with any judgment or decree of a court of competent jurisdiction; and (c) all
Events of Default, other than the non-payment of principal of, premium, if any,
and interest on the Notes which have become due solely by such declaration of
acceleration, have been cured or waived as provided in the Indenture. No such
rescission shall affect any subsequent default or impair any right consequent
thereon. (Section 502)
The holders of not less than a majority in aggregate principal amount of
the Notes outstanding may on behalf of the holders of all outstanding Notes
waive any past default under the Indenture and its consequences, except a
default (i) in the payment of the principal of, premium, if any, or interest on
any Note (which may only be waived with the consent of each holder of Notes
affected) or (ii) in respect of a covenant or provision which under the
Indenture cannot be modified or amended without the consent of the holder of
each Note affected by such modification or amendment. (Section 513)
No holder of any of the Notes has any right to institute any proceedings
with respect to the Indenture or any remedy thereunder, unless the holders of
at least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee under the Notes and the Indenture, the Trustee has
failed to institute such proceeding within 15 days after receipt of such notice
and the Trustee, within such 15-day period, has not received directions
inconsistent with such written request by holders of a majority in aggregate
principal amount of the outstanding Notes. Such limitations do not, however,
apply to a suit instituted by a holder of a Note for the enforcement of the
payment of the principal of, premium, if any, or interest on such Note on or
after the respective due dates expressed in such Note.
The Company is required to notify the Trustee within five business days of
the occurrence of any Default. The Company is required to deliver to the
Trustee, on or before a date not more than 60 days after the end of each fiscal
quarter and not more than 120 days after the end of each fiscal year, a written
statement as to compliance with the Indenture, including whether or not any
Default has occurred. (Section 1020) The Trustee is under no obligation to
exercise any of the rights or powers vested in it by the Indenture at the
request or direction of any of the holders of the Notes unless such holders
offer
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to the Trustee security or indemnity satisfactory to the Trustee against the
costs, expenses and liabilities which might be incurred thereby. (Section 603)
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, if any, to obtain
payment of claims in certain cases or to realize on certain property received
by it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions, provided that if it acquires any
conflicting interest it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
Defeasance or Covenant Defeasance of Indenture
The Company may, at its option and at any time, elect to have the
obligations of the Company, any Guarantor and any other obligor upon the Notes
discharged with respect to the outstanding Notes ("defeasance"). Such
defeasance means that the Company, any such Guarantor and any other obligor
under the Indenture shall be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Notes, except for (i) the rights of
holders of such outstanding Notes to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes, and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect
to have the obligations of the Company and any Guarantor released with respect
to certain covenants that are described in the Indenture ("covenant
defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or an Event of Default with respect to the Notes. In
the event covenant defeasance occurs, certain events (not including
non-payment, bankruptcy and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes. (Sections 401, 402 and 403)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants or a nationally recognized investment banking
firm, to pay and discharge the principal of, premium, if any, and interest on
the outstanding Notes on the Stated Maturity (or on any date after August 1,
2003 (such date being referred to as the "Defeasance Redemption Date"), if at
or prior to electing either defeasance or covenant defeasance, the Company has
delivered to the Trustee an irrevocable notice to redeem all of the outstanding
Notes on the Defeasance Redemption Date); (ii) in the case of defeasance, the
Company shall have delivered to the Trustee an opinion of independent counsel
in the United States stating that (A) the Company has received from, or there
has been published by, the Internal Revenue Service a ruling or (B) since the
Issue Date, there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of
independent counsel in the United States shall confirm that, the holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance had not occurred; (iii) in the case
of covenant defeasance, the Company shall have delivered to the Trustee an
opinion of independent counsel in the United States to the effect that the
holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such covenant defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as clauses (viii) or (ix)
under the first paragraph under -- "Events of Default" are concerned, at any
time during the period ending on the 91st day after the date of deposit (other
than a Default which results from the borrowing of amounts to finance the
defeasance and which borrowing does not result in a breach or violation of, or
constitute a default, under any other material agreement or instrument to which
the Company or any Restricted Subsidiary is a party or to which it is bound);
(v) such defeasance or covenant defeasance shall not cause the Trustee for the
Notes to have a conflicting interest as defined in the Indenture and for
purposes of the Trust Indenture Act with respect to any securities of the
Company or any Guarantor; (vi) such defeasance or covenant defeasance shall not
result in a breach or violation of, or constitute a Default under, the
Indenture or any other material agreement or instrument to which the Company,
any Guarantor or any Restricted Subsidiary is a party or by which it is bound;
(vii) such defeasance or covenant defeasance shall not result in the trust
arising from such deposit constituting an investment company within the meaning
of the Investment Company Act of 1940, as amended, unless such trust shall be
registered under such Act or exempt from registration thereunder; (viii) the
Company will have delivered to the Trustee an opinion of independent counsel in
the United States to the effect that (assuming that no holder of any Notes
would be considered an insider of the Company under
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any applicable bankruptcy or insolvency law) after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (ix) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by the Company with
the intent of preferring the holders of the Notes or any Guarantee over the
other creditors of the Company or any Guarantor with the intent of defeating,
hindering, delaying or defrauding creditors of the Company, any Guarantor or
others; (x) no event or condition shall exist that would prevent the Company
from making payments of the principal of, premium, if any, and interest on the
Notes on the date of such deposit or at any time ending on the 91st day after
the date of such deposit; and (xi) the Company will have delivered to the
Trustee an officers' certificate and an opinion of independent counsel, each
stating that all conditions precedent provided for relating to either the
defeasance or the covenant defeasance, as the case may be, have been complied
with. (Section 404)
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes as expressly provided for in the Indenture) as to all outstanding Notes
under the Indenture when (a) either (i) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or paid or Notes whose payment has been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust as provided for in the Indenture) have
been delivered to the Trustee for cancellation or (ii) all Notes not
theretofore delivered to the Trustee for cancellation (x) have become due and
payable, (y) will become due and payable at their Stated Maturity within one
year, or (z) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company; and the Company or any
Guarantor has irrevocably deposited or caused to be deposited with the Trustee
as trust funds in trust an amount in United States dollars sufficient to pay
and discharge the entire indebtedness on the Notes not theretofore delivered to
the Trustee for cancellation, including principal of, premium, if any, and
accrued interest at such Maturity, Stated Maturity or redemption date; (b) the
Company or any Guarantor has paid or caused to be paid all other sums payable
under the Indenture by the Company and any Guarantor; and (c) the Company has
delivered to the Trustee an officers' certificate and an opinion of independent
counsel in form and substance reasonably satisfactory to the Trustee each
stating that (i) all conditions precedent under the Indenture relating to the
satisfaction and discharge of such Indenture have been complied with and (ii)
such satisfaction and discharge will not result in a breach or violation of, or
constitute a default under, the Indenture or any other material agreement or
instrument to which the Company, any Guarantor or any Subsidiary is a party or
by which the Company, any Guarantor or any Subsidiary is bound. (Section 1201)
Modifications and Amendments
Modifications and amendments of the Indenture may be made by the Company,
each Guarantor, if any, and the Trustee with the consent of the holders of at
least a majority in aggregate principal amount of the Notes then outstanding;
provided, however, that no such modification or amendment may, without the
consent of the holder of each outstanding Note affected thereby: (i) change the
Stated Maturity of the principal of, or any installment of interest on, or
change to an earlier date any redemption date of, or waive a default in the
payment of the principal of, premium, if any, or interest on, any such Note or
reduce the principal amount thereof or the rate of interest thereon or any
premium payable upon the redemption thereof, or change the coin or currency in
which the principal of any such Note or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment after the Stated Maturity thereof (or, in the case of redemption, on or
after the redemption date); (ii) amend, change or modify the obligation of the
Company to make and consummate an Offer with respect to any Asset Sale or Asset
Sales in accordance with " -- Certain Covenants -- Limitation on Sale of
Assets" or the obligation of the Company to make and consummate a Change of
Control Offer in the event of a Change of Control in accordance with "Purchase
of Notes Upon a Change of Control," including, in each case, amending, changing
or modifying any definitions related thereto, but only to the extent such
definitions relate thereto; (iii) reduce the percentage in principal amount of
such outstanding Notes, the consent of whose holders is required for any such
supplemental indenture, or the consent of whose holders is required for any
waiver or compliance with certain provisions of the Indenture; (iv) modify any
of the provisions relating to supplemental indentures requiring the consent of
holders or relating to the waiver of past defaults or relating to the waiver of
certain covenants, except to increase the percentage of such outstanding Notes
required for such actions or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of
each such Note affected thereby; (v) except as otherwise permitted under " --
Consolidation, Merger, Sale of Assets," consent to the assignment or transfer
by the Company or any Guarantor of any of
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its rights and obligations under the Indenture; or (vi) amend or modify any of
the provisions of the Indenture relating to the subordination of the Notes or
any Guarantee in any manner adverse to the holders of the Notes or any
Guarantee. (Section 902)
Notwithstanding the foregoing, without the consent of any holders of the
Notes, the Company, any Guarantor, any other obligor under the Notes and the
Trustee may modify or amend the Indenture: (a) to evidence the succession of
another Person to the Company or a Guarantor or any other obligor upon the
securities, and the assumption by any such successor of the covenants of the
Company or such Guarantor or obligor in the Indenture and in the Notes and in
any Guarantee in accordance with " -- Consolidation, Merger, Sale of Assets;"
(b) to add to the covenants of the Company, any Guarantor or any other obligor
upon the Notes for the benefit of the holders of the Notes or to surrender any
right or power conferred upon the Company or any Guarantor or any other obligor
upon the Notes, as applicable, in the Indenture, in the Notes or in any
Guarantee; (c) to cure any ambiguity, or to correct or supplement any provision
in the Indenture or in any supplemental indenture, the Notes or any Guarantee
which may be defective or inconsistent with any other provision in the
Indenture, the Notes or any Guarantee or make any other provisions with respect
to matters or questions arising under the Indenture, the Notes or any
Guarantee; provided that, in each case, such provisions shall not adversely
affect the interest of the holders of the Notes; (d) to comply with the
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act; (e) to add a Guarantor under
the Indenture; (f) to evidence and provide the acceptance of the appointment of
a successor Trustee under the Indenture; or (g) to mortgage, pledge,
hypothecate or grant a security interest in favor of the Trustee for the
benefit of the holders of the Notes as additional security for the payment and
performance of the Company's and any Guarantor's obligations under the
Indenture, in any property, or assets, including any of which are required to
be mortgaged, pledged or hypothecated, or in which a security interest is
required to be granted to the Trustee pursuant to the Indenture or otherwise.
(Section 901)
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1021)
Governing Law
The Indenture, the Notes and any Guarantee will be governed by, and
construed in accordance with, the laws of the State of New York, without giving
effect to the conflicts of law principles thereof.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue as Trustee with such conflict or resign as Trustee. (Sections 608
and 611)
The holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs (which has not been cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any holder of Notes unless such holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense. (Section 602)
Certain Definitions
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition, as the case may be.
Acquired Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from any Person or the date the acquired Person becomes a
Restricted Subsidiary, as the case may be.
"Affiliate" means, with respect to any specified Person: (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person; (ii) any other Person that
owns, directly or indirectly, 5% or more of such specified Person's Capital
Stock or any officer or director of any such specified Person or other Person
or, with respect to any natural Person, any person having a relationship with
such Person by blood, marriage or adoption
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not more remote than first cousin; or (iii) any other Person 5% or more of the
Voting Stock of which is beneficially owned or held directly or indirectly by
such specified Person. For the purposes of this definition, "control" when used
with respect to any specified Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of: (i) any
Capital Stock of any Restricted Subsidiary (other than directors qualifying
shares and transfers of Capital Stock required by a Manufacturer to the extent
the Company does not receive cash or Cash Equivalents for such Capital Stock);
(ii) all or substantially all of the properties and assets of any division or
line of business of the Company or any Restricted Subsidiary; or (iii) any
other properties or assets of the Company or any Restricted Subsidiary other
than in the ordinary course of business. For the purposes of this definition,
the term "Asset Sale" shall not include any transfer of properties and assets
(A) that is governed by the provisions described under "Consolidation, Merger,
Sale of Assets," (B) that is by the Company to any Wholly Owned Restricted
Subsidiary, or by any Restricted Subsidiary to the Company or any Wholly Owned
Restricted Subsidiary in accordance with the terms of the Indenture, (C) that
is of obsolete equipment, (D) that consists of defaulted receivables for
collection or any sale, transfer or other disposition of defaulted receivables
for collection, or (E) the Fair Market Value of which in the aggregate does not
exceed $2.5 million in any transaction or series of related transactions.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of determination to
the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by
(ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law or foreign law
relating to bankruptcy, insolvency, receivership, winding up, liquidation,
reorganization or relief of debtors or any amendment to, succession to or
change in any such law.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its Restricted Subsidiaries on a Consolidated basis under any
capital lease of (or other agreement conveying the right to use) real or
personal property which, in accordance with GAAP, is required to be recorded as
a capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations, rights in or other equivalents (however designated) of such
Person's capital stock or other equity interests whether now outstanding or
issued after the Issue Date, partnership interests (whether general or
limited), any other interest or participation that confers on a Person that
right to receive a share of the profits and losses of, or distributions of
assets of (other than a distribution in respect of Indebtedness), the issuing
Person and any rights (other than debt securities convertible into Capital
Stock), warrants or options exchangeable for or convertible into such Capital
Stock.
"Cash Equivalents" means (i) marketable direct obligations, maturing not
more than one year after the date of acquisition, issued by the United States
of America, or an instrumentality or agency thereof, and guaranteed fully as to
principal, premium, if any, and interest by the United States of America, (ii)
any certificate of deposit, maturing not more than one year after the date of
acquisition, issued by a commercial banking institution that is a member of the
Federal Reserve System and that has combined capital and surplus and undivided
profits of not less than $500 million, whose debt has a rating, at the time as
of which any investment therein is made, of "P-1" (or higher) according to
Moody's Investors Service, Inc. ("Moody's") or any successor rating agency or
"A-1" (or higher) according to Standard & Poor's Rating Group, a division of
McGraw Hill, Inc. ("S&P") or any successor rating agency, (iii) commercial
paper, maturing not more than 180 days after the date of acquisition, issued by
a corporation (other than an Affiliate or Subsidiary of the Company) organized
and existing under the laws of the United States of America with a rating, at
the time as of which any investment therein is made, of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P and (iv) any money
market deposit accounts issued or offered by a domestic commercial bank having
capital and surplus in excess of $500 million; provided that the short term
debt of such commercial bank has a rating, at the time of Investment, of "P-1"
(or higher) according to Moody's or "A-1" (or higher) according to S&P.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), other than Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have beneficial ownership of all shares
that such Person has the right to acquire, whether such right is exercisable
immediately or only after
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the passage of time), directly or indirectly, of more than 35% of the total
outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of such board of directors then in office;
(iii) the Company consolidates with or merges with or into any Person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates with
or merges into or with the Company, in any such event pursuant to a transaction
in which the outstanding Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than any such
transaction where (A) the outstanding Voting Stock of the Company is changed
into or exchanged for (x) Voting Stock of the surviving corporation which is
not Redeemable Capital Stock or (y) cash, securities and other property (other
than Capital Stock of the surviving corporation) in an amount which could be
paid by the Company as a Restricted Payment as described under " -- Certain
Covenants -- Limitation on Restricted Payments" (and such amount shall be
treated as a Restricted Payment subject to the provisions in the Indenture
described under "-- Certain Covenants -- Limitation on Restricted Payments")
and (B) immediately after such transaction, no "person" or "group," other than
Permitted Holders, is the beneficial owner (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that a person shall be deemed to have beneficial
ownership of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, more than 35% of the total outstanding Voting Stock of
the surviving corporation; or (iv) the Company is liquidated or dissolved or
adopts a plan of liquidation or dissolution other than in a transaction which
complies with the provisions described under " -- Consolidation, Merger, Sale
of Assets." For purposes of this definition, any transfer of an equity interest
of an entity that was formed for the purpose of acquiring voting stock of the
Company will be deemed to be a transfer of such portion of such voting stock as
corresponds to the portion of the equity of such entity that has been so
transferred.
"Class A Common Stock" means the Company's Class A Common Stock, par value
$.01 per share, or any successor common stock thereto.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Securities Act, Exchange Act and Trust
Indenture Act then the body performing such duties at such time.
"Commodity Price Protection Agreement" means any forward contract,
commodity swap, commodity option or other similar financial agreement or
arrangement relating to, or the value which is dependent upon, fluctuations in
commodity prices.
"Company" means Sonic Automotive, Inc., a corporation incorporated under
the laws of Delaware, until a successor Person shall have become such pursuant
to the applicable provisions of the Indenture, and thereafter "Company" shall
mean such successor Person.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, for any
period, the ratio of (a) the sum of Consolidated Net Income (Loss), and in each
case to the extent deducted in computing Consolidated Net Income (Loss) for
such period, Consolidated Interest Expense, Consolidated Income Tax Expense and
Consolidated Non-cash Charges for such period, of such Person and its
Restricted Subsidiaries on a Consolidated basis, all determined in accordance
with GAAP, less all noncash items increasing Consolidated Net Income for such
period and less all cash payments during such period relating to noncash
charges that were added back to Consolidated Net Income in determining the
Consolidated Fixed Charge Coverage Ratio in any prior period to (b) the sum of
Consolidated Interest Expense for such period and cash and noncash dividends
paid on any Preferred Stock of such Person during such period, in each case
after giving pro forma effect to (i) the incurrence of the Indebtedness giving
rise to the need to make such calculation and (if applicable) the application
of the net proceeds therefrom, including to refinance other Indebtedness, as if
such Indebtedness was incurred, and the application of such proceeds occurred,
on the first day of such period; (ii) the incurrence, repayment or retirement
of any other Indebtedness by the Company and its Restricted Subsidiaries since
the first day of such period as if such Indebtedness was incurred, repaid or
retired at the beginning of such period (except that, in making such
computation, the amount of Indebtedness under any revolving credit facility
shall be computed based upon the average daily balance of such Indebtedness
during such period); (iii) in the case of Acquired Indebtedness or any
acquisition occurring at the time of the incurrence of such Indebtedness, the
related acquisition, assuming such acquisition had been consummated on the
first day of such period; and (iv) any acquisition or disposition by the
Company and its Restricted Subsidiaries of any company or any business or any
assets out of the ordinary course of business, whether by merger, stock
purchase or sale or asset purchase or sale, or any related repayment
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of Indebtedness, in each case since the first day of such period, assuming such
acquisition or disposition had been consummated on the first day of such
period; provided that (i) in making such computation, the Consolidated Interest
Expense attributable to interest on any Indebtedness computed on a pro forma
basis and (A) bearing a floating interest rate shall be computed as if the rate
in effect on the date of computation had been the applicable rate for the
entire period and (B) which was not outstanding during the period for which the
computation is being made but which bears, at the option of such Person, a
fixed or floating rate of interest, shall be computed by applying at the option
of such Person either the fixed or floating rate and (ii) in making such
computation, the Consolidated Interest Expense of such Person attributable to
interest on any Indebtedness under a revolving credit facility computed on a
pro forma basis shall be computed based upon the average daily balance of such
Indebtedness during the applicable period.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person and
its Consolidated Restricted Subsidiaries for such period as determined in
accordance with GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of (a) the interest expense of such Person and its
Restricted Subsidiaries for such period, on a Consolidated basis (other than
interest expense under any Inventory Facility), including, without limitation,
(i) amortization of debt discount, (ii) the net costs associated with Interest
Rate Agreements, Currency Hedging Agreements and Commodity Price Protection
Agreements (including amortization of discounts), (iii) the interest portion of
any deferred payment obligation, (iv) all commissions, discounts and other fees
and charges owed with respect to letters of credit and bankers acceptance
financing and (v) accrued interest, plus (b) (i) the interest component of the
Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued
by such Person and its Restricted Subsidiaries during such period and (ii) all
capitalized interest of such Person and its Restricted Subsidiaries plus (c)
the interest expense under any Guaranteed Debt of such Person and any
Restricted Subsidiary to the extent not included under clause (a)(iv) above,
whether or not paid by such Person or its Restricted Subsidiaries.
"Consolidated Net Income (Loss)" of any Person means, for any period, the
Consolidated net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a Consolidated basis as determined in
accordance with GAAP, adjusted, to the extent included in calculating such net
income (or loss), by excluding, without duplication, (i) all extraordinary
gains or losses net of taxes (less all fees and expenses relating thereto),
(ii) the portion of net income (or loss) of such Person and its Restricted
Subsidiaries on a Consolidated basis allocable to minority interests in
unconsolidated Persons or Unrestricted Subsidiaries to the extent that cash
dividends or distributions have not actually been received by such Person or
one of its Consolidated Restricted Subsidiaries, (iii) net income (or loss) of
any Person combined with such Person or any of its Restricted Subsidiaries on a
"pooling of interests" basis attributable to any period prior to the date of
combination, (iv) any gain or loss, net of taxes, realized upon the termination
of any employee pension benefit plan, (v) gains or losses, net of taxes (less
all fees and expenses relating thereto), in respect of dispositions of assets
other than in the ordinary course of business, (vi) the net income of any
Restricted Subsidiary to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is not at
the time permitted, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (vii) any restoration to net income of any contingency reserve,
except to the extent provision for such reserve was made out of income accrued
at any time following the Issue Date, or (viii) any net gain arising from the
acquisition of any securities or extinguishment, under GAAP, of any
Indebtedness of such Person.
"Consolidated Non-cash Charges" of any Person means, for any period, the
aggregate depreciation, amortization and other non-cash charges of such Person
and its subsidiaries on a Consolidated basis for such period, as determined in
accordance with GAAP (excluding any non-cash charge which requires an accrual
or reserve for cash charges for any future period).
"Consolidated Tangible Assets" of any Person means (a) all amounts that
would be shown as assets on a consolidated balance sheet of such Person and its
Restricted Subsidiaries prepared in accordance with GAAP, less (b) the amount
thereof constituting goodwill and other intangible assets as calculated in
accordance with GAAP.
"Consolidation" means, with respect to any Person, the consolidation of
the accounts of such Person and each of its subsidiaries if and to the extent
the accounts of such Person and each of its subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"Currency Hedging Agreements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar
agreements or arrangements designed to protect against the fluctuations in
currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
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"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the board of directors of the Company who
does not have any material direct or indirect financial interest in or with
respect to such transaction or series of transactions.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute, and the rules and regulations promulgated by the
Commission thereunder.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length free market transaction between
an informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy. Fair Market Value shall be determined
by the board of directors of the Company acting in good faith and shall be
evidenced by a resolution of the board of directors.
"Floor Plan Facility" means an agreement from Ford Motor Credit Company or
any other bank or asset-based lender pursuant to which the Company or any
Restricted Subsidiary incurs Indebtedness all of the net proceeds of which are
used to purchase, finance or refinance vehicles and/or vehicle parts and
supplies to be sold in the ordinary course of business of the Company and its
Restricted Subsidiaries and which may not be secured except by a Lien that does
not extend to or cover any property other than the property of the
dealership(s) which use the proceeds of the Floor Plan Facility.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
which are in effect on the Issue Date.
"Guarantee" means the guarantee by any Guarantor of the Company's
Indenture Obligations.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person referred to in the definition of Indebtedness
below guaranteed directly or indirectly in any manner by such Person, or in
effect guaranteed directly or indirectly by such Person through an agreement
(i) to pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the debtor to make payment of such Indebtedness or to
assure the holder of such Indebtedness against loss, (iii) to supply funds to,
or in any other manner invest in, the debtor (including any agreement to pay
for property or services without requiring that such property be received or
such services be rendered), (iv) to maintain working capital or equity capital
of the debtor, or otherwise to maintain the net worth, solvency or other
financial condition of the debtor or to cause such debtor to achieve certain
levels of financial performance or (v) otherwise to assure a creditor against
loss; provided that the term "guarantee" shall not include endorsements for
collection or deposit, in either case in the ordinary course of business.
"Guarantor" means any Subsidiary which is a guarantor of the Notes,
including any Person that is required after the Issue Date to execute a
guarantee of the Notes pursuant to " -- Certain Covenants -- Limitation on
Liens" or " -- Limitation on Issuance of Guarantees of and Pledges for
Indebtedness" covenant until a successor replaces such party pursuant to the
applicable provisions of the Indenture and, thereafter, shall mean such
successor.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
acceptance facilities or other similar facilities, (ii) all obligations of such
Person evidenced by bonds, notes, debentures or other similar instruments,
(iii) all indebtedness created or arising under any conditional sale or other
title retention agreement with respect to property acquired by such Person
(even if the rights and remedies of the seller or lender under such agreement
in the event of default are limited to repossession or sale of such property),
but excluding trade payables arising in the ordinary course of business, (iv)
all obligations of such Person under Interest Rate Agreements, Currency Hedging
Agreements or Commodity Price Protection Agreements of such Person, (v) all
Capital Lease Obligations of such Person, (vi) all Indebtedness referred to in
clauses (i) through (v) above of other Persons and all dividends of other
Persons, the payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien, upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness, (vii) all
Guaranteed Debt of such Person, (viii) all Redeemable Capital Stock issued by
such Person valued at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends, (ix) Preferred Stock of any
Restricted Subsidiary of the Company which is not a Guarantor and (x) any
amendment, supplement, modification, deferral, renewal, extension, refunding or
refinancing of any liability of the types referred to in clauses (i) through
(ix) above. For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the
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terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
Fair Market Value of such Redeemable Capital Stock, such Fair Market Value to
be determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock.
"Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture or under the Notes, including any Guarantor, to pay
principal of, premium, if any, and interest when due and payable, and all other
amounts due or to become due under or in connection with the Indenture, the
Notes and the performance of all other obligations to the Trustee and the
holders under the Indenture and the Notes, according to the respective terms
thereof.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest
rate protection agreements (including, without limitation, interest rate swaps,
caps, floors, collars and similar agreements) and/or other types of interest
rate hedging agreements from time to time.
"Inventory Facility" means any Floor Plan Facility or any other agreement
(including pursuant to a commercial paper program) pursuant to which the
Company or any Restricted Subsidiary incurs Indebtedness, the net proceeds of
which are used to purchase, finance or refinance vehicles and/or vehicle parts
and supplies to be sold in the ordinary course of business of the Company and
its Restricted Subsidiaries and which may not be secured except by a Lien that
does not extend to or cover any property other than the property of the
dealership(s) which use the proceeds of the Inventory Facility.
"Investment" means, with respect to any Person, directly or indirectly,
any advance, loan (including guarantees), or other extension of credit or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase, acquisition or ownership by such Person of any
Capital Stock, bonds, notes, debentures or other securities issued or owned by
any other Person and all other items that would be classified as investments on
a balance sheet prepared in accordance with GAAP.
"Issue Date" means the original issue date of the Notes under the
Indenture.
"Lien" means any mortgage or deed of trust, charge, pledge, lien
(statutory or otherwise), privilege, security interest, assignment, deposit,
arrangement, easement, hypothecation, claim, preference, priority or other
encumbrance upon or with respect to any property of any kind (including any
conditional sale, capital lease or other title retention agreement, any leases
in the nature thereof, and any agreement to give any security interest), real
or personal, movable or immovable, now owned or hereafter acquired. A Person
will be deemed to own subject to a Lien any property which it has acquired or
holds subject to the interest of a vendor or lessor under any conditional sale
agreement, Capitalized Lease Obligation or other title retention agreement.
"Manufacturer" means a vehicle manufacturer which is a party to a
dealership franchise agreement with the Company or any Restricted Subsidiary.
"Maturity" means, when used with respect to the Notes, the date on which
the principal of the Notes becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date or the
redemption date and whether by declaration of acceleration, Offer in respect of
Excess Proceeds, Change of Control Offer in respect of a Change of Control,
call for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any
Person, the proceeds thereof (without duplication in respect of all Asset
Sales) in the form of cash or Temporary Cash Investments including payments in
respect of deferred payment obligations when received in the form of, or stock
or other assets when disposed of for, cash or Temporary Cash Investments
(except to the extent that such obligations are financed or sold with recourse
to the Company or any Restricted Subsidiary) net of (i) brokerage commissions
and other reasonable fees and expenses (including fees and expenses of counsel
and investment bankers) related to such Asset Sale, (ii) provisions for all
taxes payable as a result of such Asset Sale, (iii) payments made to retire
Indebtedness where payment of such Indebtedness is secured by the assets or
properties the subject of such Asset Sale, (iv) amounts required to be paid to
any Person (other than the Company or any Restricted Subsidiary) owning a
beneficial interest in the assets subject to the Asset Sale and (v) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an officers'
certificate delivered to the Trustee and (b) with respect to any issuance or
sale of Capital Stock or options, warrants or rights to purchase Capital Stock,
or debt securities or Capital Stock that have been converted into or exchanged
for Capital Stock as referred to under " -- Certain Covenants -- Limitation on
Restricted Payments," the proceeds of such issuance or sale in the form of
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cash or Temporary Cash Investments including payments in respect of deferred
payment obligations when received in the form of, or stock or other assets when
disposed of for, cash or Temporary Cash Investments (except to the extent that
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Pari Passu Indebtedness" means (a) any Indebtedness of the Company that
is pari passu in right of payment to the Notes and (b) with respect to any
Guarantee, Indebtedness which ranks pari passu in right of payment to such
Guarantee.
"Permitted Holders" means (i) Mr. Bruton Smith or Mr. William S. Egan and
their respective guardians, conservators, committees, or attorneys-in-fact;
(ii) lineal descendants of Mr. Smith or Mr. Egan (in either case, a
"Descendant") and their respective guardians, conservators, committees or
attorneys-in-fact; and (ii) each "Family Controlled Entity" (as defined
herein). The term "Family Controlled Entity" means (a) any not-for-profit
corporation if at least 80% of its board of directors is composed of Mr. Smith,
Mr. Egan and/or Descendants; (b) any other corporation if at least 80% of the
value of its outstanding equity is owned by a Permitted Holder; (c) any
partnership if at least 80% of the value of the partnership interests are owned
by a Permitted Holder; and (d) any limited liability or similar company if at
least 80% of the value of the company is owned by a Permitted Holder; and (e)
any trusts created for the benefit of any of the persons listed in (i) or (ii)
of the prior sentence.
"Permitted Investment" means (i) Investments in any Wholly Owned
Restricted Subsidiary or any Person which, as a result of such Investment, (a)
becomes a Wholly Owned Restricted Subsidiary or (b) is merged or consolidated
with or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or any Wholly Owned Restricted Subsidiary; (ii)
Indebtedness of the Company or a Restricted Subsidiary described under clauses,
(v), (vi) and (vii) of the definition of "Permitted Indebtedness;" (iii)
Investments in any of the Notes; (iv) Temporary Cash Investments; (v)
Investments acquired by the Company or any Restricted Subsidiary in connection
with an Asset Sale permitted under "-- Certain Covenants -- Limitation on Sale
of Assets" to the extent such Investments are non-cash proceeds as permitted
under such covenant; (vi) any Investment to the extent the consideration
therefor consists of Qualified Capital Stock of the Company or any Restricted
Subsidiary; (vii) Investments representing Capital Stock or obligations issued
to the Company or any Restricted Subsidiary in the course of the good faith
settlement of claims against any other person by reason of a composition or
readjustment of debt or a reorganization of any debtor or any Restricted
Subsidiary; (viii) prepaid expenses advanced to employees in the ordinary
course of business or other loans or advances to employees in the ordinary
course of business not to exceed $1 million in the aggregate at any one time
outstanding; (ix) Investments in existence on the Issue Date; and (x) in
addition to the Investments described in clauses (i) through (x) above,
Investments in an amount not to exceed $10 million in the aggregate at any one
time outstanding. In connection with any assets or property contributed or
transferred to any Person as an Investment, such property and assets shall be
equal to the Fair Market Value (as determined by the Company's board of
directors) at the time of Investment
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten public offering of common
stock (other than Redeemable Capital Stock) of the Company with gross proceeds
to the Company of at least $50 million pursuant to a registration statement
that has been declared effective by the Commission pursuant to the Securities
Act (other than a registration statement on Form S-4, Form S-8 or otherwise
relating to equity securities issuable under any employee benefit plan of the
Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and any additions and accessions
thereto, which are purchased by the Company at any time after the Notes are
issued; provided that (i) the security agreement or conditional sales or other
title retention contract pursuant to which the Lien on such assets is created
(collectively a "Purchase Money Security Agreement") shall be entered into
within 90 days after the purchase or substantial completion of the construction
of such assets and shall at all times be confined solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom, (ii) at no time shall the aggregate principal amount of the
outstanding Indebtedness secured thereby be increased, except in connection
with the purchase of additions and accessions thereto and except in respect of
fees and other obligations in respect of such Indebtedness and (iii) (A) the
aggregate outstanding principal amount of Indebtedness secured thereby
(determined on a per asset basis in the case of any additions and accessions)
shall not at the time such Purchase Money Security Agreement is entered into
exceed 100% of the
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purchase price to the Company of the assets subject thereto or (B) the
Indebtedness secured thereby shall be with recourse solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise, is or upon the happening of an event or passage of
time would be, required to be redeemed prior to the final Stated Maturity of
the principal of the Notes or is redeemable at the option of the holder thereof
at any time prior to such final Stated Maturity (other than upon a change of
control of the Company in circumstances where the holders of the Notes would
have similar rights), or is convertible into or exchangeable for debt
securities at any time prior to such final Stated Maturity at the option of the
holder thereof.
"Replacement Assets" means properties and assets (other than cash or any
Capital Stock or other security) that will be used in a business of the Company
or its Restricted Subsidiaries existing on the Issue Date or in business
reasonably related thereto.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the board of directors of the Company by a board resolution
delivered to the Trustee as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under " -- Certain Covenants --
Limitation on Unrestricted Subsidiaries."
"Revolving Facility" means the Credit Agreement among the Company, the
Guarantors and Ford Motor Credit Company dated as of December 15, 1997, as such
agreement, in whole or in part, may be amended, renewed, extended, substituted,
refinanced, restructured, replaced, supplemented or otherwise modified from
time to time (including, without limitation, any successive renewals,
extensions, substitutions, refinancings, restructurings, replacements,
supplementations or other modifications of the foregoing).
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute, and the rules and regulations promulgated by the Commission
thereunder.
"Significant Restricted Subsidiary" means, at any particular time, any
Restricted Subsidiary that, together with the Restricted Subsidiaries of such
Restricted Subsidiary (i) accounted for more than 5% of the Consolidated
revenues of the Company and its Restricted Subsidiaries for their most recently
completed fiscal year or (ii) is or are the owner(s) of more than 5% of the
Consolidated assets of the Company and its Restricted Subsidiaries as at the
end of such fiscal year, all as calculated in accordance with GAAP and as shown
on the Consolidated Financial Statements of the Company and its Restricted
Subsidiaries for such fiscal year.
"Smith Subordinated Loan" means the subordinated loan from O. Bruton Smith
to the Company in the principal amount of $5.5 million in existence on the
Issue Date.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as
the fixed date on which the principal of such Indebtedness or such installment
of interest, as the case may be, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor subordinated in right of payment to the Notes or the Guarantee of
such Guarantor, as the case may be.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding voting power of the Voting Stock of which is owned or controlled,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries thereof, or
(ii) any limited partnership of which such Person or any Subsidiary of such
Person is a general partner, or (iii) any other Person in which such Person, or
one or more other Subsidiaries of such Person, or such Person and one or more
other Subsidiaries, directly or indirectly, has more than 50% of the
outstanding partnership or similar interests or has the power, by contract or
otherwise, to direct or cause the direction of the policies, management and
affairs thereof.
"Temporary Cash Investments" means (i) any evidence of Indebtedness,
maturing not more than one year after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof, and
guaranteed fully as to principal, premium, if any, and interest by the United
States of America, (ii) any certificate of deposit, maturing not more than one
year after the date of acquisition, issued by, or time deposit of, a commercial
banking institution that is a member of the Federal Reserve System and that has
combined capital and surplus and undivided profits of not less than $500
million, whose debt has a rating, at the time as of which any investment
therein is made, of "P-1" (or higher) according to Moody's
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Investors Service, Inc. ("Moody's") or any successor rating agency or "A-1" (or
higher) according to Standard & Poor's Rating Group, a division of McGraw Hill,
Inc. ("S&P") or any successor rating agency, (iii) commercial paper, maturing
not more than one year after the date of acquisition, issued by a corporation
(other than an Affiliate or Subsidiary of the Company) organized and existing
under the laws of the United States of America with a rating, at the time as of
which any investment therein is made, of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to S&P and (iv) any money market deposit
accounts issued or offered by a domestic commercial bank having capital and
surplus in excess of $500 million; provided that the short term debt of such
commercial bank has a rating, at the time of Investment, of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended,
or any successor statute.
"Unrestricted Subsidiary" means any Subsidiary of the Company (other than
a Guarantor) designated as such pursuant to and in compliance with the covenant
described under "Certain Covenants -- Limitation on Unrestricted Subsidiaries."
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary
means Indebtedness of such Unrestricted Subsidiary (i) as to which neither the
Company nor any Restricted Subsidiary is directly or indirectly liable (by
virtue of the Company or any such Restricted Subsidiary being the primary
obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), except Guaranteed Debt of the Company or any Restricted
Subsidiary to any Affiliate, in which case (unless the incurrence of such
Guaranteed Debt resulted in a Restricted Payment at the time of incurrence) the
Company shall be deemed to have made a Restricted Payment equal to the
principal amount of any such Indebtedness to the extent guaranteed at the time
such Affiliate is designated an Unrestricted Subsidiary and (ii) which, upon
the occurrence of a default with respect thereto, does not result in, or permit
any holder of any Indebtedness of the Company or any Subsidiary to declare, a
default on such Indebtedness of the Company or any Subsidiary or cause the
payment thereof to be accelerated or payable prior to its Stated Maturity;
provided that notwithstanding the foregoing any Unrestricted Subsidiary may
guarantee the Notes.
"Voting Stock" of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time Capital Stock of any other class or classes shall have or might
have voting power by reason of the happening of any contingency).
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares and shares of
Capital Stock of a Restricted Subsidiary which a Manufacturer requires to be
held by another Person and which Capital Stock (together with any related
contractual arrangements) has no significant economic value with respect to
distributions of profits and losses in ordinary circumstances) is owned by the
Company or another Wholly Owned Restricted Subsidiary.
Book-Entry Delivery and Form
Notes will be issued only in fully registered form, without interest
coupons, in denominations of $1,000 and integral multiples thereof. Notes will
not be issued in bearer form.
New Notes
The New Notes will be represented by the New Global Note. The New Global
Note will be deposited upon issuance with the Trustee as custodian for DTC, in
New York, New York, and registered in the name of DTC or its nominee, in each
case for credit to an account of a direct or indirect participant in DTC as
described below.
Except as set forth below, the New Global Note may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee. In addition, transfer of beneficial interests in the New Global
Note will be subject to the applicable rules and procedures of DTC and its
direct or indirect participants which may change from time to time. Beneficial
interests in the New Global Note may not be exchanged for New Notes in
certificated form except in the limited circumstances described below. See " --
Exchanges of Book-Entry Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of
the Registrar.
Exchange of Book-Entry Notes for Certificated Notes
A beneficial interest in a Global Note may not be exchanged for a Note in
certificated form unless (i) DTC (x) notifies the Company that it is unwilling
or unable to continue as Depositary for the Global Note or (y) has ceased to be
a clearing agency registered under the Exchange Act, and in either case the
Company thereupon fails to appoint a successor Depositary,
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(ii) the Company, at its option, notifies the Trustee in writing that it elects
to cause the issuance of the Notes in certificated form or (iii) there shall
have occurred and be continuing an Event of Default or any event which after
notice or lapse of time or both would be an Event of Default with respect to
the Notes. In all cases, certificated Notes delivered in exchange for any
Global Note or beneficial interests therein will be registered in the names,
and issued in any approved denominations, requested by or on behalf of the
Depositary (in accordance with its customary procedures). Any certificated Note
issued in exchange for an interest in a Global Note will bear the legend
restricting transfers that is borne by such Global Note. Any such exchange will
be effected through the DTC Deposit/Withdrawal at Custodian ("DWAC") system and
an appropriate adjustment will be made in the records of the Registrar to
reflect a decrease in the principal amount of the relevant Global Note.
Certain Book-Entry Procedures for Global Notes
The descriptions of the operations and procedures of DTC, that follow are
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the respective settlement systems and are subject
to change by them from time to time. The Company takes no responsibility for
these operations and procedures and urges investors to contact the system or
their participants directly to discuss these matters.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants ("participants") and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system is available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
DTC has advised the Company that its current practice, upon the issuance
of the Global Notes, is to credit, on its internal system, the respective
principal amount of the individual beneficial interests represented by such
Global Notes to the accounts with DTC of the participants through which such
interests are to be held. Ownership of beneficial interest in the Global Notes
will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominees (with respect to interest of
participants) and the records of participants and indirect participants (with
respect to interests of persons other than participants).
As long as DTC, or its nominee, is the registered Holder of a Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner and
Holder of the Notes represented by such Global Note for all purposes under the
Indenture and the Notes. Except in the limited circumstances described above
under " -- Exchanges of Book-Entry Notes for Certificated Notes," owners of
beneficial interests in a Global Note will not be entitled to have any portions
of such Global Note registered in their names, and will not receive or be
entitled to receive physical delivery of Notes in definitive form and will not
be considered the owners or Holders of the Global Note (or any Notes
represented thereby) under the Indenture or the Notes.
Investors may hold their interests in a Global Note directly through DTC,
if they are participants in such system, or indirectly through organizations
which are participants in such system. All interests in a Global Note will be
subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer beneficial interests in a Global Note to such persons may
be limited to that extent. Because DTC can act only on behalf of its
participants, which in turn act on behalf of indirect participants and certain
banks, the ability of a person having beneficial interests in a Global Note to
pledge such interest to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests.
Payments of the principal, of, premium, if any, and interest on Global
Notes will be made to DTC or its nominee as the registered owner thereof.
Neither the Company, the Trustee nor any of their respective agents will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interest in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
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The Company expects that DTC or its nominee, upon receipt of any payment
of principal of, premium, if any, or interest in respect of a Global Note
representing any Notes held by it or its nominee, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note for such Notes as shown
on the records of DTC or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in such Global Note held through
such participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers registered in "street name." Such payments will be the responsibility
of such participants. None of the Company or the Trustee will be liable for any
delay by DTC or any of its participants in identifying the beneficial owners of
the Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee as the registered
owner of the Notes for all purposes.
Interests in the Global Notes will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its participants. Transfers between
participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more participants to
whose accounts with DTC interests in the Global Notes are credited and only in
respect of such portion of the aggregate principal amount of the Notes as to
which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the
right to exchange the Global Notes for legended Notes in certificated form, and
to distribute such Notes to its participants.
Although DTC, has agreed to the foregoing procedures in order to
facilitate transfer of beneficial ownership interests in the Global Notes among
participants of DTC, it is under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
None of the Company, the Trustee nor any of their respective agents will have
any responsibility for the performance by DTC, or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations, including maintaining, supervising or reviewing the
records relating to or payments made on account of, beneficial ownership
interests in Global Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resales. In
addition, the Company agreed that it would not for a period of 120 days from
July 28, 1998, the date of the Offering Memorandum distributed in connection
with the sale of the Old Notes, directly or indirectly offer, sell, grant any
options to purchase or otherwise dispose of any debt securities other than in
connection with this Exchange Offer.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
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LEGAL MATTERS
Certain legal matters with respect to the legality of the New Notes being
offered hereby will be passed upon for the Company by Parker, Poe, Adams &
Bernstein L.L.P., Charlotte, North Carolina.
EXPERTS
The consolidated financial statements of Sonic Automotive, Inc. and
Subsidiaries, the combined financial statements of Clearwater Dealerships and
Affiliated Companies, the combined financial statements of Hatfield Automotive
Group, the financial statements of Economy Honda Cars, the financial statements
of Casa Ford of Houston, Inc., the combined financial statements of the
Higginbotham Automotive Group, the financial statements of Dyer & Dyer, Inc.,
the combined financial statements of Bowers Dealerships and Affiliated
Companies, 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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company may be inspected and copied (at prescribed
rates) at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the Commissions
regional offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
The Commission also maintains a World Wide Web site containing such reports,
proxy statements and other information, at http://www.sec.gov. Quotations
relating to the Company's Common Stock appear on the New York Stock Exchange
and such reports, proxy statements and other information concerning the Company
can also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
The Company has agreed that, if at any time while the Notes are restricted
securities within the meaning of the Securities Act or the Company is not
subject to the informational requirements of the Exchange Act, the Company will
furnish to holders of the Notes and to prospective purchasers designated by
such holders the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act to permit compliance with Rule 144A in
connection with resales of the Notes.
114
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT ........................................................... F-4
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1996 and 1997 and unaudited at June 30, F-5
1998
Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997
and unaudited
for the six months ended June 30, 1997 and 1998 ...................................... F-6
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995,
1996 and 1997
and unaudited for the six months ended June 30, 1998 ................................. F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997 and
unaudited for the six months ended June 30, 1997 and 1998 ............................ F-8
Notes to Consolidated Financial Statements ............................................ F-9
CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES
INDEPENDENT AUDITORS' REPORT ........................................................... F-26
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheet at December 31, 1997 ........................................... F-27
Combined Statement of Income and Retained Earnings for the year ended December 31, F-28
1997
Combined Statement of Cash Flows for the year ended December 31, 1997 ................. F-29
Notes to Combined Financial Statements ................................................ F-30
HATFIELD AUTOMOTIVE GROUP
INDEPENDENT AUDITORS' REPORT ........................................................... F-34
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets at December 31, 1996 and 1997 and unaudited at June 30, 1998 .. F-35
Combined Statements of Income for the years ended December 31, 1995, 1996 and 1997 and
unaudited for
the six months ended June 30, 1997 and 1998 .......................................... F-36
Combined Statements of Stockholders' Equity for the years ended December 31, 1995,
1996 and 1997 and
unaudited for the six months ended June 30, 1998 ..................................... F-37
Combined Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997
and unaudited
for the six months ended June 30, 1997 and 1998. ..................................... F-38
Notes to Combined Financial Statements ................................................ F-39
ECONOMY HONDA CARS
INDEPENDENT AUDITORS' REPORT ........................................................... F-44
FINANCIAL STATEMENTS:
Balance Sheets at December 31, 1997 and unaudited at June 30, 1998 .................... F-45
Statements of Income for the year ended December 31, 1997 and unaudited for the six
months ended
June 30, 1997 and 1998 ............................................................... F-46
Statements of Stockholders' Equity for the year ended December 31, 1997 and unaudited
for the six months
ended June 30, 1998 .................................................................. F-47
Statements of Cash Flows for the year ended December 31, 1997 and unaudited for the
six months ended
June 30, 1997 and 1998 ............................................................... F-48
Notes to Financial Statements ......................................................... F-49
CASA FORD OF HOUSTON, INC.
INDEPENDENT AUDITORS' REPORT ........................................................... F-53
FINANCIAL STATEMENTS:
Balance Sheets at December 31, 1997 and unaudited at March 31, 1998 ................... F-54
Statements of Income for the year ended December 31, 1997 and unaudited for the three
months ended
March 31, 1997 and 1998 .............................................................. F-55
Statements of Stockholder's Equity for the year ended December 31, 1997 and unaudited
for the three
months ended March 31, 1998 .......................................................... F-56
Statements of Cash Flows for the year ended December 31, 1997 and unaudited for the
three months ended
March 31, 1997 and 1998 .............................................................. F-57
Notes to Financial Statements ......................................................... F-58
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Page
------
<S> <C>
HIGGINBOTHAM AUTOMOTIVE GROUP
INDEPENDENT AUDITORS' REPORT ........................................................... F-63
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets at December 31, 1997 and unaudited at June 30, 1998 ........... F-64
Combined Statements of Income for the year ended December 31, 1997 and unaudited for
the six months
ended June 30, 1997 and 1998 ......................................................... F-65
Combined Statements of Stockholders' Equity for the year ended December 31, 1997 and
unaudited for the
six months ended June 30, 1998 ....................................................... F-66
Combined Statements of Cash Flows for the year ended December 31, 1997 and unaudited
for the six
months ended June 30, 1997 and 1998 .................................................. F-67
Notes to Combined Financial Statements ................................................ F-68
DYER & DYER, INC.
INDEPENDENT AUDITORS' REPORT ........................................................... F-74
FINANCIAL STATEMENTS:
Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997 ........... F-75
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-76
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-77
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-78
Notes to Financial Statements ......................................................... F-79
BOWERS DEALERSHIPS AND AFFILIATED COMPANIES
INDEPENDENT AUDITORS' REPORT ........................................................... F-83
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997 .. F-84
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-85
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-86
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-87
Notes to Combined Financial Statements ................................................ F-88
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
INDEPENDENT AUDITORS' REPORT ........................................................... F-95
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets at December 31, 1996 and unaudited at June 30, 1997 ........... F-96
Combined Statements of Income for the year ended December 31, 1996 and unaudited for
the six months
ended June 30, 1996 and 1997 ......................................................... F-97
Combined Statements of Stockholders' Equity for the year ended December 31, 1996 and
unaudited for the
six months ended June 30, 1997 ....................................................... F-98
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-99
Notes to Combined Financial Statements ................................................ F-100
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
Page
------
<S> <C>
KEN MARKS FORD, INC.
INDEPENDENT AUDITORS' REPORT ........................................................... F-105
FINANCIAL STATEMENTS:
Balance Sheets at April 30, 1997 and unaudited at July 31, 1997 ....................... F-106
Statements of Income for the year ended April 30, 1997 and unaudited for the three
months ended July 31,
1996 and 1997 ........................................................................ F-107
Statements of Stockholders' Equity for the year ended April 30, 1997 and unaudited for
the three months
ended July 31, 1997 .................................................................. F-108
Statements of Cash Flows for the year ended April 30, 1997 and unaudited for the three
months ended
July 31, 1996 and 1997 ............................................................... F-109
Notes to Financial Statements ......................................................... F-110
</TABLE>
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
SONIC AUTOMOTIVE, INC.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of Sonic
Automotive, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 2, 1998 (March 24, 1998 as to Notes 2, 8 and 9)
F-4
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997 and June 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997 1998
----------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS (Note 5)
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ............................................ $ 6,679 $ 18,304 $ 27,228
Marketable equity securities .................................................. 639 270 --
Receivables (net of allowance for doubtful accounts of $225 and $523 at
December 31, 1996 and 1997, respectively) .................................... 11,908 19,784 35,761
Inventories (Notes 1 and 3) ................................................... 71,550 156,514 175,515
Deferred income taxes (Note 6) ................................................ 280 405 669
Due from affiliates (Note 7) .................................................. -- 1,047 1,084
Other current assets .......................................................... 332 1,048 3,854
-------- -------- --------
Total current assets ......................................................... 91,388 197,372 244,111
PROPERTY AND EQUIPMENT, NET (Note 4) ............................................ 12,467 19,081 22,040
GOODWILL, NET (Note 1) .......................................................... 4,266 74,362 102,948
DUE FROM AFFILIATE (Note 7) ..................................................... 2,466 -- --
OTHER ASSETS .................................................................... 389 635 524
-------- -------- --------
TOTAL ASSETS .................................................................... $110,976 $291,450 $369,623
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 3) .......................................... $ 63,893 $133,236 $149,670
Trade accounts payable ........................................................ 3,643 6,612 7,971
Accrued interest .............................................................. 521 1,071 1,584
Other accrued liabilities (Note 6) ............................................ 3,032 10,748 17,949
Payable to affiliates (Note 7) ................................................ -- 445 445
Payable for acquisitions (Note 2) ............................................. -- -- 15,726
Current maturities of long-term debt (Note 5) ................................. 519 584 789
-------- -------- --------
Total current liabilities .................................................... 71,608 152,696 194,134
LONG-TERM DEBT (NOTE 5) ......................................................... 5,286 38,640 54,644
PAYABLE TO THE COMPANY'S CHAIRMAN (Notes 2 and 7) ............................... -- 5,500 5,500
PAYABLE TO AFFILIATES (Note 7) .................................................. 914 4,394 4,160
DEFERRED INCOME TAXES (Note 6) .................................................. 1,059 1,079 1,079
INCOME TAX PAYABLE (Note 6) ..................................................... 5,500 4,776 6,705
MINORITY INTEREST (Note 1) ...................................................... 314 -- --
COMMITMENTS AND CONTINGENCIES (Notes 7 and 10)
STOCKHOLDERS' EQUITY (Notes 1, 8 and 9):
Class A Preferred Stock, $.10 par, liquidation preference $1,000 per share,
3.0 million shares authorized, 13,034 shares issued and outstanding at
June 30, 1998 ................................................................ -- -- 11,763
Class A Common Stock, $.01 par, 50.0 million shares authorized;
5.0 million shares issued and outstanding .................................... -- 50 50
Class B Common Stock, $.01 par, 15.0 million shares authorized;
6.25 million shares issued and outstanding ................................... 63 63 63
Paid-in capital ............................................................... 13,333 68,045 68,535
Retained earnings ............................................................. 12,993 16,186 22,990
Unrealized gain (loss) on marketable equity securities ........................ (94) 21 --
-------- -------- --------
Total stockholders' equity ................................................... 26,295 84,365 103,401
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................................... $110,976 $291,450 $369,623
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
1997 and 1998
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
1995 1996 1997 1997 1998
----------- ----------- ------------- ----------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Vehicle sales .................................. $267,650 $327,674 $ 467,858 $185,216 $ 567,279
Parts, service and collision repair ............ 35,860 42,075 57,537 22,907 68,020
Finance and insurance (Note 1) ................. 7,813 7,118 10,606 4,763 13,541
-------- -------- --------- -------- ---------
Total revenues ................................ 311,323 376,867 536,001 212,886 648,840
COST OF SALES (Note 1) ........................... 272,130 332,122 473,003 189,254 566,392
-------- -------- --------- -------- ---------
GROSS PROFIT ..................................... 39,193 44,745 62,998 23,632 82,448
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ....................................... 28,091 32,602 46,770 17,532 59,622
DEPRECIATION AND AMORTIZATION .................... 832 1,076 1,322 396 1,851
-------- -------- --------- -------- ---------
OPERATING INCOME ................................. 10,270 11,067 14,906 5,704 20,975
OTHER INCOME AND EXPENSE:
Interest expense, floor plan (Note 3) .......... 4,504 5,968 8,007 3,018 7,341
Interest expense, other ........................ 436 433 1,199 318 2,745
Other income ................................... 106 355 298 135 15
-------- -------- --------- -------- ---------
Total other expense ........................... 4,834 6,046 8,908 3,201 10,071
-------- -------- --------- -------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST ....................................... 5,436 5,021 5,998 2,503 10,904
PROVISION FOR INCOME TAXES (Note 6) .............. 2,176 1,924 2,249 916 4,100
-------- -------- --------- -------- ---------
INCOME BEFORE MINORITY INTEREST .................. 3,260 3,097 3,749 1,587 6,804
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY
(Note 1) ....................................... 22 114 47 47 --
-------- -------- --------- -------- ---------
NET INCOME ....................................... $ 3,238 $ 2,983 $ 3,702 $ 1,540 $ 6,804
======== ======== ========= ======== =========
BASIC NET INCOME PER SHARE (Notes 1 and 8) ....... $ 0.53 $ 0.60
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING .................................... 6,949 11,264
========= =========
DILUTED NET INCOME PER SHARE (Notes 1 and 8) ..... $ 0.53 $ 0.58
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING .................................... 6,949 11,637
========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
1998
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Preferred Class A Class B
Stock Common Stock Common Stock
Shares Amount Shares Amount Shares Amount
-------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1994 ............ -- $ -- -- $-- 6,250 $63
Capital contributions ........ -- -- -- -- -- --
Net unrealized loss on
marketable equity
securities .................. -- -- -- -- -- --
Net income ................... -- -- -- -- -- --
BALANCE AT
DECEMBER 31, 1995 ............ -- -- -- -- 6,250 63
Capital contributions ........ -- -- -- -- -- --
Net unrealized loss on
marketable equity
securities .................. -- -- -- -- -- --
Net income ................... -- -- -- -- -- --
-- ------- -- --- ----- ---
BALANCE AT
DECEMBER 31, 1996 ............ -- -- -- -- 6,250 63
Capital contribution
(Note 1) .................... -- -- -- -- -- --
Public offering of
common stock
(Note 8) .................... -- -- 5,000 50 -- --
Stock redemption
(Note 7) .................... -- -- -- -- -- --
Dividend (Note 7) ............ -- -- -- -- -- --
Net unrealized gain on
marketable equity
securities .................. -- -- -- -- -- --
Net income ................... -- -- -- -- -- --
-- ------- ----- --- ----- ---
BALANCE AT
DECEMBER 31, 1997 ............ -- -- 5,000 50 6,250 63
-- ------- ----- --- ----- ---
Issuance of Preferred
Stock (Note 2)
(unaudited) ................. 13 11,763 -- -- -- --
Shares awarded under
stock compensation
plans (unaudited) ........... 27 --
Issuance of warrants
(unaudited) (Note 8) ........ --
Net unrealized loss on
marketable equity
securities (unaudited) ...... -- -- -- -- -- --
Net income (unaudited) ....... -- -- -- -- -- --
-- ------- ----- --- ----- ---
BALANCE AT
JUNE 30, 1998
(unaudited) .................. 13 $11,763 5,027 $50 6,250 $63
== ======= ===== === ===== ===
<CAPTION>
Unrealized
Gain/(Loss) on
Marketable Total
Paid-In Retained Equity Stockholders'
Capital Earnings Securities Equity
----------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1994 ............ $ 4,775 $ 6,772 $ -- $ 11,610
Capital contributions ........ 1,494 -- -- 1,494
Net unrealized loss on
marketable equity
securities .................. -- -- (35) (35)
Net income ................... -- 3,238 -- 3,238
BALANCE AT
DECEMBER 31, 1995 ............ 6,269 10,010 (35) 16,307
Capital contributions ........ 7,064 -- -- 7,064
Net unrealized loss on
marketable equity
securities .................. -- -- (59) (59)
Net income ................... -- 2,983 -- 2,983
-------- ------- ------ --------
BALANCE AT
DECEMBER 31, 1996 ............ 13,333 12,993 (94) 26,295
Capital contribution
(Note 1) .................... 3,208 -- -- 3,208
Public offering of
common stock
(Note 8) .................... 53,627 -- -- 53,677
Stock redemption
(Note 7) .................... (2,123) -- -- (2,123)
Dividend (Note 7) ............ -- (509) -- (509)
Net unrealized gain on
marketable equity
securities .................. -- -- 115 115
Net income ................... -- 3,702 -- 3,702
-------- ------- ------ --------
BALANCE AT
DECEMBER 31, 1997 ............ 68,045 16,186 21 84,365
-------- ------- ------ --------
Issuance of Preferred
Stock (Note 2)
(unaudited) ................. -- -- -- 11,763
Shares awarded under
stock compensation
plans (unaudited) ........... 224 224
Issuance of warrants
(unaudited) (Note 8) ........ 266 266
Net unrealized loss on
marketable equity
securities (unaudited) ...... -- -- (21) (21)
Net income (unaudited) ....... -- 6,804 -- 6,804
-------- ------- ------ --------
BALANCE AT
JUNE 30, 1998
(unaudited) .................. $ 68,535 $22,990 $ -- $103,401
======== ======= ====== ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
1997 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 3,238 $ 2,983 $ 3,702
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ................................................. 832 1,076 1,322
Minority interest ............................................................. 22 114 47
(Gain) loss on disposal of property and equipment ............................. (39) 80 110
Gain on sale of marketable equity securities .................................. (106) (355) (298)
Change in deferred income taxes ............................................... 450 (241) (27)
Changes in assets and liabilities that relate to operations:
Receivables .................................................................. (229) (2,421) (594)
Inventories .................................................................. (5,025) (14,013) 1,430
Other assets ................................................................. 7 (80) (788)
Notes payable -- floor plan .................................................. 3,431 12,985 1,632
Accounts payable and other current liabilities ............................... (42) 1,439 1,694
Income tax payable ........................................................... 501 524 (504)
--------- ---------- ----------
Total adjustments ........................................................... (198) (892) 4,024
--------- ---------- ----------
Net cash provided by operating activities ..................................... 3,040 2,091 7,726
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired ................................... -- (5,127) (85,650)
Purchases of property and equipment ............................................ (1,509) (1,907) (2,007)
Proceeds from sales of property and equipment .................................. 557 4 43
Purchase of marketable equity securities ....................................... (1,623) (207) --
Proceeds from sales of marketable equity securities ............................ 1,074 515 784
--------- ---------- ----------
Net cash used in investing activities ......................................... (1,501) (6,722) (86,830)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions .......................................................... 1,494 7,064 --
Public offering of common stock ................................................ -- -- 53,677
Proceeds from long-term debt ................................................... 3 599 45,892
Payments of long-term debt ..................................................... (269) (576) (13,353)
Issuance of shares under stock compensation plans .............................. -- -- --
Receipts from (advances to) affiliate companies ................................ 1,772 (4,771) (987)
Advances from the Company's Chairman (Note 7) .................................. -- -- 5,500
--------- ---------- ----------
Net cash provided by financing activities ..................................... 3,000 2,316 90,729
--------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. 4,539 (2,315) 11,625
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 4,455 8,994 6,679
--------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $ 8,994 $ 6,679 $ 18,304
========= ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-- Cash paid during the period for:
Interest ....................................................................... $ 4,777 $ 6,489 $ 8,761
Income taxes ................................................................... $ 1,522 $ 2,042 $ 1,392
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES:
Purchase of minority interest through exchange of common stock (Note 1) -- -- $ 3,208
Cancellation of notes payable from affiliates in exchange for common
stock (Note 7) ................................................................ -- -- $ 2,123
Cancellation of notes payable from affiliates pursuant to dividend (Note 7) -- -- $ 509
Preferred Stock issued pursuant to acquisition ................................. -- -- --
Payable for acquisitions (Note 2) .............................................. -- -- --
Issuance of warrants (Note 8) .................................................. -- -- --
<CAPTION>
Six months ended
June 30,
1997 1998
----------- ------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 1,540 $ 6,804
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ................................................. 396 1,851
Minority interest ............................................................. 47 --
(Gain) loss on disposal of property and equipment ............................. -- 104
Gain on sale of marketable equity securities .................................. (135) --
Change in deferred income taxes ............................................... 23 --
Changes in assets and liabilities that relate to operations:
Receivables .................................................................. (989) (8,493)
Inventories .................................................................. 2,800 29,384
Other assets ................................................................. (370) (1,245)
Notes payable -- floor plan .................................................. 290 (25,867)
Accounts payable and other current liabilities ............................... 1,310 1,003
Income tax payable ........................................................... (934) (545)
--------- ----------
Total adjustments ........................................................... 2,438 (3,808)
--------- ----------
Net cash provided by operating activities ..................................... 3,978 2,996
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired ................................... (3,627) (7,808)
Purchases of property and equipment ............................................ (886) (1,261)
Proceeds from sales of property and equipment .................................. -- --
Purchase of marketable equity securities ....................................... -- --
Proceeds from sales of marketable equity securities ............................ -- --
--------- ----------
Net cash used in investing activities ......................................... (4,513) (9,069)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions .......................................................... 3,209 --
Public offering of common stock ................................................ -- --
Proceeds from long-term debt ................................................... -- 23,688
Payments of long-term debt ..................................................... (180) (8,645)
Issuance of shares under stock compensation plans .............................. -- 224
Receipts from (advances to) affiliate companies ................................ 65 (270)
Advances from the Company's Chairman (Note 7) .................................. -- --
--------- ----------
Net cash provided by financing activities ..................................... 3,094 14,997
--------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. 2,559 8,924
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................... 6,679 18,304
--------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................................... $ 9,238 $ 27,228
========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-- Cash paid during the period for:
Interest ....................................................................... $ 3,317 $ 9,573
Income taxes ................................................................... $ 930 $ 3,949
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES:
Purchase of minority interest through exchange of common stock (Note 1) -- --
Cancellation of notes payable from affiliates in exchange for common
stock (Note 7) ................................................................ -- --
Cancellation of notes payable from affiliates pursuant to dividend (Note 7) -- --
Preferred Stock issued pursuant to acquisition ................................. -- $ 11,763
Payable for acquisitions (Note 2) .............................................. -- $ 15,726
Issuance of warrants (Note 8) .................................................. -- $ 266
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands except per share amounts)
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 (the "IPO") of
the Company's Class A Common Stock par value $0.01 per share ("Class A Common
Stock"). The Company owns and operates automobile dealerships in Florida,
Georgia, North Carolina, South Carolina, Tennessee, and Texas and is in the
business of selling new and used cars and light trucks, selling replacement
parts, providing vehicle maintenance, warranty, paint, and repair services and
arranging related financing and insurance.
Pursuant to the Reorganization on June 30, 1997, certain companies
affiliated through common ownership and control became wholly-owned
subsidiaries of the Company through the exchange of their common stock or
membership interests for approximately 6.3 million shares of the Company's
Class B Common Stock, par value of $.01 per share ("Class B Common Stock"). The
financial statements for the periods through the effective date of the
Reorganization represent the combined data for these companies, which include
the following:
<TABLE>
<S> <C>
Town and Country Ford, Inc. ..................... Charlotte, North Carolina
Lone Star Ford, Inc. ............................ Houston, Texas
FMF Management, Inc. (d/b/a Fort Mill Ford) ..... Charlotte, North Carolina
Town and Country Toyota, Inc. ................... Charlotte, North Carolina
Frontier Oldsmobile-Cadillac, Inc. .............. Charlotte, North Carolina
</TABLE>
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 Company's Chairman and Chief
Executive Officer.
Prior to the Reorganization, Town and Country Toyota, Inc. was 69% owned
by Mr. Bruton Smith. 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. Bruton Smith and related family trusts. Town and Country
Ford, Inc. was owned 80% by SFC and 20% by Mr. Scott Smith (Bruton Smith's
son). FMF Management, Inc. was owned 50% by SFC and 50% by Mr. Bruton Smith. In
connection with the Reorganization, the Company purchased the remaining 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 years ended December 31, 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.
The 1997 consolidated financial statements include the accounts of the
above five companies and also include the accounts and results of operations of
certain dealerships and dealership groups acquired during the year from the
respective dates of acquisition (see Note 2).
Principles of Consolidation -- All material intercompany transactions have
been eliminated in the consolidated financial statements.
Revenue Recognition -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of credit life, accident, health and disability insurance and
extended service contracts to customers. The Company may be assessed a
chargeback fee in the event of early cancellation of a loan, insurance
contract, or service contract by the customer. Finance and insurance commission
revenue is recorded net of estimated chargebacks at the time the related
contract is placed with the financial institution.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $1.3 million, $1.1 million and $1.8 million for the years ended
December 31, 1995, 1996, and 1997, respectively. Estimated
F-9
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
commission expense charged to cost of sales was approximately $0.8 million and
$2.2 million for the six months ended June 30, 1997 and 1998, respectively
(unaudited).
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 vehicle 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 agreements.
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
$5.2 million and $12.1 million at December 31, 1996 and 1997, respectively.
Inventories -- In connection with the Offering, the Company changed its
method of accounting for inventories of new vehicles from the last-in-first-out
method ("LIFO") to the first-in-first-out method ("FIFO"). 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.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using straight-line 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 and improvements .............. 5-40
Office equipment and fixtures .......... 5-15
Parts and service equipment ............ 15
Company vehicles ....................... 5
</TABLE>
Goodwill -- Goodwill represents the excess purchase price over the
estimated fair value of the tangible and separately measurable intangible net
assets acquired. The cumulative amount of goodwill at December 31, 1996,
December 31, 1997 and June 30, 1998 was $4.3 million, $75.0 million and $104.5
million, respectively. As a percentage of total assets and stockholders'
equity, goodwill, net of accumulated amortization, represented 3.8% and 16.2%,
respectively at December 31, 1996, 25.5% and 88.1%, respectively, at December
31, 1997, and 27.8% and 99.6%, respectively, at June 30, 1998. Generally
accepted accounting principles require that goodwill and all other intangible
assets be amortized over the period benefited. The Company has determined that
the period benefited by the goodwill will be no less than 40 years and,
accordingly, is amortizing goodwill over a 40 year period. If the Company were
not to separately recognize a material intangible asset having a benefit period
of less than 40 years, or were not to give effect to shorter benefit periods of
factors giving rise to a material portion of the goodwill, earnings reported in
periods immediately following the acquisition would be overstated. In later
years, the Company would be burdened by a continuing charge against earnings
without the associated benefit to income valued by management in arriving at
the consideration paid for the businesses acquired. Earnings in later years
also could be significantly affected if management then determined that the
remaining balance of goodwill was impaired. The Company periodically compares
the carrying value of goodwill with the anticipated undiscounted future cash
flows from operations of the businesses acquired in order to evaluate the
recoverability of goodwill. The Company has concluded that the anticipated
future cash flows associated with intangible assets recognized in its
acquisitions will continue indefinitely, and these is no pervasive evidence
that any material portion will dissipate over a period shorter than 40 years.
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
F-10
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
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.
Stock-Based Compensation -- The Company measures the compensation cost of
its stock-based compensation plans under the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," as permitted under Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation." Under the provisions
of APB No. 25, compensation cost is measured based on the intrinsic value of
the equity instrument awarded. Under the provisions of SFAS No. 123,
compensation cost is measured based on the fair value of the equity instrument
awarded.
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.
Fair Value of Financial Instruments -- As of December 31, 1996 and 1997
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 the Company's Chairman and long-term debt
approximate their carrying values due either to length of maturity or existence
of variable interest rates that approximate prevailing market rates.
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 $4.5 million, $5.0 million and $7.0
million for 1995, 1996 and 1997, 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, or cash flows.
Net Income per Share -- Effective December 31, 1997, the Company adopted
the provisions of SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for basic and diluted
earnings per share. The impact of adoption of SFAS No. 128 and required
disclosures are discussed in Note 8.
Impact of New Accounting Standards -- In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." This Standard establishes standards
of reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. 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
$2.4 million, $2.1 million and $3.8 million for the years ended December 31,
1995, 1996 and 1997, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Standard redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. This Statement
will be effective for the Company's fiscal year ending December 31, 1998, and
the Company does not intend
F-11
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
to adopt this Statement prior to the effective date. The Statement need not be
applied to interim financial statements in the initial year of its application.
The Company has not yet completed its analysis of which operating segments it
will disclose, if any.
Reclassification -- Certain prior year amounts have been reclassified to
conform with current year presentation.
Interim Financial Information -- The accompanying unaudited interim
financial information for the six months ended June 30, 1997 and 1998 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 year.
2. BUSINESS ACQUISITIONS
Acquisitions Completed During Year Ended December 31, 1997
In November 1997, the Company completed its previously announced
acquisition of Dyer Volvo (the "Dyer Acquisition") located in Atlanta, Georgia
for a total purchase price of $18.7 million. Also in November, the Company
completed its previously announced acquisitions of the Bowers Dealerships and
Affiliated Companies (the "Bowers Acquisition") located primarily in
Chattanooga and Nashville, Tennessee, for a total purchase price of $30.8
million. In October, 1997, the Company completed its previously announced
acquisition of Ken Marks Ford, Inc. (the "Ken Marks Acquisition") located in
Clearwater, Florida for a total purchase price of $25.8 million. The Dyer
Acquisition and the Bowers Acquisition were financed primarily with $45.5
million in cash obtained from proceeds of the Company's public offering and
from operations, and with a $4 million promissory note that is payable in 28
equal quarterly installments to Nelson Bowers, former owner of the Bowers
Dealerships, bearing interest at prime less 0.5%. The Ken Marks Acquisition was
financed with $25 million in amounts borrowed under a revolving credit facility
(see Note 5) and with cash obtained from operations.
In October 1997, the Company completed its previously announced
acquisition of Williams Motors, Inc., now Town and Country Chrysler, Plymouth,
Jeep of Rock Hill, located in Rock Hill, South Carolina, for a total purchase
price of $1.9 million. In September, 1997, the Company completed its previously
announced acquisition of Lake Norman Dodge and Affiliates for a total purchase
price of $17.9 million. These acquisitions were financed with amounts borrowed
under a short-term line of credit maturing on February 15, 1998 (see Note 5).
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.
The acquisition was financed primarily with a $3.5 million note payable to Mr.
O. Bruton Smith (see Note 7).
All of the above acquisitions have been accounted for using the purchase
method of accounting, and the results of operations of each of the above
dealerships have been included in the accompanying consolidated financial
statements from their effective dates of acquisition. The purchase price of the
above acquisitions has been allocated to the assets and liabilities acquired
based on their estimated fair market value at the respective acquisition dates
as follows:
<TABLE>
<S> <C>
Working capital ......................... $ 28,247
Property and equipment .................. 3,969
Goodwill ................................ 69,528
Non-current liabilities assumed ......... (2,940)
--------
Total purchase price .................... $ 98,804
========
</TABLE>
The following unaudited pro forma financial information presents a summary
of consolidated results of operations as if the above transactions had occurred
as of the beginning of each period presented after giving effect to certain
adjustments, including amortization of goodwill, interest expense on
acquisition debt and related income tax effects. The pro forma financial
information does not give effect to adjustments relating to net reductions in
floorplan interest expense resulting from re-negotiated floorplan financing
agreements or to reductions in salaries and fringe benefits of former owners or
officers of acquired
F-12
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
2. BUSINESS ACQUISITIONS -- Continued
dealerships who have not been retained by the Company or whose salaries have
been reduced pursuant to employment agreements with the Company. Pro forma
results for Town and Country Chrysler, Plymouth, Jeep of Rock Hill and Fort
Mill Chrysler-Plymouth-Dodge are not included because Company management
believes that the pro forma results of operations would not have been
materially affected assuming these acquisitions had occurred on January 1,
1996. The pro forma results have been prepared for comparative purposes only
and are not necessarily indicative of the results of operations that would have
occurred had the acquisitions been completed on January 1, 1996. These results
are also not necessarily indicative of the results of future operations.
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------------
1996 1997
------------- -------------
<S> <C> <C>
Total revenues ..................... $ 899,901 $ 949,081
Gross profit ....................... $ 113,772 $ 117,389
Net income ......................... $ 4,027 $ 5,439
Basic net income per share ......... $ 0.64 $ 0.78
</TABLE>
Acquisitions Completed During the Year Ended December 31, 1996
On February 1, 1996, the Company acquired Fort Mill Ford for a total
purchase price of $5.7 million. The acquisition has been accounted for using
the purchase method of accounting and the results of operations of Fort Mill
Ford have been included in the accompanying consolidated financial statements
from the date of acquisition. The purchase price has been allocated to the
assets and liabilities acquired based on their estimated fair market value at
the acquisition date as follows:
<TABLE>
<S> <C>
Working capital ......................... $ 822
Property and equipment .................. 3,022
Goodwill ................................ 4,364
Non-current liabilities assumed ......... (2,467)
--------
Total purchase price .................... $ 5,741
========
</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>
December 31,
1995
-------------
<S> <C>
Total revenues ..................... $ 345,199
Net income ......................... $ 2,875
Basic net income 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.
F-13
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------- June 30,
1996 1997 1998
---------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
New vehicles .................. $51,798 $118,751 $122,315
Used vehicles ................. 14,372 27,990 39,187
Parts and accessories ......... 4,940 9,085 12,467
Other ......................... 440 688 1,546
------- -------- --------
Total ......................... $71,550 $156,514 $175,515
======= ======== ========
</TABLE>
The inventory balance is generally reduced by manufacturer's purchase
discounts, and such reduction is not reflected in the related floor plan
liability.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $63.9 million and
$133.2 million at December 31, 1996 and 1997, respectively, and $149.7 million
at June 30, 1998. The floor plan notes bear interest, payable monthly on the
outstanding balance, at an effective rate of prime less 0.9% (7.60% at June 30,
1998), subject to incentives and other adjustments. Total floor plan interest
expense amounted to $4.5 million, $6.0 million and $8.0 million in 1995, 1996
and 1997, respectively, and $3.0 million and $7.3 million at June 30, 1997 and
1998, 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 consolidated balance sheets.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Land .................................. $ 2,678 $ 4,330
Building and improvements ............. 10,081 11,904
Office equipment and fixtures ......... 2,037 4,102
Parts and service equipment ........... 2,866 4,229
Company vehicles ...................... 437 727
-------- --------
Total, at cost ........................ 18,099 25,292
Less accumulated depreciation ......... (5,632) (6,211)
-------- --------
Property and equipment, net ........... $ 12,467 $ 19,081
======== ========
</TABLE>
F-14
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Amounts outstanding under $26.0 million revolving credit facility with Ford Motor Credit
bearing
interest at prime plus 1% (9.5% at December 31, 1997) and maturing in October 1999,
collateralized by all assets of the Company ............................................. $ -- $25,070
Amounts outstanding under $20.0 million line of credit from NationsBank bearing interest
at 7.75%
and maturing February 15, 1998 .......................................................... -- 8,200
Mortgage note payable in monthly installments of $27,000, including interest at prime
plus 1/2%
(9.0% at December 31, 1997) through April 2001, at which time remaining principal
balance is
due, collateralized by building ......................................................... 3,063 2,999
Mortgage note payable in monthly installments of $12,000, plus interest at prime plus
3/4%, (9.25% at
December 31, 1997) through May 2004, collateralized by building ......................... 1,088 940
Other notes payable ...................................................................... 1,654 2,015
------ -------
5,805 39,224
Less current maturities .................................................................. (519) (584)
------ -------
Long-term debt ........................................................................... $5,286 $38,640
====== =======
</TABLE>
Future maturities of debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998 ........................ $ 584
1999 ........................ 33,880
2000 ........................ 632
2001 ........................ 592
2002 ........................ 419
Thereafter .................. 3,117
-------
Total ....................... $39,224
=======
</TABLE>
On October 15, 1997, the Company obtained a secured, revolving acquisition
line of credit (the "Revolving Facility") from Ford Motor Credit with available
principal of $26 million. In January 1998 the Company increased the aggregate
amount available to borrow under this facility to $75 million pursuant to the
agreement with Ford Motor Credit. 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 proceeds from the Revolving Facility were used in the consummation of the
Ken Marks Acquisition in October 1997 and for the repayment in February 1998 of
amounts borrowed under the Six-Month Facility (as defined below). Additional
amounts to be drawn under the Revolving Facility are to be used for the
acquisition of additional dealerships and to provide general working capital
needs of the Company not to exceed $10 million.
The Revolving Facility currently contains 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. Additional negative covenants include specified
ratios of (i) debt to tangible equity (as defined in the Revolving Facility),
(ii) current assets to current liabilities, (iii) earnings before interest,
taxes, depreciation and amortization (EBITDA) to fixed charges, (iv) EBITDA to
interest expense, (v) EBITDA to total debt and (vi) EBITDA to total floor plan
debt. Moreover, the loss of voting control over the Company by the Smith Group
or the failure by the Company, with certain exceptions, to own all the
outstanding equity, membership or partnership interests in its dealership
subsidiaries will constitute an event of default under the Revolving Facility.
The Company did not meet the specified debt to tangible equity ratio at
December 31, 1997 and has obtained a waiver with regard to such requirement
from Ford Motor Credit. See Note 12.
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).
F-15
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
5. LONG-TERM DEBT -- Continued
On August 28, 1997, the Company obtained from NationsBank, N.A. a
short-term line of credit in an aggregate principal amount of up to $20 million
( the "Six-Month Facility"). Under the terms of the Six-Month Facility, amounts
outstanding bore interest at 7.75% and matured on February 15, 1998. Proceeds
from the Six-Month Facility were used to consummate the acquisitions of Lake
Norman Dodge and Affiliates and Williams Motors, Inc. Amounts outstanding at
December 31, 1997 have been classified as long-term as such amounts have been
subsequently refinanced with funds obtained from the Revolving Facility.
On February 16, 1998, the Company refinanced the $3 million mortgage note
payable. The mortgage note now matures February 2003 and is payable in 59
consecutive monthly installments of $26,000 each with a final balloon
installment for the unpaid balance due at maturity. The mortgage note bears
interest at the prime interest rate and is collateralized by a building.
6. INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ------------
<S> <C> <C> <C>
Current:
Federal ............................. $1,608 $1,857 $1,890
State ............................... 117 308 391
------ ------ ------
1,725 2,165 2,281
Deferred .............................. 427 (190) (27)
Change in valuation allowance ......... 24 (51) (5)
------ ------ --------
Total ................................. $2,176 $1,924 $2,249
====== ====== =======
</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>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal rate .......... 34.00 % 34.00 % 34.00 %
State income taxes .............. 3.84 3.60 3.70
Miscellaneous ................... 2.19 0.71 (0.21)
---- ---- ------
Effective tax rates ............. 40.03 % 38.31 % 37.49 %
========= ========= =========
</TABLE>
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes. Significant
components of the Company's deferred tax assets and liabilities as of December
31 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts ................... $ 86 $ 81
Inventory reserves ........................ 161 40
Net operating loss carryforwards .......... 75 120
Other ..................................... 76 151
-------- ------
Total deferred tax assets ................. 398 392
Valuation allowance ....................... (75) (70)
-------- ------
Deferred tax assets, net .................. 323 322
-------- ------
Deferred tax liabilities:
Basis difference in property and equipment (556) (799)
Basis difference in goodwill .............. -- (172)
Other ..................................... (546) (25)
-------- ------
Total deferred tax liability ............... (1,102) (996)
-------- ------
Net deferred tax liability ................. $ (779) $ (674)
======== ======
</TABLE>
F-16
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
6. INCOME TAXES -- Continued
The net changes in the valuation allowance against deferred tax assets
were a decrease of $51,000 for the year ended December 31, 1996 and a decrease
of $5,000 for the year ended December 31, 1997. The decrease was related
primarily to the expiration of state net operating loss carryforwards. At
December 31, 1997, the Company had state net operating loss carryforwards of
$1.2 million which will expire primarily between 1998 and 2002.
Certain of the Company's dealerships changed their method of accounting
for inventories of new vehicles for income tax purposes from LIFO to FIFO (see
Note 1) which resulted in an additional income tax liability. At December 31,
1996 and 1997, this liability was recorded as $5.5 million and $7.1 million,
respectively. The liability is payable over a six year period beginning in
January 1998. The current portion of the liability as of December 31, 1997 was
$2.3 million and is included in other accrued liabilities.
Certain subsidiaries of Sonic (such subsidiaries together with the Company
and SFC being hereinafter referred to as the "Sonic Group") have joined with
SFC in filing consolidated federal income tax returns for several years. Such
subsidiaries have also joined with SFC in filing for 1996 and for the six
months ending on June 30, 1997. Under applicable federal tax law, each
corporation included in SFC'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 SFC, 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 SFC's consolidated
group, less amounts previously recorded by the Company. Also pursuant to such
agreement, SFC agreed to indemnify the Company for any additional amount
determined to be due from SFC'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 SFC's consolidated group.
7. RELATED PARTIES
The Smith Guaranties, Pledges, Advance and Subordinated Loan:
In connection with the Company obtaining the NationsBank Facility, Mr.
Bruton Smith guaranteed the obligations of the Company and secured his
guarantee with a pledge of common stock of Speedway Motorsports Inc. ("SMI")
owned directly by him. In February 1998, the Company repaid in full the amounts
owed under the NationsBank Facility and Mr. Smith's guarantee was released.
In connection with the Company obtaining the Revolving Facility and a
global floor plan line of credit for all its dealership subsidiaries ("the
Floor Plan Facility" and, together with the Revolving Facility, the "Ford
Credit Facilities"), Mr. Smith personally guaranteed the obligations of the
Company under the Ford Credit Facilities, and such obligations were further
secured with a pledge of shares of common stock of SMI owned directly by him or
through Sonic Financial Corporation and having an estimated value at December
31, 1997 of approximately $50.0 million (the "Revolving Pledge").
In December 1997, upon increase of the borrowing limit under the Revolving
Facility to the maximum loan commitment of $75.0 million, the Revolving Pledge
remained in place, Mr. Smith's guarantee of the Revolving Facility was released
and Mr. Smith was required to lend $5.5 million (the "Subordinated Smith Loan")
to the Company to increase its capitalization as the result of offering
proceeds being significantly less than expected. The Subordinated Smith Loan
was required by Ford Motor Credit as a condition to its agreement to increase
the borrowing limit under the Revolving Facility. The Subordinated Smith Loan
is evidenced by the Company's Subordinated Promissory Note dated December 1,
1997 in favor of Mr. Smith, bears interest at prime plus 0.5% and matures on
November 30, 2000. All amounts owed by the Company to Mr. Smith under the
Subordinated Smith Loan are subordinate in right of payment to all amounts owed
by the Company under the Ford Credit Facilities pursuant to the terms of a
Subordination Agreement dated as of December 5, 1997 between Mr. Smith and Ford
Motor Credit.
In connection with the acquisitions by the Company of Fort Mill
Chrysler-Plymouth-Dodge, Bruton 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 this acquisition at closing. The
Smith Advance was evidenced by a demand note
F-17
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
7. RELATED PARTIES -- Continued
bearing interest at the minimum statutory rate of 3.83% per annum. The Company
repaid in full the principal of and interest on the Smith Advance from the
proceeds of the IPO.
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.
The Bowers Volvo Note
In connection with Volvo's approval of the Company's acquisition of a
Volvo franchise as part of the acquisition of the Bowers Dealerships and
Affiliated Companies Acquisition in 1997 (the "Bowers Acquisition"), Volvo,
among other things, conditioned its approval upon Nelson Bowers, the Company's
Executive Vice President and a Director, 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 financed
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 is secured by Mr. Bowers'
interest in Chattanooga Volvo.
The Bowers Volvo Note is for a principal amount of $900,000 and bears
interest at the lowest applicable federal rate as published by the U.S.
Treasury Department in effect on November 17, 1997. Accrued interest is payable
annually. The operating agreement of Chattanooga Volvo provides 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.
Registration Rights Agreement:
As part of the reorganization of the Company in connection with its
initial public offering (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 Company's Amended and Restated Certificate of Incorporation,
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 Corporation ("SFC"), 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
F-18
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
7. RELATED PARTIES -- Continued
the original selling security holders, as the case may be. The Registration
Rights Agreement expires on the November 17, 2007. Sonic Financial is
controlled by the Company's Chairman and Chief Executive Officer, Bruton Smith.
Other Related Party Transactions
Prior to June 30, 1997, two dealership subsidiaries of the Company had
each made several non-interest bearing advances to SFC ($2.5 million at
December 31, 1996). In preparation for the Reorganization, a demand promissory
note by SFC evidencing $2.1 million of these advances was canceled in June 1997
in exchange for the redemption of certain shares of the capital stock of Town &
Country Ford held by SFC. In addition, a demand promissory note by SFC
evidencing $509,000 of these advances was canceled in June 1997 pursuant to a
dividend.
The Company had amounts receivable from affiliates of $1.0 million at
December 31, 1997. Of this amount, $622,000 relates to advances made by the
Company to SFC at December 31, 1997. The remaining $425,000 at December 31,
1997, primarily relates to receivables from executives of the Company who were
former owners of certain dealerships acquired in 1997. These receivables
resulted from differences in the negotiated and actual net book value of the
dealerships at the date of acquisitions. The amounts receivable from affiliates
are non-interest bearing and are classified as current based on the expected
repayment dates.
The Company had amounts payable to affiliates of $914,000, $4.8 million at
December 31, 1996 and 1997 respectively. Amounts payable to affiliates includes
a note payable to the Company's Executive Vice-President and former owner of
the Bowers Dealerships resulting from the acquisition of the Bowers
Dealerships. The note is payable in 28 equal quarterly installments bearing
interest at prime less 0.5%. The balance outstanding under this note was $4.0
million at December 31, 1997. The current portion of this note amounted to
$445,000 at December 31, 1997. The remaining portion of the amount payable to
affiliates consisted of loans from affiliates, the majority of which bear
interest at 8.75%, and is classified as noncurrent based upon the expected
repayment dates.
During the years ended December 31, 1995 and December 31, 1996, Town &
Country Ford paid $48,000 to SFC as a management fee. SFC'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 SFC ceased in 1997.
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 and a wholly-owned subsidiary of SFC. Under these
arrangements, the dealerships paid an aggregate of $576,000 to American
Heritage in premiums for these policies for the twelve months ended December
31, 1997. The Company terminated this arrangement with American Heritage in
1997.
8. CAPITAL STRUCTURE, PUBLIC OFFERING OF COMMON STOCK, AND PER SHARE DATA
Preferred Stock -- In 1997, the Company authorized 3 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. No preferred
shares were issued and outstanding as of December 31, 1997.
In March 1998, the Board of Directors designated 300,000 shares of
preferred stock as Class A Convertible Preferred Stock, par value $0.10 per
share, which was divided into 100,000 of Series I Convertible Preferred Stock,
par value $0.10 per share (the "Series I Preferred Stock"), 100,000 shares of
Series II Convertible Preferred Stock, par value $0.10 per share (the "Series
II Preferred Stock"), and 100,000 shares of Series III Convertible Preferred
Stock, par value $0.10 per share (the "Series III Preferred Stock" and together
with the Series I Preferred Stock and the Series II Preferred Stock,
collectively, the "Preferred Stock").
The Preferred Stock has a liquidation preference of $1,000 per share. Each
share of Preferred Stock is convertible, at the option of the holder, into that
number of shares of Class A Common Stock as is determined by dividing $1,000 by
the
F-19
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
8. CAPITAL STRUCTURE, PUBLIC OFFERING OF COMMON STOCK, AND PER SHARE
DATA -- Continued
average closing price for the Class A Common Stock on the NYSE for the 20 days
preceding the date of issuance of the shares of Preferred Stock (the "Market
Price"). Conversion of Series II Preferred Stock and Series III Preferred Stock
is subject to certain adjustments which have the effect of limiting increases
and decreases in the value of the Class A Common Stock receivable upon
conversion by 10% of the original value of the shares of Series II Preferred
Stock or Series III Preferred Stock.
The Preferred Stock is redeemable at the Company's option at any time
after the date of issuance. The redemption price of the Series I Preferred
Stock is $1,000 per share. The redemption price for the Series II Preferred
Stock and Series III Preferred Stock is as follows: (i) prior to the second
anniversary of the date of issuance, the redemption price is the greater of
$1,000 per share or the aggregate Market Price of the Class A Common Stock into
which it could be converted at the time of redemption, and (ii) after the
second anniversary of the date of issuance, the redemption price is the
aggregate Market Price of the Class A Common Stock into which it could be
converted at the time of redemption.
Each share of Preferred Stock entitles its holder to a number of votes
equal to that number of shares of Class A Common Stock into which it could be
converted as of the record date for the vote. Holders of preferred stock are
entitled to participate in dividends payable on the Class A Common Stock on an
"as-if-converted" basis. The Preferred Stock has no preferential dividends.
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.
Public Offering of Common Stock -- The Company completed an IPO of 5.0
million shares of its Class A Common Stock, par value $0.01 per share, on
November 12, 1997 at a price of $12 per share. Net proceeds of the IPO of
approximately $53.7 million were used to finance acquisitions (see Note 2) and
to repay amounts borrowed under lines of credit related to the acquisitions.
Class A Common Stock entitles its holder to one vote per share, while Class B
Common Stock entitles its holder to ten votes per share, except in certain
circumstances.
Warrants -- In connection with the acquisition of Dyer Volvo in November
1997, the Company issued on January 15, 1998 warrants to purchase 44,391 shares
of Class A Common Stock at $12 per share, which is currently exercisable and
expires on January 15, 2003. The Company has recorded the issuance of such
warrants at an estimated fair value pending completion of an independent
valuation.
Per Share Data -- The calculation of diluted net income per share
considers the potential dilutive effect of options and shares under the
Company's stock compensation plans, Class A Common Stock purchase warrants, and
Class A Convertible Preferred Stock. The following table illustrates the
dilutive effect of such items on EPS:
<TABLE>
<CAPTION>
Unaudited
For the twelve months ended For the six months ended
December 31, 1997 June 30, 1998
----------------------------- ----------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
-------- -------- ----------- -------- -------- ----------
(Dollars and Shares in thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to common shareholders .......... $3,702 6,949 $ 0.53 $6,804 11,264 $ 0.60
======= =======
Effect of Dilutive Securities
Stock compensation plans ......................... -- -- -- 202
Warrants ......................................... -- -- -- 9
Convertible Preferred Stock ...................... -- -- -- 162
------ ----- ------ ------
Diluted EPS
Income available to common shareholders + assumed
conversions ..................................... $3,702 6,949 $ 0.53 $6,804 11,637 $ 0.58
====== ===== ======= ====== ====== =======
</TABLE>
Options to purchase 588,000 shares of Class A Common Stock at $12 per
share were outstanding in November and December of 1997, but were not included
in the computation of diluted EPS because the options' were anti-dilutive.
F-20
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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.
Formula Stock Option Plan
In March 1998, the Board of Directors adopted the Formula Stock Option
Plan for the benefit of the Company's outside directors. The plan authorized
options to purchase up to an aggregate of 300,000 shares of Class A Common
Stock. Under the plan, each outside director shall be awarded on or before
March 31st of each year an option to purchase 10,000 shares at an exercise
price equal to the fair market value of common stock at the date of the award.
Employee Stock Purchase Plan
Effective January 1, 1998, the Board of Directors and stockholders of the
Company adopted the Employee Stock Purchase Plan (the "ESPP"). 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.
On March 20, 1998, the Board of Directors, pursuant to the Company's ESPP,
increased the authorized shares from 150,000 to 300,000 and issued options
exercisable for 150,000 shares of Class A Common Stock granting 310 shares per
participant participating in the ESPP.
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") with
respect to Common Stock in order to attract and retain key personnel. Under the
Stock Option Plan, options to purchase up to an aggregate of 1.1 million 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. In November 1997, the Company granted
options to purchase 588,000 shares of Class A Common Stock at an exercise price
equal to the initial public offering price of $12.00 per share. 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.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
The Company granted 588,000 options in 1997 with weighted average grant-date
fair values of $5.66. No compensation cost has been recognized for the Stock
Option Plan. Had compensation cost for the stock options been determined based
on their fair value method as prescribed by SFAS No. 123, the Company's pro
forma net income and basic net income per share would have been $3.6 million
and $0.51, respectively, for 1997.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
expected volatility of 50% in 1997; risk-free interest rate of 5.6% in 1997;
and expected lives of 5 years in 1997. The model reflects that no dividends
were declared in 1997 and assumes that no dividends will be declared in the
future.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases:
The Company leases certain of its dealership facilities under
noncancelable operating leases with terms ranging from one to twelve years,
with renewal options of up to ten years. A majority of the dealership
facilities are owned by officers, directors or holders of 5% or more of the
Common Stock of the Company or their affiliates. Minimum future rental payments
required under noncancelable operating leases are as follows:
F-21
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
10. COMMITMENTS AND CONTINGENCIES -- Continued
<TABLE>
<CAPTION>
Related Parties Third Parties Total
Year ending December 31, ----------------- --------------- ---------
<S> <C> <C> <C>
1998 ..................... $ 3,849 $ 2,023 $ 5,872
1999 ..................... 3,852 1,452 5,304
2000 ..................... 3,786 1,400 5,186
2001 ..................... 3,448 1,380 4,828
2002 ..................... 3,338 1,050 4,388
Thereafter ............... 16,146 4,480 20,626
------- ------- -------
Total .................... $34,419 $11,785 $46,204
======= ======= =======
</TABLE>
Total rent expense for the years ended December 31, 1995, 1996, and 1997
was approximately $841,000, $870,000, and $2.4 million, respectively. Of these
amounts, $841,000, $870,000 and $1.3 million, respectively, were paid to
related parties.
Other Contingencies:
The Company is contingently liable for customer contracts placed with
financial institutions of approximately $741,000 and $302,000 at December 31,
1996 and 1997, 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 $1.5 million 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. Amounts outstanding under these lines at December 31,
1996 and 1997 were $151,000 and $432,000, respectively.
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.
The Company has not entered into any agreement with respect to the
approval by Jaguar of the proposed acquisition of the assets of the Jaguar of
Chattanooga dealership (the "Jaguar Dealership") by the Company as part of the
Bowers Acquisition. The Company and Jaguar 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 refuses to give its approval to the Company, the Company may not be able
to acquire the Jaguar Dealership. The Jaguar Dealership accounts for less than
1.5% of the Company's 1997 revenues and profits, respectively.
11. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's results of operations as
presented in the Consolidated Statements of Income by quarter for 1996 and
1997. Amounts below reflect reclassifications of previously reported amounts to
conform with current year presentation and exclude net income per share for
those periods prior to the completion of the Offering.
F-22
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
11. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) -- Continued
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Total revenues ........................... $ 85,684 $ 104,021 $ 93,910 $ 93,252
Gross profit ............................. $ 10,654 $ 11,860 $ 11,581 $ 11,725
Operating income ......................... $ 2,644 $ 2,920 $ 2,530 $ 2,973
Income before taxes and minority interest $ 1,604 $ 1,254 $ 1,121 $ 1,042
Year Ended December 31, 1997:
Total revenues ........................... $ 98,785 $ 114,101 $ 127,356 $ 195,759
Gross profit ............................. $ 11,228 $ 13,236 $ 15,105 $ 25,179
Operating income ......................... $ 2,262 $ 3,393 $ 3,469 $ 5,782
Income before taxes and minority interest $ 926 $ 1,577 $ 1,526 $ 1,969
Net income ............................... $ 541 $ 999 $ 911 $ 1,251
Diluted net income per share ............. $ 0.15 $ 0.14
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
Pending Acquisitions
The Company has entered into definitive agreements to acquire a dealership
located in Chattanooga, Tennessee and a dealership group comprised of three
dealerships located in Daytona Beach, Florida for an aggregate purchase price
of approximately $26.2 million plus the net book value of the assets acquired.
The aggregate purchase price will be payable in approximately 12,183 shares of
Preferred Stock with a liquidation preference of approximately $1,000 per share
and the balance payable in cash obtained from the Company's existing
opearations and from the private placement of the Company's 11% Senior
Subordinated Notes in July 1998 (the "Offering" -- see Note 12). These
acquisitions are expected to be consummated in the third quarter of 1998.
Acquisitions Completed Subsequent to June 30, 1998
In July 1998, the Company completed its previously announced acquisition
of Hatfield Automotive Group located in Columbus Ohio (the "Hatfield
Acquisition") for a total purchase price of $48.6 million, paid with $34.6
million in cash and with 14,025 shares of Series I Preferred Stock (see Note 8)
having a liquidation preference of approximately $14.0 million. Of the cash
portion of the purchase price, $26.2 million was financed with borrowings under
the Revolving Facility (see Note 5), which was subsequently repaid with
proceeds from the Offering, and $8.4 million with proceeds from the Offering.
In September 1998, the Company completed its previously announced
acquisition of the Higginbotham Automotive Group (the "Higginbotham
Acquisition") for a total price of approximately $27.0 million including the
repayment of approximately $2.7 million in indebtedness. The total purchase
price was paid with approximately $18.2 million in cash, paid for with proceeds
from the Offering, and Class A Common Stock with a market value of
approximately $8.3 million as of the closing date of the acquisition. The
remaining $0.5 million of the cash portion of the purchase price is payable in
December 1998.
Acquisitions Completed During the Six Months Ended June 30, 1998
On January 1, 1998, the Company began operation and obtained control of
Clearwater Toyota, Clearwater Mitsubishi and Clearwater Collision Center (the
"Clearwater Acquisition") located in Clearwater, Florida. On April 1, 1998, the
Company began operation and obtained control of Capitol Chevrolet and Imports
located in Montgomery, Alabama (the "Montgomery Acquisition"), Century BMW
located in Greenville, South Carolina (the "Century Acquisition") and Heritage
Lincoln-Mercury located in Greenville, South Carolina (the "Heritage
Acquisition"). On May 1, 1998, the Company began operation and obtained control
of Casa Ford of Houston, Inc. located in Houston, Texas (the "Casa Ford
Acquisition"). The aggregate purchase price for the Clearwater Acquisition, the
Montgomery Acquisition, the Century Acquisition, the Heritage Acquisition, and
the Casa Ford Acquisition (collectively, the "1998 Acquisitions") was
approximately $40.7 million, paid with $29.0 million in cash and with 13,034
shares of Preferred Stock (381 shares of Series I Preferred Stock, 6,380 shares
of Series II Preferred Stock, and 6,273 shares of Series III Preferred Stock --
see Note 8) having an aggregate liquidation preference of approximately $13.0
million and an estimated fair value of approximately $11.7 million. Of the
$29.0 million cash portion of the aggregate purchase price, $15.4 million was
financed with borrowings under the Revolving Facility,
F-23
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
12. SUBSEQUENT EVENTS (UNAUDITED) -- Continued
which was subsequently repaid with the proceeds from the Offering, $12.9
million with the proceeds from the Offering, and $0.1 million with cash
generated from the Company's existing operations. The remaining $0.6 million of
the cash portion of the purchase price is payable to the seller of the
Montgomery Acquisition on the first and second anniversaries of the closing
date of the Montgomery Acquisition. In addition, the Company will issue to the
seller of the Century Acquisition warrants to purchase 75,000 shares of the
Company's Class A Common Stock at a purchase price equal to the market value of
the Class A Common Stock on the date of grant. The Company will record these
warrants at fair value at time of issuance. In accordance with terms of the
Clearwater Acquisition and the Montgomery Acquisition, the Company may be
required to pay additional amounts up to $5.1 million contingent on the future
performance of the dealerships acquired in such acquisitions. In addition, in
accordance with the terms of the Casa Ford Acquisition, the Company may be
required to pay additional amounts to the seller equal to five times the amount
by which the dealership's pre-tax earnings for 1998, if any, exceed $2.5
million, and five times the amount by which the dealership's pre-tax earnings
for 1999, if any, exceed the greater of $2.5 million or the dealership's 1998
pre-tax earnings. Any additional amounts paid will be accounted for as
additional goodwill. The Payable for Acquisitions in the amount of $16.1
million included in the accompanying consolidated financial statements
represents the cash consideration paid for the Montgomery Acquisition, Century
Acquisition, Heritage Acquisition, and Casa Ford Acquisition upon the closing
of such acquisitions in July 1998.
The 1998 Acquisitions have been accounted for using the purchase method of
accounting and the results of operations of such acquisitions have been
included in the accompanying unaudited consolidated financial statements from
the date the Company began operation and obtained control. The purchase price
of the 1998 Acquisitions has been allocated as shown below to the assets and
liabilities acquired based on their estimated fair market value at the
acquisition date. The purchase price and corresponding goodwill may ultimatley
be different than amounts recorded depending on the actual fair value of
tangible net assets acquired and changes in the estimated fair value of
Preferred Stock (see Note 8).
<TABLE>
<S> <C>
Working capital ........................ $ 11,826
Property and equipment ................. 2,462
Goodwill ............................... 29,147
Non-current liabilites assumed ......... (2,699)
--------
Total purchase price ................... $ 40,736
========
</TABLE>
The following unaudited pro forma financial information presents a summary
of consolidated results of operations as if the Clearwater Acquisition,
Montgomery Acquisition, Century Acquisition, Heritage Acquisition, Casa Ford
Acquisition, and acquisition of dealership groups completed in 1997 had
occurred at the beginning of the period in which the acquisitions were
completed and at the beginning of the immediately preceding period after giving
effect to certain adjustments, including amortization of goodwill, interest
expense on acquisition debt and related income tax effects. The pro forma
financial information does not give effect to adjustments relating to net
reductions in floor plan interest expense resulting from re-negotiated floor
plan financing agreements or to reductions in salaries and fringe benefits of
former owners or officers of acquired dealerships who have not been retained by
the Company or whose salaries have been reduced pursuant to employment
agreements with the Company. The pro forma results have been prepared for
comparative purposes only and are not necessarily indicative of the results of
operations that would have occurred had the acquisitions been completed at the
beginning of the periods presented. These results are also not necessarily
indicative of the results of future operations.
<TABLE>
<CAPTION>
Three Months Ending Six Months Ending
June 30, June 30,
--------------------------- ---------------------------
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenues ....................... $ 359,659 $ 391,992 $ 689,565 $ 728,588
Gross profit ......................... $ 44,401 $ 50,376 $ 84,046 $ 94,551
Net Income ........................... $ 3,676 $ 5,043 $ 5,192 $ 6,901
Diluted net income per share ......... $ 0.30 $ 0.39 $ 0.42 $ 0.54
</TABLE>
F-24
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
12. SUBSEQUENT EVENTS (UNAUDITED) -- Continued
Manufacturer's Restrictions on Acquisitions
In August 1998, in the course of acquiring Jaguar franchises associated
with dealerships in Chattanooga, Tennessee and Greenville, South Carolina,
Jaguar declined to consent to the Company's proposed acquisitions of those
franchises. The Company therefore agreed with Jaguar not to acquire any Jaguar
franchise until August 2001.
Dealership Leases:
On July 9, 1998, the Company entered into, subject to the approval of the
Company's Board of Directors and the Company's independent directors, a
Strategic Alliance Agreement and Agreement for the Mutual Referral of
Acquisition Opportunities (the "Alliance Agreement") with an operating
partnership controlled by Mar Mar Realty Trust, a Maryland real estate
investment trust ("MMRT"). MMRT owns the real estate associated with various
automobile dealerships, automotive aftermarket retailers and other automotive
related businesses and leases such property to the business operators located
thereon. O. Bruton Smith, the Company's Chairman and Chief Executive Officer,
serves as the chairman of MMRT's board of trustees and is presently its
controlling shareholder.
Under the Alliance Agreement, the Company has agreed to refer real estate
acquisition opportunities that arise in connection with its dealership
acquisitions to MMRT. In exchange, MMRT has agreed to refer dealership
acquisition opportunities to the Company and to provide to the Company, at the
Company's cost, certain real estate development, maintenance, survey, and
inspection services. Pursuant to the Alliance Agreement, the Company has
entered into contracts to sell the real estate associated with Town and Country
Toyota and Fort Mill Ford, two of the Company's dealerships, for an aggregate
purchase price of $10.3 million. In addition, the Alliance Agreement provides
for an agreed form of lease (the "Sonic Form Lease") pursuant to which MMRT
would lease real estate to the Company should MMRT acquire real estate
associated with any of the Company's operations. Presently, the Company leases
or intends to lease from MMRT 18 parcels of land associated with 16 of its
dealerships, including the real estate associated with Town and Country Toyota
and Fort Mill Ford which the Company will lease back from MMRT pursuant to
leases substantially similar to the Sonic Form Lease. The aggregate initial
annual base rent to be paid by the Company for all 18 properties under the
leases with MMRT is approximately $6.4 million.
Preferred Stock reported in the accompanying Unaudited Consolidated
Balance Sheet as of June 30, 1998 consists of 381 shares of Series I Preferred
Stock, 6,380 shares of Series II Preferred Stock, and 6,273 shares of Series
III Preferred Stock issued in connection with the consummation of the 1998
Acquisitions (see Note 2). These shares of Preferred Stock were preliminarily
recorded at their estimated fair value pending completion of an independent
valuation.
In connection with the Century Acquisition, the Company will issue to the
seller of the Century Acquisition warrants to purchase 75,000 shares of the
Company's Class A Common Stock at a purchase price equal to the market value of
the Class A Common Stock on the date of grant. The Company will record these
warrants at fair value at time of issuance.
Debt Covenants
At March 31, 1998 and June 30, 1998, the Company was not in compliance
with a financial covenant of the Revolving Facility. Ford Motor Credit has
provided the Company with a waiver of this violation through December 31, 1998.
Management expects to be in compliance with or to have amended the financial
covenant such that subsequent to December 31, 1998 they will be in compliance.
The Company did not meet the specified total debt to tangible equity ratios
required by the Revolving Facility at March 31, 1998 and at June 30, 1998 and
has obtained a waiver with regard to such requirement from Ford Motor Credit.
The waiver is subject to certain requirements to the effect that the Company
must meet modified ratios after December 31, 1998 and December 31, 1998. In
connection with the Offering, the Company and Ford Motor Credit amended the
Revolving Facility to provide that the Company's 11% Senior Subordinated Notes
due 2008 (the "Notes"), which are subordinated to the Revolving Facility, will
be treated as equity capital for purposes of this ratio and, accordingly, the
Company is in compliance with this covenant after giving effect to the issuance
of the Notes.
Senior Notes
In July 1998, the Company completed its private placement of the Notes.
Interest is payable February 1 and August 1 of each year, commencing February
1, 1999. The Notes contain certain restrictive covenants and are unsecured
senior subordinated obligations of the Company.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES
CLEARWATER, FLORIDA
We have audited the accompanying combined balance sheet of Clearwater
Dealerships and Affiliated Companies (the "Company"), which are under common
ownership and management, as of December 31, 1997, and the related combined
statement of income and retained earnings and of 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, such financial statements present fairly, in all material
respects, the combined financial position of the Company as of December 31,
1997, and the combined results of its operations and its combined cash flows
for the year then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 20, 1998
F-26
<PAGE>
CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES
COMBINED BALANCE SHEET
December 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 2,065,437
Accounts receivable ................................ 1,137,797
Inventories (Note 2) ............................... 9,214,628
Other current assets ............................... 282,148
------------
Total current assets ............................. 12,700,010
PROPERTY AND EQUIPMENT, NET (Notes 3 and 4) ......... 7,829,463
GOODWILL ............................................ 1,736,154
------------
TOTAL ASSETS ........................................ $ 22,265,627
============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 2) ............... $ 8,321,386
Notes payable -- stockholder (Note 4) .............. 500,000
Trade accounts payable ............................. 789,425
Other accrued liabilities .......................... 465,618
Current maturities of long-term debt ............... 1,089,830
------------
Total current liabilities ........................ 11,166,259
------------
LONG-TERM DEBT (Note 4) ............................. 6,116,808
------------
CONTINGENCIES (Note 7)
COMBINED EQUITY (Note 5):
Common stock of combined companies ................. 1,202,064
Paid-in capital .................................... 1,210,334
Retained earnings .................................. 2,570,162
------------
Total stockholders' equity ....................... 4,982,560
------------
TOTAL LIABILITIES AND EQUITY ........................ $ 22,265,627
============
</TABLE>
See notes to combined financial statements.
F-27
<PAGE>
CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
Year ended December 31, 1997
<TABLE>
<S> <C>
REVENUES:
Vehicle sales .................................................... $ 108,811,979
Parts, service and collision repair .............................. 10,499,641
Finance and insurance (Note 1) ................................... 2,587,028
-------------
Total revenues ................................................. 121,898,648
COST OF SALES (Note 1) ............................................ 107,095,964
-------------
GROSS PROFIT ...................................................... 14,802,684
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...................... 11,617,589
DEPRECIATION AND AMORTIZATION ..................................... 389,831
-------------
OPERATING INCOME .................................................. 2,795,264
-------------
OTHER INCOME AND EXPENSE:
Interest expense -- floor plan, net (Note 2) ..................... 77,253
Interest expense -- other financing arrangements ................. 721,259
Other income ..................................................... (193,799)
-------------
Total other expense ............................................ 604,713
-------------
NET INCOME ........................................................ 2,190,551
RETAINED EARNINGS, DECEMBER 31, 1996 .............................. 1,271,737
DISTRIBUTIONS ..................................................... (892,126)
-------------
RETAINED EARNINGS, DECEMBER 31, 1997 .............................. $ 2,570,162
=============
Pro Forma Provision for Income Taxes (Note 1) (unaudited) ......... $ 876,000
=============
Pro Forma Net Income (Note 1) (unaudited) ......................... $ 1,314,551
=============
</TABLE>
See notes to combined financial statements.
F-28
<PAGE>
CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
Year ended December 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................ $ 2,190,551
------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................... 389,831
Changes in assets and liabilities that related to operations:
Decrease in receivables ........................................................ 14,836
Decrease in inventories ........................................................ 115,045
Increase in other current assets ............................................... (152,703)
Decrease in other noncurrent assets ............................................ 11,280
Increase in notes payable -- floor plan ........................................ 432,528
Decrease in accounts payable and other accrued liabilities ..................... (1,058,983)
------------
Total adjustments ............................................................. (248,166)
------------
Net cash provided by operating activities ....................................... 1,942,385
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................... (497,762)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stockholder distributions ......................................................... (892,126)
Payments of long-term debt ........................................................ (756,409)
------------
Net cash used in financing activities ........................................... (1,648,535)
------------
NET DECREASE IN CASH ............................................................... (203,912)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................... 2,269,349
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 2,065,437
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest .......................................... $ 1,608,448
============
</TABLE>
See notes to combined financial statements.
F-29
<PAGE>
CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Year ended December 31, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business -- Clearwater Dealerships and Affiliated
Companies (the "Company") operates two automobile dealerships and a body shop
in Tampa, Florida. 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. The Company's two dealership
locations sell new vehicles manufactured by Mitsubishi and Toyota.
The accompanying combined financial statements include the accounts of the
following entities:
Clearwater Auto Resources, Inc. (Clearwater Toyota)
M&S Auto Resources, Inc. (Clearwater Mitsubishi)
Clearwater Collision Center, Inc.
The accompanying combined financial statements reflect the financial
position, results of operations, and cash flows of each of the above listed
companies. 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.
Revenue Recognition -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of credit life, accident, health and disability insurance and
extended service contracts to customers. The Company may be assessed a
chargeback fee in the event of early cancellation of a loan, insurance
contract, or service contract by the customer. Finance and insurance commission
revenue is recorded net of estimated chargebacks at the time the related
contract is placed with the financial institution.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $608,362 for the year ended December 31, 1997.
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 vehicle inventory.
Each dealership operates under a dealer agreement with the manufacturer.
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 a vehicle purchase and was
$1,728,343 at December 31, 1997.
Inventories -- Inventories of new and used vehicles, including
demonstrators and parts and accessories, are valued at the lower of specific
cost or market.
F-30
<PAGE>
CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using straight-line methods over the estimated useful
lives of the assets. The range of estimated useful lives is as follows:
<TABLE>
<CAPTION>
Useful Lives
-------------
<S> <C>
Buildings and improvements .................. 31.5 - 39
Office equipment and fixtures ............... 3 - 7
Parts, service equipment and vehicles ....... 5 - 7
Company vehicles ............................ 5 - 7
Computer equipment .......................... 5 - 7
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
Goodwill -- Goodwill represents the excess purchase price over the
estimated fair value of the net assets acquired and is being amortized over a
15 year period. 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.
Income Taxes -- All entities included in the accompanying combined
financial statements are S Corporations. As such, these entities do not pay
federal or state corporate income taxes on their taxable income. The
stockholders are liable for individual income taxes on their respective shares
of the Company's taxable income.
The pro forma provision for income taxes and the pro forma net income for
the year ended December 31, 1997 reflect the amounts that would have been
recorded had the Company 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 Company's market area of Tampa Bay,
Florida.
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.
Fair Value of Financial Instruments -- As of December 31, 1997 the fair
value of the Company's financial instruments including receivables, notes
payable-floor plan, trade accounts payable, notes payable stockholder and
long-term debt approximate their book values.
Advertising -- The Company expenses advertising costs in the period
incurred. Advertising expense for 1997 amounted to $2,085,797.
2. INVENTORIES AND RELATED NOTES PAYABLE-FLOOR PLAN
Inventories at December 31, 1997 consist of the following:
<TABLE>
<S> <C>
New vehicles .................. $ 6,661,309
Used vehicles ................. 1,901,207
Parts and accessories ......... 652,112
-----------
Total ......................... $ 9,214,628
===========
</TABLE>
F-31
<PAGE>
CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
2. INVENTORIES AND RELATED NOTES PAYABLE-FLOOR PLAN -- Continued
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $8,321,386 at December
31, 1997. The floor plan notes bear interest (8.5% at December 31, 1997) that
fluctuates with prime and are payable monthly on the outstanding balance. Total
floor plan interest expense amounted to $779,671 in 1997, which is offset by
$702,418 of floor plan assistance provided by the manufacturer. 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 sheet.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 is comprised of the following:
<TABLE>
<S> <C>
Land .................................. $ 1,800,024
Buildings and improvements ............ 5,934,205
Office equipment and fixtures ......... 365,050
Parts and service equipment ........... 360,514
Leasehold improvements ................ 84,206
Company vehicles ...................... 36,304
Computer equipment .................... 9,753
-----------
8,590,056
Less accumulated depreciation ......... (760,593)
-----------
Property and equipment, net ........... $ 7,829,463
===========
</TABLE>
4. FINANCING ARRANGEMENTS
The Company has an unsecured demand note payable outstanding from a
stockholder in the amount of $500,000 at December 31, 1997. Interest on this
demand note is charged at 10%.
Long-term debt at December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Mortgage note payable, due in monthly principal and interest installments of $33,839,
interest payable at
prime plus 1.0% (8.5% at December 31, 1997), with the unpaid principal balance due May $ 5,339,809
31, 2001
Mortgage note payable in monthly principal and interest installments of $6,090, interest
payable at
9.0%, with the unpaid prinicipal balance due February 28, 1999 .......................... 550,203
Notes payable in monthly principal and interest installments of $16,667, interest payable
at prime plus
0.5%, matures January 1, 2002 ........................................................... 800,000
Installment note payable in monthly principal and interest installments of $16,667,
interest payable at
prime plus 1.5%, with the unpaid principal balance due February 1, 2001 ................. 516,626
-----------
7,206,638
Less current maturities .................................................................. 1,089,830
-----------
Long-term debt ........................................................................... $ 6,116,808
===========
</TABLE>
Future maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year Ending December 31:
1998 ........................ $ 1,089,830
1999 ........................ 1,131,896
2000 ........................ 606,068
2001 ........................ 4,362,177
2002 ........................ 16,667
-----------
Total ....................... $ 7,206,638
===========
</TABLE>
F-32
<PAGE>
CLEARWATER DEALERSHIPS AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
5. COMBINED EQUITY
The capital structure of the entities included in the combined financial
statements of the Company at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Common Stock
-----------------------------------------
Shares Additional
Shares Issued and Paid-in Retained
Authorized Outstanding Amount Capital Earnings
------------ ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Clearwater Auto Resources ....... 5,000 5,000 $ 200,000 $ -- $ 1,163,380
M & S Auto Resources ............ 1,000 1,000 1,000,000 1,210,334 1,197,699
Clearwater Collision Center ..... -- -- 2,064 -- 209,083
----------- ----------- -----------
Total ........................... $ 1,202,064 $ 1,210,334 $ 2,570,162
=========== =========== ===========
</TABLE>
6. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan, whereby substantially all of the employees
of the Company meeting certain service requirements are eligible to
participate. Contributions in 1997 by the Company were not significant.
7. 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.
8. SUBSEQUENT EVENT (UNAUDITED)
The Company entered into an agreement with Sonic Automotive, Inc.
("Sonic") whereby Sonic purchased the net assets of the Company for a total
purchase price of approximately $14.9 million subject to adjustment based on
the net book value of the purchased assets and assumed liabilities as of the
closing date. This purchase price is comprised of $11.5 million of cash,
approximately $4 million in convertible preferred stock (3,960 shares) of Sonic
and a maximum of $1.8 million in additional cash pursuant to an earnings based
earnout provision included in the definitive purchase agreement. The purchase
price attributable to the convertible preferred stock will range from a low of
the $4 million shown above, to $4.4 million depending upon the market value of
the underlying common stock at date of conversion.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS OF
HATFIELD AUTOMOTIVE GROUP
Columbus, Ohio
We have audited the accompanying combined balance sheets of Hatfield
Automotive Group (the "Company"), which are under common ownership and
management, as of December 31, 1996 and 1997, and the related combined
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. 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, such financial statements present fairly, in all material
respects, the combined financial position of the Company as of December 31,
1996 and 1997, and the combined results of its operations and its combined cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
May 22, 1998
F-34
<PAGE>
HATFIELD AUTOMOTIVE GROUP
COMBINED BALANCE SHEETS
December 31, 1996 and 1997 and June 30, 1998
<TABLE>
<CAPTION>
December 31,
--------------------------------- June 30,
1996 1997 1998
--------------- --------------- --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 11,630,711 $ 12,238,729 $14,200,066
Accounts receivable (no allowance necessary) ......... 3,014,936 3,391,406 3,294,135
Inventories (Note 3) ................................. 30,855,389 34,563,796 33,733,029
Other current assets (Note 6) ........................ 5,526,214 6,592,010 480,409
------------ ------------ -----------
Total current assets ............................... 51,027,250 56,785,941 51,707,639
PROPERTY AND EQUIPMENT, NET (Note 4) .................. 817,960 1,064,104 952,309
GOODWILL, NET (Notes 1 and 2) ......................... -- 983,333 970,833
------------ ------------ -----------
TOTAL ASSETS .......................................... $ 51,845,210 $ 58,833,378 $53,630,781
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 3) ................. $ 28,941,767 $ 33,705,904 $35,343,179
Trade accounts payable ............................... 3,182,685 2,035,848 1,374,248
Other accrued liabilities ............................ 1,543,879 1,461,131 1,351,151
Payable to stockholder's -- current (Note 6) ......... 5,986,706 7,162,864 608,939
------------ ------------ -----------
Total current liabilities .......................... 39,655,037 44,365,747 38,677,517
------------ ------------ -----------
PAYABLE TO STOCKHOLDERS -- NON-CURRENT
(Note 6) ............................................. 6,815,121 8,176,482 8,325,052
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
STOCKHOLDERS' EQUITY (Note 5):
Common stock of combined companies ................... 2,825,000 2,825,000 2,825,000
Paid-in capital ...................................... 804,000 1,744,000 1,744,000
Retained earnings .................................... 1,746,052 1,722,149 2,059,212
------------ ------------ -----------
Total stockholders' equity ......................... 5,375,052 6,291,149 6,628,212
------------ ------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $ 51,845,210 $ 58,833,378 $53,630,781
============ ============ ===========
</TABLE>
See notes to combined financial statements.
F-35
<PAGE>
HATFIELD AUTOMOTIVE GROUP
COMBINED STATEMENTS OF INCOME
For the years ended December 31, 1995, 1996 and 1997
and the six months ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
----------------------------------------------- -------------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Vehicle sales ........................... $164,216,610 $213,251,842 $251,980,884 $126,422,557 $133,660,846
Parts, service and collision repair ..... 11,905,030 13,971,959 16,399,819 7,601,130 8,774,251
Finance and insurance
(Notes 1 and 6) ....................... 4,748,018 6,113,302 6,898,899 3,415,232 4,190,125
------------ ------------ ------------ ------------ ------------
Total revenues ........................ 180,869,658 233,337,103 275,279,602 137,438,919 146,625,222
COST OF SALES (Note 1) ................... 160,396,271 206,201,099 244,329,244 122,650,266 130,220,430
------------ ------------ ------------ ------------ ------------
GROSS PROFIT ............................. 20,473,387 27,136,004 30,950,358 14,788,653 16,404,792
SELLING, GENERAL AND ADMINIS-
TRATIVE (Note 6) ........................ 13,694,632 16,250,976 20,193,275 9,855,048 11,308,119
MANAGEMENT BONUS (Note 6) ................ 3,809,573 6,339,005 7,120,875 3,735,000 3,181,319
DEPRECIATION AND
AMORTIZATION ............................ 38,836 107,461 221,463 106,565 158,210
------------ ------------ ------------ ------------ ------------
OPERATING INCOME ......................... 2,930,346 4,438,562 3,414,745 1,092,040 1,757,144
OTHER INCOME AND EXPENSE:
Interest expense -- floor plan .......... 2,926,256 3,036,515 3,662,711 1,439,607 1,245,500
Interest income ......................... (102,265) (155,804) (225,802) (57,897) (130,399)
Other (income) expense .................. 37,313 196,030 1,739 (55,134) (114,878)
------------ ------------ ------------ ------------ ------------
Total other expense ................... 2,861,304 3,076,741 3,438,648 1,326,576 1,000,223
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) ........................ $ 69,042 $ 1,361,821 $ (23,903) $ (234,536) $ 756,921
============ ============ ============ ============ ============
Pro Forma Provision (Benefit) for
Income Taxes (Note 1) (unaudited)........ $ 27,000 $ 531,000 $ (9,000) $ (95,667) $ 308,748
============ ============ ============ ============ ============
Pro Forma Net Income (Loss) (Note 1)
(unaudited) ............................. $ 42,042 $ 830,821 $ (14,903) $ (330,203) $ 448,173
============ ============ ============ ============ ============
</TABLE>
See notes to combined financial statements.
F-36
<PAGE>
HATFIELD AUTOMOTIVE GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 5)
For the years ended December 31, 1995, 1996 and 1997
and the six months ended June 30, 1998
<TABLE>
<CAPTION>
Common Total
Stock of Combined Retained Stockholders'
Companies Paid-in Capital Earnings Equity
------------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 ............ $1,525,000 $ 354,000 $ 1,402,130 $ 3,281,130
Issuance of common stock ............... 700,000 -- -- 700,000
Dividends declared ..................... -- -- (1,086,941) (1,086,941)
Net income ............................. -- -- 69,042 69,042
---------- ----------- ------------ ------------
BALANCE DECEMBER 31, 1995 ............... 2,225,000 354,000 384,231 2,963,231
Issuance of common stock ............... 600,000 -- -- 600,000
Capital contribution ................... -- 450,000 -- 450,000
Net income ............................. -- -- 1,361,821 1,361,821
---------- ----------- ------------ ------------
BALANCE DECEMBER 31, 1996 ............... 2,825,000 804,000 1,746,052 5,375,052
Capital contribution ................... -- 940,000 -- 940,000
Net loss ............................... -- -- (23,903) (23,903)
---------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1997 ............ 2,825,000 1,744,000 1,722,149 6,291,149
Net income (unaudited) ................. -- -- 756,921 756,921
---------- ----------- ------------ ------------
Dividends declared (unaudited) ......... -- -- 419,858 419,858
BALANCE AT JUNE 30, 1998 (unaudited) $2,825,000 $ 1,744,000 $ 2,059,212 $ 6,628,212
========== =========== ============ ============
</TABLE>
See notes to combined financial statements.
F-37
<PAGE>
HATFIELD AUTOMOTIVE GROUP
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, 1996 and 1997
and the six months ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
Year ended December 31, Six months ended June 30,
----------------------------------------------- ------------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- -------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ............................. $ 69,042 $ 1,361,821 $ (23,903) $ (234,536) $ 756,921
------------ ------------ ------------ ------------ ------------
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization ............... 38,836 107,461 221,463 106,565 158,210
Changes in assets and liabilities that
related to operations:
(Increase) decrease in receivables ......... (135,483) (1,503,996) (376,470) 55,647 97,271
Decrease (increase) in inventories ......... 130,645 (8,769,439) (3,624,241) 200,487 830,767
Decrease (increase) in other current
assets .................................... (3,000,000) (2,525,214) (1,065,796) (1,497,867) 6,111,601
Increase in notes payable -- floor plan 264,242 7,356,921 4,764,137 3,540,914 1,637,275
Increase (decrease) in accounts payable
and other accrued liabilities ............. 1,041,176 1,106,795 (1,229,584) (113,253) (771,580)
------------ ------------ ------------ ------------ ------------
Total adjustments ......................... (1,660,584) (4,227,472) (1,310,491) 2,292,493 8,063,544
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
operating activities .................... (1,591,542) (2,865,651) (1,334,394) 2,057,957 8,820,465
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment ........... (138,936) (702,124) (423,048) -- (33,914)
Proceeds from sale of assets .................. -- -- -- 27,892 --
Purchase of business .......................... -- -- (1,112,058) (1,112,058) --
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (138,936) (702,124) (1,535,106) (1,084,166) (33,914)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase (decrease) in amounts payable
to stockholders ............................. 2,306,507 5,144,349 3,037,518 2,190,503 (6,405,354)
Capital contribution .......................... -- -- 440,000 440,000
Distributions ................................. -- -- -- -- (419,859)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities .................... 2,306,507 5,144,349 3,477,518 2,630,503 (6,825,213)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .......................... 576,029 1,576,574 608,018 3,604,294 1,961,337
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ........................... 9,478,108 10,054,137 11,630,711 11,630,711 12,238,729
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD ..................................... $ 10,054,137 $ 11,630,711 $ 12,238,729 $ 15,235,005 $ 14,200,066
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest ...... $ 1,746,200 $ 1,053,437 $ 1,263,618 $ 669,404 $ 470,878
============ ============ ============ ============ ============
NON-CASH FINANCING ACTIVITIES:
Dividends declared but not paid ............... $ 1,086,941 -- -- -- --
Issuance of common stock in exchange for
amounts payable to stockholders ............. $ 700,000 $ 600,000 -- -- --
Contribution to paid-in capital in exchange
for amounts payable to stockholders ......... -- $ 450,000 $ 500,000 $ 500,000 --
</TABLE>
See notes to combined financial statements.
F-38
<PAGE>
HATFIELD AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business -- Hatfield Automotive Group (the "Company")
operates six automobile dealerships and a body shop in Columbus, Ohio. The
Company sells new and used cars and light trucks, sells replacement parts,
provides maintenance, warranty, paint and repair services and arranges related
financing and insurance. The Company's six dealerships sell new vehicles
manufactured by Toyota, Lincoln, Mercury, Jeep, Eagle, Volkswagen, Hyundai,
Subaru, Isuzu, Chrysler, Plymouth, KIA and Dodge.
The accompanying combined financial statements include the accounts of the
following entities:
Hatfield Jeep Eagle, Inc., d/b/a Volkswagen West, Jeep Eagle West, Hatfield
KIA and Trader Bud's Westside Chrysler Plymouth
Hatfield Lincoln Mercury, Inc., d/b/a Hatfield Lincoln Mercury
Westside Dodge, Inc., d/b/a Westside Dodge
Toyota West, Inc., d/b/a Toyota West
Hatfield Hyundai, Inc., d/b/a Hatfield Hyundai, Hatfield Isuzu and
Hatfield Subaru
The accompanying combined financial statements reflect the financial
position, results of operations, and cash flows of each of the above listed
companies. 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.
Revenue Recognition -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of credit life, accident, health and disability insurance and
extended service contracts to customers. The Company may be assessed a
chargeback fee in the event of early cancellation of a loan, insurance
contract, or service contract by the customer. Finance and insurance commission
revenue is recorded net of estimated chargebacks at the time the related
contract is placed with the financial institution.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $680,378, $718,927 and $959,426 for the years ended December 31,
1995, 1996, and 1997, respectively. Estimated commission expense charged to
cost of sales was approximately $426,848 and $534,533 for the six months ended
June 30, 1997 and 1998, respectively (unaudited).
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 vehicle inventory.
Each dealership operates under a dealer agreement with the manufacturer.
The Company's dealer agreement does not give it the exclusive right to sell the
manufacturer's product within a given geographic area. The Company could be
materially adversely affected if the manufacturer awards franchises to others
in the same market where the Company is operating. A similar adverse affect
could occur if existing competing franchised dealers increase their market
share in the Company's market. The ability of the Company to acquire additional
franchises from a particular manufacturer may be limited due to certain
restrictions imposed by manufacturers. Additionally, ownership of the Company's
stock by third parties may be limited by the terms of the franchise agreements.
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 were
$8,171,520 and $6,270,709 at December 1996 and 1997, respectively.
F-39
<PAGE>
HATFIELD AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
Inventories -- Vehicle inventories are valued at the lower of specific
cost or market. Parts and accessories are valued at the lower of first-in,
first-out ("FIFO") cost or market.
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 amortized at December 31,
1997 was $16,667. 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.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using straight-line methods over the estimated useful
lives of the assets. The range of estimated useful lives is as follows:
<TABLE>
<CAPTION>
Useful Lives
-------------
<S> <C>
Office equipment and fixtures .......... 5
Parts and service equipment ............ 5
Leasehold improvements ................. 10
Computer equipment ..................... 5
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
Income taxes -- All of the Company's dealerships are organized as S
Corporations for federal and state income tax purposes. As such, the Company's
taxable income is included in the stockholders' annual income tax return.
Accordingly, no provision for federal or state income taxes has been included
in the Company's statements of income.
The pro forma provision for income taxes and the pro forma net income for
the years ended December 31, 1995, 1996 and 1997, and for the six months ended
June 30, 1997 and 1998, 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.
Concentration 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 Company's principal market area of
Columbus, Ohio.
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 expenses for 1995, 1996 and 1997 amount to $2,619,348,
$3,941,810 and $4,475,943, respectively.
Interim Financial Information -- The accompanying unaudited interim
financial information for the six months ended June 30, 1997 and 1998 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 year.
2. BUSINESS ACQUISITION
On May 1, 1997, the Company acquired Trader Bud's Westside Chrysler
Plymouth for a total purchase price of $1,112,058. The acquisition has been
accounted for using purchase accounting and the results of operations of this
dealership have been included in the accompanying combined financial statements
from the date of acquisition. The total purchase price has been
F-40
<PAGE>
HATFIELD AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
2. BUSINESS ACQUISITION -- Continued
allocated to the assets and liabilities acquired at their estimated fair market
value at acquisition date as follows:
<TABLE>
<S> <C>
Inventory ...................... $ 84,166
Property and equipment ......... 27,892
Goodwill ....................... 1,000,000
----------
$1,112,058
==========
</TABLE>
The following unaudited pro forma financial information is presented as if
Trader Bud's Westside Chrysler Plymouth were acquired on January 1, 1996 and
January 1, 1997, respectively.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
Revenues .................. $259,336,000 $281,718,000
Gross profit .............. 30,612,000 32,684,000
Net income (loss) ......... 1,257,000 (67,000)
</TABLE>
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the operating results that would have
occurred had Trader Bud's Westside Chrysler Plymouth been acquired on January
1, 1996 and 1997, respectively. 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,
----------------------------- 1998
1996 1997 (Unaudited)
-------------- -------------- --------------
<S> <C> <C> <C>
New vehicles .................. $24,597,294 $ 29,227,278 $29,088,954
Used vehicles ................. 5,263,444 4,181,804 3,272,038
Parts and accessories ......... 966,895 1,125,050 1,333,942
Other ......................... 27,756 29,664 38,095
----------- ------------ -----------
Total ......................... $30,855,389 $ 34,563,796 $33,733,029
=========== ============ ===========
</TABLE>
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $28,941,767 and
$33,705,904 at December 31, 1996 and 1997, respectively. The floor plan notes
bear interest that fluctuates with prime. Interest is payable monthly on the
outstanding balance, ranging from 7.94% to 9.25% and 8.00% to 9.50% at December
31, 1996 and 1997, respectively. The notes payable are due when the related
vehicles are sold. As such, these floor plan notes payable are shown as a
current liability in the accompanying combined balance sheets.
F-41
<PAGE>
HATFIELD AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------- 1998
1996 1997 (Unaudited)
--------------- --------------- ---------------
<S> <C> <C> <C>
Parts and service equipment ........... $ 1,173,892 $ 1,404,291 $ 1,412,254
Office equipment and fixtures ......... 424,894 504,973 530,926
Leasehold improvements ................ 303,407 422,616 360,104
Computer equipment .................... 35,999 57,252 57,252
------------ ------------ ------------
1,938,192 2,389,132 2,360,536
Less accumulated depreciation ......... (1,120,232) (1,325,028) (1,408,227)
------------ ------------ ------------
Property and equipment, net ........... $ 817,960 $ 1,064,104 $ 952,309
============ ============ ============
</TABLE>
5. COMBINED EQUITY
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
Par Shares Issued and Paid-In
Value Authorized Outstanding Amount Capital
------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Hatfield Jeep Eagle, Inc. .............. No Par 5,000 100 $ 225,000 $354,000
Hatfield Lincoln Mercury, Inc. ......... $ 100 10,000 6,000 600,000 450,000
Westside Dodge, Inc. Voting ............ No par 5,000 4,000 800,000 --
Non-voting ............................. No par 5,000 1,000 200,000 --
Toyota West, Inc. Voting .............. No par 250 250 250,000 --
Non-voting ............................. No par 250 250 250,000 --
Hatfield Hyundai, Inc. ................. No par 750 750 500,000 --
---------- --------
Total .................................. $2,825,000 $804,000
========== ========
</TABLE>
The capital structure of the entities included in the combined financial
statements of the Company at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Common Stock
------------------------------------------------------------
Shares
Par Shares Issued and Paid-In
Value Authorized Outstanding Amount Capital
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Hatfield Jeep Eagle, Inc. .............. No Par 5,000 100 $ 225,000 $1,294,000
Hatfield Lincoln Mercury, Inc. ......... $ 100 10,000 6,000 600,000 450,000
Westside Dodge, Inc. Voting ............ No par 5,000 4,000 800,000 --
Non-voting ............................. No par 5,000 1,000 200,000 --
Toyota West, Inc. Voting ............... No par 250 250 250,000 --
Non-voting ............................. No par 250 250 250,000 --
Hatfield Hyundai, Inc. ................. No par 750 750 500,000 --
---------- ----------
Total .................................. $2,825,000 $1,744,000
========== ==========
</TABLE>
6. RELATED PARTIES
The management bonuses were paid to Company stockholders and certain
management companies owned by a Company stockholder. Unpaid bonuses and
dividends are included in the amounts payable to stockholders -- non-current.
F-42
<PAGE>
HATFIELD AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
6. RELATED PARTIES -- Continued
Included in finance and insurance revenues are $433,599, $489,005 and
$480,875 for 1995, 1996 and 1997, respectively, in commissions generated from
selling credit life policies to customers which have been distributed to a
company owned by a stockholder.
Other current assets at December 31, 1996 and 1997 include $5,525,214 and
$6,653,925, respectively, of cash owned by stockholders on deposit in the
Company's cash management account. A liability for this amount is included in
amounts payable to stockholders -- current.
The Company leases all of its operating facilities directly from a Company
stockholder or from a corporation which is owned by that stockholder. Rent
expense under these leases was $1,680,000 in 1995 and 1996 and $2,360,000 in
1997. The Company also paid $166,756, $190,500 and $216,332 to these related
parties for property taxes for the years ended December 31, 1995, 1996 and
1997, respectively. Total rent expense was $1,746,050 in 1995, $1,724,660 in
1996, and $2,469,859 in 1997.
Other leases consist primarily of leases for office and computer
equipment. Future minimum rental payments required under noncancelable
operating leases at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Related Party Other Total
--------------- ----------- -------------
<S> <C> <C> <C>
Year ending December 31:
1998 ................... $2,460,000 $189,835 $2,649,835
1999 ................... 2,460,000 128,435 2,588,435
2000 ................... 2,335,000 109,618 2,444,618
2001 ................... 300,000 29,080 329,080
2002 ................... -- 15,798 15,798
---------- -------- ----------
Total .................. $7,555,000 $472,766 $8,027,766
========== ======== ==========
</TABLE>
7. EMPLOYEE BENEFIT 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 6%
of participant contributions. Company contributions amounted to $47,528,
$63,015 and $76,922 in 1995, 1996, and 1997, respectively.
8. CONTINGENCIES
The Company is involved 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 results of operations and cash flows.
9. SUBSEQUENT EVENT (UNAUDITED)
In February 1998, the Company signed an asset purchase agreement with
Sonic Automotive, Inc. ("Sonic") whereby Sonic would purchase substantially all
of the Company's assets for a total price of approximately $48.6 million plus
the assumption of certain liabilities of the Company. This acquisition was
consummated in July 1998. The total purchase price is subject to adjustment
based on a final determination of the value of the net current assets of the
Company. Of the total purchase price Sonic paid approximately $34.6 million in
cash and the balance was paid by the issuance of preferred stock with a
liquidation preference of approximately $14.0 million as of the closing date of
the acquisition. The acquisition of the assets of Toyota West, Inc. was closed
in escrow pending the approval of Toyota for the acquisition of this
dealership.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
ECONOMY CARS, INC.
CHATTANOOGA, TENNESSEE
We have audited the accompanying balance sheet of Economy Cars, Inc.,
d/b/a Economy Honda Cars (the "Company"), as of December 31, 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 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
May 11, 1998
F-44
<PAGE>
ECONOMY HONDA CARS
BALANCE SHEETS
December 31, 1997 and June 30, 1998
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 3,834,184 $ 7,266,329
Accounts receivable (net of allowance for doubtful accounts of $13,505
at December 31, 1997) .............................................. 842,907 496,292
Note receivable (Note 2) ............................................. 238,960 0
Inventories (Note 3) ................................................. 6,541,972 4,022,603
Other current assets ................................................. 4,477 57,898
----------- ------------
Total current assets ............................................... 11,462,500 11,843,121
PROPERTY AND EQUIPMENT, NET (Note 4) .................................. 1,791,974 1,730,670
----------- ------------
TOTAL ASSETS .......................................................... $13,254,474 $ 13,573,791
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable ............................................... $ 148,073 $ 205,299
Income taxes payable (Note 6) ........................................ 251,237 0
Deferred income taxes (Note 6) ....................................... 173,511 173,511
Other taxes payable .................................................. 215,619 208,058
Accrued payroll and bonuses .......................................... 105,174 450,245
Liability for finance chargebacks .................................... 95,550 68,764
Other accrued liabilities ............................................ 6,879 1,338
----------- ------------
Total current liabilities .......................................... 996,043 1,107.215
----------- -------------
DEFERRED INCOME TAXES (Note 6) ........................................ 78,449 78,449
----------- -------------
STOCKHOLDERS' EQUITY:
Common stock (no par, 2,000 shares authorized, 500 shares issued and
450 shares outstanding) ............................................ 50,000 50,000
Retained earnings .................................................... 12,329,982 12,538,121
Treasury stock (50 shares) ........................................... (200,000) (200,000)
----------- -------------
Total stockholders' equity ......................................... 12,179,982 12,388,128
----------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $13,254,474 $ 13,573,792
=========== =============
</TABLE>
See notes to financial statements.
F-45
<PAGE>
ECONOMY HONDA CARS
STATEMENTS OF INCOME
Year ended December 31, 1997 and the six months ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
Six months
Year ended ended June 30,
December 31, ------------------------------
1997 1997 1998
--------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
REVENUES:
Vehicle sales ................................... $41,032,638 $21,020,878 $19,459,700
Parts, service and collision repair ............. 5,855,509 2,970,118 2,756,494
Finance and insurance (Note 1) .................. 1,383,106 801,745 472,438
----------- ----------- -----------
Total revenues ................................ 48,271,253 24,792,741 22,688,632
COST OF SALES (Note 1) ........................... 41,542,860 21,145,724 19,820,152
----------- ----------- -----------
GROSS PROFIT ..................................... 6,728,393 3,647,017 2,868,480
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ..... 5,142,472 2,611,619 2,584,792
DEPRECIATION ..................................... 130,996 64,518 70,857
----------- ----------- -----------
OPERATING INCOME ................................. 1,454,925 970,880 212,831
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense -- floor plan (Note 3) ......... (2,791) (679) (3,102)
Interest income ................................. 75,852 13,886 88,584
Other income .................................... 119,261 39,750 37,190
----------- ----------- -----------
Total other income ............................ 192,322 52,957 122,672
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ....................... 1,647,247 1,023,837 335,503
PROVISION FOR INCOME TAXES (Note 6) .............. 626,062 388,649 127,357
----------- ----------- -----------
NET INCOME ....................................... $ 1,021,185 $ 635,188 $ 208,146
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-46
<PAGE>
ECONOMY HONDA CARS
STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended December 31, 1997 and the six months ended June 30, 1998
<TABLE>
<CAPTION>
Total
Common Retained Treasury Stockholders'
Stock Earnings Stock Equity
---------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 ................. $50,000 $11,308,797 $ (200,000) $11,158,797
Net income .................................. -- 1,021,185 -- 1,021,185
------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1997 ................. 50,000 12,329,982 (200,000) 12,179,982
Net income (unaudited) ...................... -- 208,146 -- 208,146
------- ----------- ---------- -----------
BALANCE AT JUNE 30, 1998 (unaudited) ......... $50,000 $12,538,128 $ (200,000) $12,388,128
======= =========== ========== ===========
</TABLE>
See notes to financial statements.
F-47
<PAGE>
ECONOMY HONDA CARS
STATEMENTS OF CASH FLOWS
Year ended December 31, 1997 and the six months ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
Six months ended
Year ended June 30,
December 31, ----------------------------
1997 1997 1998
------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $1,021,185 $ 635,188 $ 208,146
---------- ---------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation .......................................................... 130,996 64,518 70,857
Loss on disposal of fixed assets ...................................... 2,258 -- --
Deferred income taxes ................................................. (39,266) 0 0
Changes in assets and liabilities that related to operations:
(Increase) decrease in accounts receivables .......................... (432,900) (109,163) 346,615
Decrease in inventories .............................................. 789,447 (179,870) 2,519,369
Decrease in prepaids and other current assets ........................ 330,940 304,268 (53,421)
Increase in trade accounts payable and accrued liabilities ........... 142,753 547,579 111,173
---------- ---------- ----------
Total adjustments ................................................... 924,228 627,332 2,994,593
---------- ---------- ----------
Net cash provided by operating activities ........................... 1,945,413 1,262,520 3,202,739
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ..................................... (196,016) (170,252) (9,554)
Proceeds from sale of assets ............................................ 4,685 -- --
Principal collected on notes receivable ................................. 47,358 24,739 238,960
---------- ---------- ----------
Net cash provided by (used in) investing activities ................. (143,973) (145,513) 229,406
---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................ 1,801,440 1,117,007 3,432,145
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................... 2,032,744 2,032,744 3,834,184
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................. $3,834,184 $3,149,751 $7,266,329
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-- Cash paid during the period for:
Interest ................................................................ $ 89,984 $ 63,880 $ 8,756
Income taxes ............................................................ $ 258,869 $ 98,914 $ 434,614
</TABLE>
See notes to financial statements.
F-48
<PAGE>
ECONOMY HONDA CARS
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business -- Economy Honda Cars (the "Company") operates
an automotive dealership, service department, body shop and parts and
accessories department in Chattanooga, Tennessee. The Company sells new and
used cars and light trucks, sells replacement parts and accessories, provides
vehicle maintenance, warranty, paint and repair services and arranges related
financing and insurance. The Company sells new vehicles manufactured by Honda.
Revenue Recognition -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of credit life, accident, health and disability insurance and
extended service contracts to customers. The Company may be assessed a
chargeback fee in the event of early cancellation of a loan, insurance
contract, or service contract by the customer. Finance and insurance commission
revenue is recorded net of estimated chargebacks at the time the related
contract is placed with the financial institution.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $251,233 for the year ended December 31, 1997. Estimated
commission expense charged to cost of sales was approximately $144,827 and
$89,333 for the six months ended June 30, 1997 and 1998, respectively
(unaudited).
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 vehicle inventory.
The Company operates under a dealer agreement with the manufacturer. The
Company's dealer agreement does not give it the exclusive right to sell the
manufacturer's product within a given geographic area. The Company could be
materially adversely affected if the manufacturer awards franchises to others
in the same market where the Company is operating. A similar adverse affect
could occur if existing competing franchised dealers increase their market
share in the Company's market. 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 were
$919,251 at December 31, 1997.
Inventories -- Inventories of new and used vehicles, including
demonstrators and parts and accessories, are valued at the lower of specific
cost or market. Cost is determined using the last-in, first-out method ("LIFO")
for new vehicles and parts and accessories.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. The range of estimated useful lives is as follows:
<TABLE>
<CAPTION>
Useful Lives
-------------
<S> <C>
Buildings and improvements ............. 7-31.5
Office equipment and fixtures .......... 5-7
Parts and service equipment ............ 5-10
Company vehicles ....................... 5
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
Income Taxes -- The provision for income taxes includes federal and state
taxes currently payable and deferred taxes. Deferred taxes are determined
utilizing an asset and liability approach as required by Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. This method gives
consideration to the future tax consequences associated with differences
between financial accounting and tax basis of assets and liabilities. This
method gives immediate effect to
F-49
<PAGE>
ECONOMY HONDA CARS
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
changes in income tax laws upon enactment. A valuation allowance is established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.
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 Company's market area of Chattanooga,
Tennessee.
Fair Value of Financial Instruments -- As of December 31, 1997 the fair
value of the Company's financial instruments including accounts and notes
receivables and trade accounts payable approximate their book 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 for 1997 amounted to $531,473.
Interim Financial Information -- The accompanying unaudited financial
information for the six months ended June 30, 1997 and 1998 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 year.
2. NOTE RECEIVABLE
At December 31, 1997, the Company had a note receivable from an unrelated
party totaling $238,960. The note bore interest at 12% per annum and was
payable in monthly installments of $6,293. On April 7, 1998, the note was
purchased for cash by one of the Company's principal stockholders at the
recorded book value of $231,115 at that date.
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
New vehicles .................. $ 1,798,172 $2,390,339
Used vehicles ................. 4,902,142 1,910,137
Parts and accessories ......... 365,630 324,379
----------- ----------
7,065,944 4,624,855
LIFO reserve .................. (523,972) (602,252)
----------- ----------
Total ......................... $ 6,541,972 $4,022,603
=========== ==========
</TABLE>
Had the Company used the first-in, first-out method of valuing new
vehicles, parts and accessories inventory, pretax earnings would have been
$1,819,742 in 1997.
From time to time certain vehicles are pledged to collateralize floor plan
notes payable to financial institutions. The floor plan notes bear interest,
payable monthly on the outstanding balance at a rate that fluctuates with prime
(8.5% at
F-50
<PAGE>
ECONOMY HONDA CARS
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN -- (Continued)
December 31, 1997). Total floor plan interest expense amounted to $2,791 in
1997. The notes payable are due when the related vehicle is sold; however, the
Company generally pays floor plan as invoiced for vehicles during the year.
There is no balance outstanding under such floor plan notes at December 31,
1997.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------------- ---------------
(Unaudited)
<S> <C> <C>
Land .................................. $ 624,430 $ 624,430
Buildings and improvements ............ 1,922,175 1,928,017
Office equipment and fixtures ......... 299,278 302,844
Parts and service equipment ........... 358,961 358,961
Company vehicles ...................... 62,254 62,254
------------ ------------
3,267,098 3,276,506
Less accumulated depreciation ......... (1,475,124) (1,545,836)
------------ ------------
Property and equipment, net ........... $ 1,791,974 $ 1,730,670
============ ============
</TABLE>
5. EMPLOYEE BENEFIT PLAN
The Company has 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 in 1997 were approximately $39,000.
6. INCOME TAXES
The provision for income taxes consists of the following components for
the year ended December 31, 1997:
<TABLE>
<S> <C>
Current:
Federal ................ $ 559,667
State .................. 105,663
---------
665,330
---------
Deferred:
Federal ................ (33,061)
State .................. (6,207)
---------
39,268
---------
Total .................. $ 626,062
=========
</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 for
the year ending December 31, 1997:
<TABLE>
<S> <C>
Statutory federal rate ......... 34.00%
State income taxes ............. 3.98%
Miscellaneous .................. 0.03%
-----
Effective tax rates ............ 38.01%
=====
</TABLE>
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes.
F-51
<PAGE>
ECONOMY HONDA CARS
NOTES TO FINANCIAL STATEMENTS -- (Continued)
6. INCOME TAXES -- (Continued)
Deferred income tax assets and liabilities consist of the following at
December 31, 1997:
<TABLE>
<S> <C>
Deferred tax assets, primarily from differences relating to chargebacks ........... $ 85,528
Deferred tax liabilities, primarily from differences relating to used car inventory
reserve .......................................................................... (337,488)
----------
Net deferred tax liabilities ...................................................... $ 251,960
==========
</TABLE>
7. SUBSEQUENT EVENT
On March 16, 1998, the Company entered into an agreement with Sonic
Automotive, Inc. ("Sonic") whereby Sonic will purchase all of the outstanding
capital stock of the Company for a total purchase price of $7.5 million plus an
amount equal to the net book value of the assets of the Company. This purchase
price will be paid in cash and convertible preferred stock of Sonic. Preferred
stock will be issued for 51% of the total purchase price, not to exceed $5.1
million in liquidation preference as of the closing of the acquisition.
F-52
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CASA FORD OF HOUSTON, INC.
Houston, Texas
We have audited the accompanying balance sheet of Casa Ford of Houston,
Inc. (the "Company") as of December 31, 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 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
June 4, 1998
F-53
<PAGE>
CASA FORD OF HOUSTON, INC.
BALANCE SHEETS
December 31, 1997 and March 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) .................................. $ 1,386,749 $ 1,685,197
Accounts receivable (net of allowance for doubtful accounts of $1,553
at December 31, 1997) ............................................. 822,335 495,339
Inventories (Note 3) ................................................ 8,743,629 6,430,778
Other current assets ................................................ 283,717 315,144
----------- -----------
Total current assets .............................................. 11,236,430 8,926,458
PROPERTY AND EQUIPMENT, NET (Notes 4 and 5) .......................... 911,615 872,323
DEFERRED INCOME TAXES (Note 8) ....................................... 264,307 264,307
GOODWILL (Note 1) .................................................... 617,518 603,795
----------- -----------
TOTAL ASSETS ......................................................... $13,029,870 $10,666,883
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 3) ................................ $ 8,681,340 $ 6,149,209
Trade accounts payable .............................................. 432,860 294,196
Current maturities -- long-term debt (Note 5) ....................... 782,098 770,425
Income taxes payable (Note 8) ....................................... 149,725 233,795
Accrued payroll and bonuses ......................................... 188,080 24,255
Other accrued liabilities ........................................... 538,430 837,295
----------- -----------
Total current liabilities ......................................... 10,772,533 8,309,175
----------- -----------
LONG-TERM DEBT (Note 5) .............................................. 1,020,867 857,732
----------- -----------
COMMITMENTS (Notes 6 and 9)
STOCKHOLDERS' EQUITY:
Receivable from stockholder (Note 2) ................................ (428,310) (441,309)
Common stock ($100 par, 12,500 shares authorized, issued and
outstanding) ...................................................... 1,250,000 1,250,000
Retained earnings ................................................... 414,780 691,285
----------- -----------
Total stockholders' equity ........................................ 1,236,470 1,499,976
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................... $13,029,870 $10,666,883
=========== ===========
</TABLE>
See notes to financial statements.
F-54
<PAGE>
CASA FORD OF HOUSTON, INC.
STATEMENTS OF INCOME
Year ended December 31, 1997 and the three months ended March 31, 1997 and 1998
<TABLE>
<CAPTION>
Three months
Year ended ended March 31,
December 31, -----------------------------
1997 1997 1998
--------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
REVENUES:
Vehicle sales ................................... $ 58,239,109 $12,889,721 $15,165,697
Parts, service and collision repair ............. 6,025,033 1,290,680 1,498,063
Finance and insurance (Note 1) .................. 2,252,297 479,359 534,451
------------ ----------- -----------
Total revenues ................................ 66,516,439 14,659,760 17,198,211
COST OF SALES (Note 1) ........................... 57,164,094 12,656,805 14,629,714
------------ ----------- -----------
GROSS PROFIT ..................................... 9,352,345 2,002,955 2,568,497
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ..... 6,929,277 1,428,740 1,778,333
DEPRECIATION AND AMORTIZATION .................... 299,456 74,864 76,014
------------ ----------- -----------
OPERATING INCOME ................................. 2,123,612 499,351 714,150
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense -- floor plan (Note 3) ......... (885,573) (202,407) (216,937)
Interest expense -- other ....................... (301,995) (71,332) (59,624)
Other income .................................... 129,518 89 9,541
------------ ----------- -----------
Total other expense ........................... (1,058,050) (273,650) (267,020)
------------ ----------- -----------
INCOME BEFORE INCOME TAXES ....................... 1,065,562 225,701 447,130
PROVISION FOR INCOME TAXES (Note 8) .............. 406,579 86,178 170,625
------------ ----------- -----------
NET INCOME ....................................... $ 658,983 $ 139,523 $ 276,505
============ =========== ===========
</TABLE>
See notes to financial statements.
F-55
<PAGE>
CASA FORD OF HOUSTON, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31, 1997 and the three months ended March 31, 1998
<TABLE>
<CAPTION>
Retained Total
Receivable Common Earnings Stockholders'
from Shareholder Stock (Deficit) Equity
------------------ -------------- --------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 ........... (352,101) $ 1,250,000 $ (244,203) $ 653,696
Amounts loaned to stockholder ......... (76,209) -- -- (76,209)
Net income ............................ -- -- 658,983 658,983
-------- ----------- ----------- ----------
BALANCE AT DECEMBER 31, 1997 ........... (428,310) 1,250,000 414,780 1,236,470
Amounts loaned to stockholder ......... (12,999) -- -- (12,999)
Net income (unaudited) ................ -- -- 276,505 276,505
-------- ----------- ----------- ----------
BALANCE AT MARCH 31, 1998 (unaudited) $ (441,309) $ 1,250,000 $ 691,285 $1,499,976
========== =========== =========== ==========
</TABLE>
See notes to financial statements.
F-56
<PAGE>
CASA FORD OF HOUSTON, INC.
STATEMENTS OF CASH FLOWS
Year ended December 31, 1997 and the three months ended March 31, 1997 and 1998
<TABLE>
<CAPTION>
Three months ended
Year ended March 31,
December 31, ---------------------------------
1997 1997 1998
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 658,983 $ 139,523 $ 276,505
------------ ------------ ------------
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization ........................................ 354,346 74,864 76,014
Deferred income taxes ................................................ (140,290) (69,860) --
Changes in assets and liabilities that related to operations:
(Increase) decrease in accounts receivables ......................... 60,637 302,948 326,996
(Increase) decrease in inventories .................................. (369,151) 2,520,131 2,312,851
Increase in other current assets .................................... (69,385) (309,711) (31,427)
Increase (decrease) in income tax payable ........................... (40,341) (103,888) 84,070
Payments of floor plan notes payable ................................ (690,969) (2,952,473) (2,532,131)
Increase (decrease) in trade accounts payable and accrued liabilities 29,941 392,792 (3,624)
------------ ------------ ------------
Total adjustments .................................................. (865,212) (145,197) 232,749
------------ ------------ ------------
Net cash (used in) provided by operating activities ................ (206,229) (5,674) 509,254
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................................... (290,996) (17,338) (22,999)
------------ ------------ ------------
Net cash used in investing activities .............................. (290,996) (17,338) (22,999)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt ............................................. (529,853) (253,428) (174,808)
------------ ------------ ------------
Amounts (loaned to) received from stockholder .......................... (76,209) 3,065 (12,999)
Net cash used in financing activities .............................. (606,062) (250,363) (187,807)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................... (1,103,287) (273,375) 298,448
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................... 2,490,036 2,490,036 1,386,749
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................ $ 1,386,749 $ 2,216,661 $ 1,685,197
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-- Cash paid during the period for:
Interest ............................................................... $ 64,241 $ 112,862 $ 89,417
============ ============ ============
Income taxes ........................................................... $ 597,500 $ 330,000 $ 86,555
============ ============ ============
</TABLE>
See notes to financial statements.
F-57
<PAGE>
CASA FORD OF HOUSTON, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business -- Casa Ford of Houston, Inc. (the "Company")
operates an automotive dealership, service department, body shop and parts and
accessories department in Houston, Texas. The Company sells new and used cars
and light trucks, sells replacement parts and accessories, provides vehicle
maintenance, warranty, paint and repair services and arranges related financing
and insurance. The Company sells new vehicles manufactured by Ford.
Revenue Recognition -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of credit life, accident, health and disability insurance and
extended service contracts to customers. The Company may be assessed a
chargeback fee in the event of early cancellation of a loan, insurance
contract, or service contract by the customer. Finance and insurance commission
revenue is recorded net of estimated chargebacks at the time the related
contract is placed with the financial institution.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $290,267 for the year ended December 31, 1997. Estimated
commission expense charged to cost of sales was approximately $60,827 and
$80,195 for the six months ended March 31, 1997 and 1998, respectively
(unaudited).
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 vehicle inventory.
The Company operates under a dealer agreement with the manufacturer. The
Company's dealer agreement does not give it the exclusive right to sell the
manufacturer's product within a given geographic area. The Company could be
materially adversely affected if the manufacturer awards franchises to others
in the same market where the Company is operating. A similar adverse effect
could occur if existing competing franchised dealers increase their market
share in the Company's market. 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
$761,776 at December 31, 1997.
Inventories -- Inventories of new and demonstrator vehicles are valued at
the lower of last-in, first-out method ("LIFO") cost or market. Inventories of
used vehicles are stated at the lower of specific cost or market. All other
inventories are generally stated at replacement cost, which approximates cost
on the first-in, first-out method ("FIFO").
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method 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 ................. 7-31.5
Office equipment and fixtures .......... 5-7
Parts and service equipment ............ 5-10
Company vehicles ....................... 5
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
Income Taxes -- The provision for income taxes includes federal and state
taxes currently payable and deferred taxes. Deferred taxes are determined
utilizing an asset and liability approach as required by Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. This method gives
consideration to the future tax consequences associated with differences
between financial accounting and tax basis of assets and liabilities. This
method gives immediate effect to
F-58
<PAGE>
CASA FORD OF HOUSTON, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
changes in income tax laws upon enactment. A valuation allowance is established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.
Goodwill -- Goodwill is being amortized on a straight-line basis over a
period of 15 years. Accumulated amortization at December 31, 1997 was $205,839.
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.
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 Company's market area of Houston, Texas.
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.
Fair Value of Financial Instruments -- As of December 31, 1997 the fair
value of the Company's financial instruments including accounts receivable,
receivable from shareholder, trade accounts payable, and long-term debt
approximate their book values.
Advertising -- The Company expenses advertising costs in the period
incurred. Advertising expense for 1997 amounted to $581,752.
Interim Financial Information -- The accompanying unaudited financial
information for the three months ended March 31, 1997 and 1998 have 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. RECEIVABLE FROM STOCKHOLDER
At December 31, 1997, the Company had a receivable due from a related
party totaling $428,310, bearing no stated interest rate. The receivable was
paid in full as of April 1998 pursuant to a dividend.
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
New and demonstrator vehicles ......... $ 7,969,681 $ 4,980,041
Used vehicles ......................... 996,821 1,484,967
Parts and accessories ................. 412,757 432,264
Other ................................. 77,896 247,032
----------- -----------
9,457,155 7,144,304
LIFO reserve .......................... (713,526) (713,526)
----------- -----------
Total ................................. $ 8,743,629 $ 6,430,778
=========== ===========
</TABLE>
F-59
<PAGE>
CASA FORD OF HOUSTON, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN -- Continued
Had the Company used the first-in, first-out method of valuing new
vehicles and parts inventory, pretax earnings would have been $1,304,193 in
1997.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $8,681,340 at December
31, 1997. The floor plan notes bear interest, payable monthly on the
outstanding balance at the prime rate plus 1% to 1-1/2% (prime rate was 8.5% at
December 31, 1997). Total floor plan interest expense amounted to $885,573 in
1997. 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. The maximum credit available under the financing
arrangement is $7,800,000 for 1997.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-------------- ------------
(Unaudited)
<S> <C> <C>
Leasehold improvements ................ $ 221,132 $ 222,496
Office equipment and fixtures ......... 780,133 785,025
Parts and service equipment ........... 437,504 454,163
Company vehicles ...................... 219,547 219,631
---------- ----------
1,658,317 1,681,315
Less accumulated depreciation ......... (746,701) (808,992)
---------- ----------
Property and equipment, net ........... $ 911,615 $ 872,323
========== ==========
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-------------- ------------
(Unaudited)
<S> <C> <C>
Unsecured note payable to a related party, in monthly installments of $25,500, plus
interest
at prime .............................................................................. $ 864,000 $ 787,500
Unsecured note payable in monthly installments of $14,880, plus interest at prime plus
1 1/2%, through February 2001 ......................................................... 570,960 524,237
Notes payable in monthly installments totaling $7,670, plus interest ranging from 9.7% to
10.7%, through December 2000 .......................................................... 104,433 92,389
Unsecured note payable in monthly installments of $2,083, plus interest at 8.55%, through
March 1999 ............................................................................ 31,250 27,083
Notes payable in monthly installments totaling $5,501, including interest at rates
ranging
from 4.748% to 9.312%, maturities from December 1998 to November 2000,
collateralized by Company vehicles .................................................... 156,921 142,934
Other notes payable ..................................................................... 75,401 54,014
----------- ----------
1,802,965 1,628,157
Less current maturities ................................................................. 782,098 770,425
----------- ----------
Long-term debt .......................................................................... $ 1,020,867 $ 857,732
=========== ==========
</TABLE>
F-60
<PAGE>
CASA FORD OF HOUSTON, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
5. LONG-TERM DEBT -- Continued
Future maturities of debt at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- --------------------------
<S> <C>
1998 ................... $ 782,098
1999 ................... 544,503
2000 ................... 441,084
2001 ................... 35,280
-----------
Total .................. $ 1,802,965
===========
</TABLE>
6. OPERATING LEASES
The Company leases its business premises, modular space and various
equipment under non-cancelable operating leases with terms up to 10 years.
Future minimum rental payments required under non-cancelable leases at December
31, 1997 are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
1998 ................... $ 305,560
1999 ................... 304,452
2000 ................... 304,452
2001 ................... 304,452
2002 ................... 304,452
Thereafter ............. 989,469
----------
Total .................. $2,512,837
==========
</TABLE>
Rent expense under all operating leases was $297,592 during 1997.
7. EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) Profit Sharing Plan (the "Plan"),
whereby substantially all of the employees of the Company meeting certain
service requirements are eligible to participate. Contributions by the Company
in 1997 were $20,733.
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following
components at December 31, 1997:
<TABLE>
<S> <C>
Current:
Federal .............. $ 482,949
State ................ 63,920
----------
546,869
Deferred:
Federal .............. (123,213)
State ................ (17,077)
----------
(140,290)
----------
Total ................ $ 406,579
==========
</TABLE>
F-61
<PAGE>
CASA FORD OF HOUSTON, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
8. INCOME TAXES -- Continued
The reconciliation of the statutory federal income tax rate with the
Company's federal and state overall effective income tax rate is as follows for
the year ending December 31, 1997:
<TABLE>
<S> <C>
Statutory federal rate ......... 34.00%
State income taxes ............. 2.90%
Miscellaneous .................. 1.26%
-----
Effective tax rate ............. 38.16%
=====
</TABLE>
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes.
Deferred income tax assets and liabilities consist of the following at
December 31, 1997:
<TABLE>
<S> <C>
Deferred tax assets -- primarily from differences relating to amortization of
extended
warranties ....................................................................... $ 522,261
Deferred tax liabilities -- primarily from differences relating to depreciation .... (29,389)
---------
Net deferred tax assets ............................................................ $ 492,872
=========
</TABLE>
9. COMMITMENTS
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 $902,057 at December 31, 1997.
10. SUBSEQUENT EVENT (UNAUDITED)
In April 1998, the Company entered into an agreement with Sonic
Automotive, Inc. ("Sonic") whereby Sonic purchased all of the outstanding
capital stock of the Company for a total purchase price of approximately $11.3
million. The initial purchase price was subject to adjustment based upon a
final determination of the net working capital of the Company. Of the total
purchase price approximately $9.0 million was paid in cash and the balance was
paid in 2,313 shares of Sonic preferred stock with a liquidation preference of
approximately $2.3 million.
F-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS OF
HIGGINBOTHAM AUTOMOTIVE GROUP
New Smyrna Beach, Florida
We have audited the accompanying combined balance sheet of Higginbotham
Automotive Group (the "Company"), which are under common ownership and
management, as of December 31, 1997, and the related combined 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, such financial statements present fairly, in all material
respects, the combined financial position of the Company as of December 31,
1997, and the combined results of its operations and its combined cash flows
for the year then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
August 21, 1998
F-63
<PAGE>
HIGGINBOTHAM AUTOMOTIVE GROUP
COMBINED BALANCE SHEETS
December 31, 1997 and June 30, 1998
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................. $ 4,653,226 $ 4,627,800
Accounts receivable ................................... 2,694,069 2,292,400
Finance notes receivable, net (Note 3) ................ 2,157,078 2,479,858
Inventories, net (Note 4) ............................. 14,442,063 9,893,278
Other current assets .................................. 449,690 556,828
----------- -----------
Total current assets ................................ 24,396,126 19,850,164
PROPERTY AND EQUIPMENT, NET (Notes 5 and 6) ............ 2,942,142 2,921,787
FINANCE NOTES RECEIVABLE, NET (Note 3) ................. 1,407,762 1,564,234
GOODWILL, NET (Note 1) ................................. 884,000 847,167
OTHER ASSETS ........................................... 364,936 373,918
----------- -----------
TOTAL ASSETS ........................................... $29,994,966 $25,557,270
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 4) .................. $16,217,355 $11,032,690
Notes payable -- other (Note 6) ....................... 3,237,083 3,034,879
Trade accounts payable ................................ 1,328,672 980,135
Dividends payable ..................................... 275,000 250,000
Current maturities -- long-term debt (Note 6) ......... 111,986 111,986
Accrued payroll and bonuses ........................... 299,996 135,284
Liability for finance chargebacks ..................... 287,160 306,568
Other accrued liabilities ............................. 717,179 1,464,300
----------- -----------
Total current liabilities ........................... 22,474,431 17,315,842
----------- -----------
LONG-TERM DEBT (Note 6) ................................ 1,117,533 1,063,720
----------- -----------
COMMITMENTS (Notes 8 and 10)
STOCKHOLDERS' EQUITY (Notes 2, 7 and 10):
Receivable from stockholder (Note 2) .................. (117,647)
Common stock of combined companies .................... 704,101 704,101
Paid-in capital ....................................... 2,360,301 2,360,301
Retained earnings ..................................... 3,456,247 4,113,306
----------- -----------
Total stockholders' equity .......................... 6,403,002 7,177,708
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............. $29,994,966 $25,557,270
=========== ===========
</TABLE>
See notes to combined financial statements.
F-64
<PAGE>
HIGGINBOTHAM AUTOMOTIVE GROUP
COMBINED STATEMENTS OF INCOME
Year ended December 31, 1997 and the six months ended June 30, 1997 and 1998
<TABLE>
<CAPTION>
Six months
Year ended ended June 30,
December 31, -----------------------------
1997 1997 1998
--------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
REVENUES:
Vehicle sales ................................................ $102,594,217 $51,721,258 $57,829,376
Parts, service and collision repair .......................... 10,496,298 5,083,979 5,362,859
Finance and insurance (Note 1) ............................... 3,060,356 1,667,583 1,583,384
------------ ----------- -----------
Total revenues ............................................. 116,150,871 58,472,820 64,775,619
COST OF SALES (Note 1) ........................................ 98,429,984 49,530,115 55,166,730
------------ ----------- -----------
GROSS PROFIT .................................................. 17,720,887 8,942,705 9,608,889
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Notes 3 and 8) .............................................. 13,099,284 6,617,958 6,948,065
DEPRECIATION AND AMORTIZATION ................................. 338,064 155,315 143,966
------------ ----------- -----------
OPERATING INCOME .............................................. 4,283,539 2,169,432 2,516,858
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense -- floor plan, net (Note 3) ................. (1,207,774) (635,061) (565,843)
Interest expense -- other .................................... (303,126) (163,605) (144,532)
Other income ................................................. 20,283 9,622 19,870
------------ ----------- -----------
Total other expense ........................................ (1,490,617) (789,044) (690,505)
------------ ----------- -----------
NET INCOME .................................................... $ 2,792,922 $ 1,380,388 $ 1,826,353
============ =========== ===========
Pro forma provision for income taxes (Note 1) (unaudited) ..... $ 1,077,509 $ 532,554 $ 704,606
============ =========== ===========
Pro forma net income (Note 1) (unaudited) ..................... $ 1,715,413 $ 847,834 $ 1,121,747
============ =========== ===========
</TABLE>
See notes to combined financial statements.
F-65
<PAGE>
HIGGINBOTHAM AUTOMOTIVE GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 7)
Year ended December 31, 1997 and the six months ended June 30, 1998
<TABLE>
<CAPTION>
Common
Stock of Total
Receivable Combined Paid-in Retained Stockholders'
from Stockholder Companies Capital Earnings Equity
------------------ ----------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 .................... $ -- $680,101 $1,994,301 $ 2,397,619 $ 5,072,021
Amounts loaned to stockholder .................. (117,647) -- -- -- (117,647)
Dividends declared ............................. -- -- (1,734,294) (1,734,294)
Capital contributions .......................... 24,000 366,000 -- 390,000
Net income ..................................... -- -- -- 2,792,922 2,792,922
---------- -------- ---------- ------------ ------------
BALANCE AT DECEMBER 31, 1997 .................... (117,647) 704,101 2,360,301 3,456,247 6,403,002
Stockholder loan repayment (unaudited) ......... 117,647 117,647
Dividends declared (unaudited) ................. (1,169,294) (1,169,294)
Net income (unaudited) ......................... 1,826,353 1,826,353
------------ ------------
BALANCE AT JUNE 30, 1998 (unaudited) ............ $ 0 $704,101 $2,360,301 $ 4,113,306 $ 7,177,708
========== ======== ========== ============ ============
</TABLE>
See notes to combined financial statements.
F-66
<PAGE>
HIGGINBOTHAM AUTOMOTIVE GROUP
STATEMENTS OF CASH FLOWS
For the Year ended December 31, 1997 and the six months ended June 30, 1997 and
1998
<TABLE>
<CAPTION>
Six months ended
Year ended June 30,
December 31, ---------------------------------
1997 1997 1998
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 2,792,922 $ 1,380,388 $ 1,826,353
------------ ------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on disposal of property and equipment .......................... (8,196) (31,163)
Depreciation and amortization ....................................... 338,064 155,315 143,966
Changes in assets and liabilities that relate to operations:
Decrease in accounts receivable .................................... 1,240,999 1,330,251 401,669
(Increase) decrease in inventories ................................. (1,818,431) 2,196,261 4,548,785
(Increase) in other current assets ................................. (313,642) (202,157) (107,138)
(Increase) decrease in noncurrent assets ........................... (35,178) 7,725 (8,982)
Increase (decrease) in floor plan notes payable .................... 1,897,022 (2,766,136) (5,184,665)
Increase in trade accounts payable and accrued liabilities ......... 329,888 482,122 253,280
Other .............................................................. (11,473) -- --
------------ ------------ ------------
Total adjustments ................................................. 1,619,053 1,172,218 46,915
------------ ------------ ------------
Net cash provided by operating activities ......................... 4,411,975 2,552,606 1,873,268
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................... (171,106) (38,360) (100,039)
Proceeds from disposal of property and equipment ...................... 43,800 13,261
Notes receivable ...................................................... (3,672,375) (2,215,490) (2,253,734)
Principal collected on notes receivable ............................... 4,246,561 2,230,071 1,774,482
------------ ------------ ------------
Net cash provided by (used in) investing activities ............... 446,880 (23,779) (566,030)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt .......................................... 20,144 267,998 --
Payments of long-term debt ............................................ (107,500) -- (53,813)
Dividends paid ........................................................ (1,491,294) (1,166,294) (1,194,294)
Amounts (advanced to) received from stockholder ....................... (958,922) (775,028) (84,557)
Issuance of common stock .............................................. 390,000 390,000
------------ ------------
Net cash provided by (used in) financing activities ............... (2,147,572) (1,283,324) (1,332,664)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... 2,711,283 1,245,503 (25,426)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................... 1,941,943 1,941,943 4,653,226
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................... $ 4,653,226 $ 3,187,446 $ 4,627,800
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-- Cash paid during the period for interest ........................... $ 321,763 $ 135,679 $ 165,050
============ ============ ============
</TABLE>
See notes to combined financial statements.
F-67
<PAGE>
HIGGINBOTHAM AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business -- Higginbotham Automotive Group (the "Company")
operates three automobile dealerships, one stand-alone used car facility, three
service departments, a body shop, and a finance company in the Daytona Beach
area of Florida. The Company sells new and used cars and light trucks, sells
replacement parts, provides maintenance, warranty, paint and repair services
and arranges related financing and insurance. The Company's three new vehicle
dealership locations sell vehicles manufactured by Acura, Mercedes, Chevrolet,
Oldsmobile, Ford and Mercury.
The accompanying combined financial statements include the accounts of the
following entities:
Higginbotham Automobiles, Inc.
Higginbotham Chevrolet-Oldsmobile, Inc.
Halifax Ford-Mercury, Inc.
Sunrise Auto World, Inc.
HMC Finance Corporation
The accompanying combined financial statements reflect the financial
position, results of operations, and cash flows of each of the above listed
companies. The combination of these entities has been accounted for at
historical cost in a manner similar to a pooling-of-interests because the
entities are under common management and control. All material intercompany
transactions have been eliminated.
Revenue Recognition -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of credit life, accident, health and disability insurance and
extended service contracts to customers. The Company may be assessed a
chargeback fee in the event of early cancellation of a loan, insurance
contract, or service contract by the customer. Finance and insurance commission
revenue is recorded net of estimated chargebacks at the time the related
contract is placed with the financial institution.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $519,405 for the year ended December 31, 1997. Estimated
commission expense charged to cost of sales was approximately $275,417 and
$270,806 for the six months ended June 30, 1997 and 1998, respectively
(unaudited).
Dealer Agreements -- The Company purchases substantially all of its new
vehicles from the manufacturers at the prevailing prices charged by the
manufacturers to their franchised dealers. The Company's sales could be
unfavorably impacted by the manufacturers' unwillingness or inability to supply
the dealerships with an adequate supply of new vehicle inventory.
The Company operates under dealer agreements with each manufacturer. The
Company's dealer agreements do not give it the exclusive right to sell the
manufacturers' product within a given geographic area. The Company could be
materially adversely affected if the manufacturers award franchises to others
in the same market where the Company is operating. A similar adverse effect
could occur if existing competing franchised dealers increase their market
share in the Company's market. 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 agreements.
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 were
approximately $1,516,000 at December 31, 1997.
Allowances for Credit Losses -- The Company provides for credit losses
using the allowance method. Accordingly, credit losses are charged to the
related allowance, and recoveries are credited to the allowance. Additions to
the allowance for credit losses are provided by charges to operations based on
various factors, including historical losses and existing
F-68
<PAGE>
HIGGINBOTHAM AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
economic conditions, which, in management's judgment, deserve current
recognition in estimating losses. Because of the uncertainty inherent in the
estimation process, management's estimate of the allowance for credit losses
may change in the near term.
Inventories -- Inventories of new and used vehicles, including
demonstrators, and parts and accessories are valued at the lower of specific
cost or market. Cost is determined using the last-in, first-out method ("LIFO")
for new vehicles and certain parts and accessories, and the first-in, first-out
method ("FIFO") for all other inventories.
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>
Buildings and improvements ............. 5-40
Office equipment and fixtures .......... 5-7
Parts and service equipment ............ 5-7
Company vehicles ....................... 5
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
Goodwill -- Goodwill represents the excess of the purchase price over the
estimated fair value of the net assets acquired and is being amortized on a
straight-line basis over a 15 year period. The cumulative amount of goodwill
amortization was approximately $221,000 at December 31, 1997. 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.
Income Taxes -- All of the entities included in the Company's accompanying
combined financial statements are organized as S Corporations for federal and
state income tax purposes. As such, the Company's taxable income is included in
the stockholders' annual income tax returns. Accordingly, no provision for
federal or state income taxes has been included in the Company's combined
statement of income.
The pro forma provision for income taxes and the pro forma net income for
the year ended December 31, 1997, and for the six months ended June 30, 1997
and 1998, 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.
Fair Value of Financial Instruments -- As of December 31, 1997 the fair
values of the Company's financial instruments including accounts and finance
notes receivables, receivables from stockholders, notes payable - floor plan,
trade accounts payable, payables to affiliated companies and long-term debt
approximate their carrying values due to either their length to maturity or the
existence of variable interest rates that approximate prevailing market rates.
Advertising -- The Company expenses advertising costs in the period
incurred. Advertising expenses for 1997 amounted to approximately $1,081,000.
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 market area of Daytona Beach,
Florida.
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.
F-69
<PAGE>
HIGGINBOTHAM AUTOMOTIVE GROUP
NOTES TO COMBINED 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, 1997 and 1998 has been prepared
on substantially the same basis as the audited financial statements, and
includes 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. RECEIVABLES FROM STOCKHOLDERS
At December 31, 1997, the Company had receivables due from stockholders
totaling $117,647, bearing no stated interest rate. The receivable was paid in
full as of June 1998 pursuant to a dividend.
3. FINANCE NOTES RECEIVABLE
The Company regularly provides financing to customers purchasing used
vehicles under a Buy-Here-Pay-Here installment note program. These customer
finance notes receivable have terms up to 36 months and provide for interest at
the rate of approximately 29%. As of December 31, 1997, the balances due on
finance notes totaled $4,265,946. The Company's allowance for credit losses for
these finance notes was approximately $701,000 at January 1, 1997 and December
31, 1997. The Company provided for and charged against the allowance losses of
approximately $739,000 during 1997.
4. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------------- ---------------
(Unaudited)
<S> <C> <C>
New and demonstrator vehicles ......... $ 14,320,621 $ 9,828,062
Used vehicles ......................... 2,802,854 2,738,187
Parts and accessories ................. 542,185 571,440
Other ................................. 40,268 19,454
------------ ------------
17,705,928 13,157,143
LIFO reserve .......................... (3,263,865) (3,263,865)
------------ ------------
Inventories, net ...................... $ 14,442,063 $ 9,893,278
============ ============
</TABLE>
Had the Company used the first-in, first-out method of valuing new
vehicles and certain parts and accessories, pretax earnings would have been
$2,869,044 in 1997.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $16,217,355 at
December 31, 1997. The floor plan notes bear interest, payable monthly on the
outstanding balances at rates ranging from prime to prime plus 1% (prime rate
was 8.5% at December 31, 1997). Total floor plan interest expense amounted to
$1,207,774 in 1997. 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 sheet.
F-70
<PAGE>
HIGGINBOTHAM AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------------- ---------------
(Unaudited)
<S> <C> <C>
Land .................................. $ 254,592 $ 254,592
Buildings and improvements ............ 3,489,286 3,479,508
Office equipment and fixtures ......... 870,494 948,030
Parts and service equipment ........... 674,746 711,461
Company vehicles ...................... 77,877 97,774
------------ ------------
5,366,995 5,491,365
Less accumulated depreciation ......... (2,424,853) (2,569,578)
------------ ------------
Property and equipment, net ........... $ 2,942,142 $ 2,921,787
============ ============
</TABLE>
6. FINANCING ARRANGEMENTS
Notes payable - other consists principally of a promissory note and
advances from a stockholder and advances from an affiliate company under common
ownership by a Company stockholder. The Company routinely finances its finance
notes receivable (see Note 3) through the issuance of short-term promissory
notes which are payable to a Company stockholder. The maximum amount that can
be advanced under the note is $3,000,000. This note has been and is expected to
be renewed on an annual basis.
Notes payable - other consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------------- ------------
(Unaudited)
<S> <C> <C>
Unsecured short-term promissory note to the principal stockholder - due on demand,
interest at 10% ................................................................ $2,857,792 $2,657,792
Unsecured non-interest bearing note to the principal stockholder - due on demand . 163,503 160,699
Unsecured non-interest bearing advances from an affiliate company - due on demand 215,788 216,388
---------- ----------
Notes payable - other ............................................................ $3,237,083 $3,034,879
========== ==========
</TABLE>
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Mortgage note payable to Barnett Bank of Volusia County, FL, due in monthly principal
installments of $8,958, plus interest at the bank's prime rate (8.0% at December 31,
1997) with the unpaid balance due September 9, 1999, secured by the Company's real
property located at 1307 North Dixie Freeway, New Smyrna Beach, FL ................. $1,209,375 $1,155,633
Other ................................................................................ 20,144 20,073
---------- ----------
1,229,519 1,175,706
Less current maturities .............................................................. (111,986) (111,986)
---------- ----------
Long-term debt ....................................................................... $1,117,533 $1,063,720
========== ==========
</TABLE>
F-71
<PAGE>
HIGGINBOTHAM AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
6. FINANCING ARRANGEMENTS -- Continued
Future maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- --------------------------
<S> <C>
1998 ................... $ 111,986
1999 ................... 1,106,709
2000 ................... 5,209
2001 ................... 5,615
----------
Total .................. $1,229,519
==========
</TABLE>
7. COMBINED STOCKHOLDERS' EQUITY
The capital structure of the entities included in the combined financial
statements of the Company at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Common Stock
-----------------------------------------------
Shares
Par Shares Issued and Paid-In
Value Authorized Outstanding Amount Capital
<S> <C> <C> <C> <C> <C>
Higginbotham Automobiles, Inc. ................. $ 1 100 100 $ 100 $1,994,301
Higginbotham Chevrolet -- Oldsmobile, Inc...... 100 3,000 2,400 224,000 366,000
Halifax Ford -- Mercury, Inc. .................. No Par 100 100 289,795 --
Sunrise Auto World, Inc. ....................... No Par 100 100 25,000 --
HMC Finance Corporation ........................ No Par 100 100 165,206 --
-------- ----------
Total .......................................... $704,101 $2,360,301
======== ==========
</TABLE>
8. RELATED PARTY TRANSACTIONS
Management bonuses of $276,834 were paid to Company stockholders and
certain management companies owned by the Company's principal stockholder in
1997. Unpaid bonuses and dividends are included in accrued payroll and bonuses
and dividends payable, respectively, in the accompanying combined balance
sheet.
The Company has entered into short-term management and expense
reimbursement agreements with Higginbotham Management Company ("HMC") for
management and consultation services. HMC is an affiliated entity owned by the
Company's principal stockholder. Under these agreements, fixed monthly
management fees together with certain contingency payments based on the number
of new and used vehicles sold during the month and provisions for reimbursement
for expenditures are incurred by HMC on the Company's behalf. The Company paid
fees under these agreements totaling approximately $1,120,000 in 1997 which are
included in selling, general and administrative expenses in the accompanying
combined statement of income.
The Company leases substantially all of its facilities directly from the
Company's principal stockholder or from a corporation which is owned by that
stockholder. Rent expense under these leases was approximately $517,000 in
1997. Other leases consist primarily of leases for certain business premises,
modular space and various equipment with terms up to twenty years. Rent expense
under all operating leases was approximately $569,000 during 1997. Future
minimum rental payments required under non-cancelable operating leases at
December 31, 1997 are as follows:
F-72
<PAGE>
HIGGINBOTHAM AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
8. RELATED PARTY TRANSACTIONS -- Continued
<TABLE>
<CAPTION>
Related
Year Ending December 31, Party Other Total
<S> <C> <C> <C>
1998 ..................... $ 465,572 $142,138 $ 607,710
1999 ..................... 461,676 100,707 562,383
2000 ..................... 329,176 66,630 395,806
2001 ..................... 302,676 59,038 361,714
2002 ..................... 292,818 23,447 316,265
Thereafter ............... 1,559,786 894 1,560,680
---------- -------- ----------
Total .................... $3,411,704 $392,854 $3,804,558
========== ======== ==========
</TABLE>
9. EMPLOYMENT BENEFIT PLANS
The Company has a qualified 401(k) Profit Sharing Plan (the "Plan"),
whereby substantially all of the employees of the Company meeting certain
service requirements are eligible to participate. Contributions by the Company
in 1997 were approximately $19,000.
10. STOCK COMPENSATION ARRANGEMENT
Effective January 1, 1997, the Company entered into an incentive stock
plan agreement with a Company stockholder who owns 360 shares of Higginbotham
Chevrolet-Oldsmobile, Inc. This agreement provides a base salary and bonus with
an option to use this compensation along with any other compensation earned
from the Company and any entity controlled by the principal stockholder, to
purchase up to 25% of the outstanding stock of Higginbotham Chevrolet --
Oldsmobile, Inc.(see Note 7). As of December 31, 1997, no stock has been
purchased under this agreement.
11. SUBSEQUENT EVENT (UNAUDITED)
In July 1998, the Company signed an asset purchase agreement with Sonic
Automotive, Inc. ("Sonic") whereby Sonic will purchase the Company's assets for
a total price of approximately $27.0 million including the repayment of
approximately $2.7 million in indebtedness. This acquisition was consummated in
September 1998. The total purchase price was paid with approximately $18.2
million in cash and Class A Common Stock with a market value of approximately
$8.3 million as of the closing date of the acquisition. The remaining $0.5
million of the cash portion of the purchase price is payable in December 1998.
F-73
<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 the Company as of December
31, 1995 and 1996, and the results of its operations and its 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-74
<PAGE>
DYER & DYER, INC.
BALANCE SHEETS
December 31, 1995 and 1996 and June 30, 1997
<TABLE>
<CAPTION>
December 31,
------------------------------- June 30,
1995 1996 1997
--------------- --------------- --------------
(Unaudited)
<S> <C> <C> <C>
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-75
<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
-------------- -------------- -------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
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 (Note 1) .......... 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 (Note 1) ................... 54,127,162 55,784,883 62,559,885 31,975,433 32,381,114
----------- ----------- ----------- ----------- -----------
GROSS PROFIT ............................. 7,002,423 6,330,865 10,016,738 4,487,012 5,081,522
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................ 6,154,468 5,613,128 6,984,895 3,347,148 3,494,565
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-76
<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-77
<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>
Year ended December 31, Six months ended June 30,
--------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
------------- --------------- --------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
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-78
<PAGE>
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business -- Dyer & Dyer, Inc. (the "Company") was
incorporated in South Carolina in 1978, and operates a Volvo automobile
dealership in Atlanta, Georgia. The Company sells new and used cars, sells
replacement parts, provides vehicle maintenance, warranty, paint and repair
services and arranges related financing and insurance.
In August 1997, the Company signed a definitive purchase agreement whereby
its net assets would be acquired by Sonic Automotive, Inc. ("Sonic") for $18
million. This acquisition is to be effective prior to the completion of an
anticipated public offering of common stock by Sonic Automotive in 1997. In
addition to the $18 million, the Company's stockholder will receive a warrant
entitling the holder to acquire common stock of Sonic Automotive at an exercise
price equal to the public offering stock price.
In connection with Volvo's approval of the sale of the Company to Sonic,
Volvo, among other things, conditioned its approval upon Richard Dyer,
acquiring and maintaining a 20% interest in the subsidiary of Sonic that will
operate the Volvo franchise. Mr. Dyer will finance all of the purchase price
for this 20% interest by the issuance of a promissory note to be secured by Mr.
Dyers' interest in the dealership. The principal amount of the note will be
$3.6 million and it will bear interest at the lowest applicable federal rate,
payable annually. Mr. Dyers' interest in the dealership will be redeemed and
the note will be due and payable in full when Volvo no longer requires Mr. Dyer
to maintain his interest in the dealership.
Revenue Recognition -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of credit life, accident, health and disability insurance and
extended service contracts to customers. The Company may be assessed a
chargeback fee in the event of early cancellation of a loan, insurance
contract, or service contract by the customer. Finance and insurance commission
revenue is recorded net of estimated chargebacks at the time the related
contract is placed with the financial institution.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $6,096, $8,215 and $12,388 for the years ended December 31, 1994,
1995, and 1996, respectively. Estimated commission expense charged to cost of
sales was approximately $6,411 and $3,867 for the six months ended June 30,
1996 and 1997, respectively (unaudited).
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.
F-79
<PAGE>
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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>
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.
F-80
<PAGE>
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------- June 30,
1995 1996 1997
------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
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.
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
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
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>
F-81
<PAGE>
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS -- Continued
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.
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-82
<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 the Company as of
December 31, 1995 and 1996, and the combined results of its operations and its
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-83
<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
------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
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 (Note 4) .................... 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-84
<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
-------------- -------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
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 (Note 1) ................... 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 (Note 1) ............................ 63,860,705 88,137,717 35,724,354 64,206,340
----------- ------------ ----------- -----------
GROSS PROFIT ...................................... 9,241,035 13,352,093 5,854,745 10,347,802
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...... 7,724,640 11,426,205 4,887,868 8,032,401
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-85
<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
Common Earnings
Stock of and Members'
Combined and 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-86
<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>
Year ended December 31, Six months ended June 30,
------------------------------- -------------------------------
1995 1996 1996 1997
--------------- --------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
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-87
<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.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of credit life, accident, health and disability insurance and
extended service contracts to customers. The Company may be assessed a
chargeback fee in the event of early cancellation of a loan, insurance
contract, or service contract by the customer. Finance and insurance commission
revenue is recorded net of estimated chargebacks at the time the related
contract is placed with the financial institution.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $279,480 and $380,903 for the years ended December 31, 1995 and
1996, respectively. Estimated commission expense charged to cost of sales was
approximately $192,285 and $261,319 for the six months ended June 30, 1996 and
1997, respectively (unaudited).
F-88
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED 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
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.
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.
F-89
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
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.
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>
F-90
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
2. BUSINESS ACQUISITIONS -- Continued
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, 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.
F-91
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------- June 30,
1995 1996 1997
------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
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.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------- June 30,
1995 1996 1997
------------ ------------- ------------
(Unaudited)
<S> <C> <C> <C>
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 noncancelable 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.
F-92
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
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
------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
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>
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------- June 30,
1995 1996 1997
------------ ------------- --------------
(Unaudited)
<S> <C> <C> <C>
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.
F-93
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
7. RELATED PARTIES -- Continued
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.
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>
F-94
<PAGE>
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued
8. EQUITY -- Continued
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-95
<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 the Company as of
December 31, 1996, and the combined results of its operations and its 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-96
<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
-------------- --------------
(Unaudited)
<S> <C> <C>
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-97
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF INCOME
Year ended December 31, 1996 and the six months ended June 30, 1996 and 1997
<TABLE>
<CAPTION>
Year ended Six months ended June 30,
December 31, -----------------------------
1996 1996 1997
--------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
REVENUES:
Vehicle sales .............................. $124,538,878 $55,071,168 $69,798,274
Finance and insurance (Note 1) ............. 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 (Note 1) ...................... 122,144,997 54,058,544 68,487,590
------------ ----------- -----------
GROSS PROFIT ................................ 15,554,364 7,157,508 8,582,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,876,217 6,523,200 6,721,836
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-98
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31, 1996 and the 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-99
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
Year ended December 31, 1996 and the six months ended June 30, 1996 and 1997
<TABLE>
<CAPTION>
Year ended Six months ended June 30,
December 31, ---------------------------
1996 1996 1997
---------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
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-100
<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.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of credit life, accident, health and disability insurance and
extended service contracts to customers. The Company may be assessed a
chargeback fee in the event of early cancellation of a loan, insurance
contract, or service contract by the customer. Finance and insurance commission
revenue is recorded net of estimated chargebacks at the time the related
contract is placed with the financial institution.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $338,785 for the year ended December 31, 1996. Estimated
commission expense charged to cost of sales was approximately $213,529 and
$215,235 for the six months ended June 30, 1996 and 1997, respectively
(unaudited).
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.
F-101
<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)
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>
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.
F-102
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOORPLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
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 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
-------------- ------------
(Unaudited)
<S> <C> <C>
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>
F-103
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
4. NOTE PAYABLE TO BANK AND LONG-TERM DEBT
The note payable with a balance of $68,168 at December 31, 1996 is due in
monthly installments of $7,172, including interest at 8.25%, through October,
1997. The note is collateralized by modular buildings used in Company
operations.
In July, 1996, the Company borrowed $1,000,000 from Chrysler Financial
Corporation. Payments of $11,905 plus interest at prime plus .5% (8.75% at
December 31, 1996) are due monthly, through July, 2003. The loan is
collateralized by a security interest in all assets of LNCPJE. Principal is due
as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997 ............................ $142,857
1998 ............................ 142,857
1999 ............................ 142,857
2000 ............................ 142,857
2001 ............................ 142,857
2002 ............................ 142,857
Thereafter ...................... 71,430
--------
928,572
Less current maturities ......... 142,857
--------
Long-term debt .................. $785,715
========
</TABLE>
5. OPERATING LEASES
The Company leases its operating facilities from its shareholders under
three separate leases expiring March, 2000 and June, 2001. Monthly payments
under these leases at December 31, 1996, total $83,000. One of these leases has
an option for renewal for two additional five year terms. The Company pays all
operating costs such as utilities, repairs, maintenance and insurance relating
to these facilities. Total payments made to related parties under these leases
in 1996 were $786,000 exclusive of operating costs.
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>
F-104
<PAGE>
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
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-105
<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 the Company 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-106
<PAGE>
KEN MARKS FORD, INC.
BALANCE SHEETS
April 30, 1997 and July 31, 1997
<TABLE>
<CAPTION>
April 30, July 31,
1997 1997
------------- --------------
(Unaudited)
<S> <C> <C>
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-107
<PAGE>
KEN MARKS FORD, INC.
STATEMENTS OF INCOME
Year ended April 30, 1997 and the three months ended July 31, 1996 and 1997
<TABLE>
<CAPTION>
Year ended Three months ended July 31,
April 30, -----------------------------
1997 1996 1997
--------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
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 (Note 1) ........................... 2,188,071 596,854 529,109
------------ ----------- -----------
Total revenues ......................................... 145,349,441 38,081,277 36,627,309
COST OF SALES (Note 1) .................................... 127,281,076 33,231,739 32,296,634
------------ ----------- -----------
GROSS PROFIT .............................................. 18,068,365 4,849,538 4,330,675
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 7) ..... 15,333,774 3,914,881 3,542,942
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-108
<PAGE>
KEN MARKS FORD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended April 30, 1997 and the 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-109
<PAGE>
KEN MARKS FORD, INC.
STATEMENTS OF CASH FLOWS
Year ended April 30, 1997 and the three months ended
July 31, 1996 and 1997
<TABLE>
<CAPTION>
Three months ended July 31,
Year ended ---------------------------
April 30, 1997 1996 1997
--------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 470,280 $ 276,219 $ 198,154
------------ ---------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ......................................... 100,771 20,846 20,302
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) 323,213 816,067
(Increase) decrease in inventories ................................... 5,197,288 1,129,058 (593,075)
(Increase) decrease in prepaid expenses .............................. 429,467 (595,810) 264,511
Decrease in due from related parties ................................. 134,141 -- --
Increase (decrease) in notes payable, floor plan ..................... (3,401,971) (663,355) 162,611
Increase in trade accounts payable ................................... 322,319 219,902 13,285
Decrease in accrued payroll and bonuses .............................. (284,875) (400,442) (117,658)
Increase (decrease) in accrued expenses and other payables ........... (848,544) 484,719 (235,888)
Decrease in allowance for insurance, service contract and finance
income chargebacks .................................................. (85,107) -- --
Increase (decrease) in income tax payable ............................ (39,839) 112,049 (15,161)
------------ ---------- ----------
Total adjustments ................................................... 549,462 636,780 314,994
------------ ---------- ----------
Net cash provided by operating activities ............................. 1,019,742 912,999 513,148
------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ..................................... (183,674) (5,060) (79,821)
------------ ---------- ----------
Net cash used in investing activities ................................. (183,674) (5,060) (79,821)
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to stockholders .......................................... (20,000) -- --
------------ ---------- ----------
Net cash used in financing activities ................................. (20,000) -- --
------------ ---------- ----------
NET INCREASE IN CASH ..................................................... 816,068 907,939 433,327
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................. 1,688,034 1,688,034 2,504,102
------------ ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................... $ 2,504,102 $2,595,973 $2,937,429
============ ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest .............................................................. $ 2,008,468 $ 480,132 $ 485,358
Income taxes .......................................................... $ 322,064 $ 55,000 $ 144,000
</TABLE>
See notes to financial statements.
F-110
<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.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. The Company also receives commissions
from the sale of credit life, accident, health and disability insurance and
extended service contracts to customers. The Company may be assessed a
chargeback fee in the event of early cancellation of a loan, insurance
contract, or service contract by the customer. Finance and insurance commission
revenue is recorded net of estimated chargebacks at the time the related
contract is placed with the financial institution.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Estimated commission expense charged to cost of sales was
approximately $410,166 for the year ended April 30, 1997. Estimated commission
expense charged to cost of sales was approximately $120,059 and $101,237 for
the three months ended July 31, 1996 and 1997, respectively (unaudited).
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.
F-111
<PAGE>
KEN MARKS FORD, INC.
NOTES TO 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 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.
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
------------- --------------
(Unaudited)
<S> <C> <C>
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
<TABLE>
<CAPTION>
Property and equipment is comprised of the following:
April 30, July 31,
1997 1997
------------- ------------
(Unaudited)
<S> <C> <C>
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-112
<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 (17,705)
---------
depreciation
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-113
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or 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 Issuers or the Initial Purchasers. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Notes or
Guarantees 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 Issuers since the date hereof.
--------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Prospectus Summary ................................. 3
Risk Factors ....................................... 15
The Exchange Offer ................................. 27
Use of Proceeds .................................... 33
The 1998 Acquisitions .............................. 33
Capitalization ..................................... 36
Selected Consolidated Financial Data ............... 37
Unaudited Pro Forma Consolidated Financial
Data ............................................ 40
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ...................................... 48
Business ........................................... 58
Management ......................................... 71
Certain Transactions ............................... 75
Principal Stockholders ............................. 80
Description of Certain Other Indebtedness .......... 82
Description of the New Notes ....................... 84
Plan of Distribution ............................... 113
Legal Matters ...................................... 114
Experts ............................................ 114
Available Information .............................. 114
Index to Financial Statements ...................... F-1
</TABLE>
[SONIC AUTOMOTIVE INC TM LOGO]
Offer to exchange all outstanding
11% Senior Subordinated Notes Due 2008, Series A
($125,000,000 Principal Amount)
for
11% Senior Subordinated Notes Due 2008, Series B
--------------------------------
PROSPECTUS
--------------------------------
ALL TENDERED OLD NOTES, EXECUTED
LETTERS OF TRANSMITTAL AND OTHER
RELATED DOCUMENTS SHOULD BE
DIRECTED TO THE EXCHANGE AGENT.
QUESTIONS AND REQUESTS FOR ASSISTANCE
AND REQUESTS FOR ADDITIONAL COPIES OF
THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE ADDRESSED TO
THE EXCHANGE AGENT AS FOLLOWS:
BY REGISTERED OR CERTIFIED MAIL:
U.S. Bank Trust National Association
180 East Fifth Street
Mail Code: SPFT0210
St. Paul, Minnesota 55101
Attn: Specialized Finance
BY HAND OR OVERNIGHT COURIER:
U.S. Bank Trust National Association
180 East Fifth Street
Mail Code: SPFT0210
St. Paul, Minnesota 55101
Attn: Specialized Finance
BY FACSIMILE:
(612) 244-1537 (MN)
Confirm by Telephone (612) 244-5011 (MN)
(Originals of all documents submitted by facsimile should be sent promptly by
hand, overnight courier, or registered or certified mail)
November 5, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Company's Bylaws effectively provide that the Company shall, to the
full extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as amended from time to time ("Section 145"), indemnify all
persons whom it may indemnify pursuant thereto. In addition, the Company's
Certificate of Incorporation eliminates personal liability of its directors to
the full extent permitted by Section 102(b)(7) of the General Corporation Law
of the State of Delaware, as amended from time to time ("Section 102(b)(7)").
Section 145 permits a corporation to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent
that the court in which the action or suit was brought shall determine upon
application that the defendant officers or directors are reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
Section 102(b)(7) provides that a corporation may eliminate or limit that
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith of which involve
intentional misconduct or a knowing violation of law, (iii) for willful or
negligent conduct in paying dividends or repurchasing stock out of other than
lawfully available funds or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or
limit the liability of a director for any act or omission occurring prior to
the date when such provision becomes effective.
The Company maintains insurance against liabilities under the Securities
Act of 1933 for the benefit of its officers and directors.
Section 4(b) of the Registration Rights Agreement (filed as Exhibit 4.1 to
this Registration Statement) provides that the holders of the Old Notes covered
by this Registration Statement severally and not jointly will indemnify and
hold harmless the Company, the Guarantors, and their respective officers,
directors, partners, employees, representatives and agents from and against any
loss, liability, claim, damage or expense caused by any untrue statement or
omission, or alleged untrue statement or omission, in the Registration
Statement, in the Prospectus or in any amendment or supplement thereto, in each
case to the extent that the statement or omission was made in reliance upon and
in conformity with written information furnished to the Company by the holders
of the Old Notes covered by this Registration Statement expressly for use
therein, provided, however, that no such holder of the Old Notes shall be
liable for any claims hereunder in excess of the amount of net proceeds
received by such holder of the Old Notes from the sale of Registrable
Securities pursuant to such Registration Statement.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ------------------------------------------------------------------------------------------------------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-33295) of the Company (the
"Form S-1")).
3.2* Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Form S-1).
4.1* Registration Rights Agreement dated as of July 31, 1998 among Sonic Automotive, Inc., the
Guarantors named therein and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith,
Incorporated, NationsBanc Montgomery Securities LLC and BancAmerica Robertson Stephens.
4.2* Indenture dated as of July 1, 1998 between Sonic Automotive, Inc. and U.S. Bank Trust National
Association.
4.3* Form of 11% Senior Subordinated Note Due 2008, Series B.
5.1 Opinion of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities being
registered.
10.1* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Nelson E.
Bowers, II or his affiliates (incorporated by reference to Exhibit 10.1 to the Form S-1).
10.2* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Marks
Holding Company, Inc. (incorporated by reference to Exhibit 10.2 to the Form S-1).
10.3* Lease Agreement dated as of January 1, 1995 between Lone Star Ford, Inc. and Viking Investment
Associates (incorporated by reference to Exhibit 10.3 to the Form S-1).
10.4* Lease Agreement dated as of October 23, 1979 between O. Bruton Smith, Bonnie Smith and Town and
Country Ford, Inc. (incorporated by reference to Exhibit 10.4 to the Form S-1).
10.5* North Carolina Warranty Deed dated as of April 24, 1987 between O. Bruton Smith and Bonnie Smith,
as Grantors, and STC Properties, as Grantee (incorporated by reference to Exhibit 10.5 to the Form
S-1).
10.6* Lease dated January 13, 1995 between JAG Properties LLC and Jaguar of Chattanooga LLC
(incorporated by reference to Exhibit 10.6 to the Form S-1).
10.7* Lease dated October 18, 1991 by and between Nelson E. Bowers II, Thomas M. Green, Jr., and Infiniti
of Chattanooga, Inc. (incorporated by reference to Exhibit 10.7 to the Form S-1).
10.8* Amendment to Lease Agreement dated as of January 13, 1995 among Nelson E. Bowers II,
Thomas M. Green, Jr., JAG Properties LLC and Infiniti of Chattanooga, Inc. (incorporated by
reference to Exhibit 10.8 to the Form S-1).
10.9* Lease dated March 15, 1996 between Cleveland Properties LLC and Cleveland Chrysler-Plymouth-
Jeep-Eagle LLC (incorporated by reference to Exhibit 10.9 to the Form S-1).
10.10* Lease Agreement dated January 2, 1993 among Nelson E. Bowers II, Thomas M. Green, Jr. and
Cleveland Village Imports, Inc. (incorporated by reference to Exhibit 10.10 to the Form S-1).
10.11* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing dated
August 10, 1972 by Lone Star Ford, Inc. (incorporated by reference to Exhibit 10.11 to the Form S-1).
10.12* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing and
Security Agreement dated August 22, 1984 by Town and Country Ford, Inc. (incorporated by reference
to Exhibit 10.12 to the Form S-1).
10.13* Wholesale Floor Plan Security Agreement dated October 5, 1990 between Marcus David Corporation
(d/b/a Town & Country Toyota) and World Omni Financial Corp. (incorporated by reference to Exhibit
10.13 to the Form S-1).
10.14* Demand Promissory Note dated October 5, 1990 of Marcus David Corporation (d/b/a Town & Country
Toyota) in favor of World Omni Financial Corp. (incorporated by reference to Exhibit 10.14 to the
Form S-1).
10.15* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 21,
1995 between Cleveland Chrysler-Plymouth-Jeep-Eagle LLC and Chrysler Credit Corporation
(incorporated by reference to Exhibit 10.15 to the Form S-1).
10.15 a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Cleveland Chrysler
Plymouth Jeep Eagle, LLC (incorporated by reference to Exhibit 10.15a to the Form S-1).
10.16* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Saturn of
Chattanooga, Inc. (incorporated by reference to Exhibit 10.16a to the Form S-1).
10.17* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 24,
1995 between Nelson Bowers Ford, L.P. and Chrysler Credit Corporation (incorporated by reference to
Exhibit 10.17 to the Form S-1).
10.17 a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Nelson Bowers Ford
L.P. (incorporated by reference to Exhibit 10.17a to the Form S-1).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ----------------------------------------------------------------------------------------------------
<S> <C>
10.18* Floor Plan Agreement dated May 6, 1996 between European Motors, LLC and NationsBank, N.A.
(incorporated by reference to Exhibit 10.18 to the Form S-1).
10.19* Floor Plan Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A.
(incorporated by reference to Exhibit 10.19 to the Form S-1).
10.19 a* Security Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A.
(incorporated by reference to Exhibit 10.19a to the Form S-1).
10.20* Floor Plan Agreement dated October 17, 1996 between European Motors of Nashville, LLC and
NationsBank, N.A. (incorporated by reference to Exhibit 10.20 to the Form S-1).
10.20 a* Security Agreement dated October 17, 1996 between European Motors of Nashville, LLC and
NationsBank, N.A. (incorporated by reference to Exhibit 10.20a to the Form S-1).
10.21* Floor Plan Agreement dated March 5, 1997 between Nelson Bowers Dodge, LLC (d/b/a Dodge of
Chattanooga) and NationsBank, N.A. (incorporated by reference to Exhibit 10.21 to the Form S-1).
10.22* Security Agreement and Master Credit Agreement dated May 15, 1996 between Lake Norman Chrysler
Plymouth Jeep Eagle, LLC and Chrysler Financial Corporation (incorporated by reference to Exhibit
10.22 to the Form S-1).
10.22 a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman
Chrysler Plymouth Jeep Eagle, LLC (incorporated by reference to Exhibit 10.22a to the Form S-1).
10.23* Security Agreement & Capital Loan Agreement dated May 15, 1996 between Lake Norman Dodge,
Inc. and Chrysler Financial Corp. (incorporated by reference to Exhibit 10.23 to the Form S-1).
10.23 a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman
Dodge, Inc. (incorporated by reference to Exhibit 10.23a to the Form S-1).
10.23 b* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman
Dodge, Inc. (incorporated by reference to Exhibit 10.23b to the Form S-1).
10.24* Security Agreement and Master Credit Agreement (Non-Chrysler Corporation Dealer) dated May 15,
1996 between Lake Norman Chrysler Plymouth Jeep Eagle, LLC and Chrysler Financial Corporation
(incorporated by reference to Exhibit 10.24 to the Form S-1).
10.24 a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman
Chrysler Plymouth Jeep Eagle, LLC (incorporated by reference to Exhibit 10.24a to the Form S-1).
10.25* Floor Plan Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc.
(incorporated by reference to Exhibit 10.25 to the Form S-1).
10.25 a* Security Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc.
(incorporated by reference to Exhibit 10.25a to the Form S-1).
10.26* Security Agreement and Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 21,
1995 between Cleveland Village Imports, Inc. (d/b/a Cleveland Village Honda, Inc.) and Chrysler
Credit Corporation (incorporated by reference to Exhibit 10.26 to the Form S-1).
10.27* Jaguar Credit Corporation Automotive Wholesale Plan Application for Wholesale Financing and
Security Agreement dated March 14, 1995 by Jaguar of Chattanooga LLC (incorporated by reference
to Exhibit 10.27 to the Form S-1).
10.28* Assignment of Joint Venture Interest in Chartown dated as of June 30, 1997 among Town and Country
Ford, Inc., SMDA LLC and Sonic Financial Corporation (incorporated by reference to Exhibit 10.28 to
the Form S-1).
10.29* Form of Employment Agreement between the Company and O. Bruton Smith (incorporated by
reference to Exhibit 10.29 to the Form S-1).
10.30* Form of Employment Agreement between the Company and Bryan Scott Smith (incorporated by
reference to Exhibit 10.30 to the Form S-1).
10.31* Form of Employment Agreement between the Company and Theodore M. Wright (incorporated by
reference to Exhibit 10.31 to the Form S-1).
10.32* Form of Employment Agreement between the Company and Nelson E. Bowers, II (incorporated by
reference to Exhibit 10.32 to the Form S-1).
10.33* Tax Allocation Agreement dated as of June 30, 1997 between the Company and Sonic Financial
Corporation (incorporated by reference to Exhibit 10.33 to the Form S-1).
10.34* Form of Sonic Automotive, Inc. Stock Option Plan (incorporated by reference to Exhibit 10.34 to the
Form S-1).
10.35* Form of Sonic Automotive, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.35 to the Form S-1).
10.36* Subscription Agreement dated as of June 30, 1997 between O. Bruton Smith and the Company
(incorporated by reference to Exhibit 10.36 to the Form S-1).
10.37* Subscription Agreement dated as of June 30, 1997 between Sonic Financial Corporation and the
Company (incorporated by reference to Exhibit 10.37 to the Form S-1).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.38* Subscription Agreement dated as of June 30, 1997 between Bryan Scott Smith and the Company
(incorporated by reference to Exhibit 10.38 to the Form S-1).
10.39* Subscription Agreement dated as of June 30, 1997 between William S. Egan and the Company
(incorporated by reference to Exhibit 10.39 to the Form S-1).
10.40* Asset Purchase Agreement dated as of May 27, 1997 by and among Sonic Auto World, Inc., Lake
Norman Dodge, Inc., Lake Norman Chrysler-Plymouth-Jeep-Eagle LLC, Quinton M. Gandy and
Phil M. Gandy, Jr. (confidential portions omitted and filed separately with the SEC) (incorporated by
reference to Exhibit 10.40 to the Form S-1).
10.41* Asset Purchase Agreement dated as of June 24, 1997 by and among Sonic Auto World, Inc., Kia of
Chattanooga, LLC, European Motors of Nashville, LLC, European Motors, LLC, Jaguar of
Chattanooga LLC, Cleveland Chrysler-Plymouth-Jeep-Eagle LLC, Nelson Bowers Dodge, LLC,
Cleveland Village Imports, Inc., Saturn of Chattanooga, Inc., Nelson Bowers Ford, L.P., Nelson E.
Bowers II, Jeffrey C. Rachor, and the other shareholders named herein (confidential portions omitted
and filed separately with the SEC) (incorporated by reference to Exhibit 10.41 to the Form S-1).
10.41 a* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Bowers Acquisition
(incorporated by reference to Exhibit 10.41a to the Form S-1).
10.42* Stock Purchase Agreement dated as of July 29, 1997 between Sonic Auto World, Inc. and Ken Marks,
Jr., O.K. Marks, Sr. and Michael J. Marks (confidential portions omitted and filed separately with the
SEC) (incorporated by reference to Exhibit 10.42 to the Form S-1).
10.43* Asset Purchase Agreement dated as of August 1997 by and among Sonic Automotive, Inc., Dyer &
Dyer, Inc. and Richard Dyer (confidential portions omitted and filed separately with the SEC)
(incorporated by reference to Exhibit 10.43 to the Form S-1).
10.43 a* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Dyer Acquisition (incorporated
by reference to Exhibit 10.43a to the Form S-1).
10.44* Security Agreement and Master Credit Agreement dated April 21, 1995 between Cleveland Chrysler
Plymouth Jeep Eagle and Chrysler Credit Corporation (incorporated by reference to Exhibit 10.44 to
the Form S-1).
10.45* Promissory Note dated as of August 28, 1997 by Sonic Automotive, Inc. in favor of NationsBank,
N.A. (incorporated by reference to Exhibit 10.45 to the Form S-1).
10.46* Credit Agreement dated October 15, 1997 by and between Sonic Automotive, Inc. and Ford Motor
Credit Company (incorporated by reference to Exhibit 10.46 to the Form S-1).
10.47* Automotive Wholesale Plan Application For Wholesale Financing And Security Agreement dated
June 29, 1982 between Ford Motor Credit Company and O.K. Marks Ford, Inc. (incorporated by
reference to Exhibit 10.47 to the Form S-1).
10.48* Supplemental Agreement between the Company and Ford Motor Company (incorporated by reference
to Exhibit 10.48 to the Form S-1).
10.49* Agreement between Toyota Motors Sales USA and the Company (incorporated by reference to Exhibit
10.49 to the Form S-1).
10.50* Ford Sales and Service Agreement with Town and Country Ford (incorporated by reference to Exhibit
10.50 to the Form S-1).
10.51* Ford Sales and Service Agreement with Lone Star Ford (incorporated by reference to Exhibit 10.51 to
the Form S-1).
10.52* Ford Sales and Service Agreement with Fort Mill Ford (incorporated by reference to Exhibit 10.52 to
the Form S-1).
10.53* Ford Sales and Service Agreement with Ken Marks Ford (incorporated by reference to Exhibit 10.53 to
the Form S-1).
10.54* Ford Sales and Service Agreement with Nelson Bowers Ford (incorporated by reference to Exhibit
10.54 to the Form S-1).
10.55* Chrysler Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge (incorporated by
reference to Exhibit 10.55 to the Form S-1).
10.56* Plymouth Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge (incorporated by
reference to Exhibit 10.56 to the Form S-1).
10.57* Dodge Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge (incorporated by
reference to Exhibit 10.57 to the Form S-1).
10.58* Dodge Sales and Service Agreement with Sonic Dodge, LLC d/b/a Lake Norman Dodge (incorporated
by reference to Exhibit 10.58 to the Form S-1).
10.59* Chrysler Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake
Norman Chrysler-Plymouth-Jeep-Eagle (incorporated by reference to Exhibit 10.59 to the Form S-1).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ----------------------------------------------------------------------------------------------------------
<S> <C>
10.60* Plymouth Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake
Norman Chrysler-Plymouth-Jeep-Eagle (incorporated by reference to Exhibit 10.60 to the Form S-1).
10.61* Jeep Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman
Chrysler-Plymouth-Jeep-Eagle (incorporated by reference to Exhibit 10.61 to the Form S-1).
10.62* Chrysler Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle (incorporated by
reference to Exhibit 10.62 to the Form S-1).
10.63* Plymouth Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle (incorporated by
reference to Exhibit 10.63 to the Form S-1).
10.64* Jeep Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle (incorporated by
reference to Exhibit 10.64 to the Form S-1).
10.65* Dodge Sales and Service Agreement with Nelson Bowers Dodge (incorporated by reference to Exhibit
10.65 to the Form S-1).
10.66* Volvo Authorized Retailer Agreement with European Motors, LLC d/b/a Volvo of Chattanooga
(incorporated by reference to Exhibit 10.66 to the Form S-1).
10.67* Volvo Sales Agreement with Dyer & Dyer, Inc. (incorporated by reference to Exhibit 10.67 to the
Form S-1).
10.68* Toyota Dealer Agreement with Marcus David Corporation d/b/a Town & Country Toyota (incorporated
by reference to Exhibit 10.68 to the Form S-1).
10.69* Sonic Automotive, Inc. Formula Stock Option Plan for Independent Directors (incorporated by
reference to Exhibit 10.69 to the Company's Amended Annual Report on Form 10-K/A for the year
ended December 31, 1997 (the "1997 Form 10-K/A")).
10.70* Amended and Restated Credit Agreement dated as of December 15, 1997 (the "Credit Agreement")
between Sonic Automotive, Inc., as borrower, and Ford Motor Credit Company, as lender (incorporated
by reference to Exhibit 10.70 to the 1997 Form 10-K/A).
10.71* Promissory Note dated December 15, 1997 in the amount of $75 million by Sonic Automotive, Inc., as
borrower, in favor of Ford Motor Credit Company, as lender, under the Credit Agreement (incorporated
by reference to Exhibit 10.71 to the 1997 Form 10-K/A).
10.72* Subordinated Promissory Note dated December 1, 1997 in the amount of $5.5 million by Sonic
Automotive, Inc., as borrower, in favor of O. Bruton Smith, as lender (incorporated by reference to
Exhibit 10.72 to the 1997 Form 10-K/A).
10.73* Subordination Agreement dated as of December 15, 1997 between O. Bruton Smith and Ford Motor
Credit Company and acknowledged by Sonic Automotive, Inc. (incorporated by reference to Exhibit
10.73 to the 1997 Form 10-K/A).
10.74* Asset Purchase Agreement dated December 31, 1997 between Sonic Automotive, Inc., as buyer, and
M & S Resources, Inc., Clearwater Auto Resources, Inc., and Clearwater Collision Center, Inc., as
sellers and Scott Fink, Michael Cohen, Jeffrey Schumon, and Timothy McCabe as shareholders of the
sellers (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated
March 30, 1998 (the "March 1998 Form 8-K")).
10.75* Amendment No. 1 and Supplement to Asset Purchase Agreement dated as of March 24, 1998 between
Sonic Automotive, Inc., as buyer, and M & S Resources, Inc., Clearwater Auto Resources, Inc., and
Clearwater Collision Center, Inc., as sellers and Scott Fink, Michael Cohen, Jeffrey Schumon, and
Timothy McCabe as shareholders of the sellers (incorporated by reference to Exhibit 99.2 to the March
1998 Form 8-K).
10.76* Asset Purchase Agreement dated as of February 4, 1998 between Sonic Automotive, Inc., as buyer, and
Hatfield Jeep Eagle, Inc., Hatfield Lincoln Mercury, Inc., Trader Bud's Westside Dodge, Inc., Toyota
West, Inc., and Hatfield Hyundai Inc., as sellers and Bud C. Hatfield, Dan E. Hatfield and Dan E.
Hatfield, as Trustee of the Bud C. Hatfield, Sr. Special Irrevocable Trust as shareholders of the sellers
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 (the "1998 First Quarter Form 10-Q").
10.77* Agreement and Plan of Merger dated as of February 10, 1998 between Sonic Automotive, Inc., as
buyer, and Capitol Chevrolet, Inc., Capitol Imports, LTD., and Frank E. McGough, Jr., as sellers
(incorporated by reference to Exhibit 10.4 to the 1998 First Quarter Form 10-Q).
10.78* Stock Purchase Agreement dated as of March 16, 1998 between Sonic Automotive, Inc., as buyer, and
Freeman Smith, as stockholder and the other stockholders named therein (incorporated by reference to
Exhibit 10.5 to the 1998 First Quarter Form 10-Q).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ---------------------------------------------------------------------------------------------------------
<S> <C>
10.79* Amendment No. 1 and Supplement to Asset Purchase Agreement dated as of May 28, 1998 by and
among Sonic Automotive, Inc., Hatfield Jeep Eagle, Inc., Hatfield Lincoln Mercury, Inc., Westside
Dodge, Inc., Toyota West, Inc., Hatfield Hyundai, Inc., Bud C. Hatfield, Dan E. Hatfield and Dan E.
Hatfield, as Trustee of The Bud C. Hatfield, Sr. Special Irrevocable Trust (incorporated by reference to
Exhibit 99.6 to the Company's Current Report on Form 8-K dated July 9, 1998 (the "July 9, 1998
Form 8-K")).
10.80* Asset Purchase Agreement dated April 10, 1998 by and among Sonic Automotive, Inc., Century Auto
Sales, Inc., and A. Foster McKissick, III and Murray P. McKissick (incorporated by reference to
Exhibit 99.9 to the July 9, 1998 Form 8-K).
10.81* Contract to Purchase and Sell Real Property dated as of April 10, 1998 by and between the Company,
Century Auto Sales, Inc. and Fairway Investments, LLC (incorporated by reference to Exhibit 99.10 to
the July 9, 1998 Form 8-K).
10.82* Asset Purchase Agreement dated April 10, 1998 by and among the Company, Fairway Management
Company d/b/a Heritage Lincoln-Mercury-Jaguar, and Fairway Ford, Inc (incorporated by reference to
Exhibit 99.11 to the July 9, 1998 Form 8-K).
10.83* Contract to Purchase and Sell Real Property dated as of April 10, 1998 by and between the Company
and Fairway Ford, Inc (incorporated by reference to Exhibit 99.12 to the July 9, 1998 Form 8-K).
10.84* Stock Purchase Agreement dated as of April 30, 1998 by and among the Company, Aldo B. Paret and
Casa Ford of Houston, Inc (incorporated by reference to Exhibit 99.13 to the July 9, 1998 Form 8-K).
10.85* Asset Purchase Agreement dated as of July 7, 1998 by and among the Company, HMC Finance
Corporation, Inc., Halifax Ford-Mercury, Inc., Higginbotham Automobiles, Inc., Higginbotham
Chevrolet-Oldsmobile, Inc., Sunrise Auto World, Inc. and Dennis D. Higginbotham (the
"Higginbotham Purchase Agreement") (incorporated by reference to Exhibit 99.14 to the July 9, 1998
Form 8-K).
10.85 a* Amendment No. 1 and Supplement to Higginbotham Purchase Agreement dated as of
September 16, 1998.
10.86* Amendment No. 2 and Supplement to Asset Purchase Agreement dated as of July 8, 1998 between
Sonic Automotive, Inc. Hatfield Jeep Eagle, Inc. Hatfield Lincoln Mercury, Inc. and Hatfield Hyundai,
Inc., Bud C. Hatfield, Dan E. Hatfield and Dan E. Hatfield, as trustee of The Bud C. Hatfield Sr.
Special Irrevocable Trust (incorporated by reference to Exhibit 99.3 to the Company's Current Report
on Form 8-K dated July 24, 1998 (the "July 24, 1998 Form 8-K")).
10.87* Strategic Alliance Agreement and Agreement for the Mutual Referral of Acquisition Opportunities
dated July 9, 1998, between Sonic Automotive, Inc. and Mar Mar Realty, L.P. (incorporated by
reference to Exhibit 99.7 to the July 24, 1998 Form 8-K).
10.88* Purchase Agreement dated as of July 28, 1998 between Sonic Automotive, Inc., the Guarantors named
therein and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith, Incorporated, NationsBanc
Montgomery Securities LLC and BancAmerica Robertson Stephens.
10.89* Subordination Agreement dated as of July 31, 1998 between O. Bruton Smith and U.S. Bank Trust
National Association.
10.90* Employment Agreement between the Company and Dennis D. Higginbotham.
11.1* Statement regarding computation of per share earnings (incorporated by reference to Exhibit 11.1 to
the 1996 Form 10-K).
12.1* Statement regarding computation of ratios.
21.1* Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1).
24.1* Powers of Attorney (included on the signature pages of this Registration Statement).
25.1* Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of U.S.
Bank Trust National Association.
27.1* Financial Data Schedule.
99.1 Form of Letter of Transmittal regarding Exchange Offer.
99.2 Notice of Guaranteed Delivery.
</TABLE>
- ---------
* Filed previously.
Item 22. Undertakings
Each of the undersigned Registrants hereby undertakes that, for purposes
of determining any liability under the Securities Act, each filing of such
Registrant's annual report pursuant to section 13(a) or section 15 (d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act)
II-6
<PAGE>
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, each of the
Registrants has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by a Registrant of expenses
incurred or paid by a director, officer or controlling person of such
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, such Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Each of the undersigned Registrants hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
Each of the undersigned Registrants hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Chief Financial Officer, Vice President-Finance,
Treasurer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- ---------------------------------------- -----------------
<S> <C> <C>
* Chairman, Chief Executive Officer and November 3, 1998
---------------------------------- Director (principal executive officer)
O. Bruton Smith
* President, Chief Operating Officer and November 3, 1998
---------------------------------- Director
Bryan Scott Smith
* Executive Vice President and Director November 3, 1998
----------------------------------
Nelson E. Bowers, II
/s/ THEODORE M. WRIGHT Chief Financial Officer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Vice President -- Finance, Treasurer,
Secretary and Director
* Director November 3, 1998
----------------------------------
William P. Benton
* Director November 3, 1998
----------------------------------
William R. Brooks
* Director November 3, 1998
----------------------------------
William I. Belk
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
CAPITOL CHEVROLET AND IMPORTS, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
CASA FORD OF HOUSTON, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
FORT MILL CHRYSLER-PLYMOUTH-DODGE INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
FORT MILL FORD, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
FREEDOM FORD, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
-------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
FRONTIER OLDSMOBILE-CADILLAC, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
-------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
LONE STAR FORD, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
-------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
MARCUS DAVID CORPORATION
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
-------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE OF CHATTANOOGA, LLC
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- ----------------------------------------- -----------------
<S> <C> <C>
* President (principal executive officer) November 3, 1998
----------------------------------
O. Bruton Smith
* Vice President and Governor November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Governor
</TABLE>
*By: /s/ THEODORE M. WRIGHT
-------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE-CLEARWATER, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ Theodore M. Wright
-------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE COLLISION CENTER
OF CLEARWATER, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer, and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
-------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE OF GEORGIA, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
Bryan Scott Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - HWY. 153
AT SHALLOWFORD ROAD, CHATTANOOGA, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE OF NASHVILLE, LLC
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- ----------------------------------------- -----------------
<S> <C> <C>
* President (principal executive officer) November 3, 1998
----------------------------------
O. Bruton Smith
* Vice President and Governor November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Governor
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE OF NEVADA, INC.
By: /s/ BRYAN SCOTT SMITH
-------------------------------------
Bryan Scott Smith
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* Chief Executive Officer and Director November 3, 1998
---------------------------------- (principal executive officer)
O. Bruton Smith
/s/ BRYAN SCOTT SMITH President (principal financial and November 3, 1998
---------------------------------- accounting officer) and Director
Bryan Scott Smith
*By: /s/ BRYAN SCOTT SMITH
------------------------------
Bryan Scott Smith
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE OF TENNESSEE, INC.
By: /s/ BRYAN SCOTT SMITH
-------------------------------------
Bryan Scott Smith
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- ------------------------------------ -----------------
<S> <C> <C>
/s/ BRYAN SCOTT SMITH President, Chief Executive Officer November 3, 1998
----------------------------------
Bryan Scott Smith (principal executive officer) and
Director
* Treasurer (principal financial and November 3, 1998
---------------------------------- accounting officer), Secretary and
Theodore M. Wright Director
*By: /s/ BRYAN SCOTT SMITH
------------------------------
Bryan Scott Smith
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 1307 N. DIXIE HWY.,
NSB, INC.
By: /s/ THEODORE M. WRIGHT
---------------------------------------
Theodore M. Wright
Vice President, Treasurer, and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
----------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 1400 AUTOMALL DRIVE,
COLUMBUS, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer, and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
----------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 1455 AUTOMALL DRIVE,
COLUMBUS, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer, and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
----------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 1495 AUTOMALL DRIVE,
COLUMBUS, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer, and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
----------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 1500 AUTOMALL DRIVE,
COLUMBUS, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer, and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
----------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 1720 MASON AVE., DB,
INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer, and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
----------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 1720 MASON AVE., DB,
LLC
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Governor (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Governor November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Governor
</TABLE>
*By: /s/ THEODORE M. WRIGHT
----------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 1919 N. DIXIE HWY.,
NSB, INC.
By: /s/ THEODORE M. WRIGHT
---------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 21699 U.S. HWY 19
N., INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 241 RIDGEWOOD AVE.,
HH, INC.
By: /s/ THEODORE M. WRIGHT
---------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE 2424 LAURENS RD.,
GREENVILLE, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 2490 SOUTH LEE
HIGHWAY, LLC
By: /s/ THEODORE M. WRIGHT
---------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- ----------------------------------------- -----------------
<S> <C> <C>
* President (principal executive officer) November 3, 1998
----------------------------------
O. Bruton Smith
* Vice President and Governor November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Governor
</TABLE>
*By: /s/ THEODORE M. WRIGHT
-------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE 2752 LAURENS RD.,
GREENVILLE, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 3700 WEST BROAD
STREET, COLUMBUS, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 3741 S. NOVA RD. PO,
INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
--------------------------------
Theodore M. Wright
Attorney-in-fact for each of
the persons indicated)
II-39
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 4000 WEST BROAD
STREET, COLUMBUS, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
</TABLE>
*By: /s/ THEODORE M. WRIGHT
--------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-40
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE 5260 PEACHTREE
INDUSTRIAL BLVD., LLC
By: /s/ THEODORE M. WRIGHT
---------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- ----------------------------------------- -----------------
<S> <C> <C>
* President (principal executive officer) November 3, 1998
----------------------------------
O. Bruton Smith
* Vice President and Governor November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Governor
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-41
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 5585 PEACHTREE
INDUSTRIAL BLVD., LLC
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Governor (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Governor November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Governor
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC AUTOMOTIVE - 6025 INTERNATIONAL
DRIVE, LLC
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- ----------------------------------------- -----------------
<S> <C> <C>
* President (principal executive officer) November 3, 1998
----------------------------------
O. Bruton Smith
* Vice President and Governor November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Governor
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-43
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC CHRYSLER-PLYMOUTH-JEEP-EAGLE, LLC
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Manager (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Manager November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Manager
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-44
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC DODGE, LLC
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Manager (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Manager November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
----------------------------------
Theodore M. Wright financial and accounting officer),
Secretary and Manager
</TABLE>
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-45
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
TOWN AND COUNTRY
CHRYSLER-PLYMOUTH-JEEP, LLC
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- ----------------------------------------- -----------------
<S> <C> <C>
* President (principal executive officer) November 3, 1998
----------------------------------
O. Bruton Smith
* Vice President and Governor November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Governor
</TABLE>
*By: /s/ THEODORE M. WRIGHT
-----------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
II-46
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
TOWN AND COUNTRY CHRYSLER-PLYMOUTH-JEEP
OF ROCK HILL, INC.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer,
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-47
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
TOWN AND COUNTRY DODGE OF
CHATTANOOGA, LLC
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- ----------------------------------------- -----------------
<S> <C> <C>
* President (principal executive officer) November 3, 1998
----------------------------------
O. Bruton Smith
* Vice President and Governor November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Governor
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-48
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
TOWN AND COUNTRY FORD, INCORPORATED
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- -------------------------------------- -----------------
<S> <C> <C>
* President and Director (principal November 3, 1998
---------------------------------- executive officer)
O. Bruton Smith
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Director
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-49
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
TOWN AND COUNTRY FORD OF CLEVELAND, LLC
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- ----------------------------------------- -----------------
<S> <C> <C>
* President (principal executive officer) November 3, 1998
----------------------------------
O. Bruton Smith
* Vice President and Governor November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Governor
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-50
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
TOWN AND COUNTRY JAGUAR, LLC
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Theodore M. Wright
Vice President, Treasurer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- ----------------------------------------- -----------------
<S> <C> <C>
* President (principal executive officer) November 3, 1998
----------------------------------
O. Bruton Smith
* Vice President and Governor November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Vice President, Treasurer (principal November 3, 1998
---------------------------------- financial and accounting officer),
Theodore M. Wright Secretary and Governor
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-51
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Charlotte, state of
North Carolina, on November 3, 1998.
SONIC PEACHTREE INDUSTRIAL BLVD., L.P.
By: /s/ THEODORE M. WRIGHT
-------------------------------------
Sonic Automotive of Georgia, Inc.
General Partner
Theodore M. Wright, Vice President,
Treasurer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- ---------------------------------------- -----------------
<S> <C> <C>
* President (principal executive officer November 3, 1998
---------------------------------- of Sonic Automotive of Georgia, Inc.
O. Bruton Smith and Sonic Peachtree Industrial
Blvd., L.P.)
* Vice President and Director November 3, 1998
----------------------------------
Bryan Scott Smith
/s/ THEODORE M. WRIGHT Treasurer (principal financial and November 3, 1998
---------------------------------- accounting officer of Sonic
Theodore M. Wright Automotive of Georgia, Inc. and
Sonic Peachtree Industrial Blvd.,
L.P.), Vice President, Secretary
and Director
*By: /s/ THEODORE M. WRIGHT
------------------------------
Theodore M. Wright
(Attorney-in-fact for each of
the persons indicated)
</TABLE>
II-52
<PAGE>
EXHIBIT 5.1
November 3, 1998
Board of Directors
Sonic Automotive, Inc.
5401 East Independence Boulevard
Charlotte, North Carolina 28218
Dear Sirs:
We are acting as counsel to Sonic Automotive, Inc., a Delaware corporation
(the "Company") and its subsidiaries, as guarantors (the "Guarantors" and,
collectively with the Company, the "Issuers"), in connection with the
preparation, execution, filing and processing with the Securities and Exchange
Commission (the "Commission"), pursuant to the Securities Act of 1933, as
amended (the "Act"), of a Registration Statement (No. 333-64397 and Nos.
333-64397-001 through 333-64397-044) on Form S-4 (as amended through the date
hereof, the "Registration Statement"). This opinion is furnished to you for
filing with the Commission pursuant to Item 601(b)(5) of Regulation S-K
promulgated under the Act.
The Registration Statement covers the proposed offer to exchange (the
"Exchange Offer") by the Company of its $125,000,000 aggregate principal amount
of 11% Senior Subordinated Notes due 2008 (the "Exchange Notes") and the
guarantees (the "Guarantees" and, collectively with the Exchange Notes, the
"Securities") by the Guarantors of the Company's obligations under the Exchange
Notes, for any and all of the Company's $125,000,000 aggregate principal amount
of 11% Senior Subordinated Notes due 2008 currently outstanding and the
guarantees by the Guarantors of the Company's obligations thereunder (the "Old
Notes").
In our representation of the Company and the Guarantors, we have examined
(i) the Registration Statement, (ii) the Company's Certificate of Incorporation
and Bylaws, each as amended to date, (iii) each of the Guarantors' respective
Articles of Incorporation or Organization, as the case may be, and Bylaws,
Operating Agreement or Limited Partnership Agreement, as the case may be, all
as amended to date, (iv) all actions of the Company's Board of Directors
recorded in the Company's minute book, (v) all actions of the Guarantors'
respective Board of Directors, Board of Governors, Managers or General
Partners, as the case may be, recorded in the respective Guarantors' minute
books, (vi) the form of Old Note, (vii) the form of Exchange Note, (viii) the
form of Guarantees, (ix) the Indenture dated as of July 1, 1998 between the
Issuers and U.S. Bank Trust National Association, as trustee (the "Trustee"),
under which the Old Notes with the Guarantees were issued and the Exchange
Notes with the Guarantees will be issued, (x) certificates of good standing or
existence, as the case may be, with respect to the Issuers from the States of
Alabama, Delaware, Florida, Georgia, Nevada, North Carolina, Ohio, South
Carolina, Tennessee and Texas and (xi) such other documents as we have
considered necessary for purposes of rendering the opinions expressed below.
Based upon the foregoing, we are of the following opinion:
When (a) the Indenture, under which the Securities will be issued, has
been qualified under the Trust Indenture Act of 1939, as amended, (b) the
Exchange Notes have been executed by the Company and the Guarantees have been
executed by each of the Guarantors and (c) the Securities have been delivered
in exchange for the Old Notes and the guarantees endorsed thereon in the manner
stated in the Registration Statement and the Indenture, the Securities will be
validly issued, fully paid and non-assessable, and will be binding obligations
of the Company (in the case of the Exchange Notes) and the Guarantors (in the
case of the Guarantees), except as may be limited by: (i) the effect of
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other similar laws now or hereafter in effect relating to or affecting the
rights or remedies of creditors; (ii) the effect of general principles of
equity, whether enforcement is considered in a proceeding in equity or at law,
and the discretion of the court before which any proceeding therefor may be
brought; and (iii) the unenforcebility under certain circumstances, as contrary
to public policy, under law or court decisions of provisions providing for the
indemnification or exculpation of, or contribution to, a party.
We express no opinion as to the validity, binding effect or enforceability
of any provision of the Exchange Notes or the Guarantees: (1) relating to
indemnification or contribution; (2) containing any purported waiver, release,
variation, disclaimer, consent or other agreement of similar effect (all of the
foregoing, a "Waiver") by the Company or any Guarantor under any of such
agreements to the extent limited by provisions of applicable law (including
judicial decisions), or to the extent that such a Waiver applies to a right,
claim, duty, defense or ground for discharge otherwise existing or occurring as
a matter of law (including judicial decisions), except to the extent that such
a Waiver is effective under, and is not prohibited by or void or invalid under
provisions of applicable law (including judicial decisions), or any Waiver in
the Guarantee insofar as it
<PAGE>
relates to causes or circumstances that would operate as a discharge or release
of, or defense available to the Guarantors thereunder as a matter of law
(including judicial decisions), except to the extent such Waiver is effective
under and is not prohibited by or void or invalid under applicable law
(including judicial decisions); (3) relating to choice of governing law to the
extent that the validity, binding effect or enforceability of any such
provision is to be determined by any court other than a court of the State of
New York or a federal district court sitting in the State of New York and
applying the law of the State of New York; (4) specifying that provisions
thereof may be waived only in writing, to the extent that an oral agreement or
an implied agreement by trade practice or course of conduct has been created
that modifies any provision of such agreement; and (5) purporting to give any
person or entity the power to accelerate obligations without any notice to the
obligor.
In addition to the foregoing, our opinions expressed herein are subject to
the following qualifications: (a) provisions in the Guarantees that provide
that the Guarantors' liability thereunder shall not be affected by actions or
failures to act on the part of the holders or the Trustee or by amendments or
waivers of provisions of documents governing the guaranteed obligations might
not be enforceable under circumstances and in the event of actions that change
the essential nature of the terms and conditions of the guaranteed obligations;
(b) we express no opinion as to whether the Guarantee would be deemed by a
court of competent jurisdiction to be within the authorized corporate power of
any Guarantor; and (c) we have assumed consideration that is fair and
sufficient to support the agreements of each Guarantor under the Guarantee has
been, and would be deemed by a court of competent jurisdiction to have been,
duly received by each Guarantor.
The opinions expressed herein are limited to matters governed by the laws
of the States of North Carolina and New York, the General Corporation Law of
the State of Delaware, the Act and the applicable business corporation, limited
liability company or limited partnership laws of the States of Alabama,
Florida, Georgia, Nevada, Ohio, South Carolina, Tennessee and Texas. We do not
purport to be expert with respect to the laws of the States of Alabama,
Florida, Georgia, Nevada, Ohio, Tennessee and Texas and our opinions with
respect to the laws of such states is based solely upon our reading of the
texts of the relevant corporate, limited liability company and limited
partnership statutes as set forth in the Corporation Guide and the State
Limited Liability Company & Partnership Laws, both published by Aspen Law &
Business.
We hereby consent to the use of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the use of our name under the heading "Legal
Matters" in related prospectuses. In giving this consent, we do not admit that
we are in the category of persons whose consent is required under Section 7 of
the Act or the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
/S/ PARKER, POE, ADAMS & BERNSTEIN L.L.P.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
Sonic Automotive, Inc.:
We consent to the use in this Registration Statement of Sonic Automotive,
Inc. on Form S-4 of (i) our report dated March 2, 1998 (March 24, 1998 as to
Notes 2, 8 and 9) on the consolidated financial statements of Sonic Automotive,
Inc. and Subsidiaries as of December 31, 1996 and 1997 and for each of the
three years in the period ended December 31, 1997; (ii) our report dated
February 20, 1998 on the combined financial statements of Clearwater
Dealerships and Affiliated Companies as of and for the year ended December 31,
1997; (iii) our report dated May 22, 1998 on the combined financial statements
of Hatfield Automotive Group as of December 31, 1996 and 1997 and for each of
the three years in the period ended December 31, 1997; (iv) our report dated
May 11, 1998 on the financial statements of Economy Cars, Inc. as of and for
the year ended December 31, 1997; (v) our report dated June 4, 1998 on the
financial statements of Casa Ford of Houston, Inc. as of and for the year ended
December 31, 1997; (vi) our report dated August 21, 1998 on the combined
financial statements of Higginbotham Automotive Group as of and for the year
ended December 31, 1997; (vii) our report dated August 7, 1997 on the financial
statements of Dyer & Dyer, Inc. as of December 31, 1995 and 1996 and for each
of the three years in the period ended December 31, 1996; (viii) our report
dated August 7, 1997 (October 16, 1997 as to Note 1) on the combined financial
statements of Bowers Dealerships and Affiliated Companies as of December 31,
1995 and 1996 and for each of the two years in the period ended December 31,
1996; (ix) our report dated August 7, 1997 (September 29, 1997 as to Note 1) on
the combined financial statements of Lake Norman Dodge, Inc. and Affiliated
Companies as of and for the year ended December 31, 1996; (x) our report dated
August 26, 1997 (October 15, 1997 as to Note 1) on the financial statements of
Ken Marks Ford, Inc. as of and for the year ended April 30, 1997 all appearing
in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------------------
November 2, 1998
Exhibit 99.1
SONIC AUTOMOTIVE, INC.
OFFER TO EXCHANGE
11% SENIOR SUBORDINATED NOTES DUE 2008,
SERIES B, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING
11% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A
Pursuant to the Prospectus Dated October 16, 1998
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON DECEMBER
7, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 7, 1998.
- --------------------------------------------------------------------------------
By Messenger, Mail, or Overnight Delivery:
U.S. Bank Trust National Association
180 East Fifth Street
Mail Code: SPFT0210
St. Paul, Minnesota 55101
Attention: Specialized Finance
Facsimile Transmission:
(612) 244-1537 (MN)
Confirm by Telephone:
(612) 244-5011 (MN)
Attention: Specialized Finance
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE,
OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE,
WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus, dated November 5,
1998 (the "Prospectus"), of Sonic Automotive, Inc., a Delaware corporation (the
"Company"), and this Letter of Transmittal (this "Letter"), which together
constitute the offer (the "Exchange Offer") to exchange an aggregate principal
amount of up to $125,000,000 11% Senior Subordinated Notes Due 2008, Series B
(the "New Notes") for an equal principal amount of the outstanding 11% Senior
Subordinated Notes Due 2008, Series A (the "Old Notes").
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note. The New Notes will bear interest at a rate equal to 11%
per anum. Interest on the New Notes is payable semiannually, commencing
February 1, 1999, on February 1 and August 1 of each year (each, an "Interest
Payment Date") and shall accrue from July 31, 1998, or from the most recent
Interest Payment Date with respect to the Old Notes to which interest was paid
or for which interest was duly provided. The New Notes will mature on August 1,
2008.
Subject to certain exceptions, in the event of a Registration Default (as
defined below), the interest rate borne by the Old Notes shall be increased by
one-quarter of one percent per annum upon the occurrence of each Registration
Default, which rate (as increased aforesaid) will increase by an additional one
quarter of one percent each 90-day period that such additional interest
continues to accrue under any such circumstance, with an aggregate maximum
increase in the interest rate equal to one percent (1%) per annum. A
"Registration Default" with respect to the Exchange Offer shall occur if: (a)
the Exchange Offer Registration Statement is not filed with the Commission on
or prior to the 60th calendar day following the date of original issue of the
Old Notes, (b) the Exchange Offer Registration Statement has not been declared
effective on or prior to the 135th calendar day following the date of original
issue of the Old Notes, (c) the Exchange Offer is not consummated or a Shelf
Registration Statement is not declared effective, in either case, on or prior
to the 165th calendar day following the date of original issue of the Old Notes
or (d) the Shelf Registration Statement is declared effective but
<PAGE>
shall thereafter become unusable for more than 30 days in the aggregate. The
Shelf Registration Statement will be required to remain effective until the
second anniversary of the issuance of the Old Notes. Following the cure of all
Registration Defaults, the accrual of additional interest will cease and the
interest rate will revert to the original rate; provided, however, that, if
after any such reduction in interest rate, a different Registration Default
occurs, the interest rate shall again be increased pursuant to the foregoing
provisions. Holders of New Notes will not be and, upon consummation of the
Exchange Offer, holders of Old Notes will no longer be, entitled to (i) the
right to receive the increased interest specified above or (ii) certain other
rights under the Registration Rights Agreement intended for holders of Old
Notes. The Exchange Offer shall be deemed consummated upon the occurrence of
the delivery by the Company to the Registrar under the Indenture of New Notes
in the same aggregate principal amount as the aggregate principal amount of Old
Notes that are tendered by holders thereof pursuant to the Exchange Offer.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, in which event the
term "Expiration Date" shall mean the latest time and date to which the
Exchange Offer is extended, (iii) if the Commission does not declare the
Registration Statement effective, to terminate the Exchange Offer, by giving
oral or written notice of such delay, extension, or termination to the Exchange
Agent, and (iv) to amend the terms of the Exchange Offer in any manner. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendments by means of
a prospectus supplement that will be distributed to the registered holders of
the Old Notes. Modifications of the Exchange Offer, including but not limited
to (i) extension of the period during which the Exchange Offer is open and (ii)
satisfaction of the conditions set forth under the caption "The Exchange Offer
- -- Conditions of the Exchange Offer" in the Prospectus, may require that at
least ten business days remain in the Exchange Offer. In order to extend the
Exchange Offer, the Company will notify the Exchange Agent of any extension by
oral or written notice and will make a public announcement thereof, each prior
to 9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
This Letter must be completed and delivered by a holder of Old Notes if:
(i) such holder is not a member of the ATOP system ("ATOP") of the Depository
Trust Company (the "Book-Entry Transfer Facility"), (ii) such holder is an ATOP
member but chooses not to use ATOP or (iii) the Old Notes are to be tendered in
accordance with the guaranteed delivery procedures set forth in Instruction 1
to this Letter. Holders of Old Notes whose Notes are not immediately available,
or who are unable to deliver their Notes or confirmation of the book-entry
tender of their Old Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility (a "Book-Entry Confirmation"), as the case may be, and all
other documents required by this Letter to the Exchange Agent on or prior to
the Expiration Date, must tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery
Procedures" section of the Prospectus. See Instruction 1 to this Letter.
Delivery of documents to the Book Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
List below the Old Notes to which this Letter relates. If the space
provided below is inadequate, the Note numbers and principal amount of Old
Notes should be listed on a separate signed schedule affixed hereto.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD 1 2 3
NOTES
- ------------------------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF AGGREGATE PRINCIPAL PRINCIPAL
REGISTERED HOLDER(S) NOTE AMOUNT OF AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* OLD NOTE(S) TENDERED**
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
* Need not be complete if Old Notes are being tendered by book-entry transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have tendered the entire principal amount represented
by the Old Note indicated in column 2. See Instruction 2. Old Notes tendered hereby must be in denominations of principal
amount of $1,000 and any integral multiple thereof. See Instruction 1.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
-----------------------------------------
Account Number Transaction Code Number
--------- -----------------------
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name of Registered Holder(s)
------------------------------------------
Window Ticket Number (if any)
------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
--------------------
Name of Institution which guaranteed delivery
--------------------------
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number Transaction Code Number
--------- -----------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
------------------------------------------------------------------
Address:
--------------------------------------------------------------
3
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells,
assigns and transfers to, or upon the order of, the Company all right, title
and interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances
and not subject to any adverse claim when the same are accepted by the Company.
The undersigned hereby further represents that any New Notes acquired in
exchange for Old Notes tendered hereby will have been acquired in the ordinary
course of business of the person receiving such New Notes, whether or not such
person is the undersigned, that neither the holder of such Old Notes nor any
such other person is engaged in, or intends to engage in, a distribution of
such New Notes, or has an arrangement or understanding with any person to
participate in the distribution of such New Notes, and that neither the holder
of such Old Notes nor any such other person is an "affiliate,"as defined in
Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"),
of the Company.
The undersigned also acknowledges that this Exchange Offer is being made
based upon the Company's understanding of an interpretation by the staff of the
Securities and Exchange Commission (the "Commission") as set forth in no-action
letters issued to third parties, including Exxon Capital Holdings Corporation,
SEC No-Action Letter (available April 13, 1989), Morgan Stanley & Co.,
Incorporated, SEC No-Action Letter (available June 5, 1991), Mary Kay
Cosmetics, Inc., SEC No-Action Letter (available June 5, 1991), Warnaco, Inc.,
SEC No-Action Letter (available October 11, 1991) and Shearman & Sterling, SEC
No-Action Letter (available July 2, 1993), that the New Notes issued in
exchange for the Old Notes pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by holders thereof (other than a
broker-dealer who acquires such New Notes directly from the Company for resale
pursuant to Rule 144A under the Securities Act or any other available exemption
under the Securities Act or any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders are not engaged in, and do
not intend to engage in, a distribution of such New Notes and have no
arrangement with any person to participate in the distribution of such New
Notes. If a holder of Old Notes is engaged in or intends to engage in a
distribution of the New Notes or has any arrangement or understanding with
respect to the distribution of the New Notes to be acquired pursuant to the
Exchange Offer, which holder could not rely on the applicable interpretations
of the staff of the Commission and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction. If the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes, it represents
that the Old Notes to be exchanged for the New Notes were acquired by it as a
result of market-making activities or other trading activities and acknowledges
that it will deliver a prospectus in connection with any resale of such New
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. This tender may be withdrawn only in accordance
with the procedures set forth in "The Exchange Offer -- Withdrawal Rights"
section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute Notes representing the remaining principal balance of any Old Note
exchanged only in part) in the name of the undersigned or, in the case of a
book-entry delivery of Old Notes, please credit the account indicated above
maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise
indicated under the box entitled "Special Delivery Instructions" below, please
send the New Notes (and, if applicable, substitute Notes representing the
remaining principal balance of any Old Note exchanged only in part) to the
undersigned at the address shown above in the box entitled "Description of Old
Notes."
4
<PAGE>
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS
SET FORTH IN SUCH BOX ABOVE.
- --------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if Notes for Old Notes not exchanged and/or New Notes
are to be issued in the name of and sent to someone other than the
person(s) whose signature(s) appear(s) on this Letter above, or if Old
Notes delivered by book-entry transfer which are not accepted for exchange
are to be returned by credit to an account maintained at the Book-Entry
Transfer Facility other than the account indicated above.
Issue New Notes and/or Old Notes to:
Name(s)
----------------------------------------------------------------
(PLEASE TYPE OR PRINT)
-----------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Address
---------------------------------------------------------------
-----------------------------------------------------------------------
(INCLUDING ZIP CODE)
(Complete accompanying Substitute Form W-9)
Credit unexchanged Old Notes delivered by book-entry transfer to
the Book-Entry Transfer Facility account set forth below.
(Book-Entry Transfer Facility Account Number, if applicable)
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- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if Notes for Old Notes not exchanged and/or New Notes
are to be sent to someone other than the person(s) whose signature(s)
appear(s) on this Letter above or to such person(s) at an address other
than shown in the box entitled "Description of Old Notes" on this Letter
above.
Mail New Notes and/or Old Notes to:
Name(s)
----------------------------------------------------------------
(PLEASE TYPE OR PRINT)
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(PLEASE TYPE OR PRINT)
Address
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(INCLUDING ZIP CODE)
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IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE OLD NOTES AND
ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY), OR A
BOOK-ENTRY CONFIRMATION, AS THE CASE MAY BE, MUST BE RECEIVED BY THE EXCHANGE
AGENT PRIOR TO 5:00 P.M., NEW YORK TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE
5
<PAGE>
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PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(COMPLETE ACCOMPANYING SUBSTITUTE Form W-9)
Dated: ,1998
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x
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x
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(Signature(s) of Owner) (Date)
Area Code and Telephone Number:
---------------------------------------
If a holder is tendering any Old Notes, this Letter must be signed by the
registered holder(s) as the name(s) appear(s) on the Note(s) for the Old Notes
or by any person(s) authorized to become registered holder(s) by endorsements
and documents transmitted herewith. If signature is by a trustee, executor,
administrator, guardian, officer or other person acting in a fiduciary or
representative capacity, please set forth full title. See Instruction 3.
Name(s):
------------------------------------------------------------------
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(Please Print or Type)
Capacity:
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Address:
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- ----------------------------------------------------------------------------
(Including Zip Code)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution:
--------------------------------------------------
(Authorized Signature)
- ----------------------------------------------------------------------------
(Title)
- ----------------------------------------------------------------------------
(Name and Firm)
Dated: , 1998
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6
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER TO EXCHANGE
11% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1993, AS AMENDED, FOR ANY AND ALL
OUTSTANDING 11% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A
SONIC AUTOMOTIVE, INC.
1. Delivery of this Letter and Old Notes; Guaranteed Delivery Procedures.
Certificates for Old Notes as well as a properly completed and duly executed
copy of this Letter (or facsimile thereof) and any other documents required by
this Letter, or a Book Entry Confirmation, as the case may be, must be received
by the Exchange Agent at its address set forth herein on or before the
Expiration Date, or the tendering holder must comply with the guaranteed
delivery procedures set forth below. This Letter must be used: (i) by all
holders who are not ATOP members, (ii) by holders who are ATOP members but
choose not to use ATOP or (iii) if the Old Notes are to be tendered in
accordance with the guaranteed delivery procedures set forth below. Old Notes
tendered hereby must be in denominations of principal amount of $1,000 or any
integral multiple thereof.
Holders whose Old Notes are not immediately available or who cannot
deliver their Notes or a Book-Entry Confirmation, as the case may be, and all
other required documents to the Exchange Agent on or prior to the Expiration
Date, may tender their Old Notes pursuant to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Guaranteed Delivery Procedures" section of
the Prospectus. Pursuant to such procedures, (i) such tender must be made by or
through an Eligible Institution (as defined below) and a Notice of Guaranteed
Delivery in the Form of Exhibit 99.2 to the Registration Statement of which the
Prospectus forms a part, a copy of which may be obtained from the Exchange
Agent (a "Notice of Guaranteed Delivery"), must be signed by such holder, (ii)
on or prior to the Expiration Date, the Exchange Agent must receive from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery), setting
forth the name and address of the holder of Old Notes, the certificate number
or numbers of the tendered Old Notes and the principal amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within four business days after the date of delivery of the Notice of
Guaranteed Delivery, this Letter together with the certificates representing
the tendered Old Notes or a Book-Entry Confirmation, as the case may be, as
well as all other documents required by this Letter will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for
all tendered Old Notes or a Book-Entry Confirmation, as the case may be, as
well as all other documents required by this Letter (properly completed and
duly executed), must be received by the Exchange Agent within four business
days after the date of delivery of such Notice of Guaranteed Delivery.
The method of delivery of this Letter, certificates for the Old Notes or a
Book-Entry Confirmation, as the case may be, and all other required documents
is at the election and risk of the tendering holders, but the delivery will be
deemed made only when actually received or confirmed by the Exchange Agent. If
Old Notes are sent by mail, it is recommended that the mailing be made by
registered mail, properly insured, with return receipt requested, and that such
mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date. Instead of delivery by mail, it is recommended that the holder
use an overnight or hand delivery service. In all cases, sufficient time should
be allowed for timely delivery. See "The Exchange Offer" section of the
Prospectus.
2. Partial Tenders (Not Applicable to Holders of Old Notes Who Tender by
Book-entry Transfer). If less than the entire principal amount of any submitted
Note is to be tendered, the tendering holder(s) should fill in the aggregate
principal amount to be tendered in the box above entitled "Description of Old
Notes -- Principal Amount Tendered." A reissued Note representing the balance
of nontendered principal of any submitted Old Notes will be sent to such
tendering holder, unless otherwise provided in the appropriate box on this
Letter, promptly after the Expiration Date. THE ENTIRE PRINCIPAL AMOUNT OF ANY
OLD NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED
UNLESS OTHERWISE INDICATED.
3. Signatures on this Letter; Assignments and Endoresement; Guarantee of
Signatures. If this Letter is signed by the registered holder of the Old Notes
tendered hereby, the signature must correspond exactly with the name as written
on the face of the Notes without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter.
If any tendered Old Notes are registered in different names on several
Notes, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of Notes.
7
<PAGE>
When this Letter is signed by the registered holder of the Old Notes
specified herein and tendered hereby, no endorsements of the submitted Notes or
separate instruments of assignment are required. If, however, the New Notes are
to be issued, or any untendered Old Notes are to be reissued, to a person other
than the registered holder, then endorsements of any Notes transmitted hereby
or separate instruments of assignment are required. Signatures on such Notes
must be guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder of
any Notes specified herein, such Notes must be endorsed or accompanied by
appropriate instruments of assignment, in either case signed exactly as the
name of the registered holder appears on the Notes and the signatures on such
Notes must be guaranteed by an Eligible Institution.
If this Letter or any Notes or instruments of assignment are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must
be submitted.
Endorsements on Old Notes or signatures on instruments of assignment
required by this Instruction 3 must be guaranteed by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., by a commercial bank or trust company
having an office or correspondent in the United States or by an "eligible
guarantor" institution within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (an "Eligible Institution").
Signatures on this Letter need not be guaranteed by an Eligible
Institution, provided the Old Notes are tendered: (i) by a registered holder of
Old Notes (which term, for purposes of the Exchange Offer, includes any
participant in the Book-Entry Transfer Facility system whose name appears on a
security position listing as the holder of such Old Notes) tendered who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on this Letter, or (ii) for the account of an Eligible
Institution.
4. Special Issuance and Delivery Instructions. Tendering holders of Old
Notes should indicate in the applicable box the name and address to which New
Notes issued pursuant to the Exchange Offer and/or substitute Notes evidencing
Old Notes not exchanged are to be issued or sent, if different from the name or
address of the person signing this Letter. In the case of issuance in a
different name, the employer identification or social security number of the
person named must also be indicated. A holder of Old Notes tendering Old Notes
by book-entry transfer may request that Old Notes not exchanged be credited to
such account maintained at the Book-Entry Transfer Facility as such holder of
Old Notes may designate hereon. If no such instructions are given, such Old
Notes not exchanged will be returned to the name or address of the person
signing this Letter.
5. Tax Identification Number. Federal income tax law generally requires
that a tendering holder whose Old Notes are accepted for exchange must provide
the Company (as payor) with such Holder's correct Taxpayer Identification
Number ("TIN") on Substitute Form W-9 below, which, in the case of a tendering
holder who is an individual, is his or her social security number. If the
Company is not provided with the current TIN or an adequate basis for an
exemption, such tendering holder may be subject to a $50 penalty imposed by the
Internal Revenue Service. In addition, delivery of New Notes to such tendering
holder may be subject to backup withholding in an amount equal to 31% of all
reportable payments made after the exchange. If withholding results in an
overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of
Taxpayer Identification Number on Substitute Form W-9 (the "W -9 Guidelines")
for additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9"set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder
has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Notice of
Foreign Status. These forms may be obtained from the Exchange Agent. If the Old
Notes are in more than one name or are not in the name of the actual owner,
such holder should consult the W-9 Guidelines for information on which TIN to
report. If such holder does not have a TIN, such holder should consult the W-9
Guidelines for instructions on applying for a TIN, check the box in Part 2 of
the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note:
checking-this box and writing "applied for" on the form means that such holder
has already
8
<PAGE>
applied for a TIN or that such holder intends to apply for one in the near
future. If such holder does not provide its TIN to the Company within 60 days,
backup withholding will begin and continue until such holder furnishes its TIN
to the Company.
6. Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, a transfer tax is imposed for any reason other than the exchange of
Old Notes pursuant to the Exchange Offer, the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted herewith, the amount of such transfer
taxes will be billed directly to such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT IS NOT NECESSARY FOR TRANSFER
TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER.
7. Waiver of Conditions. The Company reserves the absolute right to waive
satisfaction of any or all conditions enumerated in the Prospectus.
8. No Conditional Tenders. No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering holders of Old Notes, by
execution of this Letter, shall waive any right to receive notice of the
acceptance of their Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defeat or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. Mutilated, Lost, Stolen or Destroyed Old Notes. Any holder whose Old
Notes have been mutilated, lost, stolen or destroyed should contact the
Exchange Agent at the address indicated above for further instructions.
10. Requests for Assistance or Additional Copies. Questions relating to
the procedure for tendering, as well as requests for additional copies of the
Prospectus, this Letter and other related documents, should be directed to the
Exchange Agent, at the address and telephone number indicated above.
9
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(See Instruction 5)
<TABLE>
<S> <C> <C>
PAYOR'S NAME: SONIC AUTOMOTIVE, INC.
- ---------------------------------------------------------------------------------------------
SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR |TIN: ---------------------
TIN IN THE BOX AT RIGHT AND | Social Security Number
Form W-9 CERTIFY BY SIGNING AND |
DATING BELOW. | OR
| Employer Identification Number
--------------------------------------------------------------
Department of the Treasury Part 2 -- TIN Applied for [ ]
Internal Revenue Service ==============================================================
CERTIFICATION: Under penalties of perjury, I certify that:
(1) the number shown on this form is my correct Taxpayer
Identification Number
(or I am waiting for a number to be issued to me),
Payor's Request for Taxpayer (2) I am not subject to backup withholding either because: (a)
Identification Number ("TIN") I am exempt from backup withholding, or (b) I have not been
and Certification notified by the Internal Revenue Service (the "IRS") that
I am subject to backup withholding as a result of a failure
to report all interest or dividends, or (c) the IRS has
notified me that I am no longer subject to backup withholding,
and
(3) any other information provided on this form is true and
correct.
Signature
------------------------------------------------------
Date:
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You must cross out item (ii) above if you have been notified by the IRS
that you are subject to backup withholding because of underreporting of
interest or dividends on your tax return and you have not been notified
by the IRS that you are no longer subject to backup withholding.
- ---------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 2 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of the exchange,
thirty-one percent (31%) of all reportable payments made to me thereafter will
be withheld until I provide a number.
- ----------------------------------------- --------------------------
Signature Date
- --------------------------------------------------------------------------------
10
Exhibit 99.2
SONIC AUTOMOTIVE, INC.
This form or one substantially equivalent hereto must be used to accept
the Exchange Offer of Sonic Automotive, Inc. (the "Company") made pursuant to
the Prospectus, dated November 5, 1998 (the "Prospectus"), and the enclosed
Letter of Transmittal (the "Letter of Transmittal") if Old Notes are not
immediately available or if time will not permit all documents required by the
Letter of Transmittal to reach the U.S. Bank Trust National Association (the
"Exchange Agent") prior to the Expiration Date of the Exchange Offer. Such form
may be delivered or transmitted by facsimile transmission, mail, overnight or
hand delivery to the Exchange Agent as set forth below. In addition, in order
to utilize the guaranteed delivery procedure to tender Old Notes pursuant to
the Exchange Offer, a completed, signed and dated Letter of Transmittal (or
facsimile thereof) must also be received by the Exchange Agent on or prior to
5:00 P.M., New York City time, on the Expiration Date. Capitalized terms not
defined herein are defined in the Prospectus.
Delivery To:
U.S. Bank Trust National Association, Exchange Agent
By Messenger, Mail, Overnight Delivery:
U.S. Bank Trust National Association
180 East Fifth Street
Mail Code: SPFT0210
St. Paul, Minnesota 55101
Attention: Specialized Finance
Facsimile Transmission:
(612) 244-1537 (MN)
Confirm By Telephone:
(612) 244-5011 (MN)
Attention: Specialized Finance
Delivery of this instrument to an address other than as set forth above, or
transmission of instructions via facsimile other than as set forth above, will
not constitute a valid delivery.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Old Notes set forth below, pursuant to the
guaranteed delivery procedure described in "The Exchange Offer -- Guaranteed
Delivery Procedures" section of the Prospectus.
<PAGE>
Principal Amount of Old Notes Tendered
$
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Note Certificate Nos. (if available):
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If Old Notes will be delivered by book-entry transfer to The Depositary Trust
Company, provide account number.
Account Number:
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Name(s) of Record Holder(s):
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Address(es):
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Area Code and Telephone Number(s):
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Signature(s):
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THE ACCOMPANYING GUARANTEE MUST BE COMPLETED.
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm that is a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office correspondent in the United
States or any "eligible guarantor" institution within the meaning of Rule
17Ad-15 of the Exchange Act of 1934, as amended, hereby guarantees to deliver
to the Exchange Agent, at its address set forth above, the Old Notes described
above, in proper form for transfer, together with a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees, and any other documents required by the Letter of
Transmittal within four business days after the date of execution of this
Notice of Guaranteed Delivery.
Name of Firm:
--------------------------------------------------------------
--------------------------------------------------------------
(Authorized Signature)
Title:
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Name:
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Date:
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Address:
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Area Code and
Telephone Number:
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- --------------------------------------------------------------------------------
2
