<PAGE>
PROSPECTUS
8,500,000 SHARES
[SONIC LOGO APPEARS HERE]
CLASS A COMMON STOCK
---------------
Sonic Automotive, Inc. is selling 6,067,230 of the shares of Class A
common stock and certain of our stockholders are selling 2,432,770 of the
shares of Class A common stock.
The Class A common stock trades on the New York Stock Exchange under the
symbol "SAH." On April 29, 1999, the last sale price of the Class A common
stock as reported on the New York Stock Exchange was $14 15/16 per share.
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED
IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
---------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------- ---------------
<S> <C> <C>
Public offering price ........................................ $ 14.9375 $126,968,750
Underwriting discount ........................................ $ .75 $ 6,375,000
Proceeds, before expenses, to Sonic .......................... $ 14.1875 $ 86,078,826
Proceeds, before expenses, to the selling stockholders ....... $ 14.1875 $ 34,514,924
</TABLE>
The Underwriters may also purchase up to an additional 1,275,000 shares
from us at the public offering price, less the underwriting discount, within 30
days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of Class A common stock will be ready for delivery in New York,
New York on or about May 5, 1999.
---------------
MERRILL LYNCH & CO.
BANCBOSTON ROBERTSON STEPHENS
STEPHENS INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
---------------
The date of this prospectus is April 29, 1999.
<PAGE>
[SONIC AUTOMOTIVE LOGO HERE]
[MAP APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Ben Reading Buick Dyer & Dyer Volvo Kia and Volkswagen of Sam White Motor City
BMW of Fairfax Economy Honda Chattanooga Shottenkirk Honda
BMW and Volkswagen of Fitzgerald Chevrolet Lake Norman Chrysler- Superior Oldsmobile-Cadillac-
Nashville Fort Mill Chrysler- Plymouth-Jeep GMC
BMW and Volvo of Plymouth-Dodge Lake Norman Dodge Tampa Volvo
Chattanooga Fort Mill Ford Lexus of Rockville Tom Williams Buick
Bondesen Chevrolet Oldsmobile Freedom Ford Lloyd Mercedes-Nissan Tom Williams Cadillac
Cadillac Frontier Oldsmobile- Lloyd Pontiac-Cadillac-GMC Tom Williams Lexus
Capitol Chevrolet Cadillac Lone Star Ford Tom Williams Imports
Capitol Imports Global Imports Lute Riley Honda Town and Country Chrysler-
Casa Ford Halifax Ford-Mercury Newsome Automotive Plymouth-Jeep of Rock Hill
Century BMW Hatfield Hyundai- Newsome Chevrolet World Town and Country Ford
Charleston Lincoln-Mercury Isuzu-Subaru Nissan Jeep of Waldorf Town and Country Ford of
Classic Dodge Hatfield Lincoln- North Charleston Hyundai Cleveland
Clearwater Mitsubishi Mercury Rally Mitsubishi Town and Country Toyota
Clearwater Toyota Hatfield Volkswagen-Jeep Rockville Porsche Audi Toyota West
Cleveland Chrysler- Heritage Lincoln- Ron Craft Chevrolet-Cadillac- Trader Bud's Westside
Plymouth-Jeep Mercury Oldsmobile Chrysler-Plymouth
Dodge of Chattanooga Higginbotham Chevy-Olds Ron Craft Chrysler Plymouth Trader Bud's Westside Dodge
Higginbotham Automobiles Jeep
Infiniti of Chattanooga
Imports of Florence
</TABLE>
This list of dealerships shown above assumes that Sonic completes its pending
acquisitions.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary ................................................................... 5
Risk Factors ......................................................................... 11
Recent Acquisitions .................................................................. 23
Use of Proceeds ...................................................................... 24
Dividend Policy ...................................................................... 24
Price Range of Class A Common Stock .................................................. 24
Capitalization ....................................................................... 25
Selected Consolidated Financial Data ................................................. 26
Management's Discussion and Analysis of Financial Condition and Results of Operations 28
Business ............................................................................. 37
Management ........................................................................... 52
Principal and Selling Stockholders ................................................... 54
Certain Transactions ................................................................. 56
Description of Capital Stock ......................................................... 62
Description of Certain Indebtedness .................................................. 65
Certain Manufacturer Restrictions .................................................... 68
Shares Eligible for Future Sale ...................................................... 69
United States Federal Tax Considerations for Non-United States Holders ............... 71
Underwriting ......................................................................... 74
Legal Matters ........................................................................ 76
Experts .............................................................................. 76
Where You Can Find More Information About Sonic ...................................... 76
Unaudited Pro Forma Consolidated Financial Data ...................................... P-1
Index to Financial Statements ........................................................ F-1
</TABLE>
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, its supplements and documents incorporated by reference
into it contain statements that constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We intend such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Litigation Securities Reform Act of 1995, and we are
including this statement for purposes of complying with these safe harbor
provisions. These statements appear in a number of places in this prospectus
and include statements regarding our intent, belief or current expectations, or
of our directors or officers, with respect to, among other things:
o our potential acquisitions;
o our financing plans;
o trends affecting our financial condition or results of operations; and
o our business and growth strategies.
You are cautioned that these 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:
o local and regional economic conditions in the areas we serve;
o the level of consumer spending;
o our relationships with manufacturers;
o high competition;
o site selection and related traffic and demographic patterns;
o inventory management and turnover levels;
o realization of cost savings; and
o our success in integrating recent and potential future acquisitions.
3
<PAGE>
Additional factors that could negatively affect our future financial
condition and operations are discussed under the heading "Risk Factors" and in
other parts of this prospectus. You are urged to consider these factors
carefully before investing in our Class A common stock.
All forward-looking statements made by us in this prospectus are qualified
by the cautionary statement above.
---------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the Underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities (1) in any jurisdiction where the offer or sale is not
permitted, (2) where the person making the offer is not qualified to do so, or
(3) to any person who can not legally be offered the securities. You should
assume that the information appearing in this prospectus is accurate only as of
the date on the front cover of this prospectus. Our business, financial
condition, results of operations and prospects may have changed since that
date.
---------------
This prospectus includes statistical data regarding the retail automotive
industry. Unless otherwise indicated, this data is taken from information
published by (1) THE WALL STREET JOURNAL, (2) a division of Intertec Publishing
Corp. in its "Ward's Dealer Business," (3) Crain's Communications, Inc. in its
"Automotive News" and "1998 Market Data Book," (4) ADT Automotive in its "1998
Used Car Market Report," (5) the U.S. Census Bureau, or (6) the Industry
Analysis Division of the National Automobile Dealers Association ("NADA") in
its "Industry Analysis and Outlook" and "Automotive Executive Magazine"
publications.
4
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS FROM THIS PROSPECTUS. UNLESS WE INDICATE OTHERWISE, ALL INFORMATION
IN THIS PROSPECTUS REFLECTS OUR 2-FOR-1 COMMON STOCK SPLIT THAT OCCURRED ON
JANUARY 25, 1999 AND ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS
NOT EXERCISED.
SONIC AUTOMOTIVE, INC.
Sonic is one of the top five automotive retailers in the United States, as
measured by total revenue, operating 47 dealerships and 17 collision repair
centers in 11 metropolitan areas of the southeastern, southwestern and
midwestern United States. We sell new and used cars, light trucks and
replacement parts and provide vehicle maintenance, warranty, paint and repair
services. We also arrange related financing and insurance ("F&I") for our
automotive customers. Sonic operates dealerships in metropolitan markets which
on average are experiencing population growth that is more than one and a half
times the national average. These markets are:
o Atlanta, Georgia
o Birmingham, Alabama
o Charlotte, North Carolina
o Chattanooga, Tennessee
o Columbus, Ohio
o Daytona Beach, Florida
o Greenville/Spartanburg,
South Carolina
o Houston, Texas
o Montgomery, Alabama
o Nashville, Tennessee
o Tampa/Clearwater, Florida
In several of our markets, our dealerships have a significant market share
for new cars and light trucks. Sonic has signed definitive agreements to
acquire 17 additional dealerships in some of its existing markets and in the
new markets of Washington, D.C., Dallas, Texas and Columbia, South Carolina.
COMPANY STRENGTHS
o DISCIPLINED ACQUISITION STRATEGY. Sonic applies a disciplined approach
to potential acquisitions, utilizing a "hub and spoke" acquisition strategy. In
1998, our senior managers reviewed approximately 138 potential acquisitions
with approximately $10.3 billion in revenue and were approached by numerous
other dealerships interested in being acquired. After performing these reviews,
Sonic signed 19 definitive agreements during 1998 for the acquisition of 30
dealerships representing over $1.5 billion in revenue based on dealership
statements, of which 16 have been consummated to date. When analyzing a
potential acquisition, we consider the following factors:
<TABLE>
<S> <C>
o overall fit with operating strategy; o quality of existing management;
o return on investment; o impact on our relationships with manufacturers; and
o impact on earnings per share; o real estate and facilities.
</TABLE>
o PROVEN TRACK RECORD OF INTEGRATING AND IMPROVING ACQUISITIONS. In recent
years, Sonic has grown primarily through acquisitions. Senior management of
Sonic has collectively acquired and integrated more than 75 dealerships during
their careers to date. This acquisition experience helps us to identify and
capitalize on opportunities for improvement and determine and implement
corrective actions. For example, pro forma operating income of dealerships
acquired before December 31, 1997 increased 25.0% from the year ended December
31, 1997 to the year ended December 31, 1998.
o BENEFITS OF SCALE. After acquiring a dealership, we have the potential
to improve its performance by utilizing our existing strengths of experienced
management, best practices and employee training. We have been most successful
at leveraging these strengths in Charlotte and Houston where, subsequent to
acquiring satellite dealerships in these markets, we have improved
significantly both the revenue and, more importantly, the margins of such
dealerships. As we acquire more dealerships in a particular market, we benefit
from the following additional economies of scale:
o IMPROVED TERMS ON BANK AND FLOOR PLAN FINANCING AND INVENTORY
MANAGEMENT. Our floor plan expense, as a percentage of sales, has been
reduced from 1.5% for the year ended December 31, 1997 to 0.9% for the
year ended December 31, 1998 as a result of negotiating with a single
provider and improved inventory management.
o REDUCED ADVERTISING COSTS AS A PERCENTAGE OF SALES. We have reduced our
advertising costs from 1.3% of sales for the year ended December 31,
1997 to 1.1% of sales for the year ended December 31, 1998. More
specifically, we were able to reduce our print advertising rates in both
Charlotte and Houston by over 40%.
5
<PAGE>
o IMPROVED COMMISSIONS ON SALES OF FINANCE AND INSURANCE PRODUCTS.
Sonic's large and increasing volume of F&I sales has allowed us to
renegotiate more favorable commissions on the sales of these products.
These renegotiated commission rates resulted in incremental commissions
of $2.1 million for the year ended December 31, 1998.
o LOWER COSTS FOR PROPERTY AND CASUALTY AND WORKERS' COMPENSATION
INSURANCE. Annual premiums under these policies have decreased from
approximately $3.5 million to $2.6 million.
o CONSISTENT RECORD OF INTERNAL GROWTH. In addition to identifying,
consummating and integrating attractive acquisitions, Sonic continually focuses
on improving its existing dealership operations. As a result, we have a history
of internal growth as demonstrated by same store sales growth of 16.3% in 1995,
6.4% in 1996, 10.1% in 1997 and 11.4% in 1998. Sonic believes that its
historical level of internal growth exceeds the industry average.
o DIVERSE OFFERING OF AUTOMOTIVE BRANDS, PRODUCTS AND
SERVICES. We sell a wide variety of 29 domestic and international brands of new
automotive vehicles in 11 metropolitan areas. We believe this product and
geographic diversity (1) reduces our reliance on any single manufacturer and
(2) mitigates the effect of regional economic conditions and changing consumer
preference.
[PIE CHART APPEARS HERE]
% of Gross Profit
New Vehicles 36%
Service, Parts and Collision Repair 34%
Used Vehicles 16%
F&I 14%
In addition to selling a broad range of new vehicles, Sonic has a balanced
portfolio of other automotive products and services including F&I, used
vehicles, and service, parts and collision repair. The graphic to the right
shows the breakdown of these products and services, represented as a percentage
of Sonic's total gross profit for the year ended December 31, 1998.
o EXPERIENCED MANAGEMENT TEAM WITH EXTENSIVE AUTOMOTIVE RETAILING BACKGROUND.
Sonic's senior management team, which consists of O. Bruton Smith, Chairman and
Chief Executive Officer; B. Scott Smith, President and Chief Operating Officer;
Dennis Higginbotham, President of Retail Operations; Theodore Wright, Chief
Financial Officer; and Jeff Rachor, Vice President of Retail Operations, has, on
average, 20 years of experience working in the automotive industry. During the
course of their individual careers, Messrs. Bruton Smith, Scott Smith,
Higginbotham and Rachor have each owned and/or operated individual dealerships.
We believe that this first-hand operating experience among our senior management
will enable us to continue to acquire and integrate dealerships into the Sonic
platform quickly and effectively.
STRATEGY
o ACQUIRE SELECTED DEALERSHIPS. We believe 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 $673 billion of
total sales in 1997 and controlling less than 5% of all new vehicle dealerships
in the United States. We believe that these factors, together with the
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. We
believe our "hub and spoke" acquisition strategy will allow us to capitalize on
economies of scale, offer a greater breadth of products and services and
increase brand diversity. Generally, we retain the management of a well-run
dealership in order to benefit from its market knowledge, name recognition and
local reputation. In addition, we selectively acquire dealerships that have
underperformed the industry average but which carry attractive product lines or
have attractive locations and which would benefit from our existing
infrastructure.
o INCREASE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. Sonic intends to
increase its sales of higher-margin products and services by, for instance,
expanding its collision repair business and increasing sales of used vehicles.
6
<PAGE>
o CONTROL COSTS. We are focused on controlling expenses and expanding
margins at the dealerships we acquire and integrate into our organization.
Approximately 73% of our operating costs for the year ended December 31, 1998
were variable. We are able to adjust these expenses as the operating or
economic environment impacting our dealerships changes. We manage these
variable costs, such as floor plan (8%), advertising (10%) and compensation
(50%) expenses, so that they are generally related to vehicle sales and can be
adjusted in response to changes in vehicle sales volume. We also focus on
controlling components of fixed cost.
o ENHANCE PROFIT OPPORTUNITIES IN FINANCE AND INSURANCE. Sonic offers 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 our size and scale, we have
negotiated increased commissions on the origination of customer vehicle
financing and insurance policies, which resulted in incremental F&I commissions
of $2.1 million for the year ended December 31, 1998.
o TRAIN, DEVELOP AND MOTIVATE QUALIFIED MANAGEMENT. We believe that our
well trained dealership personnel is key to our long-term prospects. We believe
that our comprehensive training of all employees and the institution of a
decentralized, multi-tiered management structure to supervise effectively our
dealership operations provide us with a competitive advantage over other
dealership groups. In order to motivate management, we employ an incentive
compensation program for each officer, vice president and dealer/operator, a
portion of which is provided in the form of Sonic stock options with additional
incentives based on the performance of individual profit centers. We believe
that this organizational structure, together with the opportunity for promotion
and for equity participation, serve as a strong motivation for our employees.
o ACHIEVE HIGH LEVELS OF CUSTOMER SATISFACTION. We focus on maintaining
high levels of customer satisfaction. Our personalized sales process is
designed to satisfy customers by providing high-quality vehicles in a positive,
"consumer friendly" buying environment.
RECENT ACQUISITIONS
Sonic recently acquired Infiniti of Charlotte, Economy Honda, Rally
Mitsubishi, Global Imports, the Tom Williams Dealerships, Bondesen Chevrolet
Oldsmobile Cadillac and Sam White Motor City for a total purchase price of
$58.0 million in cash, 1,532 shares of Series II Preferred Stock having a
liquidation value of $1,000 per share and 34,100 shares of Series III Preferred
Stock having a liquidation value of $1,000 per share. In addition, we have
recently entered into definitive agreements to acquire Fitzgerald Chevrolet,
the Newsome dealerships, Superior Oldsmobile-Cadillac-GMC, the Lloyd
dealerships, Lute Riley Honda, Charleston Lincoln-Mercury, the Manhattan
dealerships, Ben Reading Buick, Classic Dodge and Shottenkirk Honda for a
minimum of approximately $83.3 million in cash, 10,350 shares of Series II
Preferred Stock, 10,525 shares of Series III Preferred Stock and approximately
$18.0 million in Class A common stock. The aggregate purchase price is subject
to adjustment based on the actual net book value of the assets acquired. Until
our pending acquisitions are consummated, we will use a portion of the net
proceeds from this offering to repay debt incurred primarily to fund
acquisitions that closed in 1999, which repaid amounts may be reborrowed. Sonic
is continuing to review acquisitions in the ordinary course of its business and
is currently negotiating terms for several of these acquisitions, some of which
may be material.
RECENT DEVELOPMENTS
For the three months ended March 31, 1999, Sonic's unaudited total revenue
was $593.5 million and gross profit was $78.1 million, representing increases
of $329.5 million or 124.8% and $43.9 million or 128.6%, respectively, from the
comparable 1998 period. These increases were due primarily to additional
revenue from acquisitions, increased same store revenue of $58.9 million or
22.3% for the first quarter of 1999 as compared to the first quarter of 1998
and improvements in gross margins to 13.2% in the first quarter of 1999 from
12.9% in the first quarter of 1998. For the quarter ended March 31, 1999,
operating income was $19.0 million and net income was $6.7 million,
representing increases of $11.5 million or 155.3% and $4.6 million or 213.0%,
respectively from the comparable 1998 period. These increases were due
primarily to the factors noted above, as well as a decrease in selling, general
and administrative expenses as a percentage of total revenue from 9.8% in the
first quarter of 1998 to 9.6% in the first quarter of 1999 and a decrease in
floor plan interest expense as a percentage of total revenues from 1.1% in the
first quarter of 1998 to 0.8% in the first quarter of 1999. Sonic's net income
per diluted share for the quarter ended March 31, 1999 was $0.24 per diluted
share, an increase of $0.15 per diluted share or 167% from the same period in
1998.
RISK FACTORS
See "Risk Factors" beginning on page 11 for a discussion of other factors
that should be considered by prospective purchasers of the Class A common stock
offered hereby.
7
<PAGE>
THE OFFERING
Class A common stock offered:
By Sonic....................... 6,067,230 shares(1)
By the selling stockholders.... 2,432,770 shares(2)
Total shares offered.......... 8,500,000 shares(1)(2)
Common stock to be outstanding
after the offering:
Class A common stock........... 21,007,796 shares(3)
Class B common stock........... 12,400,000 shares
Total shares of common stock
outstanding after the
offering..................... 33,407,796 shares(1)(2)(3)
Voting rights................... The Class A common stock and Class B common
stock vote as a single class on all matters,
except as otherwise required by law or
Sonic's charter, with each share of Class A
common stock entitling its holders to one
vote and each share of Class B common stock
entitling its holder to ten votes except with
respect to certain limited matters. See
"Description of Capital Stock."
Use of proceeds................. The net proceeds to Sonic from this
offering (without exercise of the
over-allotment options) after deducting the
underwriting discount and estimated expenses
of the offering will be $85.4 million.
We intend to use these net proceeds to fund
our pending and future acquisitions and for
other corporate purposes. Currently, Sonic
has pending acquisitions in which a minimum
of approximately $83.3 million is the cash
component of the aggregate purchase price.
Pending consummation of these acquisitions,
we will temporarily use the funds to repay
debt, which may subsequently be reborrowed.
See "Use of Proceeds" and "Principal and
Selling Stockholders."
We will not receive any proceeds from the
sale of common stock by selling stockholders.
New York Stock Exchange symbol... "SAH"
- ---------
(1) Does not include up to an aggregate of 1,275,000 shares of Class A common
stock that may be sold by Sonic upon exercise of the over-allotment option
granted to the Underwriters. See "Underwriting."
(2) The selling stockholders collectively held 35,048 shares of preferred stock
of Sonic, all of which has been converted into 2,432,770 shares of Class A
common stock to be sold in this offering (based on such shares being
converted on the basis of the 20-day average closing price for the Class A
common stock of $14.5375 per share).
(3) Does not include (a) 3,269,857 shares of Class A common stock issuable upon
exercise of outstanding options, and (b) 1,540,331 estimated shares of
Class A common stock issuable upon conversion of all shares of outstanding
preferred stock that are not being converted to Class A common stock in
connection with the offering (approximately 22,011.3 shares of preferred
stock), assuming such shares were converted on the basis of the 20-day
average closing price for the Class A common stock being $14.5375 per
share.
---------------
Our principal executive offices are located at 5401 East Independence
Boulevard, P.O. Box 18747, Charlotte, North Carolina 28218 and our telephone
number is (704) 532-3320.
8
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following Summary Historical Consolidated Financial and Operating Data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Consolidated Financial
Statements of Sonic and the related notes (included elsewhere in this
prospectus). See also the "Unaudited Pro Forma Consolidated Financial Data"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
ACTUAL
---------------------------------------------------------------
1995 1996(A) 1997(B) 1998(C)
------------- ------------- ------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND VEHICLE UNIT DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenue:
Vehicle sales .............................................. $ 267,650 $ 327,674 $ 467,858 $ 1,407,030
Parts, service and collision repair ........................ 35,860 42,075 57,537 162,660
Finance and insurance ...................................... 7,813 7,118 10,606 34,011
--------- --------- --------- -----------
Total revenue ............................................ 311,323 376,867 536,001 1,603,701
Cost of sales ............................................... 272,130 332,122 473,003 1,396,259
--------- --------- --------- -----------
Gross profit ................................................ 39,193 44,745 62,998 207,442
Selling, general and administrative expenses ................ 28,091 32,602 46,770 150,130
Depreciation and amortization ............................... 832 1,076 1,322 4,607
--------- --------- --------- -----------
Operating income ............................................ 10,270 11,067 14,906 52,705
Interest expense, floor plan ................................ 4,504 5,968 8,007 14,096
Interest expense, other ..................................... 436 433 1,199 9,395
Other income ................................................ 106 355 298 426
--------- --------- --------- -----------
Income before income taxes and minority interest ............ 5,436 5,021 5,998 29,640
Provision for income taxes .................................. 2,176 1,924 2,249 11,083
--------- --------- --------- -----------
Income before minority interest ............................. 3,260 3,097 3,749 18,557
Minority interest in earnings of subsidiary ................. 22 114 47 --
--------- --------- --------- -----------
Net income .................................................. $ 3,238 $ 2,983 $ 3,702 $ 18,557
========= ========= ========= ===========
Diluted net income per share(d) ............................. $ 0.27 $ 0.74
========= ===========
Weighted average number of common shares outstanding(d) ..... 13,898 24,970
========= ===========
OTHER CONSOLIDATED FINANCIAL AND OPERATING DATA:
New vehicle units sold ...................................... 10,273 11,693 15,715 41,592
Used vehicle units sold -- retail ........................... 5,172 5,488 6,712 24,591
New vehicle sales revenues .................................. $ 186,859 $ 233,979 $ 343,941 $ 962,939
Used vehicle sales revenues -- retail ....................... 60,766 68,054 85,132 324,740
Gross margin ................................................ 12.6% 11.9% 11.8 % 12.9 %
New vehicle gross margin .................................... 7.5% 7.7% 7.7 % 7.8 %
Used vehicle gross margin -- retail ......................... 9.5% 8.4% 8.6 % 10.7 %
Parts, service and collision repair gross margin ............ 36.1% 35.8% 36.9 % 43.2 %
EBITDAR(e) .................................................. $ 7,681 $ 7,619 $ 10,668 $ 54,125
Rental expense .............................................. 977 1,089 2,149 10,483
--------- --------- --------- -----------
EBITDA(f) ................................................... $ 6,704 $ 6,530 $ 8,519 $ 43,642
========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1998
------------------
CONSOLIDATED BALANCE SHEET DATA:
<S> <C>
Working capital .................. $ 79,155
Total assets ..................... 576,103
Long-term debt(g) ................ 145,790
Total liabilities ................ 433,674
Stockholders' equity ............. 142,429
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
9
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- ---------
(a) Sonic 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
before the date we acquired it. Accordingly, the actual financial data for
periods after the acquisition may not be comparable to data presented for
periods before the acquisition.
(b) Sonic 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. Our 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 before their effective dates of acquisition. Accordingly, the
actual financial data for periods after the acquisitions may not be
comparable to data presented for periods before the acquisitions.
(c) Sonic acquired Capitol Chevrolet and Imports, Century BMW and Heritage
Lincoln Mercury in April 1998, Casa Ford of Houston, Inc. in May 1998,
Hatfield Automotive Group in July 1998, Higginbotham Automotive Group in
August 1998, Tampa Volvo, Ron Craft Chrysler Plymouth Jeep and Ron Craft
Chevrolet-Cadillac-Oldsmobile in December 1998. Our 1998 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 before their effective dates of acquisition. Accordingly, the
actual financial data for periods after the acquisitions may not be
comparable to data presented for periods before the acquisitions.
(d) In accordance with generally accepted accounting principles, the earnings
per share information has been retroactively restated to reflect our
2-for-1 common stock split that occurred on January 25, 1999.
(e) EBITDAR means earnings before interest (other than interest expense related
to notes payable-floor plan), taxes, depreciation, amortization and rent
expense. You should not consider EBITDAR to be a substitute for operating
income or a better measure of liquidity than cash flows from operating
activities, which are determined in accordance with generally accepted
accounting principles. We include it to provide additional information on
our ability to meet future debt service, our capital expenditures and our
working capital requirements. This measure may not be comparable to
similarly titled measures reported by other companies.
(f) EBITDA means earnings before interest (other than interest expense related
to notes payable-floor plan), taxes, depreciation and amortization. This
is consistent with the measure used to calculate Sonic's consolidated
fixed charge coverage ratio for purposes of the limitations on
indebtedness covenant in the indenture governing Sonic's senior
subordinated notes. You should not consider EBITDA to be a substitute for
operating income or a better measure of liquidity than cash flows from
operating activities, which are determined in accordance with generally
accepted accounting principles. We include it to provide additional
information on our ability to meet future debt service, our capital
expenditures and our working capital requirements. This measure may not be
comparable to similarly titled measures reported by other companies.
(g) Long-term debt, including current portion, includes the payable to Sonic's
Chairman and the payable to affiliates of Sonic. See Sonic's Consolidated
Financial Statements and the related notes included in this prospectus.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF THE INFORMATION IN THIS
PROSPECTUS, INCLUDING THE RISK FACTORS SET FORTH BELOW, BEFORE INVESTING IN THE
SHARES WE ARE OFFERING.
AUTOMOBILE MANUFACTURERS EXERCISE SIGNIFICANT CONTROL OVER SONIC'S OPERATIONS
AND SONIC IS DEPENDENT ON THEM TO OPERATE ITS BUSINESS
Each of Sonic's dealerships operates pursuant to a franchise agreement
with the applicable automobile manufacturer or manufacturer authorized
distributor. Sonic is dependent to a significant extent on its relationships
with such manufacturer. Without a franchise agreement, we cannot obtain new
vehicles from a manufacturer.
Vehicles manufactured by the following manufacturers accounted for the
indicated approximate percentage of our 1998 new vehicle revenue:
<TABLE>
<CAPTION>
PERCENTAGE OF OUR
MANUFACTURER 1998 NEW VEHICLE REVENUES
- -------------------------------- --------------------------
<S> <C>
Ford Motor Company 44.0%
Daimler-Chrysler Corporation 19.0%
Toyota Motor Sales (U.S.A.) 10.7%
General Motors Corporation 6.2%
BMW 5.3%
</TABLE>
No other manufacturer accounted for more than 5% of our new vehicle sales
during 1998. A significant decline in the sale of Ford, Daimler-Chrysler,
Toyota, GM or BMW new vehicles could have a material adverse effect on us.
Manufacturers exercise a great degree of control over the operations of
Sonic's dealerships. Each of our 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. Manufacturers may also have a right of first refusal if we seek to
sell our dealerships. We believe that we will be able to renew all of our
existing franchise agreements upon expiration.
o We cannot assure you that any of our franchise agreements will be renewed
or that the terms and conditions of such renewals will be favorable to us.
o If a manufacturer is allowed under state franchise laws to terminate or
decline to renew one or more of Sonic's significant franchise agreements,
such action could have a material adverse effect on our business.
o 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 us.
Manufacturers allocate their vehicles among dealerships generally based on
the sales history of each dealership. Consequently, we also depend on the
manufacturers to provide us with a desirable mix of popular new vehicles. These
popular vehicles produce the highest profit margins and tend to be the most
difficult to obtain from the manufacturers.
o Sonic's dealerships depend on the manufacturers for certain sales
incentives, warranties and other programs that are intended to promote and
support dealership new vehicle sales. 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 our profitability.
ADVERSE CONDITIONS AFFECTING ONE OR MORE MANUFACTURERS MAY NEGATIVELY IMPACT
SONIC'S PROFITABILITY
The success of each of Sonic's dealerships depends to a great extent on
the manufacturers':
o financial condition;
o marketing;
o vehicle design;
o production capabilities; and
o management.
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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 us. 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, we have
attempted to lessen our 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 us. 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 Sonic due to
Chrysler's inability to provide us with a sufficient supply of new vehicles and
parts during such period. In addition, 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. In the
event of another such strike, Sonic 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 our financial
results.
MANUFACTURER STOCK OWNERSHIP/ISSUANCE LIMITS LIMIT SONIC'S ABILITY TO ISSUE
ADDITIONAL EQUITY TO MEET ITS FINANCING NEEDS
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. Our manufacturers 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.
o Ford may cause us to sell or resign from one or more of our Ford
franchises if any person or entity (other than the current holders of our
Class B common stock, and their lineal descendants and affiliates
(collectively, the "Smith Group")) acquires 15% or more of our voting
securities.
o 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 our voting securities are similarly acquired.
o American Honda Co., Inc. may force the sale of our 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.
o Volkswagen of America, Inc. approved of the public sale of only 25% of
the voting control of Sonic in Sonic's initial public offering, and
requires prior approval of any change in control or management of Sonic
that would affect Sonic's control or management of its Volkswagen
franchise subsidiaries.
o Chrysler approved of the public sale of only 50% of Sonic's common stock
in Sonic's initial public offering, and requires prior approval of any
future sales that would result in a change in voting or managerial control
of Sonic.
o Mercedes requires 60 days notice to approve the acquisition of securities
representing 20% or more of the voting rights of Sonic.
In addition, other manufacturers may seek to impose other similar restrictions.
In a similar manner, Sonic's lending arrangements require that voting
control over Sonic be maintained by the Smith Group. Any transfer of shares of
common stock, including a transfer by members of the Smith Group, will be
outside our control. If such transfer results in a change in control of Sonic,
it could result in the termination or non-renewal of one or more of our
franchise agreements and a default under our credit arrangements. Moreover,
these issuance limitations may impede Sonic's ability to raise capital through
additional equity offerings or to issue Sonic stock as consideration for future
acquisitions. The restrictions under Sonic's franchise agreements or lending
arrangements also may prevent or deter prospective acquirors from acquiring
control of Sonic and adversely impact Sonic's equity value.
MANUFACTURERS' RESTRICTIONS ON ACQUISITIONS COULD LIMIT SONIC'S FUTURE GROWTH
We are required to obtain the consent of the applicable manufacturer
before the acquisition of any additional dealership franchises. We cannot
assure you that manufacturers will grant such approvals, although the denial of
such approval may be subject to certain state franchise laws. In the course of
acquiring Jaguar franchises associated with
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<PAGE>
dealerships in Chattanooga, Tennessee and Greenville, South Carolina, Jaguar
declined to consent to Sonic's proposed 1997 acquisitions of those franchises.
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 our 1997 and 1998 acquisitions, other than Jaguar, which was
not obtained, took approximately five months. We believe that manufacturer
approvals of subsequent acquisitions from manufacturers with which Sonic has
previously completed applications and agreements may take less time, although
we cannot provide you with assurances to that effect.
If we experience delays in obtaining, or fail to obtain, approvals of the
manufacturers for acquisitions of dealerships, our 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
customer satisfaction index scores ("CSI scores") of Sonic 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 we seek to acquire a dealership franchise.
In addition, a manufacturer may seek to limit the number of such
manufacturers' dealerships that may be owned by Sonic, Sonic's national market
share of such manufacturer's products or the number of dealerships Sonic may
own in a particular geographic area. These restrictions may not be enforceable
under state franchise laws. See "Business -- Relationships with Manufacturers."
o Ford currently limits us to no more than the lesser of (1) 15 Ford and 15
Lincoln Mercury dealerships or (2) 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. Ford also limits us to owning only one
Ford dealership in any Ford-defined market area having three or fewer Ford
dealerships in it and no more than 25% of the Ford dealerships in a market
area having four or more Ford dealerships.
o Toyota currently restricts 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 (1) the
greater of one dealership, or 20% of the Toyota dealer count in a
Toyota-defined "Metro" market, (2) the lesser of five dealerships or 5% of
the Toyota dealerships in any Toyota region (currently 12 geographic
regions), and (3) two Lexus dealerships in any one of the four Lexus
geographic areas. Toyota further requires that at least nine months elapse
between acquisitions.
o In late 1998, Honda announced its revised policy that it will enter into
a "framework agreement" with any publicly-owned Honda dealer entity. The
purpose of this agreement is primarily to set specific limitations on the
number of Honda and Acura dealerships nationally, in each Honda- and
Acura-defined geographic zones and in each Honda- and Acura-defined
"Metro" market. Honda has not yet provided us with such a framework
agreement. Presently, Honda restricts us from holding more than seven
Honda or more than three Acura franchises nationally and restricts the
number of franchises to (1) one Honda dealership in a Honda-defined
"Metro" market with two to 10 Honda dealerships, (2) two Honda dealerships
in a Metro market with 11 to 20 Honda dealerships, (3) three Honda
dealerships in a Metro market with 21 or more Honda dealerships, (4) no
more than 4% of the Honda dealerships in any one of 10 Honda-defined
geographic zones, (5) one Acura dealership in a Metro market, and (6) two
Acura dealerships in any one of the six Acura-defined geographic zones.
o Mercedes restricts any company from owning that number of Mercedes
dealerships with sales of more than 3% of total sales of Mercedes vehicles
in the U.S. during the previous calendar year. In addition, Mercedes has
limited Sonic from acquiring more than four additional Mercedes
dealerships until November 1999. During this period, Mercedes will
evaluate the performance of our acquired Mercedes dealerships before
permitting us to acquire additional Mercedes dealerships.
o GM limited the number of GM dealerships that we may acquire during the
period from September 15, 1997 to June 10, 2000 to 15 additional GM
dealership locations. We currently own and have agreements to acquire a
total of 15 GM dealerships. GM currently limits the maximum number of GM
dealerships that we may acquire to 50% of the GM dealerships, by franchise
line, in a GM-defined geographic market area having multiple GM dealers.
o Toyota and Honda also prohibit ownership of contiguous dealerships.
o Subaru limits us to no more than two Subaru dealerships within certain
designated market areas, four Subaru dealerships within the Mid-America
region and twelve dealerships within Subaru's entire area of distribution.
o Toyota, Honda and Mercedes also prohibit the coupling of a franchise
with any other brand without their consent.
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<PAGE>
As a condition to granting their consent to our 1997 acquisitions, a
number of manufacturers forced Sonic to agree to additional restrictions. These
agreements principally restrict (1) certain material changes in Sonic 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 Sonic
which could have a material adverse effect on the manufacturer's image or
reputation or could be materially incompatible with the manufacturer's
interests; (2) the removal of a dealership general manager without the consent
of the manufacturer; and (3) the use of dealership facilities to sell or
service new vehicles of other manufacturers. If we are unable to comply with
these restrictions, we generally must (1) sell the assets of the dealerships to
the manufacturer or to a third party acceptable to the manufacturer, or (2)
terminate the dealership agreements with the manufacturer. Other manufacturers
may impose other and more stringent restrictions in connection with future
acquisitions.
We own:
seven Ford franchises,
six Chrysler franchises,
six Plymouth franchises,
five BMW franchises,
four Cadillac franchises,
four Chevrolet franchises,
four Jeep franchises,
four Dodge franchises,
four Oldsmobile franchises,
three Toyota franchises,
three Volkswagen franchises,
three Volvo franchises,
three KIA franchises,
three Mercury franchises,
three Mitsubishi franchises,
two Lincoln franchises,
two Infiniti franchises,
two Hyundai franchises, and
one franchise each of Acura, Audi, Buick, Honda, Isuzu, Lexus, Mercedes,
Nissan, Porsche, Range Rover and Subaru.
JAGUAR HAS NOT CONSENTED TO TWO ACQUISITIONS
In the course of seeking to acquire Jaguar franchises in Chattanooga,
Tennessee and Greenville, South Carolina, Jaguar declined to consent to Sonic's
proposed acquisitions of these franchises. In settling legal actions brought
against Jaguar by the seller of the Chattanooga Jaguar franchise, Sonic agreed
with Jaguar not to acquire any Jaguar franchise until August 3, 2001.
SONIC'S FAILURE TO MEET A MANUFACTURER'S CONSUMER SATISFACTION REQUIREMENTS MAY
ADVERSELY AFFECT OUR ABILITY TO ACQUIRE NEW DEALERSHIPS
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. The components of CSI have
been modified from time to time in the past, and we cannot assure you that such
components will not be further modified or replaced by different systems in the
future. To date, we have not been materially adversely affected by these
standards and have not been denied approval of any acquisition based on low CSI
scores, except for Jaguar's refusal to approve our acquisition of a Chattanooga
Jaguar franchise in 1997. See " -- Jaguar Has Not Consented to Two
Acquisitions." However, we cannot assure you that Sonic will be able to comply
with such standards in the future. Failure of Sonic's dealerships to comply
with the standards imposed by manufacturers at any given time may have a
material adverse effect on us.
LIMITATIONS ON SONIC'S FINANCIAL RESOURCES AVAILABLE FOR ACQUISITIONS
We intend to finance our acquisitions with cash on hand, through issuances
of equity or debt securities and through borrowings under credit arrangements.
o We cannot assure you that we will be able to obtain additional debt or
equity securities financing.
o Using equity to complete acquisitions could significantly dilute
existing equity holders.
o Using cash to complete acquisitions could substantially limit our
operating or financial flexibility.
o If we are unable to obtain financing on acceptable terms, we may be
required to reduce significantly the scope of our presently anticipated
expansion, which could materially adversely affect our business.
For further discussion of Sonic's financial resources, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
14
<PAGE>
In addition, Sonic is dependent to a significant extent on its ability to
finance its inventory. Automotive retail inventory financing involves
significant sums of money in the form of "floor plan financing." Floor plan
financing is how a dealership finances its purchase of new vehicles from a
manufacturer. The dealership borrows money to buy a particular vehicle from the
manufacturer and pays off the loan when it sells that particular vehicle,
paying interest during this period. As of December 31, 1998, Sonic had
approximately $228.2 million of floor plan indebtedness outstanding, all of
which is under Sonic's floor plan credit facility (the "Floor Plan Facility")
with Ford Motor Credit. Substantially all the assets of our dealerships are
pledged to secure such indebtedness, which may impede our ability to borrow
from other sources. Ford Motor Credit is associated with Ford. Consequently,
any deterioration of our relationship with Ford could adversely affect our
relationship with Ford Motor Credit and vice-versa. In addition, Sonic must
obtain new floor plan financing or obtain consents to assume such financing in
connection with its acquisition of dealerships.
O. Bruton Smith, our Chief Executive Officer and Chairman of the Board,
initially guaranteed the obligations of Sonic under Sonic's unsecured
acquisition line of credit (the "Revolving Facility") with Ford Motor Credit.
Such obligations were further secured with a pledge of shares of common stock
of Speedway Motorsports, Inc. owned by Sonic Financial Corporation, a
corporation controlled by Mr. Smith, having an estimated value at the time of
pledge of approximately $50.0 million (the "Revolving Pledge"). When the
Revolving Facility's borrowing limit was increased to $75.0 million in 1997,
Mr. Smith's personal guarantee of Sonic's obligations under the Revolving
Facility was released, although the Revolving Pledge remained in place. Mr.
Smith was also required by Ford Motor Credit to lend $5.5 million (the
"Subordinated Smith Loan") to Sonic to increase Sonic's capitalization because
the net proceeds from Sonic's November 1997 initial public offering were
significantly less than expected by Sonic and Ford Motor Credit. In August
1998, Ford Motor Credit released the Revolving Pledge. In December 1998, Ford
Motor Credit agreed to increase the borrowing limit under the Revolving
Facility to $100.0 million. Mr. Smith may be unwilling to make any such
commitments in the future if such commitments are needed.
LEVERAGE
As of December 31, 1998, Sonic's long-term debt was 49.7% of its total
capitalization. As of December 31, 1998, Sonic's total consolidated long-term
indebtedness (including certain affiliated payables) was $140.5 million, its
total consolidated short-term indebtedness (including floor plan notes payable)
was $233.5 million and its total stockholders' equity was $142.4 million. In
addition, the indenture relating to our senior subordinated notes and other
debt instruments of Sonic and its subsidiaries allow Sonic and its subsidiaries
to incur additional indebtedness, including secured indebtedness.
The degree to which Sonic is leveraged could have important consequences
to the holders of our securities, including the following:
o our ability to obtain additional financing for acquisitions, capital
expenditures, working capital or general corporate purposes may be
impaired in the future;
o a substantial portion of the our cash flow from operations must be
dedicated to the payment of principal and interest on our senior
subordinated notes, borrowings under the revolving facility, a
standardized floor plan credit facility with Ford Motor Credit for each of
our dealership subsidiaries and other indebtedness, thereby reducing the
funds available to us for our operations and other purposes;
o certain of our borrowings are and will continue to be at variable rates
of interest, which exposes us to the risk of increased interest rates;
o the indebtedness outstanding under our credit facilities is secured by a
pledge of substantially all the assets of our dealerships; and
o we may be substantially more leveraged than certain of our competitors,
which may place us at a relative competitive disadvantage and make us more
vulnerable to changing market conditions and regulations.
In addition, our debt agreements contain numerous covenants that will
limit the discretion of Sonic's and its subsidaries' management with respect to
certain business matters.
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AUTOMOBILE RETAILING IS A MATURE INDUSTRY WITH LIMITED GROWTH POTENTIAL IN NEW
VEHICLE SALES AND SONIC'S ACQUISITION STRATEGY WILL AFFECT ITS REVENUES AND
EARNINGS
The United States automobile dealership industry is considered a mature
industry in which minimal growth is expected in unit sales of new vehicles. As
a consequence, growth in our revenues and earnings is likely to be
significantly affected by our success in acquiring and integrating dealerships
and the pace and size of such acquisitions.
HIGH COMPETITION IN AUTOMOBILE RETAILING REDUCES SONIC'S PROFIT MARGINS ON
VEHICLE SALES
Automobile retailing is a highly competitive business with over 22,000
franchised automobile dealerships in the United States at the beginning of
1998. Our competition includes:
o Franchised automobile dealerships selling the same or similar makes of
new and used vehicles we offer in our markets and sometimes at lower
prices than us. Some of these dealer competitors may be larger and have
greater financial and marketing resources than Sonic;
o Other franchised dealers;
o Private market buyers and sellers of used vehicles;
o Used vehicle dealers;
o Service center chain stores; and
o 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 untraditional
outlets such as used-vehicle "superstores." Many used-vehicle superstores use
sales techniques, such as one price shopping, that are untraditional and
appealing to certain consumers. Presently, only one of Sonic's dealerships uses
one price shopping techniques. Several groups have begun to establish
nationwide networks of used-vehicle superstores. In many of the markets where
we have significant operations, used-vehicle superstores operate in competition
with us. "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 of Sonic's competitors may be capable of operating on smaller gross
margins than us, and may have greater financial, marketing and personnel
resources than us.
We along with our competition are beginning to use the Internet as a
significant part of the sales process. Customers are using the Internet to
compare pricing for cars and F&I which may further reduce margins for new cars
and profits for F&I.
In addition, Ford and GM have announced that they are entering into joint
ventures to acquire dealerships in various cities in the United States and
Saturn has announced its intention to acquire its dealerships. In addition,
other manufacturers may directly enter the retail market in the future.
Manufacturer direct retailing efforts that comply with state franchise statutes
could have a material adverse effect on us.
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 new vehicle
margins. As Sonic seeks to acquire dealerships in new markets, it may face
increasingly significant competition as it strives to gain market share through
acquisitions or otherwise. Such competition includes other large dealer groups
and dealer groups that have publicly-traded equity.
Our franchise agreements do not grant us the exclusive right to sell a
manufacturer's product within a given geographic area. We could be materially
adversely affected if any of our manufacturers award franchises to others in
the same markets where we operate, although certain state franchise laws may
limit such activities by the manufacturers. See "Business -- Relationships
with Manufacturers." A similar adverse affect could occur if existing competing
franchised dealers increase their market share in our markets. Our gross
margins may decline over time as we expand into markets where we do not have a
leading position. These and other competitive pressures could materially
adversely affect Sonic's results of operations.
THE CYCLICAL AND LOCAL NATURE OF AUTOMOBILE SALES MAY ADVERSELY AFFECT SONIC'S
PROFITABILITY
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, 1998,
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industry retail unit sales increased 2.9% as a result of retail car unit sales
declines of 1.1% offset by retail truck unit sales gains of 7.7% from the same
period in 1997. Future recessions may have a material adverse effect on our
business.
Local economic, competitive and other conditions also affect the
performance of dealerships. Sonic's dealerships currently are located in the
Atlanta, Birmingham, Charlotte, Chattanooga, Columbus, Daytona Beach,
Greenville/Spartanburg, Houston, Montgomery, Nashville and Tampa/Clearwater
markets. We intend to pursue acquisitions outside of these markets, but our
operational focus is on our current markets. As a result, Sonic's results of
operations depend substantially on general economic conditions and consumer
spending habits in the Southeast and, to a lesser extent, in the Houston and
Columbus markets. Sonic's results of operations also depend on other factors,
such as tax rates and state and local regulations specific to Alabama, Florida,
Georgia, North Carolina, Ohio, South Carolina, Tennessee and Texas. Sonic may
not be able to expand geographically and any such expansion may not adequately
insulate it from the adverse effects of local or regional economic conditions.
RISKS OF CONSOLIDATING OPERATIONS AS A RESULT OF RECENT ACQUISITIONS MAY
ADVERSELY AFFECT SONIC'S FUTURE OPERATING RESULTS
We acquired 19 dealerships in 1998. Each of these dealerships was operated
and managed as a separate independent entity until acquired. Sonic's future
operating results will depend on our ability to integrate the operations of
these businesses and manage the combined enterprise. We cannot assure you that
we will be able to effectively and profitably integrate in a timely manner any
of the dealerships included in our 1998 acquisitions or any future
acquisitions, or to manage the combined entity without substantial costs,
delays or other operational or financial problems. Our inability to do so could
have a material adverse effect on Sonic's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS MAY HINDER SONIC'S ABILITY TO INCREASE
REVENUES AND EARNINGS
The retail automobile industry is considered a mature industry in which
minimal growth is expected in industry unit sales. Accordingly, our future
growth depends in large part on our ability to acquire additional dealerships
as well as on our ability to manage expansion, control costs in our operations
and consolidate dealership acquisitions, including our 1998 and completed 1999
acquisitions, into existing operations. In pursuing a strategy of acquiring
other dealerships, we face risks commonly encountered with growth through
acquisitions. These risks include, but are not limited to:
o incurring significantly higher capital expenditures and operating
expenses;
o failing to assimilate the operations and personnel of the acquired
dealerships;
o disrupting Sonic's ongoing business;
o diverting Sonic's limited management resources;
o failing to maintain uniform standards, controls and policies;
o impairing relationships with employees and customers as a result of
changes in management;
o causing increased expenses for accounting and computer systems, as well
as integration difficulties; and
o failure to obtain a manufacturer's consent to one of its dealership
franchises.
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. We cannot
assure you that we will be successful in overcoming these risks or any other
problems encountered with such acquisitions, including our 1998 and completed
1999 acquisitions.
Although there are many potential acquisition candidates that fit our
acquisition criteria, we cannot assure you that we 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 us and higher acquisition prices. The magnitude, timing and
nature of future acquisitions will depend upon various factors, including:
o the availability of suitable acquisition candidates;
o competition with other dealer groups for suitable acquisitions;
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o the negotiation of acceptable terms;
o Sonic's financial capabilities;
o the availability of skilled employees to manage the acquired companies;
and
o general economic and business conditions.
In addition, Sonic's future growth as a result of our acquisition of
automobile dealerships will depend on our ability to obtain the requisite
manufacturer approvals. We cannot assure you that we will be able to obtain
such consents in the future.
In certain cases, we 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 our
acquisitions, and may increase the cost of completing such transactions.
THE OPERATING CONDITION OF ACQUIRED BUSINESSES CANNOT BE DETERMINED ACCURATELY
UNTIL SONIC ASSUMES CONTROL
Although we have conducted what we believe to be a prudent level of
investigation regarding the operating condition of the businesses we purchase
in light of the circumstances of each transaction, certain unavoidable levels
of risk remain regarding the actual operating condition of these businesses.
Until we actually assume operating control of such assets, we may not be able
to ascertain the actual value of the acquired entity.
POTENTIAL ADVERSE MARKET PRICE EFFECT OF ADDITIONAL SHARES ELIGIBLE FOR FUTURE
SALE
The market price of our Class A common stock could be adversely affected
by the availability for public sale of up to 18,892,992 shares held or issuable
on April 29, 1999, including:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CLASS A COMMON STOCK MANNER OF HOLDING AND/OR ISSUANCE
- ------------------------ --------------------------------------------------------------
<S> <C>
12,400,000(1) Issuable on conversion of 12,400,000 shares of our Class B
common stock owned by existing stockholders of Sonic.
These shares of Class A common stock are subject to
certain piggyback registration rights.
242,782(1) Issuable on exercise of warrants issued in our business
acquisitions.
1,540,331(1)(2) Issuable on conversion of outstanding shares of our Class
A convertible preferred stock that were issued in our
business acquisitions.
1,440,022 Issued in our business acquisitions and currently registered
for resale under the Securities Act pursuant to a shelf
registration.
2,469,282 Issuable on exercise of options granted under our 1997
Stock Option Plan. All such shares are registered for sale
under the Securities Act.
700,575 Issuable on exercise of options granted under our employee
stock purchase plans. All such shares are registered for sale
under the Securities Act.
100,000 Issuable on exercise of options granted under our Directors
Formula Stock Option Plan. All such shares are registered
for sale under the Securities Act.
</TABLE>
- ---------
(1) All such shares are "restricted securities" as defined in Rule 144 under
the Securities Act and may be resold in compliance with Rule 144.
(2) The number of shares of Class A common stock issuable upon conversion of
outstanding shares of our preferred stock is an estimate based on the
assumption that the average of the daily closing prices for the Class A
common stock on the NYSE for the 20 consecutive trading days ending one
trading day before such conversion was $14.5375 per share. This number
is subject to adjustment based on the common stock price on the date of
conversion and could be materially more or less than this estimated
amount depending on factors that we cannot
18
<PAGE>
presently determine. These factors include the future market price of the
Class A common stock and the decisions of the holders of the preferred
stock as to when to convert their shares of preferred stock. Generally,
such issuances of Class A common stock will vary inversely with the
market price of the Class A common stock.
In connection with pending acquisitions, Sonic has agreed to issue
approximately $18.0 million in Class A common stock and approximately $20.9
million in liquidation value of preferred stock. All but approximately $10.5
million in value of these securities will have registration rights, of which
approximately $18.0 million of such shares will be subject to prohibitions on
resales for the 180 days after their issuance. Sonic intends in its business
acquisitions to issue additional shares of equity securities that may have
registration rights as well as be eligible for resale under Rule 144. The
resale of substantial amounts of Class A common stock, or the perception that
such resales may occur, could materially and adversely affect the prevailing
market prices for the Class A common stock and the ability of Sonic to raise
equity capital in the future.
Sonic has agreed not to issue, and Sonic's directors and executive
officers have agreed not to resell, any shares of Sonic's common stock or other
equity securities for a period from the date of the preliminary prospectus
first mailed to investors to the date 90 days after the date of this prospectus
(the "Lock Up Period") without the prior consent of the underwriters'
representative. Sonic may, however, issue its securities without such prior
consent during the Lock Up Period (1) under its stock benefit plans, (2) in a
dealership acquisition as long as the recipient of the securities agrees not to
resell for at least the remainder of the Lock Up Period, or (3) upon the
exercise of options or warrants or the conversion of securities currently
outstanding. Our directors and executive officers hold or are entitled to
receive 13,828,339 shares of Class A common stock that are subject to the Lock
Up Period restrictions on resale. We estimate that an additional 1,027,593
shares of the shares listed in the table above are subject to similar lock up
arrangements for a period from the date of the preliminary prospectus first
mailed to investors to the date 30 days after the date of this prospectus.
Sonic also has registration rights agreements with holders of 324,803
shares of Class A common stock. These stockholders are also selling
stockholders, who are otherwise subject to restrictions on resale for the Lock
Up Period.
POTENTIAL CONFLICTS OF INTEREST BETWEEN SONIC AND ITS OFFICERS COULD ADVERSELY
AFFECT OUR FUTURE PERFORMANCE
Bruton Smith serves as the chairman and chief executive officer of
Speedway Motorsports, Inc. and as the chairman of Mar Mar Realty Trust, a real
estate investment trust that is specializing in the acquisition and leasing of
the real estate of automobile dealerships and automotive related businesses
("MMRT"). Accordingly, Sonic will compete with Speedway Motorsports and MMRT
for the management time of Mr. Smith. Under his employment agreement with
Sonic, Mr. Smith is required to devote approximately 50% of his business time
to the affairs of Sonic. The remainder of his business time may be devoted to
other entities including Speedway Motorsports and MMRT.
We have in the past and will likely in the future enter into transactions
with entities controlled by Mr. Smith or other affiliates of Sonic, including
transactions with MMRT. Sonic has recently entered into certain property
transactions with MMRT. We believe that all of our existing arrangements are
favorable to us and are as if the arrangements were negotiated between
unaffiliated parties, although certain rent rates may be below market rates.
Since no independent appraisals were obtained, we cannot assure you that our
transactions with MMRT 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 Sonic and these affiliated parties in
connection with the enforcement, amendment or termination of these
arrangements. Sonic anticipates renegotiating its leases with all related
parties at lease expiration at fair market rentals, which may be higher than
current rents. See "Certain Transactions -- Transactions with MMRT."
Under Delaware law generally, a corporate insider is precluded from acting
on a business opportunity in his individual capacity if that opportunity is (a)
one which the corporation is financially able to undertake, (b) is in the line
of the corporation's business, (c) is of practical advantage to the corporation
and (d) 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 Sonic, only through Sonic unless a majority of
our disinterested directors decide that such opportunities are not in our best
interest.
Our charter contains provisions providing that transactions between Sonic
and its affiliates must be no less favorable to Sonic than would be available
in similar transactions with an unrelated third party. Moreover, any such
transactions involving aggregate payments in excess of $500,000 must be
approved by a majority of our directors and a majority of our independent
directors. Otherwise, Sonic must obtain an opinion as to the financial fairness
of the transaction to be
19
<PAGE>
issued by an investment banking or appraisal firm of national standing. In
addition, the terms of the Revolving Facility and our senior subordinated notes
will restrict certain transactions with affiliates.
LACK OF MAJORITY OF INDEPENDENT DIRECTORS COULD RESULT IN CONFLICTS WITH
MANAGEMENT AND MAJORITY STOCKHOLDERS THAT MAY REDUCE SONIC'S FUTURE PERFORMANCE
Independent directors do not constitute a majority of the Board, and our
Board may not have a majority of independent directors in the future. Without a
majority of independent directors, our executive officers, principal
stockholders and directors could establish policies and enter into transactions
without independent review and approval, subject to certain restrictions under
our charter. These policies and transactions could present the potential for a
conflict of interest between Sonic and its minority stockholders and the
controlling officers, stockholders or directors.
THE LOSS OF KEY PERSONNEL AND THE LIMITED MANAGEMENT AND PERSONNEL RESOURCES OF
SONIC COULD ADVERSELY AFFECT SONIC'S OPERATIONS AND GROWTH
Our 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
Richard Dyer maintain a 20% interest in, and be the general manager of, Sonic's
Volvo dealerships formerly owned by him. In addition, Mercedes requires that
the individual dealer operator of our Mercedes dealerships own at least a 20%
interest in our Mercedes dealerships. We do not have employment agreements with
many of our dealership managers and other key dealership personnel.
Consequently, the loss of the services of one or more of these key employees
could have a material adverse effect on us.
In addition, as we expand we 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
Sonic operates, particularly for general managers and sales and service
personnel, is highly competitive and may subject Sonic 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 us. In addition, the lack of qualified management or
employees employed by our potential acquisition candidates may limit our
ability to consummate future acquisitions.
SEASONALITY OF THE AUTOMOTIVE RETAIL BUSINESS ADVERSELY AFFECTS FIRST QUARTER
REVENUES
Our business is seasonal, with a disproportionate amount of revenues
received in the second, third and fourth fiscal quarters.
IMPORTED PRODUCT RESTRICTIONS AND FOREIGN TRADE RISKS MAY IMPAIR SONIC'S
ABILITY TO SELL FOREIGN VEHICLES PROFITABLY
Certain motor vehicles as well as certain major components of vehicles
retailed by Sonic are of foreign origin. Accordingly, Sonic is subject to the
import and export restrictions of various jurisdictions and is dependent to
some extent upon general economic conditions in and political relations with a
number of foreign countries, particularly Germany, Japan and Sweden.
Additionally, fluctuations in currency exchange rates may adversely affect our
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.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL REGULATION COMPLIANCE COSTS MAY
ADVERSELY AFFECT SONIC'S PROFITABILITY
We are 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 us or in a cease and desist order
against our operations that are not in compliance. Our future acquisitions may
also be subject to regulation, including antitrust reviews. We believe that we
comply in all material respects with all laws and regulations applicable to our
business, but future regulations may be more stringent and require us to incur
significant additional costs.
Our facilities and operations are also subject to federal, state and local
laws and regulations relating to environmental protection and human health and
safety. Specific types of environmental regulations that apply to our business
include those governing wastewater discharges, air emissions, the operation and
removal of underground and aboveground storage
20
<PAGE>
tanks, the use, storage, treatment, transportation, release and disposal of
solid and hazardous materials and wastes and the clean up of contaminated
property or water. Certain environmental laws and regulations may make us
liable for the full amount of the costs of investigation and/or remediation of
contaminated properties, even if we are not at fault for the materials disposed
or if such disposal was legal at the time. People who can become liable under
these laws and regulations 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.
Our past and present business operations that are subject to such laws and
regulations include the use, storage, handling and disposal of hazardous or
toxic substances such as new and waste motor oil, oil filters, transmission
fluid, antifreeze, freon, new and waste paint and lacquer thinner, batteries,
solvents, lubricants, degreasing agents, gasoline and diesel fuels. We are also
subject to laws and regulations because of underground storage tanks that exist
or used to exist at many of our properties. Sonic, 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 exists at certain of our
properties. We cannot assure you that our other properties have not been or
will not become similarly contaminated. In addition, we could become subject to
new or unforeseen environmental costs or liabilities because of our
acquisitions.
Certain laws and regulations, including those governing air emissions and
underground storage tanks, require compliance with new or more stringent
standards that are imposed in the future. We 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.
Consequently, we may be required to make substantial expenditures in the
future.
CONCENTRATION OF VOTING POWER AND ANTITAKEOVER PROVISIONS OF OUR CHARTER MAY
REDUCE STOCKHOLDER VALUE IN ANY POTENTIAL CHANGE OF CONTROL OF SONIC
Our common stock is divided into two classes with different voting rights.
This dual class stock ownership allows the present holders of the Class B
common stock to control Sonic. Holders of Class A common stock have one vote
per share on all matters. Holders of Class B common stock have ten votes per
share on all matters, except that they have only one vote per share on any
transaction proposed by the Board of Directors or a Class B common stock holder
or otherwise benefitting the Class B common stock holders constituting a:
(a) "going private" transaction;
(b) disposition of substantially all of Sonic's assets;
(c) transfer resulting in a change in the nature of Sonic'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.
After the offering, holders of Class B common stock will hold less than a
majority of Sonic's outstanding common stock but a majority of Sonic's voting
power. This may prevent or discourage a change of control of Sonic even if such
action were favored by holders of Class A common stock.
Certain provisions of our charter and bylaws make it more difficult for
our stockholders to take certain corporate actions. See "Description of Capital
Stock -- Delaware Law, Certain Charter and Bylaw Provisions and Certain
Franchise Agreement Provisions." Options under our 1997 Stock Option Plan
become immediately exercisable on a change in control of Sonic. These
agreements, corporate documents and laws, as well as provisions of our
franchise agreements permitting manufacturers to terminate such agreements upon
a change of control and provisions of our lending arrangements creating an
event of default on a change in control, may have the effect of delaying or
preventing a change in control of Sonic or preventing stockholders from
realizing a premium on the sale of their shares upon an acquisition of Sonic.
YEAR 2000 COMPUTER PROBLEMS MAY CREATE COSTS AND PROBLEMS ADVERSELY AFFECTING
SONIC'S PROFITABILITY
We recognize the need to ensure that our operations will not be adversely
impacted by Year 2000 computer software failures. We have completed a
preliminary assessment of our operations in this regard and have determined
that our systems are either currently Year 2000 compliant or that the costs
associated with making our systems Year 2000 compliant are immaterial. However,
many of our lenders, suppliers, including manufacturers and suppliers of
finance and
21
<PAGE>
insurance products, and other third parties with whom our dealerships regularly
conduct business may be significantly impacted by Year 2000 complications.
Approximately half of our dealerships have received written verification
from their respective manufacturer that their Dealer Communication System
("DCS"), which provides on-line communication with manufacturers necessary for
ordering vehicles and parts inventory, submitting warranty claims, submitting
dealership financial statements, receiving delivery reports and receiving
technical reports used in service departments, is Year 2000 compliant. We have
asked the remaining manufacturers to inform us of their DCS Year 2000
compliance status.
Other than automobile manufacturers, we are primarily concerned with Year
2000 failures with banks and other financial service providers, companies
providing financing and insurance to our customers and utilities providing
electricity and water to our dealerships. We have received verification from
our primary banks and lenders that their systems are Year 2000 compliant and
that service is not expected to be interrupted by Year 2000 problems. We are
still in the process of contacting other key vendors and suppliers regarding
their Year 2000 remediation efforts.
While we believe that we are taking appropriate steps to ensure we are
adequately prepared to deal with Year 2000 problems as they arise, we cannot
make assurances that Year 2000 problems will not have a material adverse effect
on our results of operations or financial condition. In a most reasonably
likely worst case scenario, Year 2000 problems may delay our ability to sell
vehicles, provide financing and insurance to our customers, provide parts and
repair service to our customers, complete acquisitions or meet third-party
obligations until Year 2000 problems can be resolved in the affected systems.
For further discussion of our state of readiness, costs and contingency plans
for Year 2000 problems, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 compliance."
AMORTIZATION OF GOODWILL FROM ACQUISITIONS COULD CHANGE, RESULTING IN
SIGNIFICANT REDUCTION IN EARNINGS FOR FUTURE PERIODS
Goodwill represented approximately 31.3% of our total assets and 126.4% of
our stockholders' equity as of December 31, 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. We determined that the period benefited by all of the
goodwill will be no less than 40 years. Accordingly, we amortize goodwill over
a 40 year period. Earnings reported in periods immediately following the
acquisition would be overstated if Sonic attributed a 40 year benefit period to
an intangible asset that should have had a shorter benefit period. In later
years, we would be burdened by a continuing charge against earnings without the
associated benefit to income valued by management in arriving at the price 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. We periodically compare the carrying value of goodwill with
anticipated undiscounted future cash flows from operations of the businesses we
have acquired to evaluate the recoverability of goodwill. We have 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. Sonic will incur additional goodwill in its future
acquisitions.
22
<PAGE>
RECENT ACQUISITIONS
The following table summarizes acquisitions of automobile dealerships and
related businesses that we have completed, or for which we have agreed in
writing to purchase, since January 1, 1999:
<TABLE>
<CAPTION>
1998
DATE OF REVENUE
DEALERSHIP/COMPANY BRANDS LOCATION ACQUISITION (IN MILLIONS)
<S> <C> <C> <C> <C>
Infiniti of Charlotte Infiniti Charlotte, NC Jan. 1999 $ 27.9(1)
Economy Honda Cars Honda Chattanooga, TN Feb. 1999 40.6 (2)
Rally Mitsubishi Mitsubishi Nashville, TN Feb. 1999 14.4 (1)
Global Imports BMW Atlanta, GA Feb. 1999 77.2 (2)
Audi, BMW, Buick, Cadillac,
Williams Automotive Group Lexus, Porsche, Range Rover Birmingham, AL Mar. 1999 210.9 (2)
Bondesen Chevrolet Oldsmobile Cadillac, Chevrolet,
Cadillac Oldsmobile Central Florida Apr. 1999 51.1 (1)
Sam White Motor City Nissan, Oldsmobile Houston, TX Apr. 1999 52.4 (1)
Fitzgerald Chevrolet Chevrolet Charlotte, NC May 1999(3) 27.5 (1)
Newsome Automotive Group BMW, Chevrolet, Isuzu, Mercedes Columbia, SC May 1999(3) 120.0 (2)
Superior Oldsmobile-Cadillac-GMC Cadillac, GMC, Oldsmobile Chattanooga, TN May 1999(3) 20.4 (1)
Cadillac, GMC, Mercedes,
Lloyd Automotive Group Nissan, Pontiac Panama City, FL May 1999(3) 56.8 (2)
Charleston Lincoln-Mercury Lincoln, Mercury, Hyundai Charleston, SC May 1999(3) 69.0 (1)
Lute Riley Honda Honda Dallas, TX Jun. 1999(3) 178.2 (2)
Ben Reading Buick Buick, GMC, Pontiac, Toyota Houston, TX Jun. 1999(3) 26.3 (1)
Shottenkirk Honda Honda Pensacola, FL Jun. 1999(3) 53.1 (1)
Classic Dodge Dodge Mobile, AL Jun. 1999(3) 34.8 (1)
Audi, BMW, Jeep, Lexus,
Manhattan Auto Nissan, Porsche Washington, D.C. Jun. 1999(3) 154.0 (1)
Total: $ 1,213.6
===========
</TABLE>
(1) Based on dealer statements prepared for manufacturers.
(2) Based on audited financial statements included elsewhere in this
prospectus.
(3) Acquisition is pending; date shown is anticipated closing date. The
applicable manufacturers have not yet consented to our acquisition of this
dealership. The closing of this acquisition is contingent on our receipt
of all relevant manufacturer consents to the acquisition.
Total consideration for the acquisitions listed above is approximately
$141.4 million in cash, 11,882 shares of Series II Preferred Stock with a
liquidation value of approximately $11.9 million, 44,625 shares of Series III
Preferred Stock with a liquidation value of approximately $44.6 million and
approximately $18.0 million in Class A common stock. The aggregate purchase
price is subject to adjustment based on the net book value of assets to be
acquired.
Sonic was recently awarded two new Volvo franchises and a new Oldsmobile
franchise in the Atlanta market. Sonic currently expects to open these new
dealerships in the first half of 1999.
23
<PAGE>
USE OF PROCEEDS
The net proceeds to Sonic from the sale of 6,067,230 shares of Class A
common stock are approximately $85.4 million after deducting the underwriting
discount and estimated expenses of the offering. If the Underwriters exercise
their over-allotment option in full, the net proceeds to Sonic would be
approximately $103.5 million.
We intend to use these net proceeds to fund the $83.3 million purchase
price of our pending acquisitions, for other corporate purposes, including
funding the purchase price of our future acquisitions, and in the interim to
repay debt outstanding under the Revolving Facility that was primarily borrowed
to fund the acquisitions that closed during 1999 or amounts outstanding under
the Floor Plan Facility. See "Description of Certain Indebtedness." As of April
29, 1999, the balance of the Revolving Facility was $74.2 million, which amount
bore interest at 7.58% per annum and matures on March 2, 2001. Indebtedness
under the Floor Plan Facility as of December 31, 1998 was $228.2 million, bore
interest at 6.65% per annum and is repaid as vehicles financed by this facility
are sold.
We will not receive any proceeds from the sale of common stock by the
selling stockholders.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock to date, and do
not anticipate paying any cash dividends on our common stock for the
foreseeable future. We intend to retain our earnings to provide funds for our
operations and for paying our acquisition costs. In addition, the Revolving
Facility includes covenants that prohibit our payment of cash dividends and our
senior subordinated notes include covenants that restrict our ability to pay
cash dividends.
PRICE RANGE OF CLASS A COMMON STOCK
Since our November 10, 1997 initial public offering, our Class A common
stock has been traded on the New York Stock Exchange under the symbol "SAH."
The following table sets forth the high and low closing sales prices for the
Class A common stock, as reported on the NYSE Composite Tape for each calendar
quarter indicated, as adjusted for our January 25, 1999 2-for-1 stock split.
Before November 10, 1997, we were privately held and there was no public market
for our common stock.
<TABLE>
<CAPTION>
HIGH LOW
----------- -----------
<S> <C> <C>
1997:
Fourth Quarter (from November 10, 1997) $5 31/32 $4 13/16
1998:
First Quarter .......................... 8 5/8 4 7/8
Second Quarter ......................... 9 3/8 7 11/16
Third Quarter .......................... 11 15/16 8 1/4
Fourth Quarter ......................... 17 9/16 6 11/32
1999:
First Quarter .......................... 18 7/16 13 15/16
Second Quarter (through April 29, 1999). 16 3/8 12 7/8
</TABLE>
24
<PAGE>
CAPITALIZATION
The following table shows the capitalization of Sonic as of December 31,
1998 (a) on an actual basis, and (b) on a pro forma basis, as adjusted to
reflect the offering and the application of the estimated net proceeds of the
offering to be received by Sonic as well as for Sonic's acquisitions that are
reflected in the Unaudited Pro Forma Consolidated Financial Data included in
this prospectus. See "The Acquisitions" and "Use of Proceeds." You should read
this table in connection with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------
PRO FORMA
FOR THE
ACTUAL ADJUSTMENTS OFFERING(A)
----------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Notes payable -- floor plan .................................................... $228,158 $ 65,107 $293,265
Notes payable -- other ......................................................... 628 -- 628
Current maturities of long-term debt ........................................... 4,700 1,819 6,519
-------- -------- --------
Total short-term debt ......................................................... $233,486 $ 66,926 $300,412
======== ======== ========
Long-term debt:
Senior subordinated notes ...................................................... $120,726 $ -- $120,726
Revolving Facility ............................................................. 8,887 -- 8,887
Subordinated Smith Loan ........................................................ 5,500 -- 5,500
Other debt ..................................................................... 5,349 1,198 6,547
-------- -------- --------
Total long-term debt .......................................................... 140,462 1,198 141,660
-------- -------- --------
Stockholders' equity:
Preferred stock, $.10 par value, 3,000,000 shares authorized; 22,179 shares
issued and outstanding as of December 31, 1998 ................................ 20,431 21,542 41,973
Class A common stock, $.01 par value, 50,000,000 shares authorized;
11,959,274 shares issued and outstanding as of December 31, 1998
(20,359,225 on a pro forma basis, as adjusted to reflect the offering)(b)(c) .. 120 84 204
Class B common stock, $.01 par value, 15,000,000 shares authorized;
12,400,000 shares issued and outstanding(c) ................................... 124 -- 124
Additional paid-in capital ..................................................... 87,011 111,925 198,936
Retained earnings .............................................................. 34,743 -- 34,743
-------- -------- --------
Total stockholders' equity .................................................... 142,429 133,551 275,980
-------- -------- --------
Total capitalization ......................................................... $282,891 $134,749 $417,640
======== ======== ========
</TABLE>
- ---------
(a) Sonic intends to use the net proceeds from the offering to fund a portion
of its pending acquisitions. Sonic's cash commitments for acquisitions
that have or will close after December 31, 1998 are approximately $139.6
million, of which approximately $84.1 million is currently pending,
subject to adjustment based on the net book value of assets acquired.
Remaining amounts of net proceeds from the offering, if any, will be
applied to outstanding long-term debt that may be reborrowed to pay for
future acquisitions.
(b) As of April 29, 1999 there were 12,507,796 shares issued and outstanding
(21,007,796 on a pro forma basis, as adjusted to reflect the offering, or
22,282,796 shares if the Underwriters' over-allotment option is exercised
in full). Does not include (i) 3,269,857 shares issuable upon exercise of
outstanding options, and (ii) 3,973,101 shares issuable upon conversion of
outstanding preferred stock (based on such shares being converted on the
basis of the 20-day average closing price for the Class A common stock of
$14.5375 per share). Also does not include approximately $18.0 million in
Class A common stock and approximately $20.9 million in liquidation value
of preferred stock that Sonic has agreed to issue in connection with
pending acquisitions.
(c) The issued and outstanding shares of Class A common stock and Class B
common stock shown above reflect the 2-for-1 stock split effected January
25, 1999.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Statement of Income Data for the years ended
December 31, 1996, 1997 and 1998 and the Selected Consolidated Balance Sheet
Data as of December 31, 1997 and 1998 are derived from Sonic's audited
financial statements, which are included elsewhere in this prospectus. The
selected consolidated statement of income data for the years ended December 31,
1994 and 1995 and the selected balance sheet data as of December 31, 1995 and
1996 are derived from Sonic's audited financial statements, which are not
included in this prospectus. The selected consolidated balance sheet data as of
December 31, 1994 is derived from Sonic's unaudited financial statements, which
are also not included in this prospectus. In the opinion of management, the
unaudited Consolidated Balance Sheet Data reflects all adjustments necessary
for a fair presentation of its financial condition. All such adjustments are of
a normal recurring nature. In accordance with generally accepted accounting
principles, the selected consolidated financial data has been retroactively
restated to reflect Sonic's 2-for-1 common stock split that occurred on January
25, 1999. This selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of Sonic
and the related notes (included elsewhere in this prospectus).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1994 1995 1996(A) 1997(B) 1998(C)
----------- ----------- ----------- ------------- ---------------
(DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Revenue:
Vehicle sales .......................... $228,569 $267,650 $327,674 $ 467,858 $ 1,407,030
Parts, service and collision repair..... 33,984 35,860 42,075 57,537 162,660
Finance and insurance .................. 5,181 7,813 7,118 10,606 34,011
-------- -------- -------- --------- -----------
Total revenue ......................... 267,734 311,323 376,867 536,001 1,603,701
Cost of sales ............................ 233,833 272,130 332,122 473,003 1,396,259
-------- -------- -------- --------- -----------
Gross profit ............................. 33,901 39,193 44,745 62,998 207,442
Selling, general and administrative
expenses ............................... 23,810 28,091 32,602 46,770 150,130
Depreciation and amortization ............ 838 832 1,076 1,322 4,607
-------- -------- -------- --------- -----------
Operating income ......................... 9,253 10,270 11,067 14,906 52,705
Interest expense, floor plan ............. 3,001 4,504 5,968 8,007 14,096
Interest expense, other .................. 443 436 433 1,199 9,395
Other income ............................. -- 106 355 298 426
-------- -------- -------- --------- -----------
Income before income taxes and
minority interest ...................... 5,809 5,436 5,021 5,998 29,640
Provision for income taxes ............... 2,118 2,176 1,924 2,249 11,083
-------- -------- -------- --------- -----------
Income before minority interest .......... 3,691 3,260 3,097 3,749 18,557
Minority interest in earnings of
subsidiary ............................. 15 22 114 47 --
-------- -------- -------- --------- -----------
Net income ............................... $ 3,676 $ 3,238 $ 2,983 $ 3,702 $ 18,557
======== ======== ======== ========= ===========
Diluted net income per share ............. $ 0.27 $ 0.74
========= ===========
Weighted average number of
common shares outstanding .............. 13,898 24,970
========= ===========
CONSOLIDATED BALANCE SHEET DATA:
Working capital .......................... $ 13,246 $ 18,140 $ 19,780 $ 44,676 $ 79,155
Total assets ............................. 69,061 79,462 110,976 291,450 576,103
Long-term debt(d) ........................ 3,773 6,950 6,719 49,563 145,790
Total liabilities ........................ 57,274 62,956 84,367 207,085 433,674
Minority interest ........................ 177 200 314 -- --
Stockholders' equity ..................... 11,610 16,306 26,295 84,365 142,429
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
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- ---------
(a) Sonic 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
before the date we acquired it. Accordingly, the actual financial data for
periods after the acquisition may not be comparable to data presented for
periods before the acquisition.
(b) Sonic 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. Our 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 before their effective dates of acquisition. Accordingly, the
actual financial data for periods after the acquisitions may not be
comparable to data presented for periods before the acquisitions.
(c) Sonic acquired Capital Chevrolet and Imports, Century BMW and Heritage
Lincoln Mercury in April 1998, Casa Ford of Houston, Inc. in May 1998,
Hatfield Automotive Group in July 1998, Higginbotham Automotive Group in
August 1998, Tampa Volvo, Ron Craft Chrysler Plymouth Jeep and Ron Craft
Chevrolet-Cadillac-Oldsmobile in December 1998. Our 1998 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 before their effective dates of acquisition. Accordingly, the
actual financial data for periods after the acquisitions may not be
comparable to data presented for periods before the acquisitions.
(d) Long-term debt, including current portion, includes the payable to Sonic's
Chairman and the payable to affiliates of Sonic. See Sonic's Consolidated
Financial Statements and the related notes incorporated by reference in
this prospectus.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition as of December 31, 1998 should be read in conjunction with the Sonic
Automotive, Inc. and Subsidiaries Consolidated Financial Statements and the
related notes thereto included elsewhere herein.
OVERVIEW
Sonic is one of the top five automotive retailers in the United States,
operating 38 dealerships and 14 collision repair centers in the southeastern,
southwestern and midwestern United States. We sell new and used cars and light
trucks, sells replacement parts, provide vehicle maintenance, warranty, paint
and repair services and arrange related F&I for its automotive customers. Our
business is geographically diverse, with dealership operations in the Atlanta,
Charlotte, Chattanooga, Columbus, Daytona Beach, Greenville/Spartanburg,
Houston, Montgomery, Nashville, and Tampa-Clearwater markets. Sonic sells 23
domestic and foreign brands, which consist of Acura, BMW, Cadillac, Chevrolet,
Chrysler, Dodge, Ford, Honda, Hyundai, Infiniti, Isuzu, Jeep, KIA, Lincoln,
Mercedes, Mercury, Mitsubishi, Oldsmobile, Plymouth, Subaru, 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. In connection with vehicle
financing contracts, Sonic receives 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, Sonic has established
reserves based on its historical chargeback experience. Sonic also sells
warranties provided by third-party vendors, and recognizes a commission at the
time of sale.
While the automotive retailing business is cyclical, we sell several
products and services that are not closely tied to the sale of new and used
vehicles. Such products and services include our parts and service and
collision repair businesses, both of which are not dependent upon near-term new
vehicle sales volume.
Our cost of sales and profitability are also affected by the allocations
of new vehicles which our dealerships receive from manufacturers. When we do
not receive allocations of new vehicle models adequate to meet customer demand,
we may purchase 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, we follow a disciplined approach in selling vehicles to
other dealers and wholesalers when the vehicles have been in our inventory
longer than the guidelines set by us. Such sales are frequently at or below
cost and, therefore, reduce our overall gross margin on vehicle sales. Sonic's
salary expense, employee benefits costs and advertising expenses comprise the
majority of our selling, general and administrative expenses. Sonic's interest
expense fluctuates based primarily on the level of the inventory of new
vehicles held at our dealerships, substantially all of which is financed
through floor plan financing, as well as the amount of indebtedness incurred
for acquisitions.
We have accounted for all of our dealership acquisitions using the
purchase method of accounting and, as a result, we do not include in our
financial statements the results of operations of these dealerships prior to
the date they were acquired by us. The Consolidated Financial Statements of
Sonic discussed below reflect the results of operations, financial position and
cash flows of each of our dealerships acquired prior to December 31, 1998. As a
result of the effects of our 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 Sonic in the
future or the results of operations, financial position and cash flows which
would have resulted had such acquisitions occurred at the beginning of the
periods presented in the Consolidated Financial Statements.
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.
Sonic's profit margins are primarily impacted by changes in the percentage
of revenues attributed to new vehicle sales.
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RESULTS OF OPERATIONS
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in Sonic's statement
of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES FOR
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
New vehicle sales ........................... 62.0% 64.2% 60.0%
Used vehicle sales .......................... 24.9% 23.1% 27.8%
Parts, service and collision repair ......... 11.2% 10.7% 10.1%
Finance and insurance ....................... 1.9% 2.0% 2.1%
Total revenues .............................. 100.0% 100.0% 100.0%
Cost of sales ............................... 88.1% 88.2% 87.1%
Gross profit ................................ 11.9% 11.8% 12.9%
Selling, general and administrative ......... 8.9% 9.0% 9.6%
Operating income ............................ 2.9% 2.8% 3.3%
Interest expense ............................ 1.7% 1.7% 1.5%
Income before taxes ......................... 1.3% 1.5% 1.8%
</TABLE>
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1997
REVENUES. Revenues grew in each of Sonic's primary revenue areas for 1998
as compared with 1997, causing total revenues to increase 199% to $1.6 billion.
This increase was due primarily to revenues contributed by our acquisitions
completed in 1997 and 1998 of approximately $994.4 million. New vehicle sales
revenue increased 180% to $962.9 million in 1998, compared with $ 343.9 million
in 1997. The increase was due primarily to an increase in new vehicle unit
sales of 165% to 41,592, as compared with 15,715 in 1997 resulting principally
from 24,922 units contributed by the acquisitions completed during 1997 and
1998. The remainder of the increase was due to a 6% increase in the average
selling price of new vehicles resulting principally from sales of higher priced
import vehicles contributed by Sonic's acquisitions.
Used vehicle revenues from retail sales increased 281% to $324.7 million
in 1998 from $85.1 million in 1997. The increase was due primarily to an
increase in used vehicle unit sales of 266% to 24,591, as compared with 6,712
in 1997, resulting from additional unit sales contributed by acquisitions
completed in 1997 and 1998. The remainder of the increase was due to a 4%
increase in the average selling price of used vehicles, resulting principally
from sales of higher priced luxury and import vehicles contributed by our
acquisitions, along with an increase in used vehicle revenues from stores owned
for longer than one year of 23% in 1998 over 1997.
Sonic's parts, service and collision repair revenue increased 183% to
$162.7 million in 1998 compared to $57.5 million in 1997, due principally to
our acquisitions. Finance and insurance revenue increased $23.4 million, or
221%, due principally to increased new vehicle sales and related financing
contributed by the acquisitions completed in 1997 and 1998.
GROSS PROFIT. Gross profit increased 229% to $207.4 million in 1998 from
$63.0 million in 1997 due principally to increases in revenues contributed by
our acquisitions. Gross profit as a percentage of sales increased to 12.9% from
11.8% due to increases in new vehicle gross margins from 7.7% to 7.8% resulting
from sales of higher margin import vehicles contributed by our acquisitions, as
well as improved gross margins of used vehicles from 8.6% to 10.7% resulting
from efforts made to improve management of used vehicle inventories. In
addition, because gross margins from used vehicle revenues are higher than
gross margins from new vehicle revenues, an increase in used vehicle revenues
as a percentage of total revenues from 23.1% in 1997 to 27.8% in 1998, and a
decrease in new vehicle revenues as a percentage of total revenues from 64.2%
in 1997 to 60.0% in 1998, also contributed to the overall increase in gross
profits as a percentage of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including depreciation and amortization, increased
222% to $154.7 million in 1998 from $48.1 million in 1997. Such expenses as a
percentage of revenues increased to 9.6% from 9.0% due principally to expenses
inherent with the initial growth and formation of Sonic. In addition, because
sales compensation, which comprises over 50% of total selling, general and
administrative
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<PAGE>
expenses, is based on gross profits as opposed to revenues, the increase in
gross profit margins resulted in an increase in total selling, general, and
administrative expenses as a percent of total revenues.
INTEREST EXPENSE, FLOOR PLAN. Interest expense, floor plan increased 76%
to $14.1 million from $8.0 million, due primarily to floor plan interest
incurred by our acquisitions. As a percentage of total revenues, floor plan
interest decreased from 1.5% to 0.9% due to decreased interest rates under
Sonic's floor plan financing arrangements, as well as improvement in turnover
rates.
INTEREST EXPENSE, OTHER. Interest expense, other increased to $9.4 million
from $1.2 million, due primarily to interest incurred on Sonic's senior
subordinated notes and on acquisition-related indebtedness.
NET INCOME. As a result of the factors noted above, Sonic's net income
increased by $14.9 million in 1998 compared to 1997.
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1996
REVENUES. Revenues grew in each of Sonic'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 our 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 dealerships acquired in the
fourth quarter of 1997.
Sonic'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 our Lone Star Ford
and Fort Mill Ford locations and additional revenues from our acquisitions in
the fourth quarter of 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 our Lone Star Ford and Fort Mill Ford locations and additional
revenues from our acquisitions in the third and fourth quarter of 1997. Parts
and service revenue increases also contributed to the increase in gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative 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 inherent with the initial growth
and formation of Sonic.
INTEREST EXPENSE, FLOOR PLAN. Interest expense, floor plan increased 34.2%
to $8.0 million from $6.0 million, primarily due to our 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
interest incurred on acquisition related indebtedness.
NET INCOME. As a result of the factors noted above, Sonic's net income
increased by $0.7 million in 1997 compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
Sonic's principal needs for capital resources are to finance acquisitions,
and fund debt service and working capital requirements. Historically, we have
relied on internally generated cash flows from operations, borrowings under our
various credit facilities, and borrowings and capital contributions from our
stockholders to finance our operations and expansion. On November 10, 1997,
Sonic completed its initial public offering of its Class A common stock,
providing approximately $53.7 million of additional capital resources for the
consummation of certain acquisitions. On July 31, 1998, Sonic completed its
private placement of $125 million of its 11% senior subordinated notes, which
provided an additional $120.6 million of capital resources for the consummation
of certain acquisitions, for repayment of borrowings under our revolving line
of credit and for future acquisitions.
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<PAGE>
Sonic currently has a standardized floor plan credit facility with Ford
Motor Credit for all its dealership subsidiaries (the "Floor Plan Facility")
used to finance purchases of new and used vehicle inventory. As of December 31,
1998, there was an aggregate of $228.2 million outstanding under the Floor Plan
Facility. The Floor Plan Facility at December 31, 1998 had an effective rate of
prime less 1.1% (6.65%) subject to certain incentives and other adjustments.
Typically new vehicle floor plan indebtedness exceeds the related inventory
balances. The inventory balances are generally reduced by the manufacturer's
purchase discounts, which are not reflected in the related floor plan
liability. These manufacturer purchase discounts are standard in the industry,
typically occur on all new vehicle purchases, and are not used to offset the
related floor plan liability. These discounts are aggregated and generally paid
to Sonic by the manufacturer on a quarterly basis. The related floor plan
liability becomes due as vehicles are sold.
The Floor Plan Facility includes an available credit line for the purchase
of used vehicle inventory. Sonic's general practice is to utilize used vehicle
floor plan indebtedness only when purchasing large quantities of used vehicles
in bulk. As of December 31, 1998, there was approximately $18.5 million
available under Sonic's used vehicle credit line of which approximately $17.4
million was unused. Amounts outstanding under used floor plan indebtedness are
due when vehicles are sold.
Sonic 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 Sonic with
respect to the creation of liens and changes in ownership, officers and key
management personnel.
Sonic generated net cash of $29.8 million from operating activities in
1998, compared to $6.1 million in 1997. The increase was attributable
principally to increased net income and decreases in inventory levels.
Cash used for investing activities, excluding amounts paid in
acquisitions, was approximately $2.7 million for the year ended December 31,
1998 and related primarily to acquisitions of property and equipment. Cash used
in investing activities was $6.7 million in 1996, $86.8 million in 1997 and
$74.9 million in 1998, including $1.9 million, $2.0 million and $4.3 million of
capital expenditures during such periods. Sonic's principal capital
expenditures typically include building improvements and equipment for use in
our dealerships. Of the capital expenditures in 1998, $0.6 million related to
the construction of new dealerships and a body shop, which upon completion is
expected to be sold to an affiliate of MMRT and subsequently leased back.
Cash provided by financing activities of approximately $78.6 million in
1998 primarily reflected proceeds received from the issuance of our senior
subordinated notes, plus borrowings under our Revolving Facility with Ford
Motor Credit, less repayments of other debt. The purpose of these borrowings
was to finance acquisitions in 1998.
We estimate that our 1999 capital expenditures will be in line with our
1998 capital expenditures.
The Revolving Facility currently has a borrowing limit of $100 million.
Amounts outstanding under the Revolving Facility bear interest at a fluctuating
per annum rate equal to 2.75% above the 1 month commercial finance paper rate
as reported by the Federal Reserve Board (7.55% at December 31, 1998).
The Revolving Facility will mature in March 2001, unless Sonic 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. On July 31, 1998, all amounts
previously outstanding under the Revolving Facility were repaid with a portion
of the net proceeds of the sale of senior subordinated notes. The outstanding
balance of $8.9 million at December 31, 1998 represents amounts borrowed to
finance certain of Sonic's acquisitions completed in 1998. Amounts outstanding
under the Revolving Facility as of March 31, 1999 total approximately $53.7
million which reflects additional borrowings used to finance certain
acquisitions closed subsequent to December 31, 1998. 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 Sonic
not to exceed $10 million.
We agreed under the Revolving Facility not to pledge any of our assets to
any third party (with the exception of currently encumbered real estate and
assets of Sonic's dealership subsidiaries that are subject to previous pledges
or liens). In addition, the Revolving Facility contains certain negative
covenants, including covenants restricting or prohibiting the payment of
dividends, capital expenditures and material dispositions of assets as well as
other customary covenants. Additional negative covenants include specified
ratios of
o total debt to tangible base capital (as defined in the Revolving
Facility),
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o current assets to current liabilities,
o earnings before interest, taxes, depreciation and amortization (EBITDA)
and rent less capital expenditures to fixed charges,
o EBITDA to interest expense,
o EBITDA to total debt and
o the current lending commitment under the Revolving Facility to scaled
assets (as defined in the Revolving Facility).
In addition, the loss of voting control over Sonic by Bruton Smith, Scott
Smith and their spouses or immediate family members or the failure by Sonic,
with certain exceptions, to own all the outstanding equity, membership or
partnership interests in its dealership subsidiaries will constitute an event
of default under the Revolving Facility. Sonic 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 obtained a waiver with regard to such requirement
from Ford Motor Credit. In connection with Sonic's offering of its senior
subordinated notes, Sonic and Ford Motor Credit amended the Revolving Facility
to provide that the senior subordinated notes (which are subordinated to the
Revolving Facility) will be treated as equity capital for purposes of this
ratio. Accordingly, Sonic was in compliance with this and all other restrictive
covenants as of December 31, 1998.
On July 31, 1998, Sonic completed its private placement of its senior
subordinated notes in the aggregate principal amount of $125,000,000. The notes
are unsecured, mature on August 1, 2008, and are redeemable at Sonic's option
after August 1, 2003. Interest payments are due semi-annually on February 1 and
August 1, commencing February 1, 1999. The notes are subordinated to all
present and future senior indebtedness of Sonic, including the Revolving
Facility. Redemption prices during 12 month periods beginning August 1 are
105.500% in 2003, 103.667% in 2004, 101.833% in 2005 and 100% thereafter. Net
proceeds after commissions and discounts, including issuance discount of
$937,500, amounted to $120,625,000 and were used to finance certain of our 1998
acquisitions and to repay amounts outstanding under the Revolving Facility. On
December 7, 1998, Sonic completed an exchange offer to exchange the senior
subordinated notes for identical senior subordinated notes registered under the
Securities Act.
The indenture governing the senior subordinated notes contains certain
specified restrictive and required financial covenants. We have agreed not to
pledge our assets to any third party except under certain limited circumstances
(for example, floor plan indebtedness). We also have agreed to certain other
limitations or prohibitions concerning the incurrence of other indebtedness,
capital stock, guaranties, asset sales, investments, cash dividends to
shareholders, distributions and redemptions.
Under Sonic's Amended and Restated Certificate of Incorporation, 3 million
shares of preferred stock are authorized to be issued by Sonic with such
designations, rights and preferences as may be determined from time to time by
our Board of Directors. In March 1998, our Board of Directors designated
300,000 shares of preferred stock as Class A convertible preferred stock (the
"Preferred Stock"), which was divided into 100,000 shares of Series I Preferred
Stock, 100,000 shares of Series II Preferred Stock and 100,000 shares of 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 determination of the shares of Preferred Stock (the
"Market Price"). Conversion of Series II Preferred Stock is subject to certain
adjustments which have the effect of limiting increases and decreases in the
value of Class A common stock receivable upon conversion by 10% of the original
value of the shares of Series II Preferred Stock. Conversion of Series III
Preferred Stock is subject to certain adjustments which have the effect of
limiting increases in the value of Class A common stock receivable upon
conversion by 10% of the original value of the shares of Series III Preferred
Stock.
The Preferred Stock is redeemable at Sonic'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
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<PAGE>
to participate in dividends payable on the Class A common stock on an
"as-if-converted" basis. The Preferred Stock has no preferential dividends.
During 1998, Sonic acquired 19 dealerships for an aggregate purchase price
of approximately $134.0 million. The aggregate purchase price was paid with
approximately $96.2 million in cash, with 970,588 shares of Class A common
stock having an estimated fair value at the time of issuance of approximately
$8.3 million, with 30,733.8 shares of Preferred Stock (14,406.3 shares of
Series I Preferred Stock, 10,054.5 shares of Series II Preferred Stock and
6,273 shares of Series III Preferred Stock) having an estimated fair value at
the time of issuance of approximately $29.3 million and with warrants to
purchase an aggregate of 154,000 shares of Class A common stock having an
approximate fair value of $0.5 million. The cash portion of the aggregate
purchase price was financed with a combination of cash obtained from the net
proceeds of Sonic's private offering on July 31, 1998 of $125 million in
aggregate principal amount of its 11% senior subordinated notes, cash obtained
from the Revolving Facility and cash generated from Sonic's existing
operations. Payables for acquisitions as of December 31, 1998 on the
accompanying consolidated balance sheet represents $1.7 million of the cash
portion of the aggregate purchase price which was paid subsequent to December
31, 1998.
The difference between the aggregate purchase price of $134.0 million and
amounts paid of $134.3 million represents the net of (i) $1.3 million due from
a former owner as a result of a shortage in the actual net book value of assets
acquired compared to the minimum net book value required in the purchase
agreement, (ii) $0.4 million due to a former owner as a result of an excess in
the actual net book value of assets acquired over the minimum net book value
required in the purchase agreement, and (iii) $0.6 million due to a former
owner on the first and second anniversaries of the acquisition date. The $1.3
million due from a former owner has been included in other current assets on
the accompanying balance sheet. The $0.4 million and $0.6 million due to former
owners have been included in payable for acquisitions on the accompanying
balance sheet.
In accordance with terms of certain of the purchase agreements, Sonic may
be required to pay additional consideration contingent upon future earnings of
certain of the dealerships acquired. As of December 31, 1998, Sonic had
recorded approximately $8.0 million relating to such consideration, which has
been accounted for as goodwill. Any additional amounts which may be payable in
the future will also be accounted for as goodwill.
To date during the first and second quarters of 1999, Sonic acquired 10
dealerships for approximately $58.0 million in cash, 1,532 shares of Series II
Preferred Stock, and 34,100 shares of Series III Preferred Stock, each series
of preferred stock having a liquidation preference of $1,000 per share. The
cash portion of the purchase price was financed with a combination of cash
borrowed under the Revolving Facility and cash generated from Sonic's existing
operations. The acquisitions were accounted for using purchase accounting.
Sonic may be required to pay additional amounts based on pre-tax earnings of
certain of the dealerships acquired. Any additional amounts paid will be
accounted for as goodwill.
In connection with the subsequent acquisition of a Honda dealership
located in Chattanooga, Tennessee in March 1999, Sonic sold substantially all
of the assets of its Honda dealership in Cleveland, Tennessee for approximately
$3.6 million.
Sonic has signed definitive agreements to acquire 17 dealerships for a
minimum of approximately $83.3 million in cash, 10,350 shares of Series II
Preferred Stock, 10,525 shares of Series III Preferred Stock, each series of
preferred stock having a liquidation value of $1,000 per share, and
approximately $18.0 million worth of Class A common stock. The aggregate
purchase price is subject to adjustment based on the actual net book value of
the assets acquired. The cash portion of the purchase price will be paid with a
combination of net proceeds from the offering, borrowings under the Revolving
Facility and with cash generated from Sonic's existing operations. Sonic may be
required to pay additional amounts based on future pre-tax earnings of certain
of these acquired dealerships. These acquisitions are expected to be
consummated in the second and third quarters of 1999.
Sonic incurred a tax liability of approximately $7.1 million in connection
with the change in its tax basis of accounting for inventory from the "last-in,
first-out" method of inventory accounting to the "first-in, first-out" method
of inventory accounting, which is payable over a six-year period beginning in
January 1998. In addition, in connection with the certain of our 1998
acquisitions, we incurred an additional tax liability in the amount of
approximately $1.9 million as a result of the change in accounting for the
inventory from the "last-in, first-out" method of inventory accounting to the
"first-in, first-out" method of inventory accounting, which will be payable
over a four year period. As of December 31, 1998, the remaining cumulative
balance of this tax liability was $5.6 million. We expect to pay such
obligation with cash provided by operations.
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<PAGE>
We believe that the net proceeds from Sonic's sale of its Class A common
stock in this offering, together with funds generated through future operations
and availability of borrowings under our floor plan financing (or any
replacements thereof) and our other credit arrangements will be sufficient to
fund our debt service and working capital requirements and any seasonal
operating requirements, including our currently anticipated internal growth for
our existing businesses, for the foreseeable future. Sonic 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, preferred stock or other convertible instruments.
SEASONALITY
Sonic'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.
YEAR 2000 COMPLIANCE
GENERAL
Due to the limited memory capacity of older computers, many computer
systems and software applications in earlier years were programmed to store
dates using six digit formats (e.g. mm/dd/yy) versus eight digit formats (e.g.
mm/dd/yyyy). Under the six digit format, most computer systems and software
applications are limited to recognizing dates within the 20th century only,
causing computers to interpret the year "00" as the year "1900" rather than the
year "2000." As we approach the beginning of year 2000, there is widespread
concern that the inability of computer systems to recognize dates beyond the
year 1999 will result in software errors and system failures that could be
disruptive to ordinary business operations.
We recognize the need to ensure that our operations will not be disrupted
by Year 2000 ("Y2K") system failures either within our own computer systems or
within the computer systems of our primary lenders and suppliers. Each of our
dealerships has appointed a team comprised primarily of department managers
that, using guides developed by the National Automobile Dealers Association
("NADA"), is responsible for assessing and resolving potential Year 2000
problems, and developing contingency plans to mitigate the impact of future
problems on operations.
STATE OF READINESS
INTERNAL DEALERSHIP SYSTEMS: Internal systems supporting the dealership's
daily operations are comprised of four primary systems: (i) the Dealer
Management System ("DMS"), which supports the critical operations of the
dealership including all vehicle sales, vehicle inventory, financing and
insurance operations, service and parts operations, and accounting functions;
(ii) the Dealer Communication System ("DCS"), which provides on-line
communication with manufacturers necessary for ordering vehicles and parts
inventory, submitting warranty claims, submitting dealership financial
statements, receiving delivery reports, and receiving technical information
used in service department operations; (iii) personal computer systems ("PC
systems") used in providing information to and communicating with the parent
company; and (iv) "embedded systems" which use an electric processor or
computer chip to control, monitor, or assist with the operation of equipment,
machinery, and building management (e.g. building access, security and fire
alarms, automotive diagnostic equipment).
DEALER MANAGEMENT SYSTEM: The DMS systems used by our dealerships are
obtained from one of four primary vendors: Reynolds & Reynolds, Infiniti Net,
ADP and UCS. Each of these vendors has developed upgrades to correct Y2K
problems within the DMS systems, and we have completed the process of
installing such upgrades to our systems. In addition, we have received written
verification from each of these vendors that the DMS systems operating within
dealerships currently owned by Sonic are Y2K certified. With respect to
dealerships being acquired, dealerships using DMS systems which are not Y2K
certified are being transferred to existing systems which are Y2K certified.
DEALER COMMUNICATION SYSTEM: The DCS systems used in our dealerships are
provided by the respective manufacturers with whom the dealerships communicate.
As a result, the manufacturers have assumed responsibility for upgrading DCS
systems to Y2K compliant systems. To date, approximately half of our
dealerships have received written verification from their respective
manufacturer that their DCS system is Y2K compliant. In addition, we have
requested from each manufacturer that status reports be provided to both the
dealership and parent company to inform us of remediation efforts at those
dealerships that are not yet Y2K compliant, and when such remediation efforts
are expected to be completed.
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<PAGE>
PERSONAL COMPUTER SYSTEMS: Most PC systems currently operating in our
dealerships were installed within the past year and were determined to be Y2K
compliant at the time of installation. PC systems and local and wide area
networks used to communicate with our dealerships were also recently installed,
and were Y2K certified upon purchase. As a precautionary measure, we have
provided all dealerships with diskettes containing programs designed to test PC
systems for Y2K capability. All PC systems that have not met certification
standards for compliance will be upgraded or replaced with systems that are Y2K
compliant.
EMBEDDED SYSTEMS: Embedded systems refer to systems that use some sort of
electronic process or computer chip to track time and date information used in
the operation of that system. For example, security systems, or heating,
ventilation, and air-conditioning systems (HVAC) may be programmed to
automatically be activated or deactivated at a certain time. If a security
system is programmed to lock up a dealership on weekends, then some dealerships
may be locked out on Thursday, January 6, 2000 because the computer interprets
the date as Saturday, January 6, 1900. All facilities are currently conducting
an inventory of such systems, and will contact the manufacturer or supplier to
test such systems and obtain verification of Y2K certification. This process
has not yet been completed, though these systems are not considered critical
and a disruption in these systems is not expected to significantly affect
dealerships' daily operations.
EXTERNAL SYSTEMS: A dealership's operations may be adversely affected if
the lenders, suppliers, or other third parties with whom it regularly conducts
business are affected by Y2K problems within their systems. Other than
automobile manufacturers, we are primarily concerned about Y2K failures with
banks and other financial service providers, companies providing financing and
insurance to our customers, and utilities providing electricity and water. We
have received verification from our primary banks and lenders that their
systems are Y2K compliant and that service is not expected to be interrupted by
Y2K problems. We are still in the process of contacting other key vendors and
suppliers regarding their Y2K remediation efforts.
COSTS
The costs associated with converting our internal systems to Y2K compliant
systems have not been, and are not expected to be, material to our financial
position or results of operations. Costs associated with upgrading and
converting the DMS and DCS systems to Y2K compliant systems were covered by
monthly maintenance contracts with the respective suppliers and were expensed
as incurred. Costs associated with upgrading or replacing PC and embedded
systems have not been material and were expensed or capitalized in accordance
with our capitalization policy.
CONTINGENCY PLANS
We cannot state with certainty whether Y2K system failures either within
our own internal systems or within the systems of third-parties with whom we
are involved will have a material adverse impact on our results of operations.
In order to mitigate the potential impact of any future Y2K problems, each of
our dealerships is in the process of developing contingency plans which include
the following:
1. Use of pre-printed and pre-numbered forms and checks (including repair
orders and parts counter tickets) and manual journals and ledger books to
assist in bookkeeping and accounting functions;
2. Use of hand held, battery operated finance computers in order to
continue providing finance services to our customers;
3. Establishing emergency reserves of supplies in the event that service
from third party lenders and suppliers is disrupted due to Y2K problems
within their systems; and
4. Training of employees to manually perform functions that are currently
performed on computers.
While we believe that we are taking appropriate steps to ensure we are
adequately prepared to deal with Y2K problems as they arise, we cannot make
assurances that Y2K problems will not have a material adverse effect on our
results of operations or financial condition. In a most reasonably likely worst
case scenario, Y2K problems may delay our ability to sell vehicles, provide
financing and insurance to our customers, provide parts and repair service to
our customers, complete acquisitions or meet third-party obligations until Y2K
problems can be resolved in the affected systems.
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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 was $75.0 million and at
December 31, 1998 was $182.5 million. 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 31.3% and 126.4%,
respectively, at December 31, 1998. Generally accepted accounting principles
require that goodwill and all other intangible assets be amortized over the
period benefited. We have determined that the period benefited by the goodwill
will be no less than 40 years. Accordingly, we are amortizing goodwill over a
40 year period. Earnings reported in periods immediately following an
acquisition would be overstated if Sonic attributed a 40 year benefit to an
intangible asset that should have had a shorter benefit period. In later years,
Sonic would be burdened by a continuing charge against earnings without the
associated benefit to income valued by management in arriving at the price paid
for the businesses acquired. Earnings in later years also could be
significantly affected if management then determined that the remaining balance
of goodwill was impaired. We periodically compare the carrying value of
goodwill with the anticipated undiscounted future cash flows from operations of
the businesses we have acquired in order to evaluate the recoverability of
goodwill. We have concluded that the anticipated future cash flows associated
with intangible assets recognized in our acquisitions will continue
indefinitely, and there is no pervasive evidence that any material portion will
dissipate over a period shorter than 40 years. We will incur additional
goodwill in future acquisitions.
EFFECTS OF INFLATION
Due to the relatively low levels of inflation in 1996, 1997 and 1998,
inflation did not have a significant effect on Sonic's results of operations
for those periods.
NEW ACCOUNTING STANDARDS
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
became effective for Sonic's fiscal year ending December 31, 1998. The
implementation of FAS 131 did not have a significant impact on Sonic's
financial statements or related disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instrument
and Hedging Activities." This Standard establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. The Statement will become
effective for Sonic beginning January 1, 2000. We have elected earlier
application of all of the provisions of this Statement beginning October 1,
1998. The implementation of the provisions of this Statement had no impact on
Sonic's financial statements for the year ended December 31, 1998.
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<PAGE>
BUSINESS
Sonic is one of the top five automotive retailers in the United States, as
measured by total revenue, operating 47 dealerships and 17 collision repair
centers in 11 metropolitan areas of the southeastern, southwestern and
midwestern United States. We sell new and used cars, light trucks and
replacement parts and provide vehicle maintenance, warranty, paint and repair
services. We also arrange related financing and insurance ("F&I") for our
automotive customers. Sonic operates dealerships in metropolitan markets which
on average are experiencing population growth that is more than one and a half
times the national average. These markets are:
o Atlanta
o Birmingham
o Charlotte
o Chattanooga
o Columbus
o Daytona Beach
o Greenville/Spartanburg
o Houston
o Montgomery
o Nashville
o Tampa/Clearwater
In several of our markets, our dealerships have a significant market share for
new cars and light trucks.
We sell the following 29 domestic and foreign brands:
o Acura
o Audi
o BMW
o Buick
o Cadillac
o Chevrolet
o Chrysler
o Dodge
o Ford
o Honda
o Hyundai
o Infiniti
o Isuzu
o Jeep
o KIA
o Lincoln
o Lexus
o Mercedes
o Mercury
o Mitsubishi
o Nissan
o Oldsmobile
o Plymouth
o Porsche
o Range Rover
o Subaru
o Toyota
o Volkswagen
o Volvo
Sonic has signed definitive agreements to acquire 17 additional
dealerships in some of its existing markets and in the new markets of
Washington, D.C., Dallas, Texas and Columbia, South Carolina. Upon consummation
of these acquisitions, we will also sell GMC and Pontiac vehicles. For the year
ended December 31, 1998, we would have had pro forma revenue of $2.5 billion
and net income of $28.5 million.
COMPANY STRENGTHS
o DISCIPLINED ACQUISITION STRATEGY. Sonic applies a disciplined approach
to potential acquisitions, utilizing a "hub and spoke" acquisition strategy.
Generally, when we enter a new geographic market, we first seek to acquire a
well-performing dealership with an excellent management team. We then
capitalize on management's operating experience and knowledge of the
surrounding markets to identify and acquire additional dealerships. In 1998,
our senior managers reviewed approximately 138 potential acquisitions with
approximately $10.3 billion in revenue and were approached by numerous other
dealerships interested in being acquired. After performing these reviews, Sonic
signed 19 definitive agreements during 1998 for the acquisition of 30
dealerships representing over $1.5 billion in revenue based on dealership
statements, of which 16 have been consummated to date. To date in 1999, we have
evaluated 50 potential acquisitions representing approximately $2.3 billion in
revenue. When analyzing a potential acquisition, we consider the following
factors:
<TABLE>
<S> <C>
o overall fit with operating strategy; o quality of existing management;
o return on investment; o impact on our relationships with manufacturers; and
o impact on earnings per share; o real estate and facilities.
</TABLE>
o PROVEN TRACK RECORD OF INTEGRATING AND IMPROVING ACQUISITIONS. In recent
years, Sonic has grown primarily through acquisitions. Senior management of
Sonic has collectively acquired and integrated more than 75 dealerships during
their careers to date. This acquisition experience helps us to identify and
capitalize on opportunities for improvement and determine and implement
corrective actions. For example, pro forma operating income of dealerships
acquired before December 31, 1997 increased 25.0% from the year ended December
31, 1997 to the year ended December 31, 1998.
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o BENEFITS OF SCALE. After acquiring a dealership, we have the potential
to improve its performance by utilizing our existing strengths of experienced
management, best practices and employee training. We have been most successful
at leveraging these strengths in Charlotte and Houston where, subsequent to
acquiring satellite dealerships in these markets, we have improved
significantly both the revenues and, more importantly, the margins of such
dealerships. We intend to implement this strategy in other markets such as
Atlanta and Tampa where we operate significant "hub" operations which can
benefit from our scale. As we acquire more dealerships in a particular market,
we benefit from the following additional economies of scale:
o IMPROVED TERMS ON BANK AND FLOOR PLAN FINANCING AND INVENTORY
MANAGEMENT. Our floor plan expense, as a percentage of sales, has been
reduced from 1.5% for the year ended December 31, 1997 to 0.9% for the
year ended December 31, 1998 as a result of negotiating with a single
provider and improved inventory management.
o REDUCED ADVERTISING COSTS AS A PERCENTAGE OF SALES. We have reduced our
advertising costs from 1.3% of sales for the year ended December 31,
1997 to 1.1% of sales for the year ended December 31, 1998. More
specifically, we were able to reduce our print advertising rates in both
Charlotte and Houston by over 40%.
o IMPROVED COMMISSIONS ON SALES OF FINANCE AND INSURANCE PRODUCTS.
Sonic's large and increasing volume of sales of F&I products has allowed
us to renegotiate more favorable commissions on the sales of these
products. These renegotiated commission rates resulted in incremental
commissions of $2.1 million for the year ended December 31, 1998.
o LOWER COSTS FOR PROPERTY AND CASUALTY AND WORKERS' COMPENSATION
INSURANCE. Annual premiums under these policies have decreased from
approximately $3.5 million to $2.6 million.
o CONSISTENT RECORD OF INTERNAL GROWTH. In addition to identifying,
consummating and integrating attractive acquisitions, Sonic continually focuses
on improving the operations of its existing dealerships. As a result, we have a
history of internal growth as demonstrated by same store sales growth of 16.3%
in 1995, 6.4% in 1996, 10.1% in 1997 and 11.4% in 1998. Sonic believes that its
historical level of internal growth exceeds the industry average.
o DIVERSE OFFERING OF AUTOMOTIVE BRANDS, PRODUCTS AND SERVICES. We sell a
wide variety of 29 domestic and international brands of new automotive vehicles
in 11 metropolitan areas. We believe this product and geographic diversity (1)
reduces our reliance on any single manufacturer and (2) mitigates the effect of
regional economic conditions and changing consumer preference.
[PIE CHART APPEARS HERE]
% of Gross Profit
New Vehicles 36%
Service, Parts and Collision Repair 34%
Used Vehicles 16%
F&I 14%
In addition to selling a broad range of new vehicles, Sonic has a balanced
portfolio of other automotive products and services including F&I, used
vehicles, and service, parts and collision repair. The graphic to the right
shows the breakdown of these products and services, represented as a percentage
of Sonic's total gross profit for the year ended December 31, 1998.
Sales of higher margin products and services offset in part sales of lower
margin new vehicles. In addition, sales of parts, service and collision repair
services are less cyclical than vehicle and F&I sales.
o EXPERIENCED MANAGEMENT TEAM WITH EXTENSIVE AUTOMOTIVE RETAILING
BACKGROUND. Sonic's senior management team, which consists of O. Bruton Smith,
Chairman and Chief Executive Officer; B. Scott Smith, President and Chief
Operating Officer; Dennis Higginbotham, President of Retail Operations;
Theodore Wright, Chief Financial Officer; and Jeff Rachor, Vice President of
Retail Operations, has, on average, 20 years of experience working in the
automotive industry. During the course of their individual careers, Messrs.
Bruton Smith, Scott Smith, Higginbotham and Rachor have each owned and/or
operated individual dealerships. We believe that this first-hand operating
experience among our senior management will enable us to continue to acquire
and integrate dealerships into the Sonic platform quickly and effectively.
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<PAGE>
STRATEGY
o ACQUIRE SELECTED DEALERSHIPS. We believe 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 $673 billion of
total sales in 1997 and controlling less than 5% of all new vehicle dealerships
in the United States. We believe that these factors, together with the
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. We
believe our "hub and spoke" acquisition strategy will allow us to capitalize on
economies of scale, offer a greater breadth of products and services and
increase brand diversity. Generally, we retain the management of a well-run
dealership in order to benefit from its market knowledge, name recognition and
local reputation. In addition, we selectively acquire dealerships that have
underperformed the industry average but which carry attractive product lines or
have attractive locations and which would benefit from our existing
infrastructure.
o INCREASE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. Sonic 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. Our collision repair business provides
favorable margins and is not significantly affected by economic cycles or
consumer spending habits. Our strategy is to acquire and develop collision
repair businesses near our dealerships in order to capitalize on relationships
with existing customers and insurance companies.
We also believe that significant opportunities exist to improve our used
vehicle departments, which historically have generated higher margins on sales
than our new vehicle departments, by (1) increasing the number of used vehicles
sold and (2) increasing gross profit margins on sales of used vehicles. For
example, our ability to manage inventory levels more effectively created
increased gross profit margins on sales of used vehicles to 10.7% for the year
ended December 31, 1998 from 8.6% for the year ended December 31, 1997.
o CONTROL COSTS. We are focused on controlling expenses and expanding
margins at the dealerships we acquire and integrate into our organization.
Approximately 73% of our operating costs for the year ended December 31, 1998
were variable. We are able to adjust these expenses as the operating or
economic environment impacting our dealerships changes. We manage these
variable costs, such as floor plan (8% of operating costs), advertising (10%)
and compensation (50%) expenses, so that they are generally related to vehicle
sales and can be adjusted in response to changes in vehicle sales volume. In
addition, management compensation is tied to individual dealership
profitability and stock price appreciation through stock options. This
incentive compensation focuses all levels of our organization on cost
reduction. We also focus on controlling components of fixed cost. For example,
Sonic has reduced its property and casualty and workers' compensation insurance
costs due to the benefits of economies of scale.
o ENHANCE PROFIT OPPORTUNITIES IN FINANCE AND INSURANCE. Sonic offers 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 our size and scale, we have
negotiated increased commissions on the origination of customer vehicle
financing and insurance policies, which resulted in incremental F&I commissions
of $2.1 million for the year ended December 31, 1998.
o TRAIN, DEVELOP AND MOTIVATE QUALIFIED MANAGEMENT. We believe that our
well trained dealership personnel is key to our long-term prospects. We require
all of our employees, from service technicians to regional vice presidents, to
participate in in-house training programs. We believe that our comprehensive
training of all employees and the institution of a decentralized, multi-tiered
management structure to supervise effectively our dealership operations provide
us with a competitive advantage over other dealership groups. This training and
organizational structure enables high-level supervision over the dealerships,
accurate financial reporting and the ability to maintain good controls as Sonic
expands. In order to motivate management, we employ an incentive compensation
program for each officer, vice president and dealer/operator a portion of which
is provided in the form of Sonic stock options with additional incentives based
on the performance of individual profit centers. We believe that this
organizational structure, together with the opportunity for promotion and for
equity participation, serve as a strong motivation for our employees.
o ACHIEVE HIGH LEVELS OF CUSTOMER SATISFACTION. We focus on maintaining
high levels of customer satisfaction. Our 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 consider CSI scores in approving acquisitions. In order
to keep management focused on customer satisfaction, we include CSI results as
a component of our incentive compensation program.
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INDUSTRY OVERVIEW
With more than $670 billion in 1997 sales, automotive retailing is the
largest retail trade sector in the United States. The industry is highly
fragmented and largely privately held with approximately 22,000 automobile
dealership locations representing more than 49,000 franchised dealerships. In
1997, U.S. franchised automobile dealers sold approximately 15.0 million new
vehicles for sales of approximately $303 billion, and approximately 16.1
million used vehicles for sales of approximately $195 billion. It is estimated
that sales by franchised automobile dealers account for one-fifth of the
nation's total retail sales of all products and merchandise. Since 1993, new
vehicle revenues have grown at a 3.4% compound annual rate. Over the same
period, used vehicle revenues by franchised dealers have grown at a 7.5%
compound annual rate. Slower unit volume growth over this time period has been
offset by the rising prices associated with new vehicles and, on average, the
higher prices paid for later model high quality used vehicles which now
comprise a significant part of the used vehicle market. Automobile sales are
affected by many factors, including rates of employment, income growth,
interest rates, weather patterns and other national and local economic
conditions, automotive innovations and general consumer sentiment.
The following table sets forth new and used vehicle sales by franchised
automotive dealers in the United States for each of the five years ended
December 31, 1997. New vehicles can only be sold at retail by franchised
dealerships. The following table excludes sales of used vehicles by
non-franchised dealerships and casual sales by individuals.
<TABLE>
<CAPTION>
UNITED STATES FRANCHISED DEALERS' VEHICLE SALES
-------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(UNITS IN MILLIONS; DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
New vehicle unit sales. .................... 13.9 15.1 14.8 15.2 15.0
New vehicle sales .......................... $ 265 $ 292 $ 293 $ 299 $ 303
Used vehicle unit sales .................... 14.8 15.1 15.7 15.7 16.1
Used vehicle sales ......................... $ 146 $ 168 $ 182 $ 193 $ 195
Total vehicle sales ........................ $ 411 $ 460 $ 475 $ 492 $ 498
Annual growth in total vehicle sales ....... -- 11.9% 3.3% 3.6% 1.2%
</TABLE>
Source: ADT Automotive.
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 1997, the
average dealership's revenue consisted of 58.6% new vehicles sales, 29.0% used
vehicle sales, and 12.4% 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 services. In 1997, for example, a used vehicle earned an average
gross margin of 10.8% 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 1997. 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.
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
40
<PAGE>
approximately 22,000 new vehicle dealers accounting for approximately $195
billion in 1997 sales. In addition, an even greater number of independent used
car dealers accounted for approximately $130 billion in 1997 sales. Privately
negotiated transactions accounted for the remaining 1997 sales, estimated at
$45 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 1997, the top 100 new vehicle
dealer groups accounted for less than 10% of used vehicle sales.
INDUSTRY CONSOLIDATION. We believe that further consolidation is likely
due to increased capital requirements of dealerships, the limited number of
viable alternative exit strategies for dealership owners, the desire of certain
manufacturers to strengthen their brand identity by consolidating their
franchised dealerships. We also believe 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 Sonic, 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.
CYCLICALITY. While the automotive manufacturing industry tends to be very
sensitive to economic cycles, the automotive retailing industry has shown
relatively low volatility. The chart set forth below shows the historical
relationship between the profitability margins of the automotive retailing and
automotive manufacturing industries:
(Graph appears here. See table below for plot points.)
<TABLE>
<CAPTION>
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Automotive Retailing
Pretax Margins 1.48 0.94 1.52 1.77 2 2.1 2.1 2.05 2 1.71 1 1 1
Big Three Pretax Margin* 0.65 -8.48 -2.3 -0.2 6.06 9.38 7.96 6.98 7.34 6.44 4.32 0.08 -3.54
<CAPTION>
1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Automotive Retailing
Pretax Margins 1.39 1.6 1.8 1.4 1.53 1.37
Big Three Pretax Margin* -0.02 4.89 7.94 5.85 6.35 6.49
</TABLE>
*Ford Motor Company, General Motors Corporation and Chrysler Corporation.
Sources: FactSet and NADA
Auto retailers' pre-tax profit margins have remained relatively stable
from 1979 to 1997 even during recessionary periods. Conversely, average pre-tax
profit margins of the three largest U.S. automotive manufacturers have
fluctuated drastically during the comparable period. We believe that the
relative insensitivity to recessionary markets that the automotive retailing
industry has shown relative to the automotive manufacturing industry is due to
a number of factors including:
(a) approximately 90% of the automotive retailing sector's profits are
derived from the sale of used cars, parts and service and finance and
insurance;
(b) 60%-65% of the automotive retailing sector's costs are variable,
relating to personnel, advertising and inventory finance costs;
(c) sales and service employees are typically compensated on production
levels;
(d) manufacturers typically increase dealer incentives when sales slow,
offsetting volume declines; and
(e) the diversity in offering import and domestic brands tends to lessen
the impact of a decline in one brand.
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DEALERSHIP OPERATIONS
After giving effect to our pending acquisitions, Sonic will own ten
dealerships in the Charlotte market, eight dealerships in the Chattanooga
market, six dealerships in the Columbus market, six dealerships in the Houston
market, six dealerships in the Montgomery market, five dealerships in the
Columbia market, four dealerships in the Birmingham market, four dealerships in
the Tampa/Clearwater market, four dealerships in the Washington, D.C. market,
four dealerships in the Daytona Beach market, two dealerships in the Atlanta
market, two dealerships in the Nashville market, two dealerships in the
Greenville/Spartanburg market and one dealership in the Dallas market.
Since 1990, Sonic 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 Sonic or
its predecessors since 1990 and the dealerships to be acquired by Sonic
pursuant to its pending acquisitions:
<TABLE>
<CAPTION>
YEAR
ACQUIRED LOCATION
DEALERSHIPS AND BRANDS ---------- ---------------------
<S> <C> <C>
Town & Country Toyota .............................. 1990 Charlotte, NC
Fort Mill Ford ..................................... 1996 Charlotte, NC
Fort Mill Chrysler-Plymouth-Dodge .................. 1997 Charlotte, NC
Lake Norman Dodge .................................. 1997 Charlotte, NC
Lake Norman Chrysler-Plymouth-Jeep ................. 1997 Charlotte, NC
Town & Country Chrysler-Plymouth-Jeep of Rock Hill . 1997 Charlotte, NC
Freedom Ford ....................................... 1997 Tampa/Clearwater, FL
Infiniti of Chattanooga ............................ 1997 Chattanooga, TN
Town & Country Ford of Cleveland ................... 1997 Chattanooga, TN
Cleveland Chrysler-Plymouth-Jeep ................... 1997 Chattanooga, TN
European Motors of Nashville
"BMW, Volkswagen" ................................. 1997 Nashville, TN
European Motors
"BMW, Volvo" ...................................... 1997 Chattanooga, TN
Dodge of Chattanooga ............................... 1997 Chattanooga, TN
KIA - VW of Chattanooga ............................ 1997 Chattanooga, TN
Dyer & Dyer Volvo .................................. 1997 Atlanta, GA
Hatfield Volkswagen-Jeep ........................... 1998 Columbus, OH
Trader Bud's Westside Chrysler Plymouth
"KIA" ............................................. 1998 Columbus, OH
Hatfield Lincoln Mercury ........................... 1998 Columbus, OH
Trader Bud's Westside Dodge ........................ 1998 Columbus, OH
Toyota West ........................................ 1998 Columbus, OH
Hatfield Hyundai-Isuzu-Subaru ...................... 1998 Columbus, OH
Century BMW ........................................ 1998 Greenville/
Spartanburg, SC
Heritage Lincoln Mercury ........................... 1998 Greenville/
Spartanburg, SC
Capitol Chevrolet
"KIA" ............................................. 1998 Montgomery, AL
Capitol Imports
"Hyundai, Mitsubishi" ............................. 1998 Montgomery, AL
Casa Ford .......................................... 1998 Houston, TX
Clearwater Mitsubishi .............................. 1998 Tampa/Clearwater, FL
Clearwater Toyota .................................. 1998 Tampa/Clearwater, FL
Higginbotham Automobiles
"Acura, Mercedes" ................................. 1998 Daytona Beach, FL
Higginbotham Chevy-Olds
"Chevrolet, Oldsmobile" ........................... 1998 Daytona Beach, FL
Halifax Ford-Mercury ............................... 1998 Daytona Beach, FL
Tampa Volvo ........................................ 1998 Tampa/Clearwater, FL
Ron Craft Chevrolet-Cadillac-Oldsmobile ............ 1998 Houston, TX
Economy Honda ...................................... 1999 Chattanooga, TN
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
YEAR
ACQUIRED LOCATION
DEALERSHIPS AND BRANDS ---------- -----------------
<S> <C> <C>
Infiniti of Charlotte .......................... 1999 Charlotte, NC
Ron Craft Chrysler Plymouth Jeep ............... 1999 Houston, TX
Rally Mitsubishi ............................... 1999 Nashville, TN
Tom Williams Buick ............................. 1999 Birmingham, AL
Tom Williams Cadillac .......................... 1999 Birmingham, AL
Tom Williams Lexus ............................. 1999 Birmingham, AL
Tom Williams Imports ........................... 1999 Birmingham, AL
Sam White Motor City
"Nissan, Oldsmobile" .......................... 1999 Houston, TX
Newsome Automotive(1)
"Mercedes, Chevrolet" ......................... 1999 Florence, SC
Newsome Chevrolet World(1) ..................... 1999 Columbia, SC
Imports of Florence(1)
"BMW, Isuzu" .................................. 1999 Florence, SC
Global Imports
"BMW" ......................................... 1999 Atlanta, GA
Bondesen Chevrolet Oldsmobile Cadillac ......... 1999 DeLand, FL
Fitzgerald Chevrolet(1) ........................ 1999 Charlotte, NC
Superior Oldsmobile-Cadillac-GMC(1) ............ 1999 Chattanooga, TN
Lloyd Mercedes-Nissan(1) ....................... 1999 Panama City, FL
Lloyd Pontiac-Cadillac-GMC(1) .................. 1999 Panama City, FL
Charleston Lincoln-Mercury(1) .................. 1999 Charleston, SC
North Charleston Hyundai(1) .................... 1999 Charleston, SC
Lute Riley Honda(1) ............................ 1999 Dallas, TX
BMW of Fairfax(1) .............................. 1999 Washington, D.C.
Lexus of Rockville(1) .......................... 1999 Washington, D.C.
Rockville Porsche Audi(1) ...................... 1999 Washington, D.C.
Nissan Jeep of Waldorf(1) ...................... 1999 Washington, D.C.
Ben Reading Buick(1) ........................... 1999 Houston, TX
Classic Dodge(1) ............................... 1999 Mobile, AL
Shottenkirk Honda(1) ........................... 1999 Pensacola, FL
</TABLE>
- ---------
(1) Pending acquisition.
DEALERSHIP MANAGEMENT
Operations of the dealerships are overseen by Regional Vice Presidents,
who report to Sonic's Chief Operating Officer. Each of our dealerships is
managed by a dealer/operator who is responsible for the operations of the
dealership and the dealership's financial and customer satisfaction
performance. The dealer/operator is responsible for selecting, training and
retaining dealership personnel. All dealer/operators report to Sonic's Regional
Vice Presidents, who in turn report to Sonic's senior management on a regular
basis and prepare a comprehensive monthly financial and operating statement of
their dealership. In addition, Sonic's senior management meets on a monthly
basis with our dealer/operators 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 dealer/operator 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.
43
<PAGE>
NEW VEHICLE SALES
As of December 31, 1998, Sonic sold 23 brands of cars and light trucks.
The products have a broad range of prices from lower priced, or economy
vehicles, to luxury vehicles. We believe that our brand, product and price
diversity reduces the risk of changes in customer preferences, product supply
shortages and aging products. Approximately 14.1%
of new vehicle sales in 1998 were luxury brands (for example, BMW, Cadillac,
Infiniti and Volvo). See "Risk Factors -- Automobile Manufacturers Exercise
Significant Control Over Sonic's Operations and Sonic is Dependent on Them to
Operate its Business."
The following table presents information with respect to Sonic's new
vehicle sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Unit sales ............ 9,686 10,273 11,693 15,715 41,592
Sales revenue ......... $ 164,970 $ 186,859 $ 233,979 $ 343,941 $ 962,939
Gross profit .......... 12,103 13,926 18,001 26,427 75,494
Gross margin .......... 7.3% 7.5% 7.7% 7.7% 7.8%
</TABLE>
New vehicle sales include retail lease transactions and lease-type
transactions, both of which are arranged by Sonic. 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 our used vehicle inventory. Generally, leased vehicles
are under warranty for the entire lease term, which allows us to provide repair
service to the lessee throughout the term of the lease.
USED VEHICLE SALES
Sonic sells a broad variety of makes and models of used cars, vans, trucks
and sport utility vehicles. Used vehicles are obtained by us 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.
We sell our 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 our gross
margin on used vehicle sales.
The following table sets forth information on Sonic's used vehicle sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Retail unit sales ........... 4,374 5,172 5,488 6,712 24,591
Retail sales revenue ........ $ 47,537 $60,766 $68,054 $85,132 $324,740
Retail gross profit ......... 5,182 5,792 5,748 7,294 34,826
Retail gross margin ......... 10.9% 9.5% 8.4% 8.6% 10.7%
Wholesale unit sales ........ 4,656 5,009 5,344 7,287 21,886
Wholesale sales revenue ..... $ 16,062 $20,025 $25,642 $38,785 $119,351
Wholesale gross profit ...... 43 (45) (23) (599) (1,166)
Wholesale gross margin ...... 0.3% (0.2)% (0.1)% (1.5)% (1.0)%
Total unit sales ............ 9,030 10,181 10,832 13,999 46,477
Total revenue ............... $ 63,599 $80,791 $93,696 $123,917 $444,091
Total gross profit .......... 5,225 5,747 5,725 6,695 33,660
Total gross margin .......... 8.2% 7.1% 6.1% 5.5% 7.6%
</TABLE>
SERVICE AND PARTS SALES
Sonic provides service and parts at each of our franchised dealerships. We
also provide maintenance and repair services at each of our franchised
dealerships, offering both warranty and non-warranty services. Service and
parts sales provide higher gross margins than vehicle sales.
44
<PAGE>
The following table sets forth information regarding Sonic's service and
parts sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales revenue ......... $ 30,298 $ 31,958 $ 37,132 $ 51,033 $ 146,456
Gross profit .......... 10,344 11,003 12,593 18,118 62,152
Gross margin .......... 34.1% 34.4% 33.9% 35.5% 42.4%
</TABLE>
COLLISION REPAIR
As of December 31, 1998, Sonic operated collision repair centers, or body
shops, at fourteen of its dealership locations. Our 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 Sonic's collision
repair operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales revenue ......... $ 3,686 $ 3,903 $ 4,942 $ 6,504 $ 16,204
Gross profit .......... 1,870 1,956 2,452 3,092 8,114
Gross margin .......... 50.7% 50.1% 49.6% 47.5% 50.0%
</TABLE>
FINANCE AND INSURANCE
Sonic offers its customers a wide range of financing and leasing
alternatives for the purchase of vehicles. In addition, as part of each sale,
we also offer 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.
We assign our vehicle financing contracts and leases to other parties,
instead of directly financing sales, which reduces our exposure to loss from
financing activities. Sonic 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. We
establish 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 Sonic's finance and
insurance operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commission revenue ......... $ 5,181 $ 7,813 $ 7,118 $ 10,606 $ 34,011
Gross profit ............... 4,359 6,561 6,043 8,856 28,022
Gross margin ............... 84.1% 84.0% 84.9% 83.5% 82.4%
</TABLE>
SALES AND MARKETING
Sonic's marketing and advertising activities vary among our dealerships
and among our markets. We advertise primarily through television, newspapers,
radio and direct mail and regularly conduct special promotions designed to
focus vehicle buyers on our product offerings. We also utilize computer
technology to aid sales people in prospecting for customers. Under arrangements
with certain manufacturers, we receive a subsidy for a portion of our
advertising expenses incurred in connection with a manufacturer's vehicles.
RELATIONSHIPS WITH MANUFACTURERS
Each of Sonic's dealerships operates under a separate franchise or 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
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<PAGE>
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
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. We believe 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 Sonic's common stock, such policies could have a material
adverse effect on us. See "Risk Factors -- Automobile Manufacturers
Exercise Significant Control Over Sonic's Operations and Sonic is Dependent on
Them to Operate its Business," " -- Manufacturer Stock Ownership/Issuance
Limits Limit Sonic's Ability to Issue Additional Equity to Meet Its Financing
Needs" and " -- Manufacturers' Restrictions on Acquisitions Could Limit Sonic's
Future Growth."
In the course of acquiring Jaguar franchises in Chattanooga and
Greenville, Jaguar declined to consent to our proposed acquisitions of these
franchises. In settling legal actions brought against Jaguar by the seller of
the Chattanooga Jaguar franchise, Sonic agreed with Jaguar not to acquire any
Jaguar franchise until August 3, 2001. See "Risk Factors -- Jaguar Has Not
Consented to Two Acquisitions."
Under Sonic's agreement with Ford, Ford may force the sale of Sonic's Ford
franchises if any investor acquires 15% or more of Sonic's voting securities.
Under Sonic'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 Sonic's Honda
franchise if any person or entity, other than members of the Smith Group,
acquires 5% or greater of the Common Stock (10% or greater if such entity is an
institutional investor), and Honda deems such person or entity to be
unsatisfactory. Volkswagen has approved the sale of no more than 25% of the
voting control of Sonic, and any future changes in ownership or transfers among
Sonic'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 Sonic. Mercedes requires
60 days advance notice to approve any acquisition of 20% or more of Sonic's
voting securities. Other manufacturers may impose similar restrictions.
Certain state statutes in Florida and other states limit manufacturers'
control over dealerships. Under Florida law, notwithstanding any contrary terms
in a dealer agreement, manufacturers may not unreasonably withhold approval for
the sale of a dealership. Acceptable grounds for disapproval include material
shortcomings in the character, financial condition or business experience of
the proposed transferee. In addition, dealerships may challenge manufacturers'
attempts to establish new dealerships in the dealer's markets, and state
regulators may deny applications to establish new dealerships for a number of
reasons, including a determination that the manufacturer is adequately
represented in the area. Manufacturers must have "good cause" for any
termination or failure to renew a dealer agreement, and an automaker's license
to distribute vehicles in Florida may be revoked if, among other things, the
automaker has forced or attempted to force an automobile dealer to accept
delivery of motor vehicles not ordered by that dealer.
Under Texas law, despite the terms of contracts between manufacturers and
dealers, manufacturers may not unreasonably withhold approval of a transfer of
a dealership. It is unreasonable under Texas law for a manufacturer to reject a
prospective transferee of a dealership who is of good moral character and who
otherwise meets the manufacturer's written, reasonable and uniformly applied
standards or qualifications relating to the prospective transferee's business
experience and financial qualifications. In addition, under Texas law and the
laws of other states, franchised dealerships may challenge manufacturers'
attempts to establish new franchises in the franchised dealers' markets, and
state regulators may deny applications to establish new dealerships for a
number of reasons, including a determination that the manufacturer is
adequately represented in the region. Texas law limits the ability of
manufacturers to terminate or fail to renew franchises. In addition, other laws
in Texas and elsewhere limit the ability of manufacturers to withhold their
approval for the relocation of a franchise or require that disputes be
arbitrated. In addition, a
46
<PAGE>
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.
COMPETITION
The retail automotive industry is highly competitive. Depending on the
geographic market, Sonic competes with both dealers offering the same brands
and product lines as Sonic and dealers offering other automakers' vehicles. We
also compete for vehicle sales with auto brokers and leasing companies. We
compete with small, local dealerships and with large multi-franchise auto
dealerships. Some of our competitors are larger and have greater financial and
marketing resources and are more widely known than us. Some of our competitors
also may utilize marketing techniques, such as the Internet or "no negotiation"
sales methods, not extensively used by us. Presently, only one of Sonic's
dealerships uses one price shopping techniques. Also, we along with our
competition are beginning to use the Internet as a significant part of the
sales process. Customers are using the Internet to compare pricing which may
further reduce margins for new cars.
47
<PAGE>
We also compete 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 our dealerships. In addition, Ford
and GM have announced that they are entering into joint ventures to acquire
dealerships in various cities in the United States, and Saturn is seeking to
acquire its dealerships. In addition, other manufacturers may directly enter
the retail market in the future, which could have a material adverse effect on
us. As we seek to acquire dealerships in new markets, we may face significant
competition (including competition from other publicly-owned dealer groups) as
we strive to gain market share. See "Risk Factors -- High Competition in
Automobile Retailing Reduces Sonic's Profit Margins on Vehicle Sales."
We believe 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, we also compete with other
auto dealers, service stores, auto parts retailers and independent mechanics in
providing parts and service. We believe 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 our prices.
In arranging or providing financing for our customers' vehicle purchases,
we compete with a broad range of financial institutions. In addition, financial
institutions are now offering F&I products through the Internet, which may
reduce our profits on these items. We believe that the principal competitive
factors in providing financing are convenience, interest rates and contract
terms.
Our success depends, in part, on national and regional automobile-buying
trends, local and regional economic factors and other regional competitive
pressures. We sell our vehicles in the Atlanta, Birmingham, Charlotte,
Chattanooga, Columbus, Daytona Beach, Greenville/Spartanburg, Houston,
Montgomery, Nashville and Tampa/Clearwater markets. Conditions and competitive
pressures affecting these markets, such as price-cutting by dealers in these
areas, or in any new markets we enter, could adversely affect us, although the
retail automobile industry as a whole might not be affected. See "Risk Factors
- -- High Competition in Automobile Retailing Reduces Sonic's Profit Margin on
Vehicle Sales."
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
A number of regulations affect Sonic's business of marketing, selling,
financing and servicing automobiles. Sonic 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 we may
expand, we must obtain a license in order to establish, operate or relocate a
dealership or operate an automotive repair service. These laws also regulate
our conduct of business, including our advertising and sales practices. Other
states may have similar requirements.
Our operations are also subject to certain consumer protection laws known
as "Lemon Laws." These laws typically require a manufacturer or 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 us are subject to United States
customs duties and, in the ordinary course of our business, we may, from time
to time, be subject to claims for duties, penalties, liquidated damages, or
other charges. Currently, United States customs duties are generally assessed
at 2.5% of the customs value of the automobiles imported, as classified
pursuant to the Harmonized Tariff Schedule of the United States. See "Risk
Factors -- Imported Product Restrictions and Foreign Trade Risk May Impair
Sonic's Ability to Sell Foreign Vehicles Profitably."
Our financing activities with 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. Federal, state and local
environmental regulations, including regulations governing air and water
quality, the clean-up of contaminated property and the storage and disposal of
gasoline, oil and other materials, also apply to us and our dealership
properties.
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<PAGE>
We believe that we comply in all material respects with the laws affecting
our business. Possible penalties for violation of any of these laws include
revocation of our 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, our business involves the use, storage, handling and
contracting for recycling or disposal of hazardous or toxic substances or
wastes and other environmentally sensitive materials. Our business also
involves the past and current operation and/or removal of aboveground and
underground storage tanks containing such substances or wastes. Accordingly, we
are subject to regulation by federal, state and local authorities which
establish health and environmental quality standards, provide for liability
related to those standards, and in certain circumstances provide penalties for
violations of those standards. We are also subject to laws, ordinances and
regulations governing remediation of contamination at facilities we operate or
to which we send hazardous or toxic substances or wastes for treatment,
recycling or disposal.
We believe that we do 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 our results of
operations or financial condition. However, soil and groundwater contamination
is known to exist at certain properties used by us. Further, environmental laws
and regulations are complex and subject to frequent change. In addition, in
connection with our acquisitions, it is possible that we will assume or become
subject to new or unforeseen environmental costs or liabilities, some of which
may be material. We cannot assure you that compliance with current or amended,
or 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 Sonic, or that such expenditures will not be
material. See "Risk Factors -- Governmental Regulation and Environmental
Regulation Compliance Costs May Adversely Affect Sonic's Profitability."
FACILITIES
Sonic's principal executive offices are located at 5401 East Independence
Boulevard, Charlotte, North Carolina 28212, and our telephone number is (704)
532-3320. 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 Sonic's operations and their respective locations, after giving
effect to Sonic's pending acquisitions:
ATLANTA MARKET
o Dyer & Dyer Volvo, 5260 Peachtree Industrial Blvd., Atlanta, GA
o Global Imports, 500 & 550 Interstate North Parkway, N.W., Atlanta, GA
BIRMINGHAM MARKET
o Tom Williams Buick, 401 S. 20th Street, Birmingham, AL
o Tom Williams Cadillac, 325 S. 20th Street, Birmingham, AL
o Tom Williams Imports, 2200 3rd Avenue South, Birmingham, AL
o Tom Williams Lexus, 300 S. 22nd Street, Birmingham, AL
CHARLOTTE MARKET
o Fitzgerald Chevrolet, 3112 W. Roosevelt Blvd., Monroe, NC & 6201 E.
Independence Blvd., Charlotte, NC (1)
o Fort Mill Chrysler-Plymouth-Dodge, 3310 Hwy. 51, Fort Mill, SC
o Fort Mill Ford, 788 Gold Hill Rd., Fort Mill, SC
o Frontier Oldsmobile-Cadillac, 2501 Roosevelt Blvd., Monroe, NC
o Infiniti of Charlotte, 9103 E. Independence Ave., Charlotte, NC
o Lake Norman Chrysler-Plymouth-Jeep, Chartwell Center Dr., Cornelius, NC
o Lake Norman Dodge, I-77 & Torrence Chapel Rd., Cornelius, NC
o Town & Country Chrysler-Plymouth-Jeep of Rock Hill, 803 North Anderson Rd.,
Rock Hill, SC
o Town & Country Ford, 5401 East Independence Blvd., Charlotte, NC
o Town & Country Toyota, 9101 South Blvd., Charlotte, NC
CHATTANOOGA MARKET
o BMW/Volvo of Chattanooga, 5949 Brainard Rd., Chattanooga, TN
o Cleveland Chrysler-Plymouth-Jeep, 717 South Lee Hwy., Cleveland, TN
o Dodge of Chattanooga, 402 West Martin Luther King Blvd., Chattanooga, TN
o Economy Honda, Hwy. 153 at Shallowford Rd., Chattanooga, TN
o Infiniti of Chattanooga, 5915 Brainard Rd., Chattanooga, TN
o KIA/VW of Chattanooga, 6015 International Dr., Chattanooga, TN
o Superior-Oldsmobile-Cadillac-GMC, 875 Keith St., N.W., Cleveland, TN
o Town & Country Ford of Cleveland, 2496 South Lee Hwy., Cleveland, TN
49
<PAGE>
COLUMBIA MARKET
o Charleston Lincoln-Mercury, 8485 Rivers Ave., North Charleston, SC(1)
o Imports of Florence, 2199 David McLeod Blvd., Florence, SC(1)
o Newsome Automotive, 2199 David McLeod Blvd., Florence, SC(1)
o Newsome Chevrolet World, 4013 W. Beltline Blvd. & 6217 Monticello Rd.,
Columbia, SC(1)
o North Charleston Hyundai, 8475 Rivers Ave., North Charleston, SC(1)
COLUMBUS MARKET
o Hatfield Hyundai & Hatfield Isuzu & Hatfield Subaru, 1400 Automall Dr.,
Columbus, OH
o Hatfield KIA & Trader Bud's Westside Chrysler-Plymouth, 3700 West Broad St.,
Columbus, OH
o Hatfield Lincoln Mercury, 1495 Automall Dr., Columbus, OH
o Toyota West, 1500 Automall Dr., Columbus, OH
o Trader Bud's Westside Dodge, 4000 West Broad St., Columbus, OH
o Volkswagen West & Jeep Eagle West, 1455 Automall Dr., Columbus, OH
DALLAS MARKET
o Lute Riley Honda, 1331 North Central Expressway, Richardson, TX(1)
DAYTONA BEACH MARKET
o Bondesen Chevrolet Oldsmobile Cadillac, 2800 South Highway 17-92, DeLand, FL
o Halifax Ford-Mercury, 1307 N. Dixie Hwy., New Smyrna Beach, FL
o Higginbotham Automobiles, 1720 Mason Ave., Daytona Beach, FL
o Higginbotham Chevy-Olds, 1919 N. Dixie Hwy., New Smyrna Beach, FL
o HMC Finance, 3741 S. Nova Rd., Port Orange, FL
o Sunrise Auto World, 241 Ridgewood Ave., Holly Hill, FL
GREENVILLE/SPARTANBURG MARKET
o Century BMW, 2752 Laurens Rd., Greenville, SC
o Heritage Lincoln Mercury, 2424 Laurens Rd., Greenville, SC
HOUSTON MARKET
o Ben Reading Buick, I-10 East at Thompson Road, Baytown, TX(1)
o Casa Ford, 4701 I-10 East, Baytown, TX
o Lone Star Ford, 8477 North Freeway, Houston, TX
o Ron Craft Chevrolet-Cadillac-Oldsmobile-Geo, 3401 N. Main, Baytown, TX
o Ron Craft Chrysler Plymouth Jeep, 5221 I-10 East, Baytown, TX
o Sam White Motor City, 12230 Southwest Freeway, Stafford, TX
MONTGOMERY MARKET
o Capitol Chevrolet, 711 Eastern Blvd., Montgomery, AL
o Capitol Hyundai & Capitol Mitsubishi, 190 Eastern Blvd., Montgomery, AL
o Capitol KIA, 845 Eastern Blvd., Montgomery, AL
o Classic Dodge, 3118 Government Street, Mobile, AL(1)
o Lloyd Mercedes-Nissan, 120 E. 23rd St., Panama City, FL(1)
o Lloyd Pontiac-Cadillac-GMC, 100 E. 23rd St., Panama City, FL(1)
o Shottenkirk Honda, 5600 Pensacola Blvd, Pensacola, FL(1)
NASHVILLE MARKET
o BMW/VW of Nashville, 630 Murfreesboro Pike, Nashville, TN
o Rally Mitsubishi, 1620 West End Ave., Nashville, TN
TAMPA/CLEARWATER MARKET
o Clearwater Collision Center, 2300 Drew Street, Clearwater, FL
o Clearwater Mitsubishi, 21699 US Hwy 19N, Clearwater, FL
o Clearwater Toyota, 21799 US Hwy 19N, Clearwater, FL
o Freedom Ford, 24825 US Hwy. 19 North, Clearwater & 3925 Tampa Rd.,
Oldsmar, FL
o Tampa Volvo, 6008 N. Dale Mabry, Tampa, FL
WASHINGTON, D.C. MARKET
o BMW of Fairfax, 8427 Lee Highway, Fairfax, VA(1)
o Lexus of Rockville, 15501 Frederick Road, Rockville, MD(1)
o Nissan Jeep of Waldorf, 2950 Crain Highway, Waldorf, MD(1)
o Rockville Porsche Audi, 15515 Frederick Road, Rockville, MD(1)
- ---------
(1) Pending acquisition.
50
<PAGE>
Our dealerships are generally located along major U.S. or interstate
highways. One of the principal factors considered by Sonic in evaluating an
acquisition candidate is its location. We prefer to acquire dealerships located
along major thoroughfares, primarily interstate highways with ease of access,
which can be easily visited by prospective customers.
We lease all of the properties utilized by our dealership operations. We
believe that our facilities are adequate for our current needs.
On July 9, 1998, Sonic entered into a strategic alliance agreement with
MMRT. MMRT owns or will own 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, Sonic's Chairman and Chief Executive Officer, serves as the
chairman of MMRT's board of trustees. See "Certain Transactions -- Transactions
with MMRT."
Under the terms of our franchise agreements, Sonic 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 December 31, 1998, Sonic employed approximately 3,040 people, of
whom approximately 430 were employed in managerial positions, 980 were employed
in non-managerial sales positions, 1,170 were employed in non-managerial parts
and service positions and 460 were employed in administrative support
positions.
We believe 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. We provide
certain executive officers, managers and other employees with stock options and
all employees with a stock purchase plan and we believe this type of equity
incentive is attractive to our existing and prospective employees. See "Risk
Factors -- The Loss of Key Personnel and the Limited Management and Personnel
Resources of Sonic Could Adversely Affect Sonic's Operations and Growth."
We believe that our relationship with our employees is good. None of our
employees is represented by a labor union. Because of our dependence on the
Manufacturers, however, we may be affected by labor strikes, work slowdowns and
walkouts at the Manufacturer's manufacturing facilities. See "Risk Factors --
Automobile Manufacturers Exercise Significant Control Over Sonic's Operations
and Sonic Is Dependent on Them to Operate its Business."
LEGAL PROCEEDINGS AND INSURANCE
From time to time, Sonic is named in claims involving the manufacture of
automobiles, contractual disputes and other matters arising in the ordinary
course of our business. Currently, no legal proceedings are pending against or
involve Sonic that, in the opinion of management, could reasonably be expected
to have a material adverse effect on our business, financial condition or
results of operations.
Because of their vehicle inventory and nature of business, automobile
retail dealerships generally require significant levels of insurance covering a
broad variety of risks. Sonic's insurance includes an umbrella policy as well
as insurance on our real property, comprehensive coverage for our vehicle
inventory, general liability insurance, employee dishonesty coverage and errors
and omissions insurance in connection with our vehicle sales and financing
activities.
51
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS; KEY PERSONNEL
Sonic's executive officers, directors and key personnel, and their ages as
of the date of this prospectus, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH SONIC
- ------------------------------ ----- ---------------------------------------------------------------
<S> <C> <C>
O. Bruton Smith ......... 72 Chairman, Chief Executive Officer and Director*
Bryan Scott Smith ....... 31 President, Chief Operating Officer and Director*
Dennis D. Higginbotham .. 57 President of Retail Operations and Director*
Theodore M. Wright ...... 36 Chief Financial Officer, Vice President -- Finance, Treasurer,
Secretary and Director*
William R. Brooks ....... 49 Director
William P. Benton ....... 75 Director
William I. Belk ......... 49 Director
Jeffrey C. Rachor ....... 36 Vice President of Retail Operations
</TABLE>
- ---------
* Executive Officer
O. Bruton Smith has been the Chairman, Chief Executive Officer and a
director of Sonic since its organization in 1997, and he currently is a
director and executive officer of each of Sonic's dealerships. Mr. Smith has
worked in the retail automobile industry since 1966. Mr. Smith's initial term
as a director of Sonic will expire at the 2000 annual stockholders meeting. Mr.
Smith is also the chairman and chief executive officer, a director and
controlling shareholder 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, Las Vegas 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 MMRT. Under his employment agreement with Sonic, Mr.
Smith is required to devote approximately 50% of his business time to Sonic's
business.
Bryan Scott Smith has been the President and Chief Operating Officer of
Sonic since April 1997 and a Sonic director since its organization in 1997. Mr.
Smith also serves as a director and executive officer of many of Sonic's
subsidiaries. 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 before Sonic's acquisition of those
dealerships in 1997. Mr. Smith became the General Manager of Town & Country
Ford in November 1992 where he remained until his appointment to President and
Chief Operating Officer of Sonic in April 1997. Mr. Smith's term as a director
of Sonic will expire at the 2001 annual stockholders meeting.
Dennis D. Higginbotham has been the President of Retail Operations of
Sonic since September 1998 and a Sonic director since his appointment in
December 1998. Before joining Sonic, Mr. Higginbotham owned and was the
president of, Higginbotham Chevrolet-Oldsmobile (from 1976), Halifax
Ford-Mercury (from 1987) and Higginbotham Automobiles (from 1995), each of
which Sonic acquired in September 1998. Mr. Higginbotham has worked in the
automobile industry since 1965. Mr. Higginbotham has agreed to stand for
reelection as a Sonic director at the 1999 annual stockholders meeting.
Theodore M. Wright has been the Chief Financial Officer, Vice
President-Finance, Treasurer and Secretary of Sonic since April 1997, and a
Sonic director since June 1997. Mr. Wright also serves as a director and
executive officer of many of Sonic's subsidiaries. Before joining Sonic, Mr.
Wright was a Senior Manager and in charge of the Columbia, South Carolina
office of Deloitte & Touche LLP. Before 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 has
agreed to stand for reelection as a Sonic director at the 1999 annual
stockholders meeting.
William R. Brooks has been a director of Sonic since its formation. Mr.
Brooks also served as Sonic's initial 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
Corporation, an entity controlled by Bruton Smith, from Price Waterhouse in
1983. At Sonic Financial Corporation, he
52
<PAGE>
was promoted from manager to controller in 1985 and again to chief financial
officer in 1989. Mr. Brooks' term as a Sonic director will expire at the 2000
annual stockholders meeting.
William P. Benton became a director of Sonic 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 SMI 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.
Before 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 Sonic director will expire at the 2001 annual
stockholders meeting.
William I. Belk became a director of Sonic in March 1998. Mr. Belk is
currently the vice president and a director for Monroe Hardware Company, a
director for Piedmont Ventures, Inc., and treasurer and a director for Old Well
Water, Inc. For more than the previous five years, 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 Sonic director will expire
at the 2001 annual stockholders meeting.
Jeffrey C. Rachor is Sonic's Vice President of Retail Operations and has
held this position since September 1998. He originally joined Sonic as its
Regional Vice President -- Mid-South region upon Sonic's 1997 acquisition of
dealerships in Chattanooga Tennessee. Mr. Rachor has over 13 years experience
in automobile retailing and was the chief operating officer of the Chattanooga
dealerships from 1989 until their acquisition by Sonic 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. Before then, 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.
Sonic's Board of Directors is divided into three classes, each of which,
after a transitional period, will serve for three years, with one class being
elected at Sonic's annual stockholders meeting each year. Messrs. Bruton Smith
and Brooks belong to the class of directors whose term expires in 2000, Messrs.
Wright and Higginbotham belong to the class whose term expires in 1999, and
Messrs. Scott Smith, Benton and Belk belong to the class whose term expires in
2001. The executive officers are elected annually by, and serve at the
discretion of, Sonic's Board of Directors.
COMMITTEES OF THE BOARD
There are two standing committees of the Sonic Board of Directors, 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 was appointed on October 3, 1998 and consists of
Messrs. Bruton Smith, Benton and Belk. Set forth below is a summary of the
principal functions of each committee.
AUDIT COMMITTEE. The Audit Committee, which held one meeting in 1998,
recommends the appointment of Sonic'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
Sonic's auditors, the adequacy of Sonic's system of internal control and
procedures and the role of management in connection therewith, reviews
transactions between Sonic 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, which held one meeting
in 1998, administers certain compensation and employee benefit plans of Sonic,
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 Sonic. The Compensation Committee administers Sonic's
1997 Stock Option Plan, Employee Stock Purchase Plan and Nonqualified Employee
Stock Purchase Plan, makes recommendations for individual stock option grants
to the full Board of Directors under the plans it administers, and periodically
reviews Sonic's executive compensation programs and takes action to modify
programs that yield payments or benefits not closely related to Sonic or
executive performance. The policy of the Compensation Committee's program for
executive officers is to link pay to business strategy and performance to
attract, retain and reward key executives while also providing performance
incentives and awarding equity-based compensation to align the long-term
interests of executive officers with those of Sonic's stockholders. The
Compensation Committee's objective is to offer salaries and incentive
performance pay opportunities that are competitive in the marketplace.
Sonic currently has no standing nominating committee.
During 1998, there were three meetings of the Board of Directors of Sonic,
with each director attending each of the meetings (and, as applicable,
committees thereof).
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, immediately before the offering and
immediately after the offering, the ownership of Sonic's voting stock,
including optioned shares, taking into account Sonic's January 25, 1999 common
stock split, by (i) each stockholder who is known to Sonic, based upon their
public filings as of April 26, 1999, to own beneficially five percent or more
of each class of our outstanding voting stock, (ii) each director of Sonic,
(iii) each executive officer of Sonic (including the Chief Executive Officer),
(iv) all directors and executive officers of Sonic as a group, and (v) each
selling stockholder. The number of shares of Class A common stock sold in the
offering on behalf of selling stockholders who previously held preferred stock
reflects the conversion of all of such preferred stock on April 29, 1999 using
the 20-trading day average closing price for the Class A common stock of
$14.5375 per share as the conversion rate for such preferred stock.
<TABLE>
<CAPTION>
BEFORE OFFERING
----------------------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF NUMBER OF SHARES
CLASS A CLASS B SHARES OF OF CLASS A
COMMON COMMON PREFERRED COMMON
STOCK STOCK STOCK STOCK
BENEFICIAL OWNER OWNED OWNED OWNED OFFERED
- -------------------------------------- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS:
O. Bruton Smith(2)(3) ............... 25,400(4) 10,952,500 -- --
Bryan Scott Smith(2) ................ 66,584(5) 956,250 -- --
Dennis D. Higginbotham .............. 962,088(6) -- -- --
Theodore M. Wright .................. 26,433(7) -- -- --
William R. Brooks ................... 20,000(8) -- -- --
William P. Benton ................... 20,000(8) -- -- --
William I. Belk ..................... 5,000(9) -- -- --
All directors and executive
officers as a group
(7 persons) ........................ 1,125,505 11,908,750 -- --
SIGNIFICANT STOCKHOLDERS:
Sonic Financial Corporation(2)....... -- 8,881,250 -- --
Citigroup Inc.(10) .................. 1,813,650 -- -- --
Citicorp(11)(12) .................... 857,400 -- -- --
Citibank, N.A.(12)(13) .............. 857,400 -- -- --
Salomon Smith Barney
Holdings Inc.(14)(15) .............. 956,250 -- -- --
Salomon Brothers Holding
Company Inc.(15)(16) ............... 956,250 -- -- --
Salomon Smith Barney(15)(17) 956,250 -- -- --
J.P. Morgan & Co.
Incorporated(18) ................... 885,980 -- -- --
FMR Corp.(19) ....................... 638,600 -- -- --
Frank McGough(20) ................... -- -- 4,194.3 --
Dan E. Hatfield(21) ................. -- -- 3,750 --
Bud C. Hatfield(21) ................. -- -- 8,971 --
Dan E. Hatfield, as Trustee of
the Bud C. Hatfield, Sr.
Special Irrevocable
Trust(21) .......................... -- -- 1,304 --
Aldo B. Paret(22) ................... 81,810 -- 3,792 --
SELLING STOCKHOLDERS:
Scott Fink .......................... -- -- 1,980 149,819
Michael S. Cohen .................... -- -- 1,980 149,819
Jurassic Cars, Inc. (f/k/a Global
Imports, Inc.)(23) ................. -- -- 15,013 1,032,708
Catharine D. Ward ................... 7,148 -- 595 40,928
Thomas P. Williams, Sr.(24) ......... 267,619 -- 10,194 701,220
Charles Clark Williams .............. 25,018 -- 1,877 129,114
Thomas P. Williams, Jr. ............. 25,018 -- 1,877 129,114
Fred Bondesen Chevrolet,
Oldsmobile, Cadillac, Inc. ......... -- -- 1,532 100,048
<CAPTION>
AFTER OFFERING
-------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES OF SHARES OF NUMBER OF
CLASS A PERCENTAGE OF CLASS B SHARES OF PERCENTAGE OF
COMMON CLASS A COMMON PREFERRED ALL OUTSTANDING
STOCK COMMON STOCK STOCK VOTING
BENEFICIAL OWNER OWNED STOCK OWNED OWNED STOCK(1)
- -------------------------------------- --------------- --------------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS:
O. Bruton Smith(2)(3) ............... 25,400(4) * 10,952,500 -- 32.8%
Bryan Scott Smith(2) ................ 66,584(5) * 956,250 -- 3.1
Dennis D. Higginbotham .............. 962,088(6) 4.6% -- -- 2.9
Theodore M. Wright .................. 26,433(7) * -- -- *
William R. Brooks ................... 20,000(8) * -- -- *
William P. Benton ................... 20,000(8) * -- -- *
William I. Belk ..................... 5,000(9) * -- -- *
All directors and executive
officers as a group
(7 persons) ........................ 1,125,505 5.4 11,908,750 -- 39.0
SIGNIFICANT STOCKHOLDERS:
Sonic Financial Corporation(2)....... -- -- 8,881,250 -- 26.6
Citigroup Inc.(10) .................. 1,813,650 8.6 -- -- 5.4
Citicorp(11)(12) .................... 857,400 4.1 -- -- 2.6
Citibank, N.A.(12)(13) .............. 857,400 4.1 -- -- 2.6
Salomon Smith Barney
Holdings Inc.(14)(15) .............. 956,250 4.6 -- -- 2.9
Salomon Brothers Holding
Company Inc.(15)(16) ............... 956,250 4.6 -- -- 2.9
Salomon Smith Barney(15)(17) 956,250 4.6 -- -- 2.9
J.P. Morgan & Co.
Incorporated(18) ................... 885,980 4.2 -- -- 2.7
FMR Corp.(19) ....................... 638,600 3.0 -- -- 1.9
Frank McGough(20) ................... -- -- -- 4,194.3 *
Dan E. Hatfield(21) ................. -- -- -- 3,750 *
Bud C. Hatfield(21) ................. -- -- -- 8,971 *
Dan E. Hatfield, as Trustee of
the Bud C. Hatfield, Sr.
Special Irrevocable
Trust(21) .......................... -- -- -- 1,304 *
Aldo B. Paret(22) ................... 81,810 * -- 3,792 *
SELLING STOCKHOLDERS:
Scott Fink .......................... -- -- -- -- --
Michael S. Cohen .................... -- -- -- -- --
Jurassic Cars, Inc. (f/k/a Global
Imports, Inc.)(23) ................. -- -- -- -- --
Catharine D. Ward ................... 7,148 * -- -- *
Thomas P. Williams, Sr.(24) ......... 267,619 1.3 -- -- *
Charles Clark Williams .............. 25,018 * -- -- *
Thomas P. Williams, Jr. ............. 25,018 * -- -- *
Fred Bondesen Chevrolet,
Oldsmobile, Cadillac, Inc. ......... -- -- -- -- --
</TABLE>
- ---------
* Less than one percent (FOOTNOTES ON FOLLOWING PAGE)
54
<PAGE>
(1) The percentage of total voting power after the offering will be as
follows: O. Bruton Smith, 74.8%, Sonic Financial Corporation, 60.6%, Bryan
Scott Smith, 6.6%, Citigroup Inc., 1.2%, and less than 1% for all other
stockholders shown.
(2) The address of such person or group is 5401 East Independence Boulevard,
Charlotte, North Carolina 28212.
(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) Amount of Class A common stock shown does not include 200,000 shares
under options granted pursuant to Sonic's 1997 Stock Option Plan, which
became vested on April 6, 1999, but will not become exercisable until
Sonic's stockholders approve an increase in the number of authorized
shares under Sonic's 1997 Stock Option Plan at the 1999 annual meeting of
stockholders.
(5) Represents one-third of 199,750 shares that underlie options to purchase
shares of Class A common stock granted by Sonic pursuant to Sonic's 1997
Stock Option Plan, which became exercisable in three equal installments
beginning in October 1998. Amount of Class A common stock shown does not
include 100,000 additional shares under options granted pursuant to
Sonic's 1997 Stock Option Plan, which became vested on April 6, 1999, but
will not become exercisable until Sonic's stockholders approve an increase
in the number of authorized shares under Sonic's 1997 Stock Option Plan at
the 1999 annual meeting of stockholders.
(6) The address of such person is 104 South Riverside Dr., New Smyrna Beach,
Florida 32168. Amount of Class A common stock shown does not include
150,000 shares under unvested options granted pursuant to Sonic's 1997
Stock Option Plan. One-third of these options will become exercisable
beginning in October 1999. All shares shown are held of record by the
Dennis D. Higginbotham Revocable Trust, over which Mr. Higginbotham
exercises control.
(7) Includes one-third of 76,376 shares that underlie options to purchase
shares of Class A common stock granted by Sonic pursuant to Sonic's 1997
Stock Option Plan, which became exercisable in three equal installments
beginning in October 1998. Amount of Class A common stock shown does not
include 100,000 additional shares under options granted pursuant to
Sonic's 1997 Stock Option Plan, which became vested on April 6, 1999, but
will not become exercisable until Sonic's stockholders approve an increase
in the number of authorized shares under Sonic's 1997 Stock Option Plan at
the 1999 annual meeting of stockholders.
(8) Represents 20,000 shares that underlie options to purchase shares of
Class A common stock granted by Sonic pursuant to the Directors Plan,
which became exercisable in December 1998. Does not include an additional
20,000 shares that underlie options to purchase shares of Class A common
stock granted by Sonic pursuant to the Directors Plan on March 31, 1999,
which options become exercisable on September 30, 1999.
(9) Does not include 20,000 shares that underlie options to purchase shares
of Class A common stock granted by Sonic pursuant to the Directors Plan on
March 31, 1999, which options become exercisable on September 30, 1999.
(10) The address of such entity is 153 East 53rd Street, New York, New York
10043. The Schedule 13G/A 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 Citicorp and by Salomon Smith Barney
Holdings Inc. elsewhere in the table. Citigroup Inc. owns all of the
capital stock of Citicorp and of Salomon Smith Barney Holdings Inc.
(11) The Schedule 13G/A 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 capital stock of Citibank, N.A.
(12) The address of such entity is 399 Park Avenue, New York, New York 10043.
(13) The Schedule 13G/A filed by the beneficial owner indicates that Citibank,
N.A. has shared voting power and shared dispositive power over all
857,400 shares shown.
(14) The Schedule 13G/A 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 Salomon Brothers Holding Company Inc.
elsewhere in the table. Salomon Smith Barney Holdings Inc. owns all of
the capital stock of Salomon Brothers Holding Company Inc.
(15) The address of such entity is 388 Greenwich Street, New York, New York
10013.
(16) The Schedule 13G/A 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 Salomon Smith Barney Inc. elsewhere in the
table. Salomon Brothers Holding Company Inc. owns all of the capital
stock of Salomon Smith Barney Inc.
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(17) The Schedule 13G/A filed by the beneficial owner indicates that Salomon
Smith Barney Inc. has shared voting power and shared dispositive power
over all 956,250 shares shown.
(18) The address of such entity is 60 Wall Street, New York, New York 10260.
The Schedule 13G filed by the beneficial owner indicates that it has sole
voting power as to 753,380 shares of the 885,980 shares shown with no
voting power as to the remainder, and has sole dispositive power over all
885,980 shares.
(19) The address of such entity is 82 Devonshire Street, Boston, Massachusetts
02109. The Schedule 13G filed by FMR Corp. indicates that it has sole
voting power as to 507,200 shares of the 638,600 shares shown with no
voting power as to the remainder, and has sole dispositive power over all
638,600 shares. The Schedule 13G filed by FMR Corp. further indicates
that Fidelity Management Trust Company, a wholly-owned subsidiary of FMR
Corp., beneficially owns 574,600 shares of the 638,600 shares shown, and
Fidelity Management & Research Company, a wholly-owned subsidiary of FMR
Corp., beneficially owns the remaining 64,000 shares of the 638,600
shares shown.
(20) The address of such person is 711 Eastern Blvd., Montgomery, Alabama
36117.
(21) The address of such person is 1500 Automall Drive, Columbus, Ohio 43228.
(22) The address of such person is 4701 I-10 East, Baytown, Texas 77521.
(23) The address of such person is 5430 New Northside Drive, Suite 250,
Atlanta, Georgia 30339.
(24) The address of such person is c/o Tom Williams Automotive Group, 401 20th
Street South, Birmingham, Alabama 35233.
CERTAIN TRANSACTIONS
REGISTRATION RIGHTS AGREEMENT
When Sonic acquired Town & Country Ford, Lone Star Ford, Fort Mill Ford,
Town & Country Toyota and Frontier Oldsmobile-Cadillac in 1997, Sonic signed a
Registration Rights Agreement dated as of June 30, 1997 with Sonic Financial
Corporation ("SFC"), Bruton Smith, Scott Smith and William S. Egan
(collectively, the "Class B Registration Rights Holders"). SFC currently owns
8,881,250 shares of Class B common stock; Bruton Smith, 2,071,250 shares; Scott
Smith, 956,250 shares; and Egan Group, LLC, an assignee of Mr. Egan (the "Egan
Group"), 491,250 shares, all of which are covered by the Registration Rights
Agreement. The Egan Group also owns 32,000 shares of Class A common stock to
which the Registration Rights Agreement applies. If, among other things
provided in Sonic's charter, offers and sales of shares Class B common stock
are registered with the Commission, then such shares will automatically convert
into a like number of shares of Class A common stock.
The Class B Registration Rights Holders have certain limited piggyback
registration rights under the Registration Rights Agreement. These rights
permit them to have their shares of Sonic's common stock included in any Sonic
registration statement registering Class A common stock, except for
registrations on Form S-4, relating to exchange offers and certain other
transactions, and Form S-8, relating to employee stock compensation plans. The
Registration Rights Agreement expires in November 2007. SFC is controlled by
Bruton Smith. The Class B Registration Rights Holders have agreed to waive
their registration rights in this offering.
THE SMITH GUARANTEES, PLEDGES AND SUBORDINATED LOAN
Under a loan from NationsBank to Sonic in the amount of $20 million in
August 1997, Bruton Smith guaranteed the obligations of Sonic and secured his
guarantee with a pledge of Speedway Motorsports common stock owned directly by
him. In February 1998, Sonic repaid in full the amounts owed under the
NationsBank loan, and Mr. Smith's guarantee and pledge were released.
Mr. Smith initially guaranteed the obligations of Sonic under the
Revolving Facility. Such obligations were further secured with the Revolving
Pledge of approximately $50.0 million in Speedway Motorsports stock owned by
SFC, a corporation controlled by Mr. Smith.
When the Revolving Facility's borrowing limit was increased to $75.0
million in December 1997, Mr. Smith's personal guarantee of Sonic's obligations
under the Revolving Facility was released, although the Revolving Pledge
remained in place. In August 1998, the Revolving Pledge was released by Ford
Motor Credit.
In December 1997, Mr. Smith was also required by Ford Motor Credit to lend
the $5.5 million Subordinated Smith Loan to Sonic to increase Sonic's
capitalization. Ford Motor Credit required the Subordinated Smith Loan as a
condition
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to increasing the Revolving Facility borrowing limit because the net offering
proceeds from Sonic's November 1997 initial public offering were significantly
less than expected by Sonic and Ford Motor Credit. The Subordinated Smith Loan
bears interest at NationsBank's announced prime rate plus 0.5% and matures on
November 30, 2000. All amounts owed by Sonic to Mr. Smith under the
Subordinated Smith Loan are to be paid after all amounts owed by Sonic under
the Ford Credit Facilities and Sonic's senior subordinated notes are paid. 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
In 1998, Sonic entered into the Alliance Agreement with MMRT. Bruton Smith
serves as the chairman of MMRT's board of trustees. Under the Alliance
Agreement, Sonic agreed to refer to MMRT real estate acquisition opportunities
arising with Sonic's dealership acquisitions. In exchange, MMRT agreed to refer
to Sonic dealership acquisition opportunities and to provide certain real
estate development and maintenance services to Sonic. MMRT will also arrange
for property inspections and environmental reports for prospective dealership
properties at Sonic's cost.
In addition, the Alliance Agreement provides for a form of lease to be
used when MMRT leases to Sonic real estate MMRT acquires in the future. Under
terms substantially similar to those of this form lease, Sonic leases or will
lease certain properties from MMR Holdings, LLC ("MMR Holdings"), which is a
limited liability company currently owned by Bruton Smith and SFC that Sonic
expects to be acquired by MMRT. See " -- Certain Dealership Leases."
Sonic entered into the Alliance Agreement with MMRT rather than with an
unaffiliated third party for purposes consistent with Sonic's acquisition
strategy. Sonic 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 Sonic in the course of MMRT's
acquisitions of real property. In addition, Sonic's relationship with MMRT will
assist Sonic in negotiating transactions with sellers of dealerships that Sonic
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
Sonic to negotiate an acquisition on more favorable terms. Finally, MMRT will
provide development assistance to Sonic which will enable Sonic to avoid
additional costs associated with hiring employees with real estate development
expertise. For these reasons, Sonic feels that MMRT's growth and operating
strategies are closely-aligned with Sonic's dealership acquisition strategy and
that the Alliance Agreement will provide significant future benefits to Sonic.
For acquisitions identified by Sonic, 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, Sonic 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. Sonic and MMRT will subsequently enter into a lease agreement
regarding the dealership real property using the lease form attached to the
Alliance Agreement to satisfy all non-economic terms of the lease agreement.
The economic terms of the lease will be negotiated between Sonic and MMRT and
will depend on several factors, including:
o the projected earnings capacity of the dealership,
o the quality, age and condition of the dealership structure(s),
o the location of the dealership property, and
o the rent paid for comparable commercial properties.
As required by Sonic's charter, the terms of any lease agreement with MMRT
involving total payments of more than $500,000 will be subject to the approval
of Sonic's Board of Directors and of Sonic's independent directors to ensure
that such terms are no less favorable to Sonic than would be available to Sonic
in a transaction with an unrelated third party. When necessary, Sonic will also
obtain independent appraisals to determine the fairness of lease terms to
Sonic.
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
Sonic completes its acquisition of the dealership business, then
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Sonic and MMRT will enter into a lease agreement regarding the dealership real
property using the Alliance Agreement's lease form and will determine the
economic terms of the lease according to the principles described in the
paragraph above.
Sonic has sold to MMR Holdings the Town and Country Toyota real estate for
approximately $5.7 million and the Fort Mill Ford real estate for approximately
$4.6 million. The sales price for each of these parcels of real property was
determined in negotiations between Sonic and MMRT based on the projected
earnings capacity of the dealership, from which a monthly lease payment was
calculated. Using this rent calculation, Sonic 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:
o the quality, age and condition of the dealership structure(s),
o the location of the dealership property,
o the value of the properties for alternative uses,
o the availability of similar properties in the area, and
o recent sales prices for comparable commercial properties in the area.
An additional factor in determining Sonic's sales price for each of the
properties were independent appraisals obtained by Sonic for the Town and
Country Toyota property in December 1997 and Fort Mill Ford property in
February 1996. These appraisals, after giving effect to the passage of time,
indicate that the sales price payable to Sonic by MMRT for each of the
properties exceeds the appraised fair value of such properties determined in
the independent appraisals.
Bruton Smith determined the sales price for each of these two properties,
and such determination was approved by Sonic's Board of Directors and Sonic's
independent directors. In giving their approval for these sales, Sonic's
directors evaluated the earning 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.
CERTAIN DEALERSHIP LEASES
Certain properties leased by Sonic's dealerships are, or since the
beginning of the last fiscal year were, owned by Sonic's officers or directors
or their affiliates. These leases contain terms comparable to, or more
favorable to Sonic than, terms that would be obtained from unaffiliated third
parties. Many of these properties as well as others are now owned or are under
contract to be acquired by MMR Holdings, which Sonic expects will become a
subsidiary of MMRT.
Sonic leases or will lease 36 properties for 27 of its dealerships,
described in the following table, from MMR Holdings. Sonic's directors have
approved these "triple net leases," which require Sonic to pay all costs of
operating the properties, as well as all taxes, utilities, insurance, repairs,
maintenance and other property related expenses. These leases generally provide
Sonic with options to renew the lease for two additional five year terms after
the expiration of the initial lease term. The rental rates indicated below
reflect minimum or "base" annual rents payable by Sonic in the first year of
the applicable leases. Such rental rates generally are subject to increases
either at renewal or every five years based on factors such as increases in the
consumer price index or an evaluation of fair market rents.
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<TABLE>
<CAPTION>
INITIAL INITIAL LEASE
PROPERTY LOCATION BASE RENT TERM EXPIRATION
- ------------------------------------------------------ ---------------------- ---------------------- ----------------
<S> <C> <C> <C>
Higginbotham Acura-Mercedes ........................ Daytona Beach, FL $ 221,288 2008
Halifax Ford-Mercury ............................... New Smyrna Beach, FL 536,675(1) 2008
Halifax Ford Used Cars ............................. Edgewater, FL 72,875 2008
Higginbotham Chevy-Olds ............................ New Smyrna Beach, FL 775,131 2009
Infiniti of Charlotte .............................. Charlotte, NC 432,000 2008
Town & Country Ford (Parcel #1) .................... Charlotte, NC 409,200(2) 2009(2)
Town & Country Ford (Parcel #2) .................... Charlotte, NC 108,513(3) 2008
Town & Country Toyota .............................. Charlotte, NC 600,000 2008
Lake Norman Chrysler-Plymouth-Jeep (Parcel #1) ..... Cornelius, NC 480,000 2007
Lake Norman Chrysler-Plymouth-Jeep (Parcel #2) ..... Cornelius, NC 110,250 2008
Lake Norman Dodge .................................. Cornelius, NC 480,000(1) 2007
Westside Dodge ..................................... Columbus, OH 600,000 2009
Toyota West ........................................ Columbus, OH 480,000 2009
Hatfield Hyundai ................................... Columbus, OH 480,000 2009
Hatfield Lincoln-Mercury ........................... Columbus, OH 300,000 2009
VW & Jeep-Eagle West ............................... Columbus, OH 300,000 2009
Westside Chrysler-Plymouth ......................... Columbus, OH 300,000 2009
Fort Mill Ford ..................................... Fort Mill, SC 480,000 2008
Century BMW ........................................ Greenville, SC 420,000(4) 2008
Heritage Lincoln-Mercury ........................... Greenville, SC 313,898(4) 2008
Century BMW ........................................ Spartanburg, SC 112,805(4) 2008
Infiniti of Chattanooga ............................ Chattanooga, TN 334,224(1)(5) 2007
BMW/Volvo of Chattanooga ........................... Chattanooga, TN 279,840(1)(5) 2007
KIA/Volkswagon of Chattanooga ...................... Chattanooga, TN 132,840(5) 2007
Town & Country Ford of Cleveland ................... Cleveland, TN 281,424(1)(5) 2007
Cleveland Honda .................................... Cleveland, TN 154,296(5) 2007
Volkswagen of Nashville ............................ Nashville, TN 147,000 2008
Ron Craft Chrysler Plymouth Jeep ................... Baytown, TX 210,000 2008
Lone Star Ford ..................................... Houston, TX 360,000(6) 2009(6)
-------------
Total Initial Annual Base Rent Payable to MMR
Holdings ......................................... $ 9,912,259
=============
</TABLE>
- ---------
(1) Initial base rent indicated is the total rent payable on more than one
property parcel utilized by the dealership.
(2) The rent on Town & Country Ford (Parcel #1) is currently below market
rates, as supported by independent appraisal. This lease will terminate by
December 31, 1999. As a condition to MMRT's ultimate acquisition of this
property, Sonic and MMRT have signed a new lease taking effect on January
1, 2000, providing for fair market annual rent of $1,140,000 and expiring
on December 31, 2009.
Town & Country Ford (Parcel #2) was owned by STC Properties ("STC"), which
was a joint venture in which Town & Country Ford maintained a 5% undivided
interest and SFC owned the remaining 95%. In October 1998, MMR Holdings
acquired this property by issuing its membership interests to SFC and paying
$425,000 to Town & Country Ford. STC leased this property in 1998 to Sonic
at the annual rent indicated.
(3) Until its acquisition by MMR Holdings in October 1998, Town & Country Ford
(Parcel #2) was owned by Bruton Smith and, in 1998, was leased to Sonic at
the annual base rent indicated.
(4) In July 1998, Chartown, a general partnership controlled by Bruton Smith
("Chartown"), acquired the real property on which this dealership
operated. Chartown then leased the property to the Sonic subsidiary that
acquired the assets of the dealership at the annual rental rate indicated.
In December 1998, MMR Holdings acquired this property from Chartown
subject to the existing lease.
(5) This dealership previously leased its property from Nelson Bowers, Sonic's
former Executive Vice President and a former director, or his affiliates.
In November 1998, MMR Holdings acquired this property subject to the
existing lease. Sonic negotiated this lease in connection with acquisition
of the dealership from Nelson Bowers in 1997 and paid 1998 rent to Mr.
Bowers or his affiliates at the indicated rate.
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(6) The rent on Lone Star Ford is currently below market rates, as supported by
independent appraisal This lease will terminate by December 31, 1999. As a
condition to MMRT's ultimate acquisition of this property, Sonic and MMRT
have signed a new lease taking effect on January 1, 2000, providing for
fair market annual rent of $1,140,000 and expiring on December 31, 2009.
The Lone Star Ford property was owned by Viking Investments Associates, a
Texas association controlled by Bruton Smith ("Viking"). In October 1998,
MMR Holdings acquired the Lone Star Ford property. Viking leased this
property in 1998 to Sonic at the annual rent indicated.
CHARTOWN TRANSACTIONS
Chartown is a general partnership engaged in real estate development and
management. Before Sonic's reorganization before its initial public offering,
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 SFC. In addition, SFC 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
our reorganization, the Chartown Note was canceled and Town & Country Ford
transferred its partnership interest in Chartown to SFC for nominal
consideration. SFC then 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 of Chartown.
THE BOWERS VOLVO NOTE
In connection with Volvo's approval of Sonic's acquisition of a Volvo
franchise from Nelson Bowers in 1997, Volvo, among other things, conditioned
its approval upon Nelson Bowers acquiring and maintaining a 20% interest in
Sonic's Chattanooga Volvo subsidiary operating 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., the wholly owned subsidiary of Sonic 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. Volvo has removed its requirement that Mr. Bowers maintain his
interest in Chattanooga Volvo. Sonic and Mr. Bowers are in the process of
redeeming his interest in Chattanooga Volvo and satisfying the Bowers Volvo
Note in return for his interest in Chattanooga Volvo.
OTHER TRANSACTIONS
o Town & Country Ford and Lone Star Ford had each made several non-interest
bearing advances to SFC, a company controlled by Bruton Smith. In
preparation for our 1997 reorganization, a demand promissory note by SFC
evidencing $2.1 million of these advances was canceled in June 1997 in
exchange tor 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 of $0.5 million of these advances was canceled in June 1997
pursuant to a dividend.
o As part of the purchase price in connection with Sonic's acquisition of
the Bowers Automotive Group in November 1997, Sonic issued its promissory
note in the 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%.
o Sonic had amounts receivable from affiliates of $1.0 million and $1.5
million at December 31, 1997 and 1998, respectively. Of this amount,
$622,000 relates to advances made by Sonic to SFC at December 31, 1997 and
$1.5 million relates to advances made by Sonic to SFC and MMRT at December
31, 1998. The remaining $425,000 at December 31, 1997 primarily relates to
receivables from executives of Sonic who were former owners of certain
dealerships acquired. 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.
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o Town and Country Toyota has an amount payable to Bruton Smith, which
payable totals approximately $0.7 million as of December 31, 1997. This
loan bears interest at 8.75% per annum.
o Certain subsidiaries of Sonic (such subsidiaries together with Sonic and
SFC are referred to as the "Sonic Group") filed consolidated federal
income tax returns with SFC for several years before our reorganization.
These joint filings were for 1996 and for the period 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, Sonic
agreed to pay to SFC, in the event that additional federal income tax is
determined to be due, an amount equal to Sonic'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 Sonic. Also pursuant to such agreement, SFC agreed
to indemnify Sonic 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.
o Sonic acquired Town & Country Ford, Lone Star Ford, Town & Country
Toyota, Fort Mill Ford and Frontier Oldsmobile-Cadillac in its 1997
reorganization pursuant to four separate stock subscription agreements.
These subscription agreements allowed the acquisition of 100% of the
capital stock or membership interests, as the case may be, of each of the
five dealerships from Sonic Financial, Bruton Smith, the Egan Group (an
assignee of Mr. Egan) and Bryan Scott Smith in exchange for certain
amounts of Sonic's Class B Common Stock. See "Principal and Selling
Stockholders."
For additional information concerning related party transactions of Sonic,
see Note 7 to the financial statements of Sonic in this prospectus.
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DESCRIPTION OF CAPITAL STOCK
Sonic's authorized capital stock consists of (a) 50,000,000 shares of
Class A common stock, $.01 par value, (b) 15,000,000 shares of Class B common
stock, $.01 par value, and (c) 3,000,000 shares of Preferred Stock, $.10 par
value (of which 300,000 shares have been designated as Class A convertible
Preferred Stock). As of April 26, 1999, Sonic had 12,507,796 outstanding shares
of Class A common stock, 12,400,000 outstanding shares of Class B common stock
and 57,059.3 outstanding shares of Class A convertible preferred stock. In
connection with pending acquisitions, Sonic has agreed to issue approximately
$18.0 million in Class A common stock and $20.9 million in liquidation value of
preferred stock that is convertible into Class A common stock.
The following summary description of Sonic's capital stock does not
purport to be complete and is qualified in its entirety by reference to Sonic's
charter amendment (which was filed as an exhibit to Sonic's Registration
Statement on Form S-1 (File No. 333-33295)), Sonic's Certificate of
Designations relating to the Preferred Stock (the "Designation") (which was
filed as an exhibit to Sonic's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998), and to Delaware law. Reference is made to such exhibits
and to Delaware law for a detailed description of the provisions thereof
summarized below.
COMMON STOCK
Sonic's Class A common stock and Class B common stock are equal in all
respects except for voting rights, conversion rights of the Class B common
stock and as required by law, as discussed more fully below.
VOTING RIGHTS; CONVERSION OF CLASS B COMMON STOCK TO CLASS A COMMON STOCK
The voting powers, preferences and relative rights of the Class A common
stock and the Class B common stock are subject to the following provisions.
Holders of Class A common stock have one vote per share on all matters
submitted to a vote of the stockholders of Sonic. Holders of Class B common
stock are entitled to ten votes per share except as described below. Holders of
all classes of common stock entitled to vote will vote together as a single
class on all matters presented to the stockholders for their vote or approval
except as otherwise required by Delaware Law. There is no cumulative voting
with respect to the election of directors.
In the event any shares of Class B common stock held by a member of the
Smith Group are transferred outside of the Smith Group, such shares will
automatically be converted into shares of Class A common stock. In addition, if
the total number of shares of common stock held by members of the Smith Group
is less than 15% of the total number of shares of common stock outstanding, all
of the outstanding shares of Class B common stock automatically will be
reclassified as Class A common stock. In any merger, consolidation or business
combination, the consideration to be received per share by holders of Class A
common stock must be identical to that received by holders of Class B common
stock, except that in any such transaction in which shares of common stock are
distributed, such shares may differ as to voting rights to the extent that
voting rights now differ between the classes of common stock.
Notwithstanding the foregoing, the holders of Class A common stock and
Class B common stock vote as a single class, with each share of each class
entitled to one vote per share, with respect to any transaction proposed or
approved by the Board of Directors of Sonic or proposed by or on behalf of
holders of the Class B common stock or as to which any member of the Smith
Group or any affiliate thereof has a material financial interest other than as
a then existing stockholder of Sonic constituting a
o "going private" transaction,
o sale or other disposition of all or substantially all of Sonic's assets,
o sale or transfer which would cause the nature of Sonic's business to be
no longer primarily oriented toward automobile dealership operations and
related activities, or
o merger or consolidation of Sonic in which the holders of the common stock
will own less than 50% of the common stock following such transaction.
A "going private" transaction is defined as any "Rule 13e-3 Transaction,"
as such term is defined in Rule 13e-3 promulgated under the Securities Exchange
Act of 1934. An "affiliate" is defined as (a) any individual or entity who or
that, directly or indirectly, controls, is controlled by, or is under common
control with any member of the Smith Group, (b) any corporation or organization
(other than Sonic or a majority-owned subsidiary of Sonic) of which any member
of the Smith Group is an officer, partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of
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voting securities, or in which any member of the Smith Group has a substantial
beneficial interest, (c) a voting trust or similar arrangement pursuant to
which any member of the Smith Group generally controls the vote of the shares
of common stock held by or subject to such trust or arrangement, (d) any other
trust or estate in which any member of the Smith Group has a substantial
beneficial interest or as to which any member of the Smith Group serves as
trustee or in a similar fiduciary capacity, or (e) any relative or spouse of
any member of the Smith Group or any relative of such spouse, who has the same
residence as any member of the Smith Group.
As used in this prospectus, the term the "Smith Group" consists of the
following persons:
o Mr. Smith and his guardian, conservator, committee, or attorney-in-fact;
o William S. Egan and his guardian, conservator, committee, or
attorney-in-fact;
o each lineal descendant of Messrs. Smith and Egan (a "Descendant") and
their respective guardians, conservators, committees or
attorneys-in-fact; and
o each "Family Controlled Entity."
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 members of the Smith Group; (c) any
partnership if at least 80% of the value of the partnership interests are owned
by members of the Smith Group; and (d) any limited liability or similar company
if at least 80% of the value of the company is owned by members of the Smith
Group. For a discussion of the effects of the disproportionate voting rights of
the common stock, see "Risk Factors -- Concentration of Voting Power and
Antitakeover Provisions of our Charter May Reduce Stockholder Value in Any
Potential Change of Control of Sonic."
Under Sonic's charter and Delaware law, the holders of Class A common
stock and/or Class B common stock are each entitled to vote as a separate
class, as applicable, with respect to any amendment to Sonic's Certificate that
would increase or decrease the aggregate number of authorized shares of such
class, increase or decrease the par value of the shares of such class, or
modify or change the powers, preferences or special rights of the shares of
such class so as to affect such class adversely.
DIVIDENDS
Holders of the Class A common stock and the Class B common stock are
entitled to receive ratably such dividends, if any, as are declared by our
Board of Directors out of funds legally available for that purpose. An
additional requirement is that dividends paid in shares of Class A common stock
shall be paid only to holders of Class A common stock, and dividends paid in
shares of Class B common stock shall be paid only to holders of Class B common
stock. Sonic's charter provides that if there is any dividend, subdivision,
combination or reclassification of either class of common stock, a
proportionate dividend, subdivision, combination or reclassification of the
other class of common stock must be made at the same time.
OTHER RIGHTS
Stockholders of Sonic have no preemptive or other rights to subscribe for
additional shares. In the event of the liquidation, dissolution or winding up
of Sonic, holders of Class A common stock and Class B common stock are entitled
to share ratably in all assets available for distribution to holders of common
stock after payment in full of creditors. No shares of any class of common
stock are subject to a redemption or a sinking fund.
TRANSFER AGENT AND REGISTRAR
First Union National Bank is the transfer agent and registrar for the
common stock.
PREFERRED STOCK
DIVIDENDS. The preferred stock has no preferential dividends. Rather,
holders of preferred stock are entitled to participate in dividends payable on
the Class A common stock on an "as-if-converted" basis.
VOTING RIGHTS. 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.
LIQUIDATION RIGHTS. The preferred stock has a liquidation preference of
$1,000 per share.
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CONVERSION RIGHTS. Each share of preferred stock is convertible into
shares of Class A common stock at the holder's option at specified conversion
rates. After the second anniversary of the date of issuance, any shares of
preferred stock which have not been converted are subject to mandatory
conversion to Class A common stock at the option of Sonic. No fractional shares
of Class A common stock will be issued upon conversion of any shares of
preferred stock. Instead, Sonic will pay cash equal to the value of such
fractional share.
Generally, each share of preferred stock is convertible into that number
of shares of Class A common stock that has an aggregate Market Price at the
time of conversion equal to $1,000 (with certain adjustments for the Series II
and Series III preferred stock). Conversion of Series II 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.
Conversion of Series III preferred stock is subject to certain adjustments
which have the effect of limiting increases in the value of Class A common
stock receivable upon conversion by 10% of the original value of the shares of
Series III preferred stock. "Market Price" is defined as the average closing
price per share of Class A common stock on the New York Stock Exchange for the
twenty trading days immediately preceding the date of conversion. If the Class
A common stock is no longer listed on the New York Stock Exchange, then the
Market Price will be determined on the basis of prices reported on the
principal exchange on which the Class A common stock is listed, or if not so
listed, prices furnished by NASDAQ. If the Class A common stock is not listed
on an exchange or reported on by NASDAQ, then the Market Price will be
determined by Sonic's Board of Directors.
Before the first anniversary of the date of issuance of preferred stock,
each holder of preferred stock is unable to convert without first giving Sonic
ten business days' notice and an opportunity to redeem such preferred stock at
the then applicable redemption price.
REDEMPTION. The preferred stock is redeemable at Sonic's option at any
time after the date of issuance. The redemption price for the Series I
preferred stock is $1,000 per share. The redemption price for the Series II
preferred stock and the Series III preferred stock is as follows: (a) 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 (b) 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. There is no restriction on Sonic's ability
to redeem the preferred stock while there is an arrearage in payment of
dividends on such preferred stock.
DELAWARE LAW, CERTAIN CHARTER AND BYLAW PROVISIONS AND CERTAIN FRANCHISE
AGREEMENT PROVISIONS
Certain provisions of Delaware Law and of Sonic's Charter and Bylaws,
summarized in the following paragraphs, may be considered to have an
antitakeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.
DELAWARE ANTITAKEOVER LAW. Sonic is subject to the provisions of Delaware
law, including Section 203. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which such person became an interested stockholder unless: (a) prior to such
date, the Board of Directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; or (b) upon becoming an interested stockholder, the stockholder
then owned at least 85% of the voting stock, as defined in Section 203; or (c)
subsequent to such date, the business combination is approved by both the Board
of Directors and by holders of at least 66 2/3% of the corporation's
outstanding voting stock, excluding shares owned by the interested stockholder.
For these purposes, the term "business combination" includes mergers, asset
sales and other similar transactions with an "interested stockholder." An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of the
corporation's voting stock. Although Section 203 permits a corporation to elect
not to be governed by its provisions, Sonic to date has not made this election.
CLASSIFIED BOARD OF DIRECTORS. Sonic's Bylaws provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of
Directors will be elected each year. Classification of the Board of Directors
expands the time required to change the composition of a majority of directors
and may tend to discourage a takeover bid for Sonic. Moreover, under Delaware
law, in the case of a corporation having a classified board of directors, the
stockholders may remove a director only for cause. This provision, when coupled
with the provision of the Bylaws authorizing only the board of directors to
fill vacant directorships, will preclude stockholders of Sonic from removing
incumbent directors without cause, simultaneously gaining control of the Board
of Directors by filing the vacancies with their own nominees.
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SPECIAL MEETINGS OF STOCKHOLDERS. Sonic's Bylaws provide that special
meetings of stockholders may be called only by the Chairman or by the Secretary
or any Assistant Secretary at the request in writing of a majority of Sonic's
Board of Directors. Sonic's Bylaws also provide that no action required to be
taken or that may be taken at any annual or special meeting of stockholders may
be taken without a meeting; the powers of stockholders to consent in writing,
without a meeting, to the taking of any action is specifically denied. These
provisions may make it more difficult for stockholders to take action opposed
by the Board of Directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Sonic's Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual or a special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the principal executive office
of Sonic, (a) in the case of an annual meeting that is called for a date that
is within 30 days before or after the anniversary date of the immediately
preceding annual meeting of stockholders, not less than 60 days nor more than
90 days prior to such anniversary date, and, (b) in the case of an annual
meeting that is called for a date that is not within 30 days before or after
the anniversary date of the immediately preceding annual meeting, or in the
case of a special meeting of stockholders called for the purpose of electing
directors, not later than the close of business on the tenth day following the
day on which notice of the date of the meeting was mailed or public disclosure
of the date of the meeting was made, whichever occurs first. The Bylaws also
specify certain requirements for a stockholder's notice to be in proper written
form. These provisions may preclude some stockholders from bringing matters
before the stockholders at an annual or special meeting or from making
nominations for directors at an annual or special meeting.
CONFLICT OF INTEREST PROCEDURES. Sonic's charter contains provisions
providing that transactions between Sonic and its affiliates must be no less
favorable to Sonic than would be available in transactions involving
arms'-length dealing with unrelated third parties. Moreover, any such
transaction involving aggregate payments in excess of $500,000 must be approved
by a majority of Sonic's directors and a majority of Sonic's independent
directors. Otherwise, Sonic must obtain an opinion as to the financial fairness
of the transactions to be issued by an investment banking or appraisal firm of
national standing.
RESTRICTIONS UNDER FRANCHISE AGREEMENTS. Sonic's franchise agreements
impose restrictions on the transfer of the common stock. A number of
Manufacturers prohibit transactions which affect changes in management control
of Sonic. For instance, Ford may cause Sonic to sell or resign from its Ford
franchises if any person or entity acquires 15% or more of Sonic's voting
securities. Likewise, General Motors, Toyota and Infiniti may force the sale of
their respective franchises if 20% or more of Sonic's voting securities are so
acquired. Honda may force the sale of Sonic's Honda franchise if any person or
entity, other than 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 has approved of the public sale of
only 25% of the voting control of Sonic and requires prior approval of any
change in control or management of Sonic that would affect Sonic's control or
management of its Volkswagen franchisee subsidiaries. Chrysler also has
approved of the public sale of only 50% of the Common Stock and requires prior
approval of any future sales that would result in a change in voting or
managerial control of Sonic. Such restrictions may prevent or deter prospective
acquirers from obtaining control of Sonic. See "Risk Factors -- Manufacturer
Stock Ownership/Issuance Limits Limit Sonic's Ability to Issue Additional Equity
to Meet Its Financing Needs."
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE REVOLVING FACILITY
In October 1997, Sonic obtained the Revolving Facility from Ford Motor
Credit in the principal amount of $26.0 million. Sonic and Ford Motor Credit
increased the aggregate amount available to borrow under this facility to a
maximum $75.0 million in December 1997, and subsequently increased this amount
to a maximum $100 million effective November 1998, pursuant to the Revolving
Facility's terms. The Revolving Facility bears interest at the Revolving
Facility Prime Rate and matures on March 2, 2001, unless we request that such
term be extended, at the option of Ford Motor Credit, for up to three (3)
additional one year terms. However, if the amount of debt exceeds the sum of
the scaled assets (as defined in the Revolving Facility), then the interest
rate will be the prime rate plus 1.0%. No assurance can be given that such
extensions will be granted. As of March 31, 1999, there was approximately $53.7
million outstanding under the Revolving Facility. We anticipate amounts to be
drawn under the Revolving Facility to be used to repay certain existing
indebtedness, for paying a portion of the cash purchase price of our pending
acquisitions, for the acquisition of additional dealership subsidiaries in the
future as approved by Ford Motor Credit and to provide general working capital
needs of Sonic not to exceed $10 million. Proceeds of the offering will be used
to temporarily repay these amounts.
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Sonic 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 its dealership subsidiaries that are subject to previous pledges or
liens as approved by Ford Motor Credit). The Revolving Facility also contains
certain negative covenants made by Sonic, including covenants restricting or
prohibiting the payment of dividends, capital expenditures and material
dispositions of assets as well as other customary covenants. Moreover, the loss
of voting control over Sonic by O. Bruton Smith, B. Scott Smith and their
spouses or immediate family members or the failure by Sonic, with certain
exceptions, to own all the outstanding equity, membership or partnership
interests in its dealership subsidiaries will constitute an event of default
under the Revolving Facility. Sonic 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 Sonic 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. Sonic and Ford Motor
Credit have amended the Revolving Credit Facility to provide that Sonic's
senior subordinated notes, which are subordinated to the Revolving Facility,
will be treated as equity capital for purposes of these ratios and,
accordingly, Sonic is in compliance with these covenants after giving effect to
the issuance of Sonic's senior subordinated notes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Revolving Facility contains certain covenants which limit, among other
things, our ability to pay dividends, make certain capital expenditures and
make dispositions of material assets. Additional covenants require us to
maintain certain ratios with respect to:
o total debt to tangible base capital
o total adjusted debt to base capital
o current assets to current liabilities
o earnings before interest, taxes, depreciation, amortization and rent
expense less capital expenditures to fixed charges
o earnings before interest, taxes, depreciation and amortization to
interest expense
o earnings before interest, taxes, depreciation and total adjusted debt to
amortization
o current lending commitment under the Revolving Facility to scaled
assets.
The indebtedness under the Revolving Facility and the Floor Plan Facility
is secured by (1) a pledge by Sonic of all the capital stock, membership
interests and partnership interests of all of its subsidiaries, (2) guaranties
by all of Sonic'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 Sonic's Ford dealership subsidiaries, which liens only secure such Ford
subsidiaries' obligations under the Floor Plan Facility) and (3) a lien on all
of Sonic's other assets, except for real estate owned by it or its
subsidiaries. In addition, the Revolving Facility is partially secured by a
pledge of shares of Speedway Motorsports, Inc. common stock owned by Sonic
Financial Corporation, a corporation controlled by Bruton Smith. See "Certain
Transactions -- The Smith Guarantees, Pledges and Subordinated Loan."
THE FLOOR PLAN FACILITY
Sonic currently has in place the Floor Plan Facility, a standardized floor
plan credit facility with Ford Motor Credit for each of its dealership
subsidiaries. Each dealership subsidiary has its own agreement with Ford Motor
Credit for its inventory financing needs. As of December 31, 1998, there was an
aggregate of $228.2 million outstanding under the Floor Plan Facility. The
Floor Plan Facility at December 31, 1998 had an effective rate of 6.65%, which
was equal to prime less 1.1%, subject to certain incentives and other
adjustments. Typically new vehicle floor plan indebtedness exceeds the related
inventory balances. The inventory balance is generally reduced by the
Manufacturer's purchase discounts, and such reduction is not reflected in the
related floor plan liability. These Manufacturer purchase discounts are
standard in the industry, typically occur on all new vehicle purchases, and are
not used to offset the related floor plan liability. These discounts are
aggregated and generally paid to Sonic by the Manufacturer on a quarterly
basis. The related floor plan liability becomes due as vehicles are sold.
Sonic 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
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description of the security for repayment of the indebtedness of Sonic and its
subsidiaries under the Floor Plan Facility, see " -- The Revolving Facility."
THE SENIOR SUBORDINATED NOTES
Pursuant to an indenture dated as of July 1, 1998, we issued $125 million
of our senior subordinated notes to finance certain acquisitions we completed
in 1998 and to repay amounts outstanding under the Revolving Facility. On
December 7, 1998, we completed an exchange offer to exchange the senior
subordinated notes for identical senior subordinated notes registered under the
Securities Act of 1933. A copy of the indenture is attached as an exhibit to
our Registration Statement on Form S-4 (Registration Nos. 333-64397 and
333-64397-001 through 333-64397-044), filed on November 5, 1998. We encourage
you to read a copy of this indenture.
Our senior subordinated notes bear interest at a rate of 11% per year,
payable semiannually on February 1 and August 1. They are general unsecured
obligations of Sonic. They rank behind all of our and our subsidiaries' current
and future senior debt.
All of our subsidiaries guaranteed the payment of the senior subordinated
notes. If we default in payment of any principal, premium or interest payments
due on the senior subordinated notes, each of our subsidiary guarantors are
liable for any such payments.
We cannot redeem our senior subordinated notes until August 1, 2003. On or
after that date, we can redeem some or all of the senior subordinated notes at
any time at the prices specified below, expressed as percentages of the
principal amount, plus accrued and unpaid interest through the applicable
redemption date, if redeemed during the 12 month period beginning August 1 of
the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------ -------------
<S> <C>
2003 ....................... 105.500%
2004 ....................... 103.667%
2005 ....................... 101.833%
2005 and thereafter ........ 100.000%
</TABLE>
If we go through a change of control, we must give holders of the senior
subordinated notes the opportunity to sell their senior subordinated notes to
us at 101% of their face amount, plus accrued and unpaid interest. We might not
be able to pay the required price for our senior subordinated notes presented
to us at the time of a change of control, because we might not have enough
funds at that time, or the terms of our senior debt may prevent us from paying.
We may also have to use cash proceeds from a sale of our assets to offer
to buy back senior subordinated notes at their face amounts, plus accrued
interest.
The indenture governing our senior subordinated notes limits what we and
our subsidiaries may do. The provisions of the indenture limit, among other
things, our ability to:
o incur more debt
o pay dividends and make distributions
o issue guarantees and pledges for indebtedness
o make certain restricted payments
o make certain investments
o transfer and sell assets
o incur debt that is senior to our senior subordinated notes but junior to
any other senior debt
o create or incur liens
o enter in transactions with affiliates
o merge or consolidate
These covenants are subject to a number of important exceptions set forth
in the indenture.
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The indenture also contains standard events of default, including (in
certain cases subject to customary grace periods) (1) defaults in payment of
principal, premium or interest, (2) defaults in compliance with covenants in
the indenture, (3) failure to pay more than $20 million of judgments and (4)
certain events of bankruptcy by us and certain of our subsidiaries.
CERTAIN MANUFACTURER RESTRICTIONS
Under agreements between Sonic and certain manufacturers, Sonic has agreed
to provide the statements provided below.
Sonic's agreements with Honda and Mercedes require that it provide the
following statement in this prospectus:
No automobile manufacturer has been involved, directly or indirectly, in
the preparation of this prospectus or in the offering being made hereby. No
automobile manufacturer has made any statements or representations in
connection with the offering or has provided any information or materials
that were used in connection with the offering, and no automobile
manufacturer has any responsibility for the accuracy or completeness of
this prospectus.
Under Sonic's Dealer Agreement with General Motors ("GM"), Sonic has
agreed, among other things, to disclose the following provisions:
Sonic will deliver to GM copies of all Schedules 13D and 13G, and all
amendments thereto and terminations thereof, received by Sonic, within five
days of receipt of such Schedules. If Sonic is aware of any ownership of
its stock that should have been reported to it on Schedule 13D but that is
not reported in a timely manner, it will promptly give GM written notice of
such ownership, with any relevant information about the owner that Sonic
possesses.
If Sonic, through its Board of Directors or through shareholder action,
proposes or if any person, entity or group sends Sonic a Schedule 13D, or
any amendments thereto, disclosing (a) an agreement to acquire or the
acquisition of aggregate ownership of more than 20% of the voting stock of
Sonic and (b) Sonic, through its Board of Directors or through shareholder
action, proposes or if any plans or proposals which relate to or would
result in the following: (i) the acquisition by any person of more than 20%
of the voting stock of Sonic other than for the purposes of ordinary
passive investment; (ii) an extraordinary corporate transaction, such as a
material merger, reorganization or liquidation, involving Sonic or a sale
or transfer of a material amount of assets of Sonic and its subsidiaries;
(iii) any change which, together with any changes made to the Board of
Directors within the preceding year, would result in a change in control of
the then current Board of Sonic; or (iv) in the case of an entity that
produces motor vehicles or controls or is controlled by or is under common
control with an entity that either produces motor vehicles or is a motor
vehicle franchiser, the acquisition by any person, entity or group of more
than 20% of the voting stock of Sonic and any proposal by any such person,
entity or group, through the Sonic Board of Directors or shareholders
action, to change the Board of Directors of Sonic, then, if such actions in
GM's business judgment could have a material or adverse effect on its image
or reputation in the GM dealerships operated by Sonic or be materially
incompatible with GM's interests (and upon notice of GM's reasons for such
judgment), Sonic has agreed that it will take one of the remedial actions
set forth in the next paragraph within 90 days of receiving such Schedule
13D or such amendment.
If Sonic is obligated under the previous paragraph to take remedial
action, it will (a) transfer to GM or its designee, and GM or its designee
will acquire the assets, properties or business associated with any GM
dealership operated by Sonic at fair market value as determined in
accordance with GM's Dealership Agreement with Sonic, or (b) provide
evidence to GM that such person, entity or group no longer has such
threshold level of ownership interest in Sonic or that the actions
described in clause (b) of the previous paragraph will not occur.
Should Sonic or its GM franchisee subsidiary enter into an agreement to
transfer the assets of the GM franchisee subsidiary to a third party, the
right of first refusal described in the GM Dealer Agreement shall apply to
any such transfer.
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SHARES ELIGIBLE FOR FUTURE SALE
As of April 26, 1999, Sonic had outstanding 12,507,796 shares of Class A
common stock. All of these shares are freely transferable and may be resold
without further registration under the Securities Act, except for any shares
purchased by an "affiliate" of Sonic (as defined by Rule 144 under the
Securities Act), which shares will be subject to the resale limitations of Rule
144. The following shares of Class A common stock may be issued by Sonic or
become available for public resale:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CLASS A COMMON STOCK MANNER OF HOLDING AND/OR ISSUANCE
- ------------------------ --------------------------------------------------------------
<S> <C>
12,400,000(1) Issuable on conversion of 12,400,000 shares of our Class B
common stock owned by existing stockholders of Sonic.
These shares of Class A common stock are subject to
certain piggyback registration rights.
242,782(1) Issuable on exercise of warrants issued in our business
acquisitions.
1,540,331(1)(2) Issuable on conversion of outstanding shares of our Class
A convertible preferred stock that were issued in our
business acquisitions.
1,440,022 Outstanding shares that were issued in our business
acquisitions and which are currently registered for resale
under the Securities Act pursuant to a shelf registration.
2,469,282 Issuable on exercise of options granted under our 1997
Stock Option Plan. All such shares are registered for sale
under the Securities Act.
700,575 Issuable on exercise of options granted under our employee
stock purchase plans. All such shares are registered for sale
under the Securities Act.
100,000 Issuable on exercise of options granted under our Directors
Formula Stock Option Plan. All such shares are registered
for sale under the Securities Act.
</TABLE>
- ---------
(1) All such shares are "restricted securities" as defined in Rule 144 under
the Securities Act and may be resold in compliance with Rule 144.
(2) The number of shares of Class A common stock issuable upon conversion of
outstanding shares of our Class A convertible preferred stock is an
estimate based on the assumption that the average of the daily closing
prices for the Class A common stock on the NYSE for the 20 consecutive
trading days ending one trading day before such conversion was $14.5375
per share. This number is subject to adjustment based on the common
stock price on the date of conversion and could be materially more or
less than this estimated amount depending on factors that we cannot
presently determine. These factors include the future market price of
the Class A common stock and the decisions of the holders of the
preferred stock as to when to convert their shares of preferred stock.
Generally, such issuances of Class A common stock will vary inversely
with the market price of the Class A common stock.
In connection with pending acquisitions, Sonic has agreed to issue
approximately $18.0 million in Class A common stock and approximately $20.9
million in liquidation value of preferred stock. All but approximately $10.5
million in value of these securities have registration rights, of which
approximately $18.0 million of such shares are subject to prohibition on resale
for 180 days after issuance. Sonic intends to issue additional equity
securities in future acquisitions. These shares may have registration rights as
well as being eligible for sale under Rule 144.
Sonic has agreed not to issue, and Sonic's directors and executive
officers have agreed not to resell, any shares of Sonic's common stock or other
equity securities for the Lock Up Period without the prior consent of the
underwriters' representative. Sonic may, however, issue its securities without
such prior consent during the Lock Up Period (1) under its stock benefits
plans, (2) in a dealership acquisition as long as the recipient of the
securities agrees not to resell for at least the remainder of the Lock Up
Period, or (3) upon the exercise of options or warrants or the conversion of
securities currently outstanding. Our directors and executive officers hold or
are entitled to receive 13,828,339 shares of Class A common stock that are
subject to the Lock Up Period restrictions on resale. We estimate that an
additional 1,027,593 shares of the shares listed in the table above are subject
to similar lock up arrangements for a period from the date of the preliminary
prospectus first mailed to investors to the date 30 days after the date of this
prospectus.
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Sonic also has registration rights agreements with holders of 324,803
shares of Class A common stock. These stockholders are also selling
stockholders who are otherwise subject to restrictions on resale for the Lock
Up Period.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year may, under certain circumstances, resell within any
three-month period, such number of shares as does not exceed the greater of one
percent of the then-outstanding shares of Class A common stock or the average
weekly trading volume of Class A common stock during the four calendar weeks
prior to such resale. Rule 144 also permits, under certain circumstances, the
resale of shares without any quantity limitation by a person who has satisfied
a two-year holding period and who is not, and has not been for the preceding
three months, an affiliate of Sonic. In addition, holding periods of successive
non-affiliate owners are aggregated for purposes of determining compliance with
these one- and two-year holding period requirements.
All of the 12,400,000 shares of Class B common stock currently outstanding
have been held for at least one year. Any transfer of shares of the Class B
common stock to any person other than a member of the Smith Group will result
in a conversion of such shares to Class A common stock. Additionally, Sonic has
entered into a Registration Rights Agreement with Sonic Financial Corporation,
Bruton Smith, Scott Smith and William Egan. The Registration Rights Agreement
provides piggyback registration rights with respect to 12,500,000 shares of
Class A common stock in the aggregate. Sonic Financial Corporation, Mr. Egan,
Bruton Smith and Scott Smith have agreed to waive their registration rights in
this offering. Holders of 11,908,750 shares of Class B common stock have agreed
to a lock up arrangement for the Lock Up Period and the holder of 491,250
shares of Class B common stock has agreed to a lock up arrangement for a period
from the date of the preliminary prospectus first mailed to investors to the
date of 30 days after the date of this prospectus.
The availability of shares for sale or actual sales under Rule 144 and the
perception that such shares may be sold may have a material adverse effect on
the market price of the Class A common stock. Sales under Rule 144 also could
impair Sonic's ability to market additional equity securities.
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UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of material U.S. federal income and
estate tax consequences of the ownership and disposition of our common stock
applicable to Non-U.S. Holders. A "Non-U.S. Holder" is a person other than:
o an individual who is a citizen or resident of the U.S.,
o a corporation, partnership or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision
thereof, other than a partnership treated as foreign under U.S. Treasury
regulations,
o an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of source, and
o a trust, in general, if it is subject to the primary supervision of a
court within the U.S. and the control of one or more U.S. persons.
This discussion does not consider:
o U.S. state and local or non-U.S. tax consequences,
o specific facts and circumstances that may be relevant to a particular
Non-U.S. Holder's tax position, including, if the Non-U.S. Holder is a
partnership, that the U.S. tax consequences of holding and disposing of
our common stock may be affected by certain determinations made at the
partner level,
o the tax consequences for the shareholders, partners or beneficiaries of
a Non-U.S. Holder,
o special tax rules that may apply to certain Non-U.S. Holders, including
without limitation, banks, insurance companies, dealers in securities and
traders in securities, or
o special tax rules that may apply to a Non-U.S. Holder that holds our
common stock as part of a "straddle," "hedge" or "conversion transaction."
The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, and
administrative and judicial interpretations as of the date of this prospectus,
all of which may change retroactively or prospectively. The following summary
is for general information. Each Non-U.S. Holder should consult a tax advisor
regarding the U.S. federal tax consequences of holding and disposing of our
common stock, as well as any tax consequences under the laws of any U.S. state,
local or other U.S. or non-U.S. taxing jurisdiction.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of common stock generally will be
subject to withholding of U.S. federal income tax at a 30% rate or such lower
rate which an applicable income tax treaty specifies. Non-U.S. Holders should
consult their tax advisors regarding their entitlement to benefits under a
relevant income tax treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct
of a trade or business in the U.S. or, if an income tax treaty applies,
attributable to a permanent establishment, or, in the case of an individual, a
"fixed base" in the U.S. ("U.S. trade or business income") are generally
subject to U.S. federal income tax on a net income basis at regular graduated
rates, but generally are not subject to the 30% withholding tax if the Non-U.S.
Holder files the appropriate U.S. Internal Revenue Service form with the payer.
Any U.S. trade or business income received by a Non-U.S. Holder that is a
corporation may, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate which an applicable
income tax treaty specifies.
Dividends paid prior to 2000 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
that country for purposes of the withholding discussed above and for purposes
of determining the applicability of an income tax treaty rate. For dividends
paid after 1999:
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o a Non-U.S. Holder of common stock that claims the benefit of an income
tax treaty rate generally will be required to satisfy applicable
certification and other requirements.
o in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of the
partnership, and the partnership will be required to provide certain
information, including a U.S. taxpayer identification number.
o look-through rules will apply to tiered partnerships.
A Non-U.S. Holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund or credit
of any excess amounts withheld by filing an appropriate claim for a refund with
the U.S. Internal Revenue Service.
DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:
o the gain is U.S. trade or business income, in which case the branch
profits tax described above may also apply to a corporate Non-U.S. Holder,
o the Non-U.S. Holder is an individual who holds the common stock as a
capital asset within the meaning of Section 1221 of the U.S. Internal
Revenue Code, is present in the United States for more than 182 days in
the taxable year of the disposition and meets certain other requirements,
o the Non-U.S. Holder is subject to tax under provisions of U.S. tax law
applicable to certain U.S. expatriates, or
o Sonic is or has been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the
five-year period ending on the date of disposition and the Non-U.S.
Holder's holding period for the common stock.
The tax relating to stock in a "U.S. real property holding corporation"
will not apply to a Non-U.S. Holder whose holdings, actual and constructive, at
all times during the applicable period, amount to 5% or less of the common
stock, provided that the common stock is regularly traded on an established
securities market. Generally, a corporation is a "U.S. real property holding
corporation" if the fair market value of its "U.S. real property interests"
equals or exceeds 50% of the sum of the fair market value of its worldwide real
property interests and its other assets used or held for use in a trade or
business. Sonic believes that it has not been and is not, and Sonic does not
anticipate becoming, a "U.S. real property holding corporation" for U.S.
federal income tax purposes.
FEDERAL ESTATES TAXES
Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes and may be subject to U.S. federal estate
tax, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Sonic must report annually to the U.S. Internal Revenue Service and to
each Non-U.S. Holder the amount of the dividends paid to that holder and any
tax withheld with respect to those dividends. These information reporting
requirements apply regardless of whether withholding is required. Copies of the
information returns reporting those dividends and withholding may also be made
available, under an applicable income tax treaty or agreement, to the tax
authorities in the country in which the Non-U.S. Holder resides.
Under certain circumstances, U.S. Treasury regulations require information
reporting and backup withholding at a rate of 31% on certain payments on common
stock. Under currently applicable law, Non-U.S. Holders of common stock
generally will be exempt from information reporting and backup withholding on
dividends paid prior to 2000 to an address outside the U.S. For dividends paid
after 1999, however, a Non-U.S. Holder of common stock that fails to certify
its Non-U.S. Holder status in accordance with applicable U.S. Treasury
regulations may be subject to backup withholding at a rate of 31% on payments
of dividends.
The payment of the proceeds of the disposition of common stock by or
through the U.S. office of a broker generally will be subject to information
reporting and backup withholding at a rate of 31% unless the holder certifies
its status as a
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<PAGE>
Non-U.S. Holder under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a Non-U.S. Holder
of common stock by or through a non-U.S. office of a non-U.S. broker will not
be subject to backup withholding or information reporting unless the non-U.S.
broker is a "U.S. related person." In the case of the payment of proceeds from
disposition of common stock by or through a non-U.S. office of a broker that is
a U.S. person or a "U.S. related person," information reporting, but currently
not backup withholding, on the payment applies unless the holder certifies its
status as a Non-U.S. Holder under penalties of perjury or the broker has
documentary evidence in its files that the holder is a Non-U.S. Holder and the
broker has no actual knowledge to the contrary. For this purpose, a "U.S.
related person" is:
o a "controlled foreign corporation" for U.S. federal income tax purposes,
o a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a U.S. trade or business, or
o effective after 1999, a foreign partnership (A) at least 50% of the
capital or profits interest in which is owned by U.S. persons, or (B) that
is engaged in a U.S. trade or business.
Effective after 1999, backup withholding will apply to the payment of
disposition proceeds by or through a non-U.S. office of a broker that is a U.S.
person or a "U.S. related person" unless certain certification requirements are
satisfied or an exemption is otherwise established and the broker has no actual
knowledge that the holder is a U.S. person. Non-U.S. Holders should consult
their own tax advisors regarding the application of information reporting and
backup withholding to them.
Any amounts withheld under the backup withholding rules from a payment to
a Non-U.S. Holder will be refunded or credited against the holder's U.S.
federal income tax liability, if any, if the required information is furnished
to the U.S. Internal Revenue Service.
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UNDERWRITING
GENERAL
We intend to offer our Class A common stock in the United States and
Canada through a number of underwriters. Merrill Lynch, Pierce, Fenner & Smith
Incorporated, BancBoston Robertson Stephens, Inc., Stephens Inc. and
NationsBanc Montgomery Securities LLC are acting as representatives of each of
the underwriters named below. Subject to the terms and conditions set forth in
a purchase agreement among Sonic, the selling stockholders and the
underwriters, we and the selling stockholders have agreed to sell to the
underwriters, and each of the underwriters severally and not jointly has agreed
to purchase from our company and the selling stockholders, the number of shares
of Class A common stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------- ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .............................. 2,680,000
BancBoston Robertson Stephens, Inc. .............. 1,842,500
Stephens Inc. .................................... 1,842,500
NationsBanc Montgomery Securities LLC ............ 335,000
Bear, Stearns & Co. Inc. ......................... 300,000
J.C. Bradford & Co. .............................. 300,000
Buckingham Research Group Incorporated ........... 300,000
Dain Rauscher Wessels, A division of Dain Rauscher
Incorporated ................................... 300,000
Doft & Co., Inc. ................................. 300,000
First Union Capital Markets Corp. ................ 300,000
---------
Total ..................................... 8,500,000
=========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject
to the terms and conditions set forth in that agreement, to purchase all of the
shares of Class A common stock being sold under the terms of such agreement if
any of the shares of Class A common stock being sold under the terms of that
agreement are purchased. In the event of a default by an underwriter, the
purchase agreement provides that, in certain circumstances, the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreement may be terminated.
We and the selling stockholders have agreed to indemnify the underwriters
against some liabilities, including some liabilities under the Securities Act,
or to contribute to payments the underwriters may be required to make in
respect of those liabilities.
The shares of Class A common stock are being offered by the several
underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
underwriters and certain other conditions. The underwriters reserve the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us and the selling stockholders that the
underwriters propose initially to offer the shares of Class A common stock to
the public at the initial public offering price set forth on the cover page of
this prospectus, and to certain dealers at such price less a concession not in
excess of $.43 per share of Class A common stock. The underwriters may allow,
and such dealers may reallow, a discount not in excess of $.10 per share of
Class A common stock to certain other dealers. After the initial public
offering, the public offering price, concession and discount may change.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us and the selling stockholders to the
underwriters and the proceeds before expenses to us and the selling
stockholders. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment options.
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<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
------------- --------------- ---------------
<S> <C> <C> <C>
Public offering price ................................. $ 14.9375 $126,968,750 $146,014,063
Underwriting discount ................................. $ .75 $ 6,375,000 $ 7,331,250
Proceeds, before expenses, to Sonic ................... $ 14.1875 $ 86,078,826 $104,167,888
Proceeds, before expenses, to the selling stockholders $ 14.1875 $ 34,514,924 $ 34,514,924
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $640,000 and are payable by us.
OVER-ALLOTMENT OPTION
We granted an option to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of 1,275,000
additional shares of our Class A common stock at the public offering price set
forth on the cover page of this prospectus, less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of our Class A common stock offered hereby. To the extent that
the underwriters exercise this option, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares of our
Class A common stock proportionate to such underwriter's initial amount
reflected in the foregoing table.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and all of the selling
stockholders have agreed, with certain exceptions, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a period from the
date of the preliminary prospectus first mailed to investors to the date 90
days after the date of this prospectus, not to directly or indirectly
o offer, pledge, sell, sell short, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our Class A common stock or securities convertible
into or exchangeable or exercisable for or repayable with our Class A
common stock, whether now owned or later acquired by the person executing
the agreement or with respect to which the person executing the agreement
later acquires the power of disposition, or file a registration statement
under the Securities Act relating to any shares of our Class A common
stock or
o enter into any swap or hedging arrangement or other agreement that
transfers, in whole or in part, the economic consequence of ownership of
our Class A common stock whether any such swap or transaction is to be
settled by delivery of our Class A common stock or other securities, in
cash or otherwise.
NEW YORK STOCK EXCHANGE LISTING
Our Class A common stock is listed on the New York Stock Exchange under
the symbol "SAH."
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of our Class A common stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the
underwriters and certain selling group members to bid for and purchase our
Class A common stock. As an exception to these rules, the representatives are
permitted to engage in transactions that stabilize the price of our Class A
common stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of our Class A common stock.
If the underwriters create a short position in our Class A common stock in
connection with the offering, i.e., if they sell more shares of our Class A
common stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our Class A common
stock in the open market. The representatives may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither Sonic nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our Class A common stock. In addition,
neither Sonic nor any of the underwriters makes any representation that the
representatives or the lead managers will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
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OTHER RELATIONSHIPS
Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancBoston Robertson
Stephens, Inc. and NationsBanc Montgomery Securities LLC have acted as
underwriters and initial purchasers in connection with previous financings by
Sonic for which they received customary fees. Stephens Inc. has acted as a
financial advisor to Sonic in connection with various acquisitions over the
past several years for which it has received customary fees. Stephens Inc. may
act as such a financial advisor in the future.
LEGAL MATTERS
Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina, counsel
to Sonic, will render an opinion that the shares of Class A common stock
offered hereby, when issued and paid for in accordance with the terms of the
Underwriting Agreement, will be duly authorized, validly issued, fully paid and
nonassessable. Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York, has served as counsel
to the Underwriters in connection with this offering.
EXPERTS
The consolidated financial statements of Sonic Automotive, Inc. and
Subsidiaries, the combined financial statements of Williams Automotive Group,
the financial statements of Economy Cars, Inc. the financial statements of
Global Imports, Inc., the combined financial statements of Newsome Automotive
Group, the combined financial statements of Lloyd Automotive Group, and the
financial statements of Lute Riley Motors, Inc., included in this prospectus
and elsewhere in the registration statement, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are
included herein in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing. In addition, the combined
financial statements of Hatfield Automotive Group, the combined financial
statements of Higginbotham Automotive Group and the financial statements of
Casa Ford of Houston, Inc. incorporated by reference in this prospectus and
elsewhere in the registration statement, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports, which are incorporated
by reference herein, and have been so incorporated in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT SONIC
Sonic files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and information relate to Sonic's business,
financial condition and other matters. You may read and copy these reports,
proxy statements and other information at the Public Reference Room 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. You may obtain information on the operation of the Commission's
Public Reference Room in Washington, D.C. by calling the Commission at
1-800-SEC-0330. Copies may be obtained from the Commission upon payment of the
prescribed fees. The Commission maintains an Internet Web site that contains
reports, proxy and information statements and other information regarding Sonic
and other registrants that file electronically with the Commission. The address
of such site is http://www.sec.gov. Such information may also be read and
copied at the offices of the New York Stock Exchange (the "NYSE") at 20 Broad
Street, New York, New York 10005.
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the Commission will automatically update and supercede this information.
We incorporate by reference the documents listed below and any future filings
made with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"):
<TABLE>
<S> <C>
1. Sonic's Annual Report on Form 10-K for its fiscal year ended December 31, 1998 (File No. 001-13395) (dated
March 31, 1999).
2. The combined financial statements of Hatfield Automotive Group, the financial statements of Casa Ford of
Houston, Inc. and the combined financial statements of the Higginbotham Automotive Group, included in
Sonic's Registration Statement on Form S-4 (Registration Nos. 333-64397 and 333-64397-001 through
333-64397-044) dated November 3, 1998.
</TABLE>
Sonic will provide without charge to each person to whom this prospectus
is delivered, upon the written or oral request, a copy of any or all of the
documents incorporated by reference in this prospectus (excluding exhibits to
such documents unless such exhibits are specifically incorporated by
reference). Written or telephone requests should be
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<PAGE>
directed to Mr. Todd Atenhan, Director of Investor Relations, 5401 East
Independence Blvd., P.O. Box 18747, Charlotte, North Carolina, 28212, Telephone
(888) 766-4218.
This prospectus is a part of a Registration Statement on Form S-3 (the
"Registration Statement") filed with the Commission by Sonic. This prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto. Statements about the contents of contracts or other
documents contained in this prospectus or in any other filing to which we refer
you are not necessarily complete. You should review the actual copy of such
documents filed as an exhibit to the Registration Statement or such other
filing. Copies of the Registration Statement and these exhibits may be obtained
from the Commission as indicated above upon payment of the fees prescribed by
the Commission.
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(This Page Intentionally Left Blank)
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of income for the
year ended December 31, 1998 reflects the historical accounts of Sonic for that
period, adjusted giving effect to the following events, as if those events had
occurred on January 1, 1998:
o the acquisitions of Casa Ford of Houston, Inc., Hatfield Automotive Group
and Higginbotham Automotive Group completed in 1998;
o the acquisitions of Economy Honda Cars, Global Imports and Williams
Automotive Group completed in the first quarter of 1999;
o the pending acquisitions of Newsome Automotive Group, Lloyd Automotive
Group and Lute Riley Motors;
o Sonic's sale of its senior subordinated notes in July 1998 and the
application of the net sale proceeds; and
o this offering of Class A common stock and the application of the
estimated net proceeds to Sonic from this offering.
The following unaudited pro forma consolidated balance sheet as of
December 31, 1998 reflects the historical accounts of Sonic as of that date as
adjusted to give pro forma effect to the following events, as if those events
had occurred on December 31, 1998:
o the acquisitions of Economy Honda Cars, Global Imports and Williams
Automotive Group completed in the first quarter of 1999;
o the pending acquisitions of Newsome Automotive Group, Lloyd Automotive
Group and Lute Riley Motors; and
o this offering.
The unaudited pro forma consolidated financial data and accompanying notes
should be read in conjunction with the Consolidated Financial Statements and
related notes of Sonic, Williams Automotive Group, Economy Honda Cars, Global
Imports, Inc., Newsome Automotive Group, Lloyd Automotive Group and Lute Riley
Motors, Inc., which are included in this prospectus, as well as the financial
statements and related notes of Casa Ford of Houston, Inc., Hatfield Automotive
Group and Higginbotham Automotive Group, all of which are incorporated by
reference in this prospectus. Such unaudited pro forma consolidated data and
accompanying notes do not give effect to Sonic's acquisitions of Century BMW,
Heritage Lincoln-Mercury, Capitol Chevrolet and Imports, Inc., Infiniti of
Charlotte, Ron Craft Chrysler Plymouth Jeep, Rally Mitsubishi, Bondesen
Chevrolet Oldsmobile Cadillac, Fitzgerald Chevrolet, Superior
Oldsmobile-Cadillac-GMC, Sam White Motor City, Charleston Lincoln-Mercury, Ben
Reading Buick, Shottenkirk Honda, Classic Dodge and Manhattan Auto, or the
financing of these acquisitions, nor the sale of Cleveland Village Honda,
because such transactions are not required to be presented in this prospectus
on a pro forma basis in accordance with Securities and Exchange Commission
rules. Sonic 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 Sonic'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 Sonic's financial condition
on any future date or its results of operation for any future period.
P-1
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
THE 1998
ACQUISITIONS
----------------------------------------------
HATFIELD HIGGINBOTHAM
CASA FORD AUTOMOTIVE AUTOMOTIVE
ACTUAL(A) OF HOUSTON, INC. GROUP GROUP
--------------- ------------------ ------------ --------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Vehicle sales ................ $ 1,407,030 $21,679 $133,661 $67,874
Parts, service and
collision repair ............ 162,660 2,061 8,774 6,309
Finance and insurance ........ 34,011 759 4,190 1,835
Total revenues ............... 1,603,701 24,499 146,625 76,018
Cost of sales ................. 1,396,259 20,852 130,221 65,110
----------- ------- -------- -------
Gross profit .................. 207,442 3,647 16,404 10,908
Selling, general and
administrative expenses....... 150,130 2,443 11,308 7,434
Management bonus .............. -- -- 3,181 --
Depreciation and
amortization ................. 4,607 94 158 168
Operating income .............. 52,705 1,110 1,757 3,306
Interest expense, floor
plan ......................... 14,096 294 1,245 780
Interest expense, other ....... 9,395 73 196
Other income (expense) ........ 426 10 244 (43)
----------- ------- -------- -------
Income before income
taxes ........................ 29,640 753 756 2,287
Provision for income taxes..... 11,083 171 --
Net income .................... $ 18,557 $ 582 $ 756 $ 2,287
=========== ======= ======== =======
Basic net income per
share (p) .................... $ 0.81
===========
Weighted average common
shares outstanding --
basic (p) .................... 22,852
===========
Diluted net income per
share (p)(q) ................. $ 0.74
===========
Weighted average common
shares outstanding --
diluted (p)(q) ............... 24,970
===========
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA FOR THE ACQUISITIONS,
1999 ADJUSTMENTS FOR ADJUSTMENTS FOR THE NOTES OFFERING
ACQUISITIONS(B) THE ACQUISITIONS THE NOTES OFFERING AND THIS OFFERING
----------------- ------------------ -------------------- ----------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Vehicle sales ................ $568,810 $ $ $ 2,199,054
Parts, service and
collision repair ............ 102,225 282,029
Finance and insurance ........ 12,615 (240) (c) 53,194
24 (d)
-----------
Total revenues ............... 683,650 (216) 2,534,277
Cost of sales ................. 594,298 (513) (e) 2,206,227
-------- ----------- -----------
Gross profit .................. 89,352 297 328,050
Selling, general and
administrative expenses....... 70,634 (82) (c) 238,747
(6,699) (f)
3,579 (g)
Management bonus .............. -- (3,181) (f)
Depreciation and
amortization ................. 3,159 (1,046) (g) 10,551
(139) (h)
3,550 (i)
-----------
Operating income .............. 15,559 4,315 78,752
Interest expense, floor
plan ......................... 3,608 (403) (j) 19,620
Interest expense, other ....... 528 (316) (g) 5,821 (1) 14,966
(731) (k)
Other income (expense) ........ 391 1,028
-------- -----------
Income before income
taxes ........................ 11,814 5,765 (5,821) 45,194
Provision for income taxes..... 1,337 2,121 (m) (2,311)(o) 16,728
4,327 (n)
-----------
Net income .................... $ 10,477 $ (683) $ (3,510) $ 28,466
======== =========== =========== ===========
Basic net income per
share (p) .................... $ 0.96
===========
Weighted average common
shares outstanding --
basic (p) .................... 29,613
===========
Diluted net income per
share (p)(q) ................. $ 0.81
===========
Weighted average common
shares outstanding --
diluted (p)(q) ............... 35,267
===========
</TABLE>
(SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
INCOME)
P-2
<PAGE>
(a) The actual consolidated statement of income data for Sonic for the year
ended December 31, 1998 includes the results of operations of the
following dealerships and dealership groups acquired during the year ended
December 31, 1998 from their respective dates of acquisition:
<TABLE>
<CAPTION>
EFFECTIVE DATE
DEALERSHIP ACQUIRED OF ACQUISITION
- --------------------------------------------------- -----------------
<S> <C>
Clearwater Dealerships and Affiliated Companies January 1, 1998
Casa Ford of Houston, Inc. May 1, 1998
Capitol Chevrolet and Imports, Inc. April 1, 1998
Century BMW April 1, 1998
Heritage Lincoln-Mercury April 1, 1998
Hatfield Automotive Group July 1, 1998
Higginbotham Automotive Group August 1, 1998
Tampa Volvo November 1, 1998
Ron Craft Chevrolet-Cadillac-Oldsmobile December 1, 1998
Ron Craft Chrysler Plymouth Jeep December 1, 1998
</TABLE>
(b) Reflects the results of operations of Sonic's pending acquisitions of Lute
Riley Motors, Inc., Lloyd Automotive Group and Newsome Automotive Group
and the results of operations of Economy Cars, Inc., Global Imports, Inc.,
and Williams Automotive Group which closed in the first quarter of 1999
(see the respective audited financial statements for each of these
acquisitions included elsewhere in this prospectus).
(c) Adjustment reflects the decrease in finance and insurance revenues and
selling, general and administrative expenses included in the results of
operations of Newsome Automotive Group resulting from transactions with
affiliates of Newsome Automotive Group not acquired by Sonic.
(d) Reflects finance and insurance revenues generated by the Higginbotham
Automotive acquisition for the year ended December 31, 1998, that was paid
directly to the dealership owner and excluded from revenue in the
historical financial statements of the acquired dealerships. No adjustment
has been made to reflect such amounts for the other acquisitions included
within these pro forma statements as the amounts could not be reasonably
ascertained.
(e) Adjustment reflects the conversion from the "last-in, first-out" method of
inventory accounting to the "first-in, first-out" method of inventory
accounting for Sonic's 1999 acquisitions to conform to Sonic's method of
accounting for vehicle inventories.
(f) Reflects the net decrease in selling, general and administrative expenses
related to the net reduction in salaries and bonuses of owners and
officers of the acquired dealerships who have become or will become
employees, consistent with reduced salaries pursuant to employment
agreements with Sonic, or whose positions have been or will be eliminated
as part of Sonic's 1998 and 1999 acquisitions.
(g) 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 Sonic, and the decreases in
depreciation expense and interest expense related to mortgage indebtedness
encumbering such property of approximately $3.7 million bearing interest
at rates from 7.75% to 8.50%.
(h) 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.
(i) Reflects the amortization over an assumed useful life of 40 years of
goodwill resulting from Sonic's 1998 and 1999 acquisitions, which were
assumed to occur on January 1, 1998. Certain of Sonic's 1998 and 1999
acquisitions have purchase agreements which require Sonic to pay
additional amounts in cash or preferred stock based on future operating
results. Amount does not include amortization of the additional goodwill
associated with the contingent purchase prices related to the acquisitions
of Casa Ford of Houston, Inc., Williams Automotive Group, and Global
Imports, Inc. Should Sonic be required to pay the maximum additional
amounts contingent in the purchase agreements for the acquisition of
Global Imports, Inc. ($1.0 million), Sonic would incur goodwill
amortization charges in addition to the amounts recorded in the Unaudited
Pro Forma Consolidated Statement of Income of approximately $25,000 in
1998. Sonic's purchase agreement for the acquisitions of Casa Ford of
Houston, Inc. and Williams Automotive Group 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.
(FOOTNOTES CONTINUED ON FOLLOWING PAGES)
P-3
<PAGE>
(j) Reflects the decrease in interest expense, floor plan resulting from the
refinancing of the notes payable, floor plan arrangements of Sonic 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 Sonic and
the dealerships being acquired was $286.5 million at December 31, 1998.
The average interest rate under the Floor Plan Facility is approximately
7.43% compared to historical interest rates ranging from 7.06% to 9.50%.
(k) Reflects the decrease in interest expense related to debt, other than
mortgage indebtedness, which has not or will not be assumed of
approximately $9.2 million bearing interest at rates from 5.4% to 10.0%.
(l) Reflects the increase in interest expense associated with Sonic's senior
subordinated notes issued in July 1998 and the decrease in interest
expense as a result of the repayment of debt outstanding under the
revolving credit facility, which had an average monthly balance of $27.8
million during 1998, with the net proceeds from Sonic's issuance of its
senior subordinated notes not used to finance Sonic's 1998 and 1999
acquisitions.
(m) Reflects the net increase in provision for income taxes resulting from pro
forma adjustments above, computed using statutory income tax rates ranging
from 35.0% to 40.7%.
(n) 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 became 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 statutory income tax rates ranging from 35.0%
to 40.7%.
(o) Reflects the net decrease in the provision for income taxes resulting from
adjustment (l), computed using a statutory income tax rate of
approximately 39.7%.
(p) All earnings per share information reflects Sonic's 2-for-1 common stock
split effective January 25, 1999. Pro forma basic and diluted net income
per share and the related weighted average shares outstanding for the year
ended December 31, 1998 have been adjusted to reflect the issuance of
970,588 shares of Class A common stock in connection with the acquisition
of Higginbotham Automotive Group as if such shares had been issued on
January 1, 1998. Pro forma diluted net income per share and the related
weighted average shares outstanding for the year ended December 31, 1998
includes the dilutive effect of the issuance of 16,338 shares of preferred
stock in connection with the 1998 acquisitions and 54,975 shares in
connection with the 1999 acquisitions. Pro forma diluted net income per
share and the related weighted average shares outstanding for the year
ended December 31, 1998 also includes the dilutive effect of the issuance
of warrants to purchase 242,782 shares of Class A common stock in
connection with the consummation of the 1997 and 1998 acquisitions. The
following is a reconciliation of the pro forma weighted average shares for
the year ended December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
Weighted Average Shares -- Basic (actual) ............................................... 22,852
Issuance of Common Stock in connection with this offering ............................... 6,067
Issuance of Common Stock in connection with the acquisition of Higginbotham Automotive 694
------
Group
Weighted Average Shares -- Basic (pro forma) ............................................ 29,613
======
Weighted Average Shares -- Diluted (actual) ............................................. 24,970
Issuance of Common Stock in connection with this offering ............................... 6,067
Issuance of Common Stock in connection with the acquisition of Higginbotham Automotive 694
Group
Class A Convertible Preferred Stock ..................................................... 3,453
Warrants ................................................................................ 83
------
Weighted Average Shares -- Diluted (pro forma) .......................................... 35,267
======
</TABLE>
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
P-4
<PAGE>
(q) For purposes of computing the number of convertible preferred shares to
include in the pro forma diluted weighted average shares outstanding, a
Class A common stock price of $10.40 per share was assumed as the
conversion price for the Casa Ford of Houston, Inc. acquisition (the
actual conversion price of the common stock used when these shares were
converted in December 1998) and $14.5375 per share (the average stock
price on the NYSE for the 20 days prior to April 29, 1999) was assumed as
the conversion price for the preferred stock issued or to be issued in
connection with the other 1998 and 1999 acquisitions included in the
Unaudited Pro Forma Consolidated Statement of Income. Certain of the
convertible preferred stock issuances are subject to conversion
adjustments limiting increases and decreases in the number of shares
received upon conversion. A 10% increase or decrease in the price per
share used in the conversion of the other 1998 and 1999 acquisitions would
result in a $0.01 increase or decrease in the pro forma diluted net income
per share for the twelve months ended December 31, 1998.
P-5
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR THE 1999
1999 FOR THE 1999 PRO FORMA ADJUSTMENTS ACQUISITIONS
ACTUAL ACQUISITIONS ACQUISITIONS FOR THIS OFFERING AND THIS OFFERING
---------- -------------- ------------------- ----------------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 51,834 $ 25,504 $ (92,515)(a) $ 85,439(f) $ 53,924
(23,069)(b)
Marketable equity 6,731 (e)
securities ................... -- 95 -- -- 95
Receivables ................... 39,902 9,350 (5,584) (b) 43,668
Inventories ................... 264,971 70,790 9,334 (c) 345,095
Deferred incomes taxes ........ 1,702 226 (189) (b) 1,739
Due from affiliates ........... 1,471 225 (225) (b) 1,471
Other current assets .......... 4,961 390 (351) (b) 5,000
-------- -------- ----------- --------
Total current assets ....... 364,841 106,580 (105,868) 85,439 450,992
Property and equipment, net 26,250 15,665 3,500 (a) 39,668
(136) (b)
(5,611) (d)
Due from affiliates ............ -- 3,298 (3,298) (b)
Goodwill, net .................. 180,081 358 106,669 (a) 286,750
(358) (b)
Other assets ................... 4,931 94 (94) (b) 4,931
Deferred income taxes .......... -- 534 534
-------- -------- ---------- --------
Total assets ............... $576,103 $126,529 $ (5,196) $ 85,439 $782,875
======== ======== =========== ========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable-floor plan ...... $228,158 $ 58,376 $ 6,731 (e) $293,265
Trade accounts payable ........ 14,994 5,567 (4,389) (b) 16,172
Accrued interest .............. 7,058 334 (290) (b) 7,102
Other accrued liabilities ..... 27,763 9,041 (6,245) (b) 30,559
Dividends payable ............. 542 (542) (b) --
Payable for acquisitions ...... 2,385 2,385
Payable to affiliates ......... 628 3,265 (3,265) (b) 628
Current maturities of
long-term debt ............... 4,700 6,532 (4,273) (b) 6,519
(440) (d)
-----------
Total current
liabilities ............... 285,686 83,657 (12,713) 356,630
Long-term debt ................. 131,337 7,294 (4,866) (b) 131,691
(2,074) (d)
Payable for acquisitions ....... 275 275
Payable to the Company's
Chairman ...................... 5,500 5,500
Payable to affiliates .......... 3,625 913 (69) (b) 4,469
Deferred income taxes .......... 4,066 152 4,218
Income tax payable ............. 3,185 387 (c) 4,112
540 (c)
Stockholders' Equity:
Common stock of
combined companies ........... 303 (303) (a) --
Preferred stock ............... 20,431 48,112 (a) (26,570)(f) 41,973
Class A common stock .......... 120 84 (f) 204
Class B common stock .......... 124 124
Paid-in capital ............... 87,011 2,481 (2,481) (a) 111,925 (f) 198,936
Receivables from
Stockholder .................. -- (80) 80 (b)
Retained earnings and
members' equity .............. 34,743 31,747 (27,674) (a) 34,743
(9,382) (b)
8,406 (c)
(3,097) (d)
Accumulated other
comprehensive income ......... -- 62 (62) (a) -- --
-------- -------- ----------- ---------- --------
Total stockholders'
equity .................... 142,429 34,513 13,599 85,439 275,980
-------- -------- ----------- ---------- --------
Total liabilities and
stockholders' equity .......... $576,103 $126,529 $ (5,196) $ 85,439 $782,875
======== ======== =========== ========== ========
</TABLE>
(SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET)
P-6
<PAGE>
- ---------
(a) Reflects the preliminary allocation of the aggregate purchase price of the
1998 and 1999 acquisitions based on the estimated fair value of the net
assets acquired. Because the carrying amount of the net assets acquired,
which primarily consist of accounts receivable, inventory, equipment and
floor plan indebtedness, approximates their fair value, management believes
the application of purchase accounting will not result in 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 and changes in the estimated fair
value of the preferred stock issued prior to its issuance. The estimated
purchase price allocation consists of the following:
<TABLE>
<S> <C>
Estimated total consideration (in thousands):
Cash ........................................ $ 92,515
Preferred stock ............................. 48,112
---------
Total ....................................... 140,627
Less: Estimated fair value of tangible net
assets acquired ............................. (33,958)
---------
Excess of purchase price over fair value of
net tangible assets acquired ................ $ 106,669
=========
</TABLE>
(b) Reflects the elimination of certain assets and liabilities other than real
property that will not be acquired.
(c) Reflects the conversion from the "last-in, first-out" method of inventory
accounting to the "first-in, first-out" method of inventory accounting at
the 1998 and 1999 acquisitions, including the resulting tax liability that
will be assumed in the acquisitions of Economy Honda Cars and Tom Williams
Lexus calculated at the applicable statutory income tax rates ranging from
38.3% to 38.9%.
(d) Reflects the elimination of the real property and the related mortgage
indebtedness encumbering such property that will not be acquired.
(e) Reflects the proceeds received from the issuance of floor plan notes
payable used to finance vehicles acquired in the acquisitions of Economy
Honda and Tom Williams Lexus.
(f) Reflects the issuance of 6,067,230 shares of Class A common stock offered
by Sonic at an assumed per share offering price of $14 15/16, and the
issuance of 2,432,770 shares of Class A common stock upon conversion of
33,516 shares of preferred stock held by the selling stockholders as of
December 31, 1998 assuming such shares were converted at a conversion price
of $14.5375.
P-7
<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT ........................................................... F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1997 and 1998 ............................. F-4
Consolidated Statements of Income for the years ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1997 and 1998........................................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998................................................................................. F-7
Notes to Consolidated Financial Statements ............................................ F-8
WILLIAMS AUTOMOTIVE GROUP
INDEPENDENT AUDITORS' REPORT ........................................................... F-25
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheet at December 31, 1998 ........................................... F-26
Combined Statement of Income for the year ended December 31, 1998 ..................... F-27
Combined Statement of Stockholder's Equity for the year ended December 31, 1998 ....... F-28
Combined Statement of Cash Flows for the year ended December 31, 1998 ................. F-29
Notes to Combined Financial Statements ................................................ F-30
ECONOMY CARS, INC.
INDEPENDENT AUDITORS' REPORT ........................................................... F-36
FINANCIAL STATEMENTS:
Balance Sheet at December 31, 1998 .................................................... F-37
Statement of Income for the year ended December 31, 1998 .............................. F-38
Statement of Stockholders' Equity for the year ended December 31, 1998 ................ F-39
Statement of Cash Flows for the year ended December 31, 1998 .......................... F-40
Notes to Financial Statements ......................................................... F-41
GLOBAL IMPORTS, INC.
INDEPENDENT AUDITORS' REPORT ........................................................... F-45
FINANCIAL STATEMENTS:
Balance Sheet at December 31, 1998 .................................................... F-46
Statement of Income for the year ended December 31, 1998 .............................. F-47
Statement of Stockholder's Equity for the year ended December 31, 1998 ................ F-48
Statement of Cash Flows for the year ended December 31, 1998 .......................... F-49
Notes to Financial Statements ......................................................... F-50
NEWSOME AUTOMOTIVE GROUP
INDEPENDENT AUDITORS' REPORT ........................................................... F-54
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheet at December 31, 1998 ........................................... F-55
Combined Statement of Income for the year ended December 31, 1998 ..................... F-56
Combined Statement of Equity for the year ended December 31, 1998 ..................... F-57
Combined Statement of Cash Flows for the year ended December 31, 1998 ................. F-58
Notes to Combined Financial Statements ................................................ F-59
LLOYD AUTOMOTIVE GROUP
INDEPENDENT AUDITORS' REPORT ........................................................... F-65
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheet at December 31, 1998 ........................................... F-66
Combined Statement of Income for the year ended December 31, 1998 ..................... F-67
Combined Statement of Stockholder's Equity for the year ended December 31, 1998 ....... F-68
Combined Statement of Cash Flows for the year ended December 31, 1998 ................. F-69
Notes to Combined Financial Statements ................................................ F-70
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
LUTE RILEY MOTORS, INC.
INDEPENDENT AUDITORS' REPORT .................................................... F-74
FINANCIAL STATEMENTS:
Balance Sheet at December 31, 1998 ............................................. F-75
Statement of Income for the year ended December 31, 1998 ....................... F-76
Statement of Stockholder's Deficiency for the year ended December 31, 1998 ..... F-77
Statement of Cash Flows for the year ended December 31, 1998 ................... F-78
Notes to Financial Statements .................................................. F-79
</TABLE>
F-2
<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, 1997 and
1998, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 16, 1999
F-3
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS (Note 5)
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ..................................................... $ 18,304 $ 51,834
Receivables (net of allowance for doubtful accounts of $523 and $700 at December 31,
1997 and 1998, respectively) .......................................................... 19,784 39,902
Inventories (Notes 1 and 3) ............................................................ 156,514 264,971
Deferred income taxes (Note 6) ......................................................... 405 1,702
Due from affiliates (Note 7) ........................................................... 1,047 1,471
Other current assets (Note 2) .......................................................... 1,318 4,961
-------- --------
Total current assets .................................................................. 197,372 364,841
PROPERTY AND EQUIPMENT, NET (Notes 4 and 5) ............................................. 19,081 26,250
GOODWILL, NET (Note 1) .................................................................. 74,362 180,081
OTHER ASSETS ............................................................................ 635 4,931
-------- --------
TOTAL ASSETS ............................................................................ $291,450 $576,103
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 3) ................................................... $133,236 $228,158
Trade accounts payable ................................................................. 6,612 14,994
Accrued interest ....................................................................... 1,071 7,058
Other accrued liabilities (Note 6) ..................................................... 10,748 27,763
Payable to affiliates (Note 7) ......................................................... 445 628
Payable for acquisitions (Note 2) ...................................................... -- 2,385
Current maturities of long-term debt (Note 5) .......................................... 584 4,700
-------- --------
Total current liabilities ............................................................. 152,696 285,686
LONG-TERM DEBT (Note 5) ................................................................. 38,640 131,337
PAYABLE FOR ACQUISITIONS (Note 2) ....................................................... -- 275
PAYABLE TO THE COMPANY'S CHAIRMAN (Note 7) .............................................. 5,500 5,500
PAYABLE TO AFFILIATES (Note 7) .......................................................... 4,394 3,625
DEFERRED INCOME TAXES (Note 6) .......................................................... 1,079 4,066
INCOME TAX PAYABLE (Note 6) ............................................................. 4,776 3,185
COMMITMENTS AND CONTINGENCIES (Notes 7 and 10)
STOCKHOLDERS' EQUITY (Notes 1, 8 and 9):
Preferred Stock, $.10 par, 3.0 million shares authorized; 300,000 shares designated as
Class A Convertible Preferred Stock, liquidation preference $1,000 per share, of which
22,179 shares are issued and outstanding at December 31, 1998 ......................... -- 20,431
Class A Common Stock, $.01 par, 50.0 million shares authorized; 5,000,000 shares issued
and outstanding at December 31, 1997 and 11,959,274 shares issued and outstanding at
December 31, 1998 ..................................................................... 100 120
Class B Common Stock, $.01 par (convertible into Class A Common Stock), 15.0 million
shares authorized; 12,500,000 shares issued and outstanding at December 31, 1997 and
12,400,000 shares issued and outstanding at December 31, 1998 ......................... 125 124
Paid-in capital ........................................................................ 67,933 87,011
Retained earnings ...................................................................... 16,186 34,743
Accumulated other comprehensive income ................................................. 21 --
-------- --------
Total stockholders' equity ............................................................ 84,365 142,429
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................................. $291,450 $576,103
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1997 1998
----------- ------------- ---------------
<S> <C> <C> <C>
REVENUES:
Vehicle sales ........................................... $327,674 $ 467,858 $ 1,407,030
Parts, service and collision repair ..................... 42,075 57,537 162,660
Finance and insurance (Note 1) .......................... 7,118 10,606 34,011
-------- --------- -----------
Total revenues ........................................ 376,867 536,001 1,603,701
COST OF SALES (Note 1) ................................... 332,122 473,003 1,396,259
-------- --------- -----------
GROSS PROFIT ............................................. 44,745 62,998 207,442
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................................ 32,602 46,770 150,130
DEPRECIATION AND AMORTIZATION ............................ 1,076 1,322 4,607
-------- --------- -----------
OPERATING INCOME ......................................... 11,067 14,906 52,705
OTHER INCOME AND EXPENSE:
Interest expense, floor plan (Note 3) ................... 5,968 8,007 14,096
Interest expense, other ................................. 433 1,199 9,395
Other income ............................................ 355 298 426
-------- --------- -----------
Total other expense ................................... 6,046 8,908 23,065
-------- --------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST ......... 5,021 5,998 29,640
PROVISION FOR INCOME TAXES (Note 6) ...................... 1,924 2,249 11,083
-------- --------- -----------
INCOME BEFORE MINORITY INTEREST .......................... 3,097 3,749 18,557
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (Note 1) ..... 114 47 --
-------- --------- -----------
NET INCOME ............................................... $ 2,983 $ 3,702 $ 18,557
======== ========= ===========
BASIC NET INCOME PER SHARE (Note 8) ...................... $ 0.27 $ 0.81
========= ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ............ 13,898 22,852
========= ===========
DILUTED NET INCOME PER SHARE (Note 8) .................... $ 0.27 $ 0.74
========= ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ............ 13,898 24,970
========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 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, 1995 ................. -- $ -- -- $ -- 12,500 $125
Capital contributions ............. -- -- -- -- -- --
Comprehensive income:
Net income ....................... -- -- -- -- -- --
Net unrealized loss on
marketable equity
securities net of tax
benefit of $35,488 .............. -- -- -- -- -- --
--- -------- -- ---- ------ ----
Total comprehensive
income .........................
BALANCE AT
DECEMBER 31, 1996 ................. -- -- -- -- 12,500 125
Capital contribution (Note 1) -- -- -- -- -- --
Public offering of common
stock (Note 8) ................... -- -- 10,000 100 -- --
Stock redemption (Note 7) ......... -- -- -- -- -- --
Dividend (Note 7) ................. -- -- -- -- -- --
Comprehensive income:
Net income ....................... -- -- -- -- -- --
Net unrealized gain on
marketable equity
securities net of tax of
$73,864.......................... -- -- -- -- -- --
--- -------- ------ ---- ------ ----
Total comprehensive
income .........................
BALANCE AT
DECEMBER 31, 1997 ................. -- -- 10,000 100 12,500 125
Issuance of Preferred Stock
(Note 2) ......................... 31 29,342 -- -- -- --
Issuance of common stock .......... -- 975 10 -- --
Shares awarded under stock
compensation plans ............... -- 252 3 -- --
Issuance of warrants
(Note 8) ......................... -- -- -- -- --
Conversion of preferred stock
(Note 8) ......................... (9) (8,911) 632 6 -- --
Conversion of Class B
common stock ..................... -- -- 100 1 (100) (1)
Comprehensive income:
Net income ....................... -- -- -- -- -- --
Net unrealized loss on
marketable equity
securities ...................... -- -- -- -- -- --
---- -------- ------ ---- ------ -----
Total comprehensive
income .........................
BALANCE AT
DECEMBER 31, 1998 ................. 22 $ 20,431 11,959 $120 12,400 $124
==== ======== ====== ==== ====== =====
<CAPTION>
ACCUMULATED
OTHER TOTAL
PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
CAPITAL EARNINGS INCOME (LOSS) EQUITY
----------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1995 ................. $ 6,207 $10,010 $ (35) $ 16,307
Capital contributions ............. 7,064 -- -- 7,064
Comprehensive income:
Net income ....................... -- 2,983 -- 2,983
Net unrealized loss on
marketable equity
securities net of tax
benefit of $35,488 .............. -- -- (59) (59)
-------- ------- ----- --------
Total comprehensive
income ......................... 2,924
--------
BALANCE AT
DECEMBER 31, 1996 ................. 13,271 12,993 (94) 26,295
Capital contribution (Note 1) 3,208 -- -- 3,208
Public offering of common
stock (Note 8) ................... 53,577 -- -- 53,677
Stock redemption (Note 7) ......... (2,123) -- -- (2,123)
Dividend (Note 7) ................. -- (509) -- (509)
Comprehensive income:
Net income ....................... -- 3,702 -- 3,702
Net unrealized gain on
marketable equity
securities net of tax of
$73,864.......................... -- -- 115 115
-------- ------- ----- --------
Total comprehensive
income ......................... 3,817
--------
BALANCE AT
DECEMBER 31, 1997 ................. 67,933 16,186 21 84,365
Issuance of Preferred Stock
(Note 2) ......................... -- -- -- 29,342
Issuance of common stock .......... 8,283 -- -- 8,293
Shares awarded under stock
compensation plans ............... 1,162 -- -- 1,165
Issuance of warrants
(Note 8) ......................... 728 -- -- 728
Conversion of preferred stock
(Note 8) ......................... 8,905 -- -- --
Conversion of Class B
common stock ..................... -- -- -- --
Comprehensive income:
Net income ....................... -- 18,557 -- 18,557
Net unrealized loss on
marketable equity
securities ...................... -- -- (21) (21)
-------- ------- ----- --------
Total comprehensive
income ......................... 18,536
--------
BALANCE AT
DECEMBER 31, 1998 ................. $ 87,011 $34,743 $ -- $142,429
======== ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------
1996
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................ $ 2,983
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization ....................................................... 1,076
Minority interest ................................................................... 114
Loss on disposal of property and equipment .......................................... 80
(Gain) loss on sale of marketable equity securities ................................. (355)
Change in deferred income taxes ..................................................... (241)
Changes in assets and liabilities that relate to operations:
Receivables ........................................................................ (2,421)
Inventories ........................................................................ (14,013)
Other assets ....................................................................... (80)
Accounts payable and other current liabilities ..................................... 1,439
Income tax payable ................................................................. 524
-----------
Total adjustments ................................................................. (13,877)
-----------
Net cash provided by (used in) operating activities ................................. (10,894)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired .......................................... (5,127)
Purchases of property and equipment ................................................... (1,907)
Proceeds from sales of property and equipment ......................................... 4
Purchase of marketable equity securities .............................................. (207)
Proceeds from sales of marketable equity securities ................................... 515
-----------
Net cash used in investing activities ............................................... (6,722)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions ................................................................. 7,064
Proceeds from notes payable -- floor plan ............................................. 306,584
Payments from notes payable -- floor plan ............................................. (293,599)
Proceeds from long-term debt .......................................................... 599
Payments of long-term debt ............................................................ (576)
Public offering of common stock ....................................................... --
Issuance of shares under stock compensation plans ..................................... --
Receipts from (advances to) affiliate companies ....................................... (4,771)
Advances from the Company's Chairman (Note 7) ......................................... --
-----------
Net cash provided by financing activities ........................................... 15,301
-----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... (2,315)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........................................... 8,994
-----------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................................. $ 6,679
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-- Cash paid during the year for:
Interest .............................................................................. $ 6,489
Income taxes .......................................................................... $ 2,042
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Purchase of minority interest in connection with the reorganization (Note 1) .......... --
Cancellation of notes payable from affiliates in connection with the reorganization --
(Note 7)
Cancellation of notes payable from affiliates pursuant to dividend (Note 7) ........... --
Preferred stock issued pursuant to acquisitions ....................................... --
Conversion of preferred stock ......................................................... --
Common stock issued to an affiliate pursuant to an acquisition ........................ --
Payable for acquisitions (Note 2) ..................................................... --
Issuance of warrants (Notes 2 and 8) .................................................. --
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998
------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................ $ 3,702 $ 18,557
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization ....................................................... 1,322 4,607
Minority interest ................................................................... 47 --
Loss on disposal of property and equipment .......................................... 110 278
(Gain) loss on sale of marketable equity securities ................................. (298) 21
Change in deferred income taxes ..................................................... (27) 2,164
Changes in assets and liabilities that relate to operations:
Receivables ........................................................................ (594) (11,018)
Inventories ........................................................................ 1,430 12,030
Other assets ....................................................................... (788) (4,190)
Accounts payable and other current liabilities ..................................... 1,694 11,026
Income tax payable ................................................................. (504) (3,682)
----------- -------------
Total adjustments ................................................................. 2,392 11,236
----------- -------------
Net cash provided by (used in) operating activities ................................. 6,094 29,793
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired .......................................... (85,650) (72,205)
Purchases of property and equipment ................................................... (2,007) (4,335)
Proceeds from sales of property and equipment ......................................... 43 1,655
Purchase of marketable equity securities .............................................. -- --
Proceeds from sales of marketable equity securities ................................... 784 --
----------- -------------
Net cash used in investing activities ............................................... (86,830) (74,885)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions ................................................................. -- --
Proceeds from notes payable -- floor plan ............................................. 459,678 1,149,497
Payments from notes payable -- floor plan ............................................. (458,046) (1,166,303)
Proceeds from long-term debt .......................................................... 45,892 179,851
Payments of long-term debt ............................................................ (13,353) (84,594)
Public offering of common stock ....................................................... 53,677 --
Issuance of shares under stock compensation plans ..................................... -- 1,165
Receipts from (advances to) affiliate companies ....................................... (987) (994)
Advances from the Company's Chairman (Note 7) ......................................... 5,500 --
----------- -------------
Net cash provided by financing activities ........................................... 92,361 78,622
----------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... 11,625 33,530
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........................................... 6,679 18,304
----------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................................. $ 18,304 $ 51,834
=========== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-- Cash paid during the year for:
Interest .............................................................................. $ 8,761 $ 17,504
Income taxes .......................................................................... $ 1,392 $ 10,919
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Purchase of minority interest in connection with the reorganization (Note 1) .......... $ 3,208 --
Cancellation of notes payable from affiliates in connection with the reorganization $ 2,123 --
(Note 7)
Cancellation of notes payable from affiliates pursuant to dividend (Note 7) ........... $ 509 --
Preferred stock issued pursuant to acquisitions ....................................... -- $ 29,342
Conversion of preferred stock ......................................................... -- $ 8,911
Common stock issued to an affiliate pursuant to an acquisition ........................ -- $ 8,250
Payable for acquisitions (Note 2) ..................................................... -- $ 2,685
Issuance of warrants (Notes 2 and 8) .................................................. -- $ 728
</TABLE>
See notes to consolidated financial statements.
F-7
<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") is one of the
top five automotive retailers in the United States, operating 38 new car
dealerships and 14 collision repair centers in 10 metropolitan areas of the
Midwestern, Southeastern, and Southwestern United States as of December 31,
1998. 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 for its automotive customers. As of December
31, 1998, Sonic sold a total 23 foreign and domestic brands of new vehicles.
Sonic was incorporated in the State of Delaware in February 1997. Pursuant
to a reorganization on June 30, 1997 (the "Reorganization"), five dealerships
which were affiliated through the common ownership and control of Mr. O. Bruton
Smith, Sonic's Chairman and Chief Executive Officer, became the first
wholly-owned subsidiaries of the Company through the exchange of their common
stock or membership interests for 12.5 million shares of Sonic's Class B common
stock, par value $.01 per share. The Reoganization was accounted for at
historical cost in a manner similar to a pooling-of-interests as the entities
were under common management and control. The financial statements for the
periods through the effective date of the Reorganization represent the combined
data for these five dealerships.
On November 12, 1997, Sonic completed an initial public offering of 10.0
million shares of its Class A common stock, par value $.01 per share which is
currently traded on the New York Stock Exchange under the symbol SAH.
During 1997 and 1998, Sonic completed the acquisitions of 19 dealerships
(see Note 2). Each of these acquisitions has been accounted for using the
purchase method of accounting, and the accompanying financial statements
include the results of operations of the dealerships acquired from their
respective dates of acquisition.
PRINCIPLES OF CONSOLIDATION -- All material intercompany transactions have
been eliminated in the consolidated financial statements.
REVENUE RECOGNITION -- Sonic records revenue when vehicles are delivered
to customers, and when vehicle service work is performed.
Sonic arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. Sonic also receives commissions from
the sale of credit life, accident, health and disability insurance and extended
service contracts to customers. Sonic 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. Commission expense charged to cost of sales was approximately $1.1
million, $1.8 million and $6.0 million for the years ended December 31, 1996,
1997, and 1998, respectively.
DEALER AGREEMENTS -- Sonic purchases substantially all of its new vehicles
from manufacturers at the prevailing prices charged by the manufacturer to its
franchised dealers. Sonic'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 Sonic to acquire additional franchises
from a particular manufacturer may be limited due to certain restrictions
imposed by manufacturers. Additionally, Sonic's ability to enter into other
significant acquisitions may be restricted and the acquisition of Sonic's stock
by third parties may be limited by the terms of the franchise agreements.
F-8
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
CASH AND CASH EQUIVALENTS -- Sonic 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 Sonic
from finance companies related to vehicle purchases, and was $12.1 million and
$36.6 million at December 31, 1997 and 1998, respectively.
INVENTORIES -- Inventories of new and used vehicles, including
demonstrators, are stated at the lower of specific cost or market. Inventories
of parts and accessories are accounted for using the "first-in, first-out"
method of inventory accounting ("FIFO") and are stated at the lower of FIFO
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, 1997 was
$75.0 million and at December 31, 1998 was $182.5 million. 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 31.3% and 126.4%, respectively, at December 31, 1998. Generally accepted
accounting principles require that goodwill and all other intangible assets be
amortized over the period benefited. Sonic has determined that the period
benefited by the goodwill will be no less than 40 years. Accordingly Sonic is
amortizing goodwill over a 40 year period. Earnings reported in periods
immediately following an acquisition would be overstated if Sonic attributed a
40 year benefit to an intangible asset that should have had a shorter benefit
period. In later years, Sonic would be burdened by a continuing charge against
earnings without the associated benefit to income valued by management in
arriving at the price paid for the businesses acquired. Earnings in later years
also could be significantly affected if management then determined that the
remaining balance of goodwill was impaired. Sonic periodically compares the
carrying value of goodwill with the anticipated undiscounted future cash flows
from operations of the businesses acquired in order to evaluate the
recoverability of goodwill. Sonic has concluded that the anticipated future
cash flows associated with intangible assets recognized in its acquisitions
will continue indefinitely, and there is no pervasive evidence that any
material portion will dissipate over a period shorter than 40 years. Sonic will
incur additional goodwill in future acquisitions.
INCOME TAXES -- Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to the capitalization of
additional inventory costs for income tax purposes, the recording of
chargebacks and repossession losses on the direct write-off method for income
tax purposes, the direct write-off of uncollectible accounts for income tax
purposes, and the accelerated depreciation method used for income tax purposes.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled. In addition, deferred
tax assets are recognized for state operating losses that are available to
offset future taxable income.
STOCK-BASED COMPENSATION -- Sonic 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.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject Sonic 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
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)
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, 1997 and 1998
the fair values of Sonic's financial instruments including receivables, due
from affiliates, notes payable-floor plan, trade accounts payable, payables to
affiliated companies and Sonic's Chairman and long-term debt excluding Sonic's
senior subordinated notes, approximate their carrying values due either to
length of maturity or existence of variable interest rates that approximate
prevailing market rates. The carrying value of Sonic's senior subordinated
notes as of December 31, 1998 was a reasonable approximation of its fair value.
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 -- Sonic expenses advertising costs in the period incurred.
Advertising expense amounted to $5.0 million, $7.0 million and $17.4 million
for the years ended December 31, 1996, 1997 and 1998, respectively.
MINORITY INTEREST -- Prior to the Reorganization, Sonic owned only a 69%
interest in Town and Country Toyota. In connection with the Reorganization,
Sonic purchased the remaining 31% minority interest in Town and Country Toyota,
Inc. for $3.2 million in a transaction accounted for using the purchase method
of accounting. On a pro forma basis for the years ended December 31, 1996 and
1997, revenue 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.
IMPACT OF NEW ACCOUNTING STANDARDS -- 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 became effective for Sonic's fiscal year
ending December 31, 1998. The implementation of FAS 131 did not have an impact
on Sonic's financial statements or related disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instrument
and Hedging Activities." This Standard establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activites. The Statement will become
effective for Sonic beginning January 1, 2000. Sonic has elected earlier
application of all of the provisions of this Statement beginning October 1,
1998. The implementation of the provisions of this Statement did not have an
impact on Sonic's financial statements for the year ended December 31, 1998.
RECLASSIFICATION -- Certain prior year amounts have been reclassified to
conform with current year presentation.
2. BUSINESS ACQUISITIONS
PENDING ACQUISITIONS (UNAUDITED)
The Company has signed definitive agreements to acquire 18 dealerships for
a minimum of approximately $84.1 million in cash, 10,350 shares of Class A
convertible preferred stock, Series II, 10,525 shares of Class A Convertible
Preferred Stock, Series III, each series of preferred stock having a
liquidation value of $1,000 per share, and approximately $18.0 million worth of
Class A common stock. The aggregate purchase price is subject to adjustment
based on the actual net book value of the assets acquired. The cash portion of
the purchase price will be paid with a combination of net proceeds from the
Company's proposed public offering of its Class A common stock, borrowings
under the Company's $100 million acquisition line of credit with Ford Motor
Credit Company (the "Revolving Facility") and with cash generated from the
Company's existing operations. The Company may be required to pay additional
F-10
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS -- (Continued)
amounts based on future pre-tax earnings of certain of these acquired
dealerships. These acquisitions are expected to be consummated in the second
and third quarters of 1999.
ACQUISITIONS COMPLETED SUBSEQUENT TO DECEMBER 31, 1998 (THROUGH MARCH 29, 1999)
(UNAUDITED)
Subsequent to December 31, 1998, Sonic acquired 9 dealerships for
approximately $55.5 million in cash, 1,532 shares of Sonic's Class A
Convertible Preferred Stock, and the issuance of 34,100 shares of Sonic's Class
A Convertible Preferred Stock, Series III, par value $.10 per share, each
series of preferred stock having a liquidation preference of $1,000 per share.
The cash portion of the purchase price was financed with a combination of cash
borrowed under the Revolving Facility and cash generated from Sonic's existing
operations. The acquisitions were accounted for using the purchase method of
accounting. Sonic may be required to pay additional amounts based on future
pre-tax earnings of certain of the dealerships acquired. Any additional amounts
paid will be accounted for as goodwill.
In connection with the subsequent acquisition of a Honda dealership in
Chattanooga, Tennessee, the Company sold substantially all of the assets of its
Honda dealership in Cleveland, Tennessee in March, 1999 for approximately $3.6
million. There was no material gain or loss as a result of the sale.
ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 1998
During 1998, Sonic acquired 19 dealerships for an aggregate purchase price
of approximately $134.0 million. The aggregate purchase price was paid with
approximately $96.2 million in cash, with 970,588 shares of Class A common
stock having an estimated fair value at the time of issuance of approximately
$8.3 million, with 30,733.8 shares of Preferred Stock (14,406.3 shares of Class
A convertible preferred stock, Series I (the "Series I Preferred Stock"),
10,054.5 shares of Series II Preferred Stock, and 6,273 shares of Class A
convertible preferred stock, Series III (the "Series III Preferred Stock"))
having an estimated fair value at the time of issuance of approximately $29.3
million and with warrants to purchase an aggregate of 154,000 shares of Class A
common stock having an approximate fair value of $0.5 million. The cash portion
of the aggregate purchase price was financed with a combination of cash
obtained from the net proceeds of Sonic's private offering on July 31, 1998 of
$125 million in aggregate principal amount of its 11% senior subordinated
notes, cash obtained from the Revolving Facility, and cash generated from
Sonic's existing operations. Payables for acquisitions as of December 31, 1998
on the accompanying consolidated balance sheet includes $1.7 million of the
cash portion of the aggregate purchase price which was paid subsequent to
December 31, 1998.
The difference between the aggregate purchase price of $134.0 million and
amounts paid of $134.3 represents the net of (i) $1.3 million due from a former
owner as a result of a shortage in the actual net book value of assets acquired
compared to the minimum net book value required in the purchase agreement, (ii)
$0.4 million due to a former owner as a result of an excess in the actual net
book value of assets acquired over the minimum net book value required in the
purchase agreement, and (iii) $0.6 million due to a former owner on the first
and second anniversaries of the acquisition date. The $1.3 million due from a
former owner has been included in other current assets on the accompanying
balance sheet. The $0.4 million and $0.6 million due to former owners have been
included in payable for acquisitions on the accompanying balance sheet.
In accordance with terms of certain of the purchase agreements, Sonic may
be required to pay additional consideration contingent upon future earnings of
certain of the dealerships acquired. As of December 31, 1998, Sonic had
recorded approximately $8.0 million relating to such consideration, which has
been accounted for as goodwill. Any additional amounts which may be payable in
the future will also be accounted for as goodwill.
All of the acquisitions completed in 1998 have been accounted for using
the purchase method of accounting, and the results of operations of such
acquisitions have been included in the accompanying consolidated financial
statements from their respective acquisition dates. The purchase price of these
acquisitions has been allocated to the assets and liabilities acquired based on
their estimated fair market value at acquisition date as shown in the table
below. The purchase price and corresponding goodwill may ultimately be
different than amounts recorded depending on the actual fair value of the
tangible net assets acquired.
F-11
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS -- (Continued)
<TABLE>
<S> <C>
Working capital ...................... $ 30,341
Property and equipment ............... 5,690
Goodwill ............................. 101,323
Non-current liabilities assumed ...... (3,365)
--------
Total purchase price ................. $133,989
========
</TABLE>
ACQUISITIONS COMPLETED DURING YEAR ENDED DECEMBER 31, 1997
During 1997, Sonic acquired 13 dealerships for an aggregate purchase price
of approximately $98.8 million. The aggregate purchase price was paid with
approximately $94.8 million in cash and with a $4.0 million promissory note
bearing interest at prime less 0.5% and payable in 28 equal quarterly
installments to a former owner of certain of the acquired dealerships. The cash
portion of the aggregate purchase price was financed with a combination of cash
obtained from the net proceeds of Sonic's initial public offering, cash
obtained from the Revolving Facility, and cash generated from Sonic's existing
operations. In addition, Sonic issued to the seller of one of the acquired
dealerships warrants to purchase an aggregate of 88,782 shares of Class A
common stock having an approximate fair value of $0.3 million.
All of the acquisitions completed in 1997 have been accounted for using
the purchase method of accounting, and the results of operations of such
acquisitions have been included in the accompanying consolidated financial
statements from their respective dates of acquisition. The purchase price of
these acquisitions has been allocated to the assets and liabilities acquired
based on their estimated fair market value at acquisition date 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>
ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 1996
On February 1, 1996, Sonic 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>
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma financial information presents a summary
of consolidated results of operations as if the above acquisition transactions
had occurred as of the beginning of the period in which the acquisitions were
completed, and at the beginning of the immediately preceeding 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 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 dealerships who have not been retained by Sonic
or whose salaries have been reduced pursuant to employment agreements with
Sonic. The pro forma results have been prepared for comparative purposes only
and are not necessarily
F-12
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS -- (Continued)
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>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Total revenues ....................... $ 1,855,254 $ 1,996,222
Gross profit ......................... $ 225,374 $ 255,721
Net income ........................... $ 8,198 $ 18,878
Diluted net income per share ......... $ 0.43 $ 0.73
</TABLE>
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
New vehicles .................. $118,751 $190,139
Used vehicles ................. 27,990 47,033
Parts and accessories ......... 9,085 16,012
Other ......................... 688 11,787
-------- --------
Total ......................... $156,514 $264,971
======== ========
</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 $133.2 million and
$228.2 million at December 31, 1997 and 1998, respectively. The floor plan
notes bear interest payable monthly on the outstanding balance. Prior to
November 15, 1998, the effective interest rate was prime less 0.9%, subject to
certain incentives and other adjustments. Effective November 15, 1998, the
interest rate was reduced to an effective rate of prime less 1.1% subject to
certain incentives and other adjustments (6.65% at December 31, 1998). Total
floor plan interest expense amounted to $6.0 million, $8.0 million and $14.1
million in 1996, 1997 and 1998, respectively. Sonic's floor plan financing
arrangements include an available line of credit for the purchase of used
vehicle inventory. As of December 31, 1998, there was approximately $18.5
million available under Sonic's used vehicle credit line, of which
approximately $17.4 million was unused. Floor plan 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,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Land .................................. $ 4,330 $ 4,330
Building and improvements ............. 11,904 14,085
Office equipment and fixtures ......... 4,102 6,739
Parts and service equipment ........... 4,229 6,495
Company vehicles ...................... 727 1,300
Construction in progress .............. -- 645
-------- --------
25,292 33,594
Less accumulated depreciation ......... (6,211) (7,344)
-------- --------
Property and equipment, net ........... $ 19,081 $ 26,250
======== ========
</TABLE>
F-13
<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,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
$125.0 million Senior Subordinated Notes bearing interest at 11%, maturing August 1,
2008, net of unamortized discount of $4.3 million....................................... $ -- $120,726
Amounts outstanding under $100 million revolving credit facility with Ford Motor Credit
bearing interest at 2.75% above the 1 month commercial finance paper rate (7.55% at
December 31, 1998) and maturing in March 2001, collateralized by all assets of the
Company ................................................................................ 25,070 8,887
Amounts outstanding under $20.0 million line of credit from NationsBank bearing interest
at 7.75% and maturing February 15, 1998 ................................................ 8,200 --
Mortgage notes payable .................................................................. 4,322 4,091
Other notes payable ..................................................................... 1,632 2,333
------- --------
39,224 136,037
Less current maturities ................................................................. (584) (4,700)
------- --------
Long-term debt .......................................................................... $38,640 $131,337
======= ========
</TABLE>
Future maturities of debt at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1999 ................... $ 4,700
2000 ................... 9,464
2001 ................... 530
2002 ................... 347
2003 ................... 135
Thereafter ............. 120,861
--------
Total .................. $136,037
========
</TABLE>
In connection with the sale of real estate at Town and Country Toyota and
Fort Mill Ford in January 1999, the Company repaid all amounts outstanding
under the related mortgages. As a result, the aggregate balance of these
mortgages of $4.1 million as of December 31, 1998 has been included in current
maturities of long-term debt.
SENIOR SUBORDINATED NOTES
On July 31, 1998, Sonic completed its private placement of its 11% senior
subordinated notes in the aggregate principal amount of $125,000,000. The
senior subordinated notes are unsecured, mature on August 1, 2008, and are
redeemable at Sonic's option after August 1, 2003. Interest payments are due
semi-annually on February 1 and August 1, commencing February 1, 1999. The
senior subordinated notes are subordinated to all present and future senior
indebtedness of Sonic, including the Revolving Facility. Redemption prices
during 12 month periods beginning August 1 are 105.500% in 2003, 103.667% in
2004, 101.833% in 2005 and 100% thereafter. Net proceeds after commissions and
discounts, including issuance discount of $937,500, amounted to $120,625,000
and were used to finance certain of Sonic's acquisitions and to repay amounts
outstanding under the Revolving Facility. The discount on the senior
subordinated notes is being amortized over the term of the notes using the
effective interest method. On December 7, 1998, Sonic completed an exchange
offer to exchange the senior subordinated notes for identical senior
subordinated notes registered under the Securities Act of 1933.
The indenture governing the senior subordinated notes contains certain
specified restrictive and required financial covenants. Sonic has agreed not to
pledge its assets to any third party except under certain limited
circumstances. Sonic also has agreed to certain other limitations or
prohibitions concerning the incurrence of other indebtedness, capital stock,
guaranties, asset sales, investments, cash dividends to shareholders,
distributions and redemptions.
F-14
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT -- (Continued)
THE REVOLVING FACILITY
In 1997, Sonic obtained the Revolving Facility with a $75.0 million
borrowing limit from Ford Motor Credit. Effective November 15, 1998, the
aggregate amount available for borrowing under the Revolving Facility was
increased from $75.0 million to $100.0 million. Prior to November 14, 1998,
amounts outstanding under the Revolving Facility bore interest at a fluctuating
per annum rate equal to the "prime" or "base" rate announced by a majority (or
if there was no majority, the median rate announced by three) of the following
banks: The Chase Manhattan Bank, NationsBank, N.A., Citibank, N.A., Bank of
America National Trust and Savings Association and Morgan Guaranty Trust
Company of New York (the "Revolving Facility Prime Rate"). The Revolving
Facility Prime Rate as of November 15, 1998 was 7.75%. Subsequent to November
15, 1998, amounts outstanding under the Revolving Facility bear interest at a
fluctuating per annum rate equal to 2.75% above the 1 month commercial finance
paper rate as reported by the Federal Reserve Board (7.55% at December 31,
1998).
The Revolving Facility will mature in March 2001, unless Sonic 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. On July 31, 1998, all amounts
previously outstanding under the Revolving Facility were repaid with a portion
of the net proceeds of the sale of senior subordinated notes. The outstanding
balance of $8.9 million at December 31, 1998 represents amounts borrowed to
finance certain of Sonic's acquisitions completed in 1998. 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 Sonic
not to exceed $10 million.
Sonic 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 Sonic's dealership subsidiaries that are subject to previous pledges
or liens). In addition, the Revolving Facility contains certain negative
covenants, including covenants restricting or prohibiting the payment of
dividends, capital expenditures and material dispositions of assets as well as
other customary covenants. Additional negative covenants include specified
ratios of:
o total debt to tangible base capital (as defined in the Revolving
Facility),
o current assets to current liabilities,
o earnings before interest, taxes, depreciation and amortization (EBITDA)
and rent less capital expenditures to fixed charges,
o EBITDA to interest expense,
o EBITDA to total debt and
o the current lending commitment under the Revolving Facility to scaled
assets (as defined in the Revolving Facility).
In addition, the loss of voting control over Sonic by Bruton Smith, Scott
Smith, President and Chief Operating Officer, and their spouses or immediate
family members or the failure by Sonic, with certain exceptions, to own all the
outstanding equity, membership or partnership interests in its dealership
subsidiaries will constitute an event of default under the Revolving Facility.
Sonic 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 obtained a
waiver with regard to such requirement from Ford Motor Credit. In connection
with Sonic's offering of its senior subordinated notes, Sonic and Ford Motor
Credit amended the Revolving Facility to provide that the senior subordinated
notes (which are subordinated to the Revolving Facility) will be treated as
equity capital for purposes of this ratio. Accordingly, Sonic was in compliance
with this and all other restrictive covenants as of December 31, 1998.
THE SIX-MONTH FACILITY
On August 28, 1997, Sonic 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
F-15
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT -- (Continued)
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.
6. INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ------------ -----------
<S> <C> <C> <C>
Current:
Federal ............................. $1,857 $1,890 $ 8,145
State ............................... 308 391 756
------ ------ -------
2,165 2,281 8,901
Deferred .............................. (190) (27) 2,252
Change in valuation allowance ......... (51) (5) (70)
------ -------- -------
Total ................................. $1,924 $2,249 $11,083
====== ======= =======
</TABLE>
The reconciliation of the statutory federal income tax rate with Sonic's
federal and state overall effective income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal rate .......... 34.00% 34.00% 35.00%
State income taxes .............. 3.60 3.70 1.46
Miscellaneous ................... 0.71 (0.21) 0.93
----- ----- -----
Effective tax rates ............. 38.31% 37.49% 37.39%
===== ===== =====
</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 Sonic's deferred tax assets and liabilities as of December 31 are
as follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts ................... $ 81 $ 69
Inventory reserves ........................ 40 631
Net operating loss carryforwards .......... 120 517
Other ..................................... 151 746
------ --------
Total deferred tax assets ................. 392 1,963
Valuation allowance ....................... (70) --
------ --------
Deferred tax assets, net .................. 322 1,963
------ --------
Deferred tax liabilities:
Basis difference in property and equipment (799) (1,276)
Basis difference in goodwill .............. (172) (2,757)
Other ..................................... (25) (294)
------ --------
Total deferred tax liability ............... (996) (4,327)
------ --------
Net deferred tax liability ................. $ (674) $ (2,364)
====== ========
</TABLE>
The net changes in the valuation allowance against deferred tax assets
were a decrease of $5,000 for the year ended December 31, 1997 and a decrease
of $70,000 for the year ended December 31, 1998. The decrease in 1997 was
related primarily to the expiration of state net operating loss carryforwards.
The decrease in 1998 was primarily related to the implementation of tax
strategies which will allow utilization of the state net operating loss
carryforwards prior to expiration. At December 31, 1998, Sonic had state net
operating loss carryforwards of $7.1 million which will expire primarily
between 1999 and 2003.
F-16
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- (Continued)
Certain of Sonic's dealerships changed their method of accounting for
inventories of new vehicles for income tax purposes from the "last-in,
first-out" method of inventory accounting to the "first-in, first-out" method
of inventory accounting which resulted in an additional income tax liability.
At December 31, 1997 and 1998, this liability was recorded as $7.1 million and
$5.6 million, respectively. The remaining portion of the liability is generally
payable from 1999 to 2002. The current portion of the liability as of December
31, 1998 was $2.4 million and is included in other accrued liabilities.
Certain subsidiaries of Sonic (such subsidiaries together with Sonic and
Sonic Financial Corporation ("SFC") being hereinafter referred to as the "Sonic
Group") have joined with SFC in filing consolidated federal income tax returns
for several years. 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, Sonic
agreed to pay to SFC, in the event that additional federal income tax is
determined to be due, an amount equal to Sonic'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
Sonic. Also pursuant to such agreement, SFC agreed to indemnify Sonic 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
REGISTRATION RIGHTS AGREEMENT
When Sonic acquired Town & Country Ford, Lone Star Ford, Fort Mill Ford,
Town & Country Toyota and Frontier Oldsmobile-Cadillac in 1997, Sonic signed a
Registration Rights Agreement dated as of June 30, 1997 with SFC, Bruton Smith,
Scott Smith and William S. Egan (collectively, the "Class B Registration Rights
Holders"). SFC currently owns 8,881,250 shares of Class B common stock; Bruton
Smith, 2,071,250 shares; Scott Smith, 956,250 shares; and Egan Group, LLC, an
assignee of Mr. Egan (the "Egan Group"), 491,250 shares, all of which are
covered by the Registration Rights Agreement. The Egan Group also owns 32,000
shares of Class A common stock to which the Registration Rights Agreement
applies. If, among other things provided in Sonic's charter, offers and sales
of shares Class B common stock are registered with the Securities and Exchange
Commission, then such shares will automatically convert into a like number of
shares of Class A common stock.
The Class B Registration Rights Holders have certain limited piggyback
registration rights under the Registration Rights Agreement. These rights
permit them to have their shares of Sonic's common stock included in any Sonic
registration statement registering Class A common stock, except for
registrations on Form S-4, relating to exchange offers and certain other
transactions, and Form S-8, relating to employee stock compensation plans. The
Registration Rights Agreement expires in November 2007. SFC is controlled by
Bruton Smith.
THE SMITH GUARANTIES, PLEDGES, ADVANCE AND SUBORDINATED LOAN
In December 1997, Mr. Smith was required by Ford Motor Credit to lend $5.5
million (the "Subordinated Smith Loan") to Sonic to increase Sonic's
capitalization. Ford Motor Credit required the Subordinated Smith Loan as a
condition to increasing the Revolving Facility borrowing limit because the net
offering proceeds from Sonic's November 1997 initial public offering were
significantly less than expected by Sonic and Ford Motor Credit. The
Subordinated Smith Loan bears interest at NationsBank's announced prime rate
plus 0.5% and matures on November 30, 2000. All amounts owed by Sonic to Mr.
Smith under the Subordinated Smith Loan are to be paid after all amounts owed
by Sonic under the Revolving Facility, Sonic's floor plan financing facility
with Ford Motor Credit and Sonic's senior subordinated notes are paid.
F-17
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTIES -- (Continued)
CHARTOWN TRANSACTIONS
Chartown is a general partnership engaged in real estate development and
management. Before Sonic's reorganization before its initial public offering,
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 SFC. In addition, SFC 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
Sonic's reorganization, the Chartown Note was canceled and Town & Country Ford
transferred its partnership interest in Chartown to SFC for nominal
consideration. In connection with that transfer, SFC then 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 of
Chartown.
THE BOWERS VOLVO NOTE
In connection with Volvo's approval of Sonic's acquisition of a Volvo
franchise from Nelson Bowers in 1997, Volvo, among other things, conditioned
its approval upon Nelson Bowers acquiring and maintaining a 20% interest in
Sonic's Chattanooga Volvo subsidiary operating 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., the wholly-owned subsidiary of Sonic 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. Volvo has removed its requirement that Mr. Bowers maintain his
interest in Chattanooga Volvo. Sonic and Mr. Bowers are in the process of
redeeming his interest in Chattanooga Volvo and satisfying the Bowers Volvo
Note.
TRANSACTIONS WITH MMRT
In 1998, Sonic entered into a Strategic Alliance Agreement (the "Alliance
Agreement") with Mar Mar Realty Trust, a real estate investment trust ("MMRT").
Bruton Smith serves as the chairman of MMRT's board of trustees. Under the
Alliance Agreement, Sonic agreed to refer to MMRT real estate acquisition
opportunities arising with Sonic's dealership acquisitions. In exchange, MMRT
agreed to refer to Sonic dealership acquisition opportunities and to provide
certain real estate development and maintenance services to Sonic. MMRT will
also arrange for property inspections and environmental reports for prospective
dealership properties at Sonic's cost.
In addition, the Alliance Agreement provides for a form of lease to be
used when MMRT leases to Sonic real estate MMRT acquires in the future. Under
terms substantially similar to those of this form lease, Sonic leases or will
lease certain properties from MMR Holdings, LLC ("MMR Holdings"), which is a
limited liability company currently owned by Bruton Smith and SFC that Sonic
expects to be acquired by MMRT.
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
Sonic completes its acquisition of the dealership business, then Sonic and MMRT
will enter into a lease agreement regarding the dealership real property using
the Alliance Agreement's lease form.
Subsequent to year end, Sonic has sold to MMR Holdings the Town and
Country Toyota real estate for approximately $5.7 million and the Fort Mill
Ford real estate for approximately $4.6 million and entered into an agreement
with MMRT to lease back the real estate over a term of 10 years. The gain on
the sale has been deferred and will be amortized against the rent expense over
the term of the lease.
F-18
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTIES -- (Continued)
CERTAIN DEALERSHIP LEASES
Certain properties leased by Sonic's dealerships are, or since the
beginning of the last fiscal year were, owned by Sonic's officers or directors
or their affiliates. These leases contain terms comparable to, or more
favorable to Sonic than, terms that would be obtained from unaffiliated third
parties. Many of these properties as well as others are now owned or are under
contract to be acquired by MMR Holdings, which Sonic expects will become a
subsidiary of MMRT.
Sonic presently leases 36 properties for 27 of its dealerships from MMR
Holdings 34 of which were entered into in 1998. Sonic's directors have approved
these "triple net leases," which require Sonic to pay all costs of operating
the properties, as well as all taxes, utilities, insurance, repairs,
maintenance and other property related expenses. These leases generally provide
Sonic with options to renew the lease for two additional five year terms after
the expiration of the initial lease term. The rental rates indicated in Note 10
reflect minimum or "base" annual rents payable by Sonic in the first year of
the applicable leases. Such rental rates generally are subject to increases
either at renewal or every five years based on factors such as increases in the
consumer price index or an evaluation of fair market rents.
OTHER RELATED PARTY TRANSACTIONS
o Town & Country Ford and Lone Star Ford had each made several non-interest
bearing advances to SFC, a company controlled by Bruton Smith. In
preparation for Sonic's 1997 reorganization, a demand promissory note by SFC
evidencing $2.1 million of these advances was canceled in June 1997 in
exchange tor 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 of $0.5 million of these advances was canceled in June 1997
pursuant to a dividend.
o Sonic had amounts receivable from affiliates of $1.0 million and $1.5
million at December 31, 1997 and 1998, respectively. Of this amount,
$622,000 relates to advances made by Sonic to SFC at December 31, 1997 and
$1.5 million relates to advances made by Sonic to SFC and MMRT at December
31, 1998. The remaining $425,000 at December 31, 1997 primarily relates to
receivables from executives of Sonic who were former owners of certain
dealerships acquired. 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.
o As part of the purchase price in connection with Sonic's acquisition of the
Bowers Automotive Group in November 1997, Sonic issued its promissory note
in the 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 balance outstanding under this Note was $4.0 million at December 31,
1997, the current portion of which was $445,000. The balance outstanding
under this Note at December 31, 1998 was $3.4 million, the current portion
of which was $572,000.
o Town and Country Toyota has an amount payable to Bruton Smith, which payable
totals approximately $0.8 million as of December 31, 1997 and $0.7 million
as of December 31, 1998. This loan bears interest at 8.75% per annum and is
classified as non-current based on the expected repayment dates.
o Certain subsidiaries of Sonic (such subsidiaries together with Sonic and SFC
are referred to as the "Sonic Group") filed consolidated federal income tax
returns with SFC for several years before our reorganization. These joint
filings were for 1996 and for the period 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, Sonic agreed to pay
to SFC, in the event that additional federal income tax is determined to be
due, an amount equal to Sonic'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
Sonic. Also pursuant to such agreement, SFC agreed to indemnify Sonic 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.
F-19
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTIES -- (Continued)
o Sonic acquired Town & Country Ford, Lone Star Ford, Town & Country Toyota,
Fort Mill Ford and Frontier Oldsmobile-Cadillac in its 1997 reorganization
pursuant to four separate stock subscription agreements. These subscription
agreements allowed the acquisition of 100% of the capital stock or
membership interests, as the case may be, of each of the five dealerships
from Sonic Financial, Bruton Smith, the Egan Group (an assignee of Mr. Egan)
and Bryan Scott Smith in exchange for certain amounts of Sonic's Class B
common stock.
8. CAPITAL STRUCTURE, PUBLIC OFFERING OF COMMON STOCK, AND PER SHARE DATA
PREFERRED STOCK -- In 1997, Sonic 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, the "Preferred Stock", which was divided into 100,000 shares of Series I
Preferred Stock, 100,000 shares of Series II Preferred Stock, and 100,000
shares of 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 determination of the shares of Preferred Stock (the
"Market Price"). Conversion of Series II 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. Conversion of Series
III Preferred Stock is subject to certain adjustments which have the effect of
limiting increases in the value of Class A common stock receivable upon
conversion by 10% of the original value of the shares of Series III Preferred
Stock.
The Preferred Stock is redeemable at Sonic'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.
During 1998, Sonic issued 14,406.3 shares of Series I Preferred Stock,
10,545.5 shares of Series II Preferred Stock and 6,273 shares of Series III
Preferred Stock. These shares were recorded at their estimated fair value on
the date of issuance. In December 1998, 6,241.5 shares of Series II Preferred
Stock and 2,313 shares of Series III Preferred Stock having an estimated fair
value of approximately $8.9 million were converted into 632,244 shares of Class
A common stock. As of December 31, 1998 there were 14,406.3 shares of Series I
Preferred Stock, 3,813 shares of Series II Preferred Stock and 3,960 shares of
Series III Preferred Stock issued and outstanding.
CLASS B COMMON STOCK -- Each share of Class B common stock is convertible
into one share of Class A common stock either upon the voluntary conversion of
the Class B common stock at the option of the holder, or automatically upon the
occurrence of certain events, as provided in Sonic's charter. Holders of Class
B common stock are entitled to ten votes per share, except in certain
circumstances.
STOCK SPLIT -- All share and per share amounts included in the
accompanying consolidated financial statements for all periods presented have
been adjusted to reflect a 2 for 1 stock split of the Class A common stock and
Class B common stock effective January 25, 1999.
F-20
<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)
PUBLIC OFFERING OF COMMON STOCK -- Sonic completed an initial public
offering of 10.0 million shares of its Class A common stock on November 12,
1997 at a price of $6 per share. Net proceeds of the initial public offering 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.
WARRANTS -- In connection with Sonic's acquisitions, Sonic has issued
warrants to purchase 242,782 shares of Class A common stock at exercise prices
ranging from $6.00 per share to $11.27 per share. The warrants expire on
various dates from January 15, 2003 to November 30, 2003. Sonic has recorded
the issuance of such warrrants at their estimated fair value on the date of
issuance.
PER SHARE DATA -- The calculation of diluted net income per share
considers the potential dilutive effect of options and shares under Sonic's
stock compensation plans, Class A common stock purchase warrants, and Class A
convertible preferred stock. The following table illustrates the dilutive
effect of such items on EPS:
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 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 .......................... $3,702 13,898 $ 0.27 $18,557 22,852 $ 0.81
====== ======
EFFECT OF DILUTIVE SECURITIES
Stock compensation plans ........... -- -- -- 630
Warrants ........................... -- -- -- 32
Convertible Preferred Stock ........ -- -- -- 1,456
------ ------ ------- ------
DILUTED EPS ........................ $3,702 13,898 $ 0.27 $18,557 24,970 $ 0.74
====== ====== ====== ======= ====== ======
</TABLE>
Options to purchase 1,176,000 shares of Class A common stock at $6.00 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.
9. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of Sonic are eligible to participate in
a 401(k) plan. Contributions by Sonic to the plan were not significant in any
period presented.
STOCK OPTION PLANS
Sonic currently has two option plans. In October 1997, the Board of
Directors adopted the Sonic Automotive, Inc. 1997 Stock Option Plan (the "Stock
Option Plan") in order to attract and retain key personnel. Under the Stock
Option Plan, options to purchase up to an aggregate of 2.25 million shares of
Class A common stock may be granted to key employees of Sonic and its
subsidiaries and to officers, directors, consultants and other individuals
providing services to Sonic. The options generally are granted at the fair
market value of Sonic's Class A common stock at the date of grant, vest over a
three year period, are exercisable upon vesting and expire ten years from the
date of grant.
In March 1998, the Board of Directors adopted the Sonic Automotive, Inc.
Formula Stock Option Plan for Independent Directors (the "Directors Plan") for
the benefit of Sonic's outside directors, subject to shareholder approval. The
Directors Plan was approved by the stockholders of Sonic at its annual meeting
of stockholders on December 3, 1998. The plan authorized options to purchase up
to an aggregate of 600,000 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 20,000 shares at an exercise price equal to the fair market
value of the Class A common stock at the date of the award. Options granted
under the Directors Plan become exercisable six months, and expire ten years,
after their date of grant.
F-21
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS -- (Continued)
A summary of the status of Sonic's stock option plans as of December 31,
1997 and 1998 and changes during the years ended on those dates is presented
below.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
---------------------------------------- -----------------------------------------
EXERCISE WEIGHTED- EXERCISE WEIGHTED-
NUMBER OF PRICE AVERAGE NUMBER OF PRICE AVERAGE
OPTIONS PER SHARE EXERCISE PRICE OPTIONS PER SHARE EXERCISE PRICE
----------- ----------- ---------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year -- $ -- $ -- 1,176 $ 6.00 $ 6.00
Granted-priced at fair value 1,176 6.00 6.00 1,433 7.25-9.19 8.61
Exercised -- -- -- (72) 6.00 6.00
----- ------ ----- ----- ------------ --------
Outstanding at end of year 1,176 $ 6.00 $ 6.00 2,537 $ 6.00-9.19 $ 7.48
===== ======= ====== ===== ============ ========
</TABLE>
Of the options outstanding as of December 31, 1998, 486,000 are currently
exercisable and have a weighted average exercise price of $3.53 per share. The
weighted average remaining contractual life of the options outstanding at
December 31, 1998 is 7.78 years. The weighted average fair value of options
granted was $2.89 per share in 1997 and $4.63 per share in 1998.
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 and 61% in 1998; risk-free interest rate of
5.6% in 1997 and 4.6% in 1998; and expected lives of 5 years in 1997 and 1998.
The model reflects that no dividends were declared in 1997 and 1998 and assumes
that no dividends will be declared in the future.
EMPLOYEE STOCK PURCHASE PLAN
In October 1997, the Board of Directors and stockholders of Sonic adopted
the Sonic Automotive, Inc. 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. Sonic'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. The grant dates are January 1
of each year plus any other interim dates designated by the Compensation
Committee. The exercise dates are the last trading days on the New York Stock
Exchange for March, June, September and December, plus any other interim dates
designated by the Compensation Committee. 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 Sonic's ESPP,
increased the authorized shares from 300,000 to 600,000 and issued options
exercisable for 300,000 shares of Class A common stock granting 620 shares per
participant participating in the ESPP. This increase in the number of options
issuable under the ESPP was approved by the stockholders of Sonic at its annual
meeting of stockholders on December 3, 1998. Under the ESPP, Sonic issued
180,730 shares to employees in 1998 at a purchase price of $4.10 per share. The
weighted average fair value of shares granted under the ESPP was $1.97 per
share in 1998.
The fair value of the employees' purchase rights are estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: expected volatility of 61%; risk-free interest rate of 4.6%; and
an expected life of one year. The model reflects that no dividends were
declared in 1997 and 1998 and assumes that no dividends will be declared in the
future.
Sonic has adopted the disclosure-only provisions of SFAS No. 123. No
compensation cost has been recognized for Sonic's stock-based compensation
plans. Had compensation cost for the stock-based compensation plans been
determined based on their fair value as prescribed by SFAS No. 123, Sonic's pro
forma net income and diluted net income per share would have been $3.6 million
and $0.26, respectively for 1997 and $16.8 million and $0.67, respectively for
1998.
F-22
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS -- (Continued)
NONQUALIFIED EMPLOYEE STOCK PURCHASE PLAN
In December 1998, the Board of Directors of Sonic adopted the Sonic
Automotive, Inc. Nonqualified Employee Stock Purchase Plan (the "Nonqualified
ESPP"). The purpose of the Nonqualified ESPP is to provide options to purchase
Class A common stock to employees of Sonic's subsidiaries that are not eligible
to participate in the ESPP; employees of Sonic who are eligible to participate
in the ESPP are not eligible to participate in the Nonqualified ESPP. Under the
terms of the Nonqualified ESPP, on January 1 of each year all employees
eligible to participate in the Nonqualified ESPP and who elect to participate
in the Nonqualified ESPP will be granted an option to purchase shares of Class
A common stock. Sonic'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 Nonqualified 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. The grant
dates are January 1 of each year plus any other interim dates designated by the
Compensation Committee. The exercise dates are the last trading days on the New
York Stock Exchange for March, June, September and December, plus any other
interim dates designated by the Compensation Committee. Options will expire on
the last exercise date of the calendar year in which granted. In adopting the
Nonqualified ESPP in December 1998, the Board of Directors authorized options
to be granted under the Nonqualified ESPP for 300,000 shares of Class A common
stock. These options may be issued effective January 1, 1999.
10. COMMITMENTS AND CONTINGENCIES
FACILITY LEASES
Certain properties leased by Sonic's dealerships are, or since the
beginning of the last fiscal year were, owned by Sonic's officers or directors
or their affiliates. These leases contain terms comparable to, or more
favorable to Sonic than, terms that would be obtained from unaffiliated third
parties. Many of these properties as well as others are not owned or are under
contract to be acquired by MMR Holdings, which Sonic expects will become a
subsidiary of MMRT. Minimum future rental payments required under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
RELATED PARTIES THIRD PARTIES TOTAL
Year ending December 31, ----------------- --------------- ----------
<S> <C> <C> <C>
1999 ..................... $ 13,660 $ 2,820 $ 16,480
2000 ..................... 13,595 2,479 16,074
2001 ..................... 13,257 2,456 15,713
2002 ..................... 13,147 2,123 15,270
2003 ..................... 13,091 1,997 15,088
Thereafter ............... 60,963 7,645 68,608
-------- ------- --------
Total .................... $127,713 $19,520 $147,233
======== ======= ========
</TABLE>
Total rent expense for the years ended December 31, 1996, 1997, and 1998
was approximately, $870,000, $2.4 million and $10.5 million, respectively. Of
these amounts, $870,000, $1.3 million and $7.5 million, respectively, were paid
to related parties.
OTHER CONTINGENCIES
Sonic is involved in various other legal proceedings. Management believes
based on advice of counsel that the outcome of such proceedings will not have a
materially adverse effect on Sonic's financial position or future results of
operations and cash flows.
F-23
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1997 and
1998. 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 initial public offering.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Total revenues ........................... $ 98,785 $ 114,101 $ 127,356 $ 195,759
Gross profit ............................. $ 10,842 $ 12,790 $ 14,755 $ 24,611
Operating income ......................... $ 2,286 $ 3,417 $ 3,469 $ 5,734
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 ............. $ 0.07 $ 0.07
Year Ended December 31, 1998:
Total revenues ........................... $ 263,979 $ 386,132 $ 504,110 $ 449,480
Gross profit ............................. $ 34,158 $ 48,264 $ 63,974 $ 61,046
Operating income ......................... $ 7,426 $ 12,779 $ 15,646 $ 16,854
Income before taxes ...................... $ 3,474 $ 7,430 $ 8,876 $ 9,860
Net income ............................... $ 2,136 $ 4,668 $ 5,426 $ 6,327
Diluted net income per share ............. $ 0.09 $ 0.20 $ 0.21 $ 0.24
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
On February 4, 1999, Sonic filed a preliminary registration statement for
the issuance of approximately 7.0 million shares of Class A common stock. Sonic
expects to complete this public offering in the second quarter of 1999.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
SONIC AUTOMOTIVE, INC.
Charlotte, North Carolina
We have audited the accompanying combined balance sheet of Williams
Automotive Group (the "Company"), which is under common ownership and
management, as of December 31, 1998, 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,
1998, 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
March 26, 1999
F-25
<PAGE>
WILLIAMS AUTOMOTIVE GROUP
COMBINED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) .................................................. $ 6,808,421
Accounts receivable (net of allowance for doubtful accounts of approximately $14,000) 1,890,357
Inventories, net (Note 3) ........................................................... 20,140,021
Deferred income taxes (Note 7) ...................................................... 8,420
Other current assets ................................................................ 172,550
-----------
Total current assets .............................................................. 29,019,769
PROPERTY AND EQUIPMENT, NET (Note 4) ................................................. 3,167,703
OTHER ASSETS ......................................................................... 13,000
-----------
TOTAL ASSETS ......................................................................... $32,200,472
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 3) ................................................ $16,588,256
Notes payable -- stockholder (Note 8) ............................................... 1,400,000
Trade accounts payable .............................................................. 1,074,937
Accrued payroll and bonuses ......................................................... 579,194
Liability for finance chargebacks ................................................... 279,100
Other accrued liabilities ........................................................... 329,560
Current maturities -- long-term debt (Note 5) ....................................... 100,000
-----------
Total current liabilities ......................................................... 20,351,047
-----------
LONG-TERM DEBT (Note 5) .............................................................. 491,671
-----------
DEFERRED INCOME TAXES (Note 7) ....................................................... 9,063
-----------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
STOCKHOLDERS' EQUITY (Note 6):
Receivables from stockholder (Note 2) ............................................... (80,067)
Common stock of combined companies .................................................. 10,034
Paid-in capital ..................................................................... 1,086,021
Retained earnings ................................................................... 10,332,703
-----------
Total stockholders' equity ........................................................ 11,348,691
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................... $32,200,472
===========
</TABLE>
See notes to combined financial statements.
F-26
<PAGE>
WILLIAMS AUTOMOTIVE GROUP
COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES:
Vehicle sales .................................................. $181,927,587
Parts, service and collision repair ............................ 27,334,730
Finance and insurance (Note 1) ................................. 1,608,725
------------
Total revenues ............................................... 210,871,042
COST OF SALES (Note 1) .......................................... 185,351,405
------------
GROSS PROFIT .................................................... 25,519,637
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 8) ........... 19,751,774
DEPRECIATION AND AMORTIZATION ................................... 749,369
------------
OPERATING INCOME ................................................ 5,018,494
------------
OTHER INCOME (EXPENSE):
Interest expense -- floor plan (Note 3) ........................ (773,439)
Interest expense -- other, net ................................. (83,722)
Other income ................................................... 79,998
------------
Total other expense .......................................... (777,163)
------------
INCOME BEFORE TAXES ............................................. 4,241,331
PROVISION FOR INCOME TAXES (Note 7) ............................. 229,832
------------
NET INCOME ...................................................... $ 4,011,499
============
PRO FORMA PROVISION FOR INCOME TAXES (Note 1) (unaudited) ....... $ 1,316,415
============
PRO FORMA NET INCOME (Note 1) (unaudited) ....................... $ 2,695,084
============
</TABLE>
See notes to combined financial statements.
F-27
<PAGE>
WILLIAMS AUTOMOTIVE GROUP
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY (NOTE 6)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON
RECEIVABLES STOCK OF TOTAL
FROM COMBINED PAID-IN RETAINED STOCKHOLDERS'
STOCKHOLDER COMPANIES CAPITAL EARNINGS EQUITY
------------- ----------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 ............. $ -- $10,034 $1,086,021 $ 7,850,901 $ 8,946,956
Stockholder loan advances ............. (80,067) -- -- -- (80,067)
Distributions to stockholders ......... -- -- -- (1,529,697) (1,529,697)
Net income ............................ -- -- -- 4,011,499 4,011,499
--------- ------- ---------- ------------ ------------
BALANCE AT DECEMBER 31, 1998 ........... $ (80,067) $10,034 $1,086,021 $ 10,332,703 $ 11,348,691
========= ======= ========== ============ ============
</TABLE>
See notes to combined financial statements.
F-28
<PAGE>
WILLIAMS AUTOMOTIVE GROUP
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 4,011,499
------------
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of property and equipment ........................................ 4,665
Depreciation and amortization ................................................. 749,369
Deferred Income Taxes ......................................................... (11,502)
Changes in assets and liabilities that relate to operations:
Decrease in accounts receivable .............................................. 1,008,081
Increase in inventories ...................................................... (4,075,089)
Increase in other current assets ............................................. (105,548)
Decrease in other assets ..................................................... 30,316
Increase in notes payable -- floor plan ...................................... 6,064,483
Decrease in trade accounts payable and accrued liabilities ................... (802,806)
------------
Total adjustments ........................................................... 2,861,969
------------
Net cash provided by operating activities ................................... 6,873,468
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................. (866,115)
Proceeds from sale of property and equipment .................................... 22,694
------------
Net cash used in investing activities ....................................... (843,421)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders ................................................... (1,529,697)
Payments of long-term debt ...................................................... (349,996)
Amounts received from stockholder ............................................... 119,109
------------
Net cash used in financing activities ....................................... (1,760,584)
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................................ 4,269,463
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ..................................... 2,538,958
------------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................................... $ 6,808,421
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--
Cash paid during the year for:
Interest ...................................................................... $ 746,249
============
Income taxes .................................................................. $ 250,407
============
</TABLE>
See notes to combined financial statements.
F-29
<PAGE>
WILLIAMS AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Williams Automotive Group (the "Company")
operates four automobile dealerships in the Birmingham area of Alabama. The
Company is a wholly owned subsidiary of Sonic Automotive, Inc. (see Note 11).
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 four vehicle dealership locations sell
vehicles manufactured by Buick, Cadillac, Lexus, Audi, Land Rover, Porsche, and
BMW.
The accompanying combined financial statements include the accounts of the
following entities:
<TABLE>
<CAPTION>
NAME LOCATION STRUCTURE
- ----------------------------------------------- ---------------- --------------
<S> <C> <C>
Tom Williams Auto, Inc. Birmingham, AL S Corporation
Tom Williams Motors, Inc. Birmingham, AL S Corporation
Williams Cadillac Company, Inc. Birmingham, AL C Corporation
Tom Williams Automotive Group, Inc. Birmingham, AL S Corporation
</TABLE>
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. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the differences
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 $477,000 for the year ended December 31, 1998.
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.
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 $3,600,000 at December 31, 1998.
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 and used vehicles and certain parts and accessories, and the first-in,
first-out method ("FIFO") for all other inventories.
F-30
<PAGE>
WILLIAMS AUTOMOTIVE GROUP
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 and accelerated methods over the
estimated useful lives of the assets. The range of estimated useful lives (in
years) is as follows:
<TABLE>
<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.
INCOME TAXES -- Williams Cadillac Company, Inc. is a C Corporation subject
to both federal and state income taxes on its taxable income. Tom Williams
Auto, Inc.; Tom Williams Motors, Inc.; and Tom Williams Automotive Group, Inc.
are organized as S Corporations for federal and state income tax purposes. As
such, the provision for income taxes in the accompanying combined financial
statements includes federal and state income taxes for Williams Cadillac
Company, Inc. The income from the S Corporations are included in the
stockholders' personal income tax returns.
Deferred taxes for Williams Cadillac Company, Inc. are determined using 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 bases of assets and liabilities. This method also gives
immediate effect to changes in income tax laws upon enactment. A valuation
allowance is established when necessary to reduce deferred tax assets to
amounts expected to be realized.
The unaudited pro forma provision for income taxes and the unaudited pro
forma net income for the year ended December 31, 1998 reflect amounts that
would have been recorded had the income of Tom Williams Lexus, Inc., Tom
Williams Motors, Inc., and Tom Williams Automotive Group, Inc. been taxed for
federal and state purposes as if they were C Corporations.
ADVERTISING COSTS -- The Company expenses advertising costs in the period
incurred. Advertising expenses for 1998 amounted to approximately $1,157,000.
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 and accounts receivable. 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 mitigated by the large
number of customers comprising the trade receivables balances. Trade
receivables are concentrated in the Company's market area of Birmingham,
Alabama.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- As of December 31, 1998, the fair
values of the Company's financial instruments including accounts receivable,
receivables from stockholder, notes payable-floor plan, trade accounts payable,
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.
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.
2. RECEIVABLES FROM STOCKHOLDERS
At December 31, 1998, the Company had receivables due from stockholders
totaling $80,067, bearing no stated interest rate or maturity date.
F-31
<PAGE>
WILLIAMS AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------
<S> <C>
New and demonstrator vehicles ......... $ 16,222,206
Used vehicles ......................... 5,527,411
Parts and accessories ................. 3,413,032
Other ................................. 73,116
------------
25,235,765
LIFO reserve .......................... (5,095,744)
------------
Inventories, net ...................... $ 20,140,021
============
</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
approximately $4,624,000 in 1998.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $16,588,256 at
December 31, 1998. The floor plan notes bear interest, payable monthly on the
outstanding balances, at an interest rate tied to LIBOR (7.63% at December 31,
1998). Total floor plan interest expense amounted to $773,439 in 1998. 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.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------
<S> <C>
Leasehold improvements ........................ $ 2,669,616
Office equipment and fixtures ................. 1,546,081
Parts and service equipment ................... 1,223,857
Company vehicles .............................. 1,077,299
------------
6,516,853
Less accumulated depreciation and amortization (3,349,150)
------------
Property and equipment, net ................... $ 3,167,703
============
</TABLE>
5. FINANCING ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Unsecured note payable to Compass Bank, due in monthly installments of $8,333, plus
interest at the prime rate less .5% (7.25% at December 31,1998), through October
2000, with a final payment of $400,012 due in 2002................................ $ 591,671
Less current maturities ........................................................... (100,000)
----------
Long-Term Debt .................................................................... $ 491,671
==========
</TABLE>
F-32
<PAGE>
WILLIAMS AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. FINANCING ARRANGEMENTS -- (Continued)
Future maturities of debt at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------
<S> <C>
1999 ................... $100,000
2002 ................... 491,671
--------
Total .................. $591,671
========
</TABLE>
6. COMBINED EQUITY
The capital structure of the entities included in the combined financial
statements of the Company at December 31, 1998 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>
Tom Williams Lexus, Inc. ................ $1 1,000 1,000 $ 1,000 $ 381,500
Tom Williams Motors, Inc. ............... $1 10,000 5,000 5,000 245,000
Williams Cadillac Company, Inc. ......... $1 5,000 2,292 2,292 226,908
Tom Williams Automotive Group, Inc. ..... $1 3,300 1,742 1,742 232,613
------- ----------
Total ................................... $10,034 $1,086,021
======= ==========
</TABLE>
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Current:
Federal .............. $ 218,964
State ................ 22,370
---------
241,334
---------
Deferred:
Federal .............. (9,933)
State ................ (1,569)
---------
(11,502)
---------
Total ................ $ 229,832
=========
</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 ended December 31, 1998:
<TABLE>
<S> <C>
Statutory federal rate ......... 34.00%
State income taxes ............. 2.21%
Miscellaneous .................. 0.82%
-----
Effective tax rate ............. 37.03%
=====
</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:
F-33
<PAGE>
WILLIAMS AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES -- (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Deferred tax assets -- primarily from differences relating to write-off of
receivables
and reserve for chargebacks ....................................................... $ 8,420
Deferred tax liabilities -- primarily from differences relating to depreciation .... (9,063)
--------
Net deferred tax liability ......................................................... $ (643)
========
</TABLE>
The Company's income before income taxes in the accompanying combined
statement of income consists of $630,645 from Williams Cadillac Company, Inc.
and a combined total for the S Corporations of $3,448,992.
8. RELATED PARTY TRANSACTIONS
The Company had an unsecured note payable to Thomas P. Williams, a
stockholder, in the amount of $1,400,000 at December 31, 1998. Interest is paid
monthly at 5.96%. The principal balance was paid in full after December 31,
1998.
The Company leases several 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 approximately $297,000 in 1998.
Other leases consist primarily of leases for business premises, modular
space and various equipment with terms up to twenty years. Future minimum
rental payments requirements under non-cancelable operating leases at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, RELATED PARTY OTHER TOTAL
- -------------------------- --------------- ------------- -------------
<S> <C> <C> <C>
1999 ................ $210,000 $ 634,808 $ 844,808
2000 ................ 87,000 550,454 637,454
2001 ................ 87,000 416,976 503,976
2002 ................ 87,000 251,526 338,526
2003 ................ 36,250 80,568 116,818
Thereafter .......... -- 62,964 62,964
-------- ---------- ----------
Total ............... $507,250 $1,997,296 $2,504,546
======== ========== ==========
</TABLE>
Rent expense under all operating leases was approximately $884,000 during
1998.
9. 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 or cash flows.
10. EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) profit sharing plan whereby
substantially all of the employees of the Company meeting certain service
requirements are eligible to participate. Contributions by the Company in 1998
were approximately $187,000.
11. SUBSEQUENT EVENT
Effective March 16, 1999, the Company sold substantially all of the
operating assets of Tom Williams Auto, Inc., Tom Williams Motors, Inc. and Tom
Williams Automotive Group, Inc. to Sonic Automotive, Inc. ("Sonic") for a
combined purchase price of approximately $23.6 million plus 12,138 shares of
convertible preferred stock. The preferred stock has a redemption value of
$1,000 per share.
F-34
<PAGE>
WILLIAMS AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENT -- (Continued)
In addition, Sonic purchased the outstanding common stock of Williams
Cadillac Company, Inc. for approximately $113,000 plus the net book value of
the purchased assets less liabilities. Sonic also issued 6,949 shares of
convertible preferred stock with a redemption price of $1,000 per share.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
SONIC AUTOMOTIVE, INC.
Charlotte, North Carolina
We have audited the accompanying balance sheet of Economy Cars, Inc.,
d/b/a Economy Honda Cars (the "Company"), as of December 31, 1998, 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, 1998, 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
March 16, 1999
F-36
<PAGE>
ECONOMY HONDA CARS
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ...................................................... $ 6,838,693
Accounts receivable (net of allowance for doubtful accounts of approximately $7,000)..... 515,218
Inventories, net (Note 2) ............................................................... 4,750,963
Deferred income taxes (Note 5) .......................................................... 29,189
Other current assets .................................................................... 1,873
-----------
Total current assets .................................................................. 12,135,936
PROPERTY AND EQUIPMENT, NET (Note 3) ..................................................... 1,652,110
-----------
TOTAL ASSETS ............................................................................. $13,788,046
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable .................................................................. $ 181,463
Income taxes payable (Note 5) ........................................................... 261,887
Other taxes payable ..................................................................... 188,316
Accrued payroll and bonuses ............................................................. 99,311
Liability for finance chargebacks ....................................................... 61,472
Other accrued liabilities ............................................................... 405
-----------
Total current liabilities ............................................................. 792,854
-----------
DEFERRED INCOME TAXES (Note 5) ........................................................... 67,842
-----------
STOCKHOLDERS' EQUITY:
Common stock (no par 2,000 shares authorized, 500 shares issued and 450 shares 50,000
outstanding)
Retained earnings ....................................................................... 13,077,350
Treasury stock (50 shares) .............................................................. (200,000)
-----------
Total stockholders' equity ............................................................ 12,927,350
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................... $13,788,046
===========
</TABLE>
See notes to financial statements.
F-37
<PAGE>
ECONOMY HONDA CARS
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES:
Vehicle sales ....................................... $ 34,988,040
Parts, service and collision repair ................. 4,852,223
Finance and insurance (Note 1) ...................... 743,557
------------
Total revenues .................................... 40,583,820
COST OF SALES (Note 1) ............................... 34,888,770
------------
GROSS PROFIT ......................................... 5,695,050
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ......... 4,642,963
DEPRECIATION ......................................... 148,174
------------
OPERATING INCOME ..................................... 903,913
------------
OTHER INCOME (EXPENSE):
Interest expense -- floor plan (Note 2) ............. (5,849)
Interest income ..................................... 251,616
Other income, net ................................... 44,864
------------
Total other income ................................ 290,631
------------
INCOME BEFORE INCOME TAXES ........................... 1,194,544
PROVISION FOR INCOME TAXES (Note 5) .................. 447,176
------------
NET INCOME ........................................... $ 747,368
============
</TABLE>
See notes to financial statements.
F-38
<PAGE>
ECONOMY HONDA CARS
STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY STOCKHOLDERS'
STOCK EARNINGS STOCK EQUITY
----------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 ........... $ 50,000 $ 12,329,982 $ (200,000) $ 12,179,982
Net income .......................... -- 747,368 -- 747,368
-------- ------------ ----------- ------------
BALANCE AT DECEMBER 31, 1998 ......... $ 50,000 $ 13,077,350 $ (200,000) $ 12,927,350
======== ============ =========== ============
</TABLE>
See notes to financial statements.
F-39
<PAGE>
ECONOMY HONDA CARS
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 747,368
-----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation ................................................................... 148,174
Deferred income taxes .......................................................... (213,307)
Changes in assets and liabilities that relate to operations:
Decrease in accounts receivables .............................................. 329,695
Decrease in inventories ....................................................... 1,791,009
Decrease in other current assets .............................................. 2,600
Decrease in trade accounts payable and accrued liabilities .................... (29,676)
-----------
Total adjustments ............................................................ 2,028,495
-----------
Net cash provided by operating activities .................................... 2,775,863
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................. (10,314)
Principal collected on notes receivable ......................................... 238,960
-----------
Net cash provided by investing activities .................................... 228,646
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ......................................... 3,004,509
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................................... 3,834,184
-----------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................................ $ 6,838,693
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the year for:
Interest ....................................................................... $ 30,671
===========
Income taxes ................................................................... $ 683,669
===========
</TABLE>
See notes to financial statements.
F-40
<PAGE>
ECONOMY HONDA CARS
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Economy Honda Cars, Inc. (the "Company")
operates an automotive dealership, service department, body shop and parts and
accessories department in the Chattanooga area of Tennessee. The Company is a
wholly owned subsidiary of Sonic Automotive, Inc. (see Note 6). 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 $279,000 for the year ended December 31, 1998.
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.
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 purchases and was
approximately $565,000 at December 31, 1998.
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 straight-line method over the estimated useful
lives of the assets. The range of estimated useful lives (in years) is as
follows:
<TABLE>
<CAPTION>
<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
F-41
<PAGE>
ECONOMY HONDA CARS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
gives immediate effect to 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.
ADVERTISING COSTS -- The Company expenses advertising costs in the period
incurred. Advertising expense for 1998 amounted to approximately $410,000.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
cash deposits and accounts receivable. 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 mitigated 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, 1998, the fair
value of the Company's financial instruments, including accounts receivables
and trade accounts payable, approximate their carrying values due to their
length to maturity.
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.
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
New vehicles .................. $2,459,799
Used vehicles ................. 2,476,882
Parts and accessories ......... 346,198
----------
5,282,879
LIFO reserve .................. (531,916)
----------
Inventories, net .............. $4,750,963
==========
</TABLE>
Had the Company used the first-in, first-out method of valuing new
vehicles, parts and accessories inventory, pretax earnings would have been
approximately $1,202,000 in 1998.
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
(prime rate was 7.75% at December 31, 1998). Total floor plan interest expense
amounted to $5,849 in 1998. 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, 1998.
F-42
<PAGE>
ECONOMY HONDA CARS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------
<S> <C>
Land .................................. $ 624,430
Buildings and improvements ............ 1,927,309
Office equipment and fixtures ......... 302,454
Parts and service equipment ........... 358,961
Company vehicles ...................... 62,254
------------
3,275,408
Less accumulated depreciation ......... (1,623,298)
------------
Property and equipment, net ........... $ 1,652,110
============
</TABLE>
4. EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) profit-sharing plan, whereby
substantially all of the employees of the Company meeting certain service
requirements are eligible to participate. Contributions by the Company in 1998
were approximately $30,000.
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Current:
Federal ............... $ 556,086
State ................. 104,397
----------
660,483
----------
Deferred:
Federal ............... (179,591)
State ................. (33,716)
----------
(213,307)
----------
Total ................. $ 447,176
==========
</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>
<S> <C>
Statutory federal rate ......... 34.00%
State income taxes ............. 3.93%
Miscellaneous .................. (0.50%)
-----
Effective tax rate ............. 37.43%
=====
</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:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Deferred tax assets -- primarily from differences relating to chargebacks and
accrued expenses ................................................................. $ 72,033
Deferred tax liabilities, primarily from differences relating to basis difference
in property and equipment ........................................................ (110,686)
----------
Net deferred tax liabilities ...................................................... $ (38,653)
==========
</TABLE>
F-43
<PAGE>
ECONOMY HONDA CARS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SUBSEQUENT EVENT
On February 19, 1999, Sonic Automotive, Inc. purchased all of the
outstanding capital stock of the Company for a total cash purchase price of
approximately $16.2 million, subject to adjustment based on the final
determination of Net Book Value as defined in the stock purchase agreement.
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
SONIC AUTOMOTIVE, INC.
Charlotte, North Carolina
We have audited the accompanying balance sheet of Global Imports, Inc.
(the "Company"), as of December 31, 1998, and the related statements of income,
stockholder's 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, 1998, 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
March 26, 1999
F-45
<PAGE>
GLOBAL IMPORTS, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ..................................................... $ 2,371,194
Accounts receivables (net of allowance for doubtful accounts of approximately $144,000). 704,467
Related party receivables (Note 2) ..................................................... 224,990
Inventories, net (Note 3) .............................................................. 9,115,606
Other current assets ................................................................... 1,414
-----------
Total current assets .................................................................. 12,417,671
PROPERTY AND EQUIPMENT, NET (Notes 1 and 4) .............................................. 2,690,433
-----------
TOTAL ASSETS ............................................................................. $15,108,104
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable -- floorplan (Note 3) .................................................... $ 9,720,300
Notes payable -- related party floorplan (Note 7) ...................................... 1,675,709
Note payable -- stockholder (Note 7) ................................................... 189,142
Trade accounts payable ................................................................. 383,778
Accrued payroll and bonuses ............................................................ 269,475
Liability for finance chargebacks ...................................................... 18,285
Other accrued liabilities .............................................................. 311,935
Current maturities -- long-term debt (Note 5) .......................................... 542,334
-----------
Total current liabilities ............................................................. 13,110,958
-----------
LONG-TERM DEBT (Note 5) .................................................................. 154,009
-----------
CONTINGENCIES (Note 8)
STOCKHOLDER'S EQUITY:
Preferred stock ($1 par, 80,000 shares authorized, no shares issued and outstanding).... --
Common stock (no par, 20,000 shares authorized, 1,001 shares issued and outstanding) ... 2,347
Paid-in capital ........................................................................ 434,415
Retained earnings ...................................................................... 1,406,375
-----------
Total stockholder's equity ............................................................ 1,843,137
-----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ............................................... $15,108,104
===========
</TABLE>
See notes to financial statements.
F-46
<PAGE>
GLOBAL IMPORTS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES:
Vehicle sales ................................................. $67,376,323
Parts, service and collision repair ........................... 9,476,510
Finance and insurance (Note 1) ................................ 341,816
-----------
Total revenues ............................................... 77,194,649
COST OF SALES (Note 1) .......................................... 66,574,843
-----------
GROSS PROFIT .................................................... 10,619,806
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .................... 8,436,372
DEPRECIATION AND AMORTIZATION ................................... 438,720
-----------
OPERATING INCOME ................................................ 1,744,714
OTHER INCOME (EXPENSE):
Interest expense -- floorplan (Note 3) ........................ (685,895)
Interest expense -- other ..................................... (40,239)
Other income .................................................. 20,915
-----------
Total other expense .......................................... (705,219)
-----------
NET INCOME ...................................................... $ 1,039,495
===========
PRO FORMA PROVISION FOR INCOME TAXES (Note 1) (unaudited) ....... $ 398,646
===========
PRO FORMA NET INCOME (Note 1) (unaudited) ....................... $ 640,849
===========
</TABLE>
See notes to financial statements.
F-47
<PAGE>
GLOBAL IMPORTS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- -------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 ........... 1,001 $2,347 $434,415 $ 404,272 $ 841,034
Net income .......................... -- -- -- 1,039,495 1,039,495
Distribution ........................ -- -- -- (37,392) (37,392)
----- ------ -------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 ......... 1,001 $2,347 $434,415 $1,406,375 $1,843,137
===== ====== ======== ========== ==========
</TABLE>
See notes to financial statements.
F-48
<PAGE>
GLOBAL IMPORTS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 1,039,495
------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...................................................... 438,720
Changes in assets and liabilities that relate to operations:
Increase in accounts receivables .................................................. (298,872)
Increase in related party receivables ............................................. (40,315)
Increase in inventories ........................................................... (2,925,738)
Decrease in other current assets .................................................. 153,153
Increase in notes payable -- floorplan ............................................ 1,692,931
Increase in notes payable -- related party floorplan .............................. 79,609
Increase in trade accounts payable and accrued liabilities ........................ 67,754
------------
Total adjustments ................................................................ (832,758)
------------
Net cash provided by operating activities ........................................ 206,737
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................................. (486,506)
------------
Net cash used in investing activities ............................................ (486,506)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable -- stockholder ........................................... 131,369
Principal payments on note payable -- stockholder ................................... (123,103)
Prinicipal payments on long-term debt ............................................... (41,064)
Principal payments on capital leases ................................................ (27,841)
Distribution to stockholder ......................................................... (37,392)
------------
Net cash used in investing activities ............................................ (98,031)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................................. (377,800)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .......................................... 2,748,994
------------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................................ $ 2,371,194
============
SUPPLEMENTAL INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations for computer equipment .................................... $ 186,637
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest .............................................. $ 726,134
============
</TABLE>
See notes to financial statements.
F-49
<PAGE>
GLOBAL IMPORTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Global Imports, Inc (the "Company") operates
an automotive dealership, service department, body shop and parts and
accessories department in Atlanta, Georgia. The Company is a wholly owned
subsidiary of Sonic Automotive, Inc. (see Note 9). The Company sells new and
used cars and motorcycles, sells replacement parts and accessories, provides
vehicle maintenance, warranty, paint and repair services and arranges related
financing and insurance. The Company sells new cars and motorcycles
manufactured by BMW.
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 $90,000 for the year ended December 31, 1998.
DEALER AGREEMENTS -- The Company purchases substantially all of its new
cars and motorcycles 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 and motorcycle 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.
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 car and motorcycle purchases
and was approximately $1,350,000 at December 31, 1998.
INVENTORIES -- Inventories of new and demonstrator cars are valued at the
lower of cost or market. Cost is determined using the last-in, first-out method
("LIFO") for new cars. Inventories of used cars and motorcycles are stated at
the lower of cost or market, on a specific unit basis. 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 primarily using straight-line methods over the
estimated useful lives of the assets. The range of estimated useful lives (in
years) is as follows:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements ............... 10
Office equipment and fixtures ........ 7
Parts and service equipment .......... 7
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
F-50
<PAGE>
GLOBAL IMPORTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
INCOME TAXES -- The Company is organized as an S Corporation for federal
and state income tax purposes. As such, the Company's taxable income is
included in the stockholder's personal income tax return. Accordingly, no
provision for federal or state income taxes has been included in the Company's
statement of income.
The unaudited pro forma provision for income taxes and the unaudited pro
forma net income for the year ended December 31, 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.
ADVERTISING COSTS -- The Company expenses advertising costs in the period
incurred. Advertising expense for 1998 amounted to approximately $1,169,000.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
cash deposits and accounts receivables. 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 mitigated by the large number of
customers comprising the trade receivables balances. Trade receivables are
concentrated in the Company's market area of Atlanta, Georgia.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- As of December 31, 1998, the fair
value of the Company's financial instruments including accounts receivables,
related party receivables, trade accounts payable, notes payable -- floor plan,
notes payable related party floorplan, note payable -- stockholder 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.
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.
2. RELATED PARTY RECEIVABLES
At December 31, 1998, the Company had receivables from related parties
totaling $194,190. Also included in related party receivables are amounts due
from other dealerships that are owned by the Company's stockholder totaling
$30,800.
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
New vehicles .................. $6,441,825
Used vehicles ................. 2,389,778
Parts and accessories ......... 1,045,131
----------
9,876,734
LIFO reserve .................. (761,128)
----------
Inventories, net .............. $9,115,606
==========
</TABLE>
Had the company used the FIFO method of valuing new cars and motorcycles
and parts inventories, net income would have been approximately $1,143,000.
Certain new and certain used cars and motorcycles are pledged to
collateralize floor plan notes payable to financial institutions and related
parties (see Note 7) in the amount of $11,396,009 at December 31, 1998. The
floor plan notes bear interest, payable monthly on the outstanding balances, at
rates ranging from 6.5% to 30 day LIBOR+2% (30 day LIBOR was 5.06% at December
31, 1998). Total floor plan interest expense amounted to $685,895 in 1998. The
notes payable are due when the related vehicle is sold. As such, these
floorplan notes payable are shown as a current liability in
F-51
<PAGE>
GLOBAL IMPORTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN -- (Continued)
the accompanying balance sheet. The maximum credit available under the
financing arrangements varies according to the specific agreements.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------
<S> <C>
Leasehold improvements ................... $ 3,052,904
Office equipment and fixtures ............ 816,303
Parts and service equipment .............. 328,804
------------
4,198,011
Less accumulated depreciation and
amortization............................. (1,507,578)
------------
Property and equipment, net .............. $ 2,690,433
============
</TABLE>
5. LONG-TERM DEBT
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Obligation under capital leases, due in monthly
installments varying from $916 to $2,298 (including
principal and interest), with the final payment due
October 2003. .................................... $196,643
Note payable to a bank, due in monthly installments
of $3,422 plus interest at 7%.The entire balance
was paid in February 1999. ....................... 499,700
--------
696,343
Less current maturities ........................... 542,334
--------
Long-term debt .................................... $154,009
========
</TABLE>
Future minimum lease payments under capital leases at December 31, 1998
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------------------------
<S> <C>
1999 ................................... $ 53,317
2000 ................................... 53,317
2001 ................................... 53,317
2002 ................................... 49,653
2003 ................................... 13,202
---------
222,806
Less amount representing interest ...... (26,163)
---------
Present value of minimum lease payments $ 196,643
=========
</TABLE>
6. EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) profit sharing plan whereby
substantially all of the employees of the Company meeting certain service
requirements are eligible to participate. Contributions by the Company in 1998
were approximately $85,000.
F-52
<PAGE>
GLOBAL IMPORTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS
The Company has floorplan notes payable to various related parties
totaling $1,675,709 at December 31, 1998. There are no formal agreements
underlying these related party notes. The related parties have been paid a
total of $148,291 in interest during 1998 based on a 30 day LIBOR + 2% (30 day
LIBOR was 5.06% at December 31, 1998) interest rate.
The Company also has a note payable to the stockholder in the amount of
$189,142 at December 31, 1998. Interest is calculated on this note each month
using a 30 day LIBOR+2% interest rate. The interest for each month is accrued
as additional note payable but is not paid. Included in sales revenues during
1998 is $509,586 in sales to various related parties at prevailing prices for
wholesale transactions.
The Company leases its operating facilities directly from the stockholder
and from an affiliated company. Rent expense under this lease was approximately
$727,000 in 1998.
Other leases consist primarily of leases for office and computer
equipment. Future minimum rental payments required under noncancelable
operating leases at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
AFFILIATED
YEAR ENDING DECEMBER 31: COMPANY OTHER TOTAL
- -------------------------- ------------- --------- -------------
<S> <C> <C> <C>
1999 ................... $ 727,000 $1,926 $ 728,926
2000 ................... 727,000 1,176 728,176
2001 ................... 727,000 1,176 728,176
2002 ................... 727,000 1,176 728,176
---------- ------ ----------
Total .................. $2,908,000 $5,454 $2,913,454
========== ====== ==========
</TABLE>
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
On February 18, 1999, Sonic Automotive, Inc., purchased substantially all
of the Company's assets for a combined purchase price of approximately $8.1
million cash and 15,013 shares of convertible preferred stock with a
liquidation preference of $1,000 per share.
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
NEWSOME AUTOMOTIVE GROUP
Columbia, South Carolina
We have audited the accompanying combined balance sheet of Newsome
Automotive Group (the "Company"), which is under common ownership and
management, as of December 31, 1998, and the related combined statements of
income, 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,
1998, 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
March 12, 1999
F-54
<PAGE>
NEWSOME AUTOMOTIVE GROUP
COMBINED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ...................................................... $ 2,248,417
Marketable equity securities ............................................................ 95,261
Accounts receivable (net of allowance for doubtful accounts of approximately $98,000) ... 2,784,966
Inventories, net (Note 2) ............................................................... 17,023,917
Other current assets .................................................................... 3,251
------------
Total current assets .................................................................. 22,155,812
PROPERTY AND EQUIPMENT, NET (Notes 3 and 4) .............................................. 1,228,165
RECEIVABLE FROM STOCKHOLDER (Note 7) ..................................................... 3,297,581
GOODWILL, NET (Note 1) ................................................................... 357,500
DEFERRED INCOME TAXES (Note 6) ........................................................... 533,979
------------
TOTAL ASSETS ............................................................................. $ 27,573,037
============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 2) .................................................... $ 11,574,748
Trade accounts payable .................................................................. 705,593
Accrued payroll and bonuses ............................................................. 328,733
Income taxes payable (Note 6) ........................................................... 268,746
Liability for finance chargebacks and extended warranties ............................... 1,430,000
Other accrued liabilities ............................................................... 633,628
Revolving credit agreement (Note 4) ..................................................... 1,725,000
Current maturities -- long-term debt (Note 4) ........................................... 93,520
------------
Total current liabilities ............................................................. 16,759,968
------------
LONG-TERM DEBT (Note 4) .................................................................. 329,938
------------
PAYABLE TO STOCKHOLDER (Note 7) .......................................................... 912,535
------------
DEFERRED INCOME TAXES (Note 6) ........................................................... 74,731
------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
EQUITY (Note 5):
Members' equity ......................................................................... 1,946,271
Common stock of combined companies ...................................................... 1,000
Retained earnings ....................................................................... 7,486,463
Accumulated other comprehensive income .................................................. 62,131
------------
Total equity .......................................................................... 9,495,865
------------
TOTAL LIABILITIES AND EQUITY ............................................................. $ 27,573,037
============
</TABLE>
See notes to combined financial statements.
F-55
<PAGE>
NEWSOME AUTOMOTIVE GROUP
COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES:
Vehicle sales ................................................. $ 87,858,645
Parts, service and collision repair ........................... 29,974,124
Finance and insurance (Note 1) ................................ 2,180,200
------------
Total revenues .............................................. 120,012,969
COST OF SALES (Note 1) ......................................... 104,116,005
------------
GROSS PROFIT ................................................... 15,896,964
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................... 13,378,890
DEPRECIATION AND AMORTIZATION .................................. 354,548
------------
OPERATING INCOME ............................................... 2,163,526
------------
OTHER (INCOME) EXPENSE:
Interest expense -- floor plan, net (Note 2) .................. 1,002,745
Interest expense -- other (Note 7) ............................ (1,242)
Other income .................................................. (58,438)
------------
Total other expense ......................................... 943,065
INCOME BEFORE INCOME TAXES ..................................... 1,220,461
PROVISION FOR INCOME TAXES (Note 6) ............................ 568,592
------------
NET INCOME ..................................................... $ 651,869
============
PRO FORMA PROVISION FOR INCOME TAX BENEFIT (Note 1) (unaudited) $ (112,445)
============
PRO FORMA NET INCOME (Note 1) (unaudited) ...................... $ 764,314
============
</TABLE>
See notes to combined financial statements.
F-56
<PAGE>
NEWSOME AUTOMOTIVE GROUP
COMBINED STATEMENT OF EQUITY (NOTE 5)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK OF OTHER
MEMBERS' COMBINED RETAINED COMPREHENSIVE TOTAL
EQUITY COMPANIES EARNINGS INCOME EQUITY
-------------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 ............... $ 2,283,725 $ 1,000 $6,497,140 $ 55,420 $8,837,285
Increase in unrealized holding gain ..... -- -- -- 6,711 6,711
Net income (loss) ....................... (337,454) -- 989,323 -- 651,869
----------- ------- ---------- -------- ----------
BALANCE AT DECEMBER 31, 1998 ............. $ 1,946,271 $ 1,000 $7,486,463 $ 62,131 $9,495,865
=========== ======= ========== ======== ==========
</TABLE>
See notes to combined financial statements.
F-57
<PAGE>
NEWSOME AUTOMOTIVE GROUP
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 651,869
------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 354,548
Deferred income taxes ......................................................... (142,629)
Changes in assets and liabilities that relate to operations:
Decrease in accounts receivable .............................................. 531,954
Decrease in inventories ...................................................... 1,392,371
Decrease in other current assets ............................................. 282,008
Decrease in notes payable -- floor plan ...................................... (1,048,906)
Decrease in trade accounts payable and accrued liabilities ................... (431,489)
------------
Total adjustments ........................................................... 937,857
------------
Net cash provided by operating activities ................................... 1,589,726
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................. (618,063)
Proceeds from disposal of property and equipment ................................ 51,991
Purchase of marketable equity securities ........................................ (4,151)
------------
Net cash used in investing activities ........................................ (570,223)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on revolving credit agreement .................................... 150,000
Proceeds from long-term debt .................................................... 49,984
Payments on long-term debt ...................................................... (262,808)
Net payments to stockholder ..................................................... (1,377,717)
------------
Net cash used in financing activities ........................................ (1,440,541)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........................................ (421,038)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ..................................... 2,669,455
------------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................................... $ 2,248,417
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the year for:
Interest ...................................................................... $ 1,025,000
============
Income taxes .................................................................. $ 506,050
============
</TABLE>
See notes to combined financial statements.
F-58
<PAGE>
NEWSOME AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Newsome Automotive Group (the "Company")
operates three automobile dealerships and a management company in the Columbia
and Florence areas of South Carolina. The Company also includes a nonoperating
holding company. 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 dealership
locations sell vehicles manufactured by Chevrolet, Mercedes, Isuzu and BMW.
The accompanying combined financial statements include the accounts of the
following entities:
<TABLE>
<CAPTION>
NAME LOCATION STRUCTURE
- --------------------------------- ---------- --------------------------
<S> <C> <C>
JN Management Co., Inc. Columbia C Corporation
Newsome Chevrolet World, Inc. Columbia C Corporation
Newsome Automotive, LLC Florence Limited Liability Company
Imports of Florence, LLC Florence Limited Liability Company
Newsome Auto World, Inc. Columbia C Corporation
</TABLE>
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. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
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.
Commission 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 amounts to
approximately $194,000 for the year ended December 31, 1998.
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.
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 $794,000 at December 31, 1998.
MARKETABLE EQUITY SECURITIES -- The Company's marketable equity securities
are classified as "available for sale" and are not bought and held principally
for the purpose of selling them in the near term. As such, these securities are
reported at fair value, with unrealized gains and losses, net of tax, excluded
from net income and reported as a separate
F-59
<PAGE>
NEWSOME AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
component of comprehensive income. Realized gains and losses on sales of
marketable equity securities are determined using the specific identification
method.
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, the specific identification method for used vehicles, 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 the straight-line method over the estimated
useful lives of the assets. The range of estimated useful lives (in years) is
as follows:
<TABLE>
<CAPTION>
USEFUL
LIVES
-------
<S> <C>
Leasehold improvements ................ 3-10
Office equipment and fixtures ......... 5-10
Parts and service equipment ........... 5-10
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 periods from 12 to 20 years. The cumulative amount of
goodwill amortization was approximately $743,000 at December 31, 1998. The
Company periodically reviews goodwill to assess recoverability. The Company's
policy is to compare the carrying value of goodwill with expected undiscounted
cash flows from operations of the acquired business.
INCOME TAXES -- JN Management Co., Inc., Newsome Chevrolet World, Inc.,
and Newsome Auto World, Inc. are organized as C Corporations subject to both
federal and state income taxes. Newsome Automotive, LLC and Imports of
Florence, LLC are organized as limited liability companies for federal and
state income tax purposes. As such, the provision for income taxes in the
accompanying combined financial statements only includes federal and state
income taxes for JN Management Co., Inc., Newsome Chevrolet World, Inc. and
Newsome Auto World, Inc. Deferred taxes are determined using 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 changes in income tax laws upon enactment. A valuation allowance is
established when necessary to reduce deferred tax assets to amounts to be
expected to be realized.
The unaudited pro forma provision for income taxes and the unaudited pro
forma net income for the year ended December 31, 1998 reflect amounts that
would have been recorded had Newsome Automotive, LLC and Imports of Florence,
LLC's income been taxed for federal and state purposes as if they were C
Corporations.
ADVERTISING COSTS -- The Company expenses advertising costs in the period
incurred. Advertising expenses for 1998 amounted to approximately $1,117,000.
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 and accounts receivable. 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 mitigated by the large
number of customers comprising the trade receivables balances. Trade
receivables are concentrated in the Company's market areas in South Carolina.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- As of December 31, 1998, the fair
values of the Company's financial instruments including accounts and finance
notes receivable, 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.
F-60
<PAGE>
NEWSOME AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
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.
2. INVENTORIES AND NOTES PAYABLE -- FLOOR PLAN
Inventories consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------
<S> <C>
New and demonstrator vehicles ......... $ 10,019,390
Used vehicles ......................... 3,622,706
Parts and accessories ................. 4,046,034
------------
17,688,130
LIFO reserve .......................... (664,213)
------------
Inventories, net ...................... $ 17,023,917
============
</TABLE>
During the year ended December 31, 1998, new vehicle inventory quantities
were reduced, resulting in a liquidation of LIFO inventory values. The
liquidation increased pre-tax income by approximately $157,000. Had the Company
used the first-in, first-out method of valuing new vehicles and certain parts
and accessories, pretax earnings would have been approximately $1,157,000 in
1998.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $11,574,748 at
December 31, 1998. The floor plan notes bear interest, payable monthly on the
outstanding balances at rates ranging from prime to prime plus 1% (prime rate
was 7.75% at December 31, 1998). Total floor plan interest expense amounted to
$1,002,745 in 1998. 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 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------
<S> <C>
Leasehold and improvements .................... $ 582,688
Office equipment and fixtures ................. 688,724
Parts and service equipment ................... 994,860
Company vehicles .............................. 591,242
------------
2,857,514
Less accumulated depreciation and amortization (1,629,349)
------------
Property and equipment, net ................... $ 1,228,165
============
</TABLE>
4. FINANCING ARRANGEMENTS
The Company has a revolving credit agreement from General Motors
Acceptance Corp. available for parts inventory purchases. Interest is paid
monthly on the outstanding balance a the prime rate plus 1.25% (9% at December
31, 1998). The note has been and is expected to be renewed on an annual basis.
The agreement provides that the outstanding balance cannot exceed 65% of the
outstanding parts inventory balance of Newsome Chevrolet World, Inc. at
December 31, 1998. The Company is in compliance with this covenant at December
31, 1998. The balance outstanding under this agreement was $1,725,000 at
December 31, 1998.
F-61
<PAGE>
NEWSOME AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS -- (Continued)
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable to Wachovia Corporation, payable in 60 monthly installments of $9,071,
including interest at 7.75% through December 2002, secured by real property owned by
the sole stockholder of JN Management Co., Inc. .................................... $ 366,683
Note payable to BB&T Corporation, payable in 60 monthly installments of $670,
including interest at 6.75% through November 2003, secured by a Company vehicle .... 33,504
Note payable to General Motors Acceptance Corporation, payable in 36 monthly
installments of $445, through May 2001, secured by service equipment ............... 12,889
Note payable to Wachovia Corporation, payable in 60 monthly installments of $556,
through October 2000, secured by a Company vehicle. ................................ 10,382
---------
423,458
Less current maturities ............................................................. (93,520)
---------
Long-term debt ...................................................................... $ 329,938
=========
</TABLE>
The future maturities of long-term debt at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------
<S> <C>
1999 ................ $ 93,520
2000 ................ 105,505
2001 ................ 105,704
2002 ................ 111,719
2003 ................ 7,010
---------
Total ............... $ 423,458
=========
</TABLE>
5. EQUITY
The capital structure of the entities included in the combined financial
statements of the Company at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------
SHARES
SHARES ISSUED AND MEMBERS'
AUTHORIZED OUTSTANDING AMOUNT EQUITY
------------ ------------- ---------- -------------
<S> <C> <C> <C> <C>
JH Management Co., Inc, no par value ..... 100,000 1,000 $ 1,000 --
Newsome Chevrolet World, Inc ............. -- -- -- --
Newsome Auto World, Inc. ................. -- -- -- --
Newsome Automotive, LLC .................. -- -- -- $1,357,184
Imports of Florence, LLC ................. -- -- -- 589,087
------- ----- ------- ----------
Total .................................... 100,000 1,000 $ 1,000 $1,946,271
======= ===== ======= ==========
</TABLE>
F-62
<PAGE>
NEWSOME AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Current:
Federal .............. $ 618,889
State ................ 92,332
----------
711,221
----------
Deferred:
Federal .............. (123,510)
State ................ (19,119)
----------
(142,629)
----------
Total ................ $ 568,592
==========
</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 ended December 31, 1998:
<TABLE>
<S> <C>
Statutory federal rate ......... 34.00%
State income taxes ............. 2.29%
Miscellaneous .................. 0.21%
-----
Effective tax rate ............. 36.50%
=====
</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:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Deferred tax assets -- primarily from differences relating to amortization of of
extended warranties, writedown of inventories, reserve for chargebacks, reserve for
extended warranties, and write-off of accounts receivable ......................... $ 563,316
Deferred tax liabilities -- primarily from differences relating to depreciation .... (104,068)
----------
Net deferred tax asset ............................................................. $ 459,248
==========
</TABLE>
The Company's income (loss) before income taxes in the accompanying
combined statement of income consists of $1,557,915 from JN Management, Co.,
Inc., Newsome Chevrolet World, Inc., and Newsome Auto World, Inc., combined and
$(337,454) from Newsome Automotive, LLC and Imports of Florence, LLC, combined.
7. RELATED PARTY TRANSACTIONS
Newsome Automotive, LLC and Imports of Florence, LLC lease their operating
facilities from the sole stockholder of JN Management, Co., Inc. The agreement
is accounted for as an operating lease and expires in December 2007. The
Company also leases equipment from unrelated parties under agreements accounted
for as operating leases. The leases expire at various dates through March 2004.
Future minimum rental payments required under non-cancelable operating leases
at December 31, 1998 are as follows:
F-63
<PAGE>
NEWSOME AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS -- (Continued)
<TABLE>
<CAPTION>
RELATED
YEAR ENDING DECEMBER 31, PARTY OTHER TOTAL
- ---------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
1999 ..................... $1,044,480 $102,996 $1,147,476
2000 ..................... 1,049,376 102,996 1,152,372
2001 ..................... 981,876 85,310 1,067,186
2002 ..................... 959,376 48,313 1,007,689
2003 ..................... 959,376 3,345 962,721
Thereafter ............... 3,976,896 -- 3,976,896
---------- -------- ----------
Total .................... $8,971,380 $342,960 $9,314,340
========== ======== ==========
</TABLE>
Total rent expense under all operating leases amounted to approximately
$1,150,000 during 1998 and rent expense to the related party was approximately
$1,045,000.
At December 31, 1998, the Company has a receivable from the stockholder of
JN Management Co., Inc. amounting to $3,297,581. Interest is accrued annually
at 8.5%. Accrued interest amounted to $297,581 at December 31, 1998. Interest
on the note is payable on April 1, of each year with monthly principal payments
of $28,522 due beginning May 1, 2000.
The Company also has a note payable due to the stockholder of JN
Management Co., Inc. amounting to $1,109,363 at December 31, 1998. Interest is
accrued annually at 8%. The amount is classified as noncurrent based on the
expected repayment date. Interest expense on the note payable amounted to
approximately $110,000 for the year ended December 31, 1998. In addition, the
Company has unsecured payables to the members of Newsome Automotive, LLC and
Imports of Florence, LLC, amounting to $68,650 at December 31, 1998. No
interest is accrued or paid on these payables.
8. EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) profit sharing plan whereby
substantially all of the employees of the Company meeting certain service
requirements are eligible to participate. Contributions by the Company in 1998
were approximately $96,000.
9. 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.
10. SALE AGREEMENT
In December 1998, the Company signed an asset purchase agreement with
Sonic Automotive, Inc. ("Sonic") whereby Sonic will purchase substantially all
of the assets of Newsome Automotive LLC and Imports of Florence LLC for a total
purchase price of $8.2 million plus the assumption of certain liabilities.
In addition, Sonic will purchase the outstanding common stock of JN
Management Co., Inc., Newsome Auto World, Inc. and Newsome Chevrolet World,
Inc. for $4.0 million plus the net book value of the purchased assets less
liabilities. Sonic will issue 8,500 shares of convertible preferred stock at
the closing date. Of the total purchase price, $3.1 million will be paid in
cash and the balance will be paid in 8,500 shares of convertible preferred
stock.
F-64
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDER OF
LLOYD AUTOMOTIVE GROUP
Panama City, Florida
We have audited the accompanying combined balance sheet of Lloyd
Automotive Group (the "Company"), which is under common ownership and
management, as of December 31, 1998, and the related combined statements of
income, stockholder's 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,
1998, 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
March 15, 1999
F-65
<PAGE>
LLOYD AUTOMOTIVE GROUP
COMBINED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) .................................................. $ 476,773
Accounts receivable (net of allowance for doubtful accounts of approximately $9,000) 983,895
Inventories, net (Note 2) ........................................................... 8,067,990
Other current assets ................................................................ 25,030
-----------
Total current assets ............................................................. 9,553,688
PROPERTY AND EQUIPMENT, NET (Notes 3 and 4) .......................................... 2,985,853
-----------
TOTAL ................................................................................ $12,539,541
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 2) ................................................ $ 5,778,965
Trade accounts payable .............................................................. 229,971
Accrued payroll and bonuses ......................................................... 122,210
Liability for finance chargebacks ................................................... 250,000
Other accrued liabilities ........................................................... 311,544
Current maturities -- long-term debt (Note 4) ....................................... 240,270
-----------
Total current liabilities ........................................................ 6,932,960
-----------
LONG-TERM DEBT (Note 4) .............................................................. 1,081,359
-----------
COMMITMENTS (Note 6)
STOCKHOLDER'S EQUITY (Note 5):
Common stock of combined companies .................................................. 200,180
Paid-in capital ..................................................................... 959,807
Retained earnings ................................................................... 3,365,235
-----------
Total stockholder's equity ....................................................... 4,525,222
-----------
TOTAL ................................................................................ $12,539,541
===========
</TABLE>
See notes to combined financial statements.
F-66
<PAGE>
LLOYD AUTOMOTIVE GROUP
COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES:
Vehicle sales .................................................. $48,547,351
Parts, service and collision repair ............................ 7,523,962
Finance and insurance (Note 1) ................................. 712,000
-----------
Total revenues .............................................. 56,783,313
COST OF SALES (Note 1) .......................................... 49,637,042
-----------
GROSS PROFIT .................................................... 7,146,271
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 6) ........... 6,047,360
DEPRECIATION AND AMORTIZATION ................................... 303,708
-----------
OPERATING INCOME ................................................ 795,203
-----------
OTHER INCOME (EXPENSE):
Interest expense -- floor plan, net (Note 2) ................... (504,873)
Interest expense -- other ...................................... (98,914)
Other income ................................................... 40,524
-----------
Total other expense ......................................... (563,263)
-----------
NET INCOME ...................................................... $ 231,940
===========
PRO FORMA PROVISION FOR INCOME TAXES (Note 1) (unaudited) ....... $ 84,572
===========
PRO FORMA NET INCOME (Note 1) (unaudited) ....................... $ 147,368
===========
</TABLE>
See notes to combined financial statements.
F-67
<PAGE>
LLOYD AUTOMOTIVE GROUP
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY (NOTE 5)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON
STOCK OF TOTAL
COMBINED PAID-IN RETAINED STOCKHOLDER'S
COMPANIES CAPITAL EARNINGS EQUITY
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 ........... $200,180 $959,807 $3,133,295 $4,293,282
Net income .......................... -- -- 231,940 231,940
-------- -------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 ......... $200,180 $959,807 $3,365,235 $4,525,222
======== ======== ========== ==========
</TABLE>
See notes to combined financial statements.
F-68
<PAGE>
LLOYD AUTOMOTIVE GROUP
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 231,940
----------
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on disposal of property and equipment .................................... (1,250)
Depreciation and amortization ................................................. 303,708
Changes in assets and liabilities that relate to operations:
Increase in accounts receivable .............................................. (220,037)
Decrease in inventories ...................................................... 611,105
Decrease in other current assets ............................................. 4,390
Decrease in notes payable -- floor plan ...................................... (938,999)
Increase in trade accounts payable and accrued liabilities ................... 31,766
----------
Total adjustments ........................................................... (209,317)
----------
Net cash provided by operating activities ..................................... 22,623
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................. (118,382)
Proceeds from disposal of property and equipment ................................ 1,250
----------
Net cash used in investing activities ......................................... (117,132)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt ...................................................... (221,426)
----------
Net cash used in financing activities ......................................... (221,426)
----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........................................ (315,935)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ..................................... 792,708
----------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................................... $ 476,773
==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the year for interest .......................................... $ 540,995
==========
</TABLE>
See notes to combined financial statements.
F-69
<PAGE>
LLOYD AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Lloyd Automotive Group (the "Company")
operates two automobile dealerships in the Panama City 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 two vehicle dealership locations sell
new vehicles manufactured by Mercedes, Pontiac, Cadillac, GMC Truck and Nissan.
The accompanying combined financial statements include the accounts of the
following entities:
<TABLE>
<CAPTION>
NAME LOCATION STRUCTURE
- ------------------------------------ ------------- --------------
<S> <C> <C>
Lloyd Pontiac-Cadillac, Inc. Panama City S Corporation
Lloyd Nissan, Inc. Panama City S Corporation
</TABLE>
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
deliver 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 differences
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 $361,000 for the year ended December 31, 1998.
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.
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 $427,000 at December 31, 1998.
INVENTORIES -- Inventories of new and used vehicles, including
demonstrators, and part 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.
F-70
<PAGE>
LLOYD AUTOMOTIVE GROUP
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 and accelerated methods over the
estimated useful lives of the assets. The range of estimated useful lives (in
years) is as follows:
<TABLE>
<CAPTION>
<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.
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 stockholder's personal income tax returns. Accordingly, no provision for
federal or state income taxes has been included in the Company's combined
statement of income.
The unaudited pro forma provision for income taxes and the unaudited pro
forma net income for the year ended December 31, 1998 reflect estimated 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.
ADVERTISING COSTS -- The Company expenses advertising costs in the period
incurred. Advertising expenses for 1998 amounted to approximately $475,000.
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 and accounts receivable. 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 mitigated by the large
number of customers comprising the trade receivables balances. Trade
receivables are concentrated in the Company's market area of Panama City,
Florida.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- As of December 31, 1998, the fair
values of the Company's financial instruments including accounts receivable,
notes payable-floor plan, trade accounts payable 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.
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-71
<PAGE>
LLOYD AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
New and demonstrator vehicles ......... $4,639,469
Used vehicles ......................... 3,331,156
Parts and accessories ................. 484,183
Other ................................. 57,258
----------
8,512,066
LIFO reserve .......................... (444,076)
----------
Inventories, net ...................... $8,067,990
==========
</TABLE>
Had the Company used the first-in, first-out method of valuing new
vehicles and certain parts and accessories, net income would have been
approximately $186,000 in 1998.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $5,778,965 at December
31, 1998. The floor plan notes bear interest, payable monthly on the
outstanding balances at rates ranging from prime to prime plus 1% (prime rate
was 7.75% at December 31, 1998). Total floor plan interest expense amounted to
$553,963 in 1998. 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 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------
<S> <C>
Land .......................................... $ 285,280
Buildings and improvements .................... 3,830,001
Office equipment and fixtures ................. 543,429
Parts and service equipment ................... 606,457
Company vehicles .............................. 166,425
------------
5,431,592
Less accumulated depreciation and amortization (2,445,739)
------------
Property and equipment, net ................... $ 2,985,853
============
</TABLE>
4. FINANCING ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Mortgage note payable to SunTrust Bank of West Florida, dated January 20, 1997, due
in monthly principal installments of $7,345, plus interest at the bank's prime rate
(7.75% at December 31, 1998) with the unpaid balance due January 20, 2002,
secured by the Company's real property ............................................ $1,311,629
Note payable. Total balance paid subsequent to December 31, 1998 ................... 10,000
----------
1,321,629
Less current maturities ............................................................ (240,270)
----------
Long-term debt ..................................................................... $1,081,359
==========
</TABLE>
F-72
<PAGE>
LLOYD AUTOMOTIVE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS -- (Continued)
Future maturities of debt at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------
<S> <C>
1999 ................... $ 240,270
2000 ................... 260,439
2001 ................... 281,414
2002 ................... 539,506
----------
Total .................. $1,321,629
==========
</TABLE>
5. COMBINED EQUITY
The capital structure of the entities included in the combined financial
statements of the Company at December 31, 1998 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>
Lloyd Pontiac-Cadillac, Inc. . $10 200,000 20,000 $200,000 $ 59,980
Lloyd Nissan, Inc. ........... 1 1,000 180 180 899,827
--- ------- ------ -------- --------
Total ........................ $11 201,000 20,180 $200,180 $959,807
=== ======= ====== ======== ========
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company leases some of its operating facilities directly from the
Company stockholder. Rent expense under these leases was approximately $33,000
in 1998. Obligations under noncancelable operating leases are $24,600 per year
through 2004.
7. EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) profit sharing plan, whereby
substantially all of the employees of the Company meeting certain service
requirements are eligible to participate. Contributions by the Company in 1998
were approximately $29,000.
8. SUBSEQUENT EVENT
In January 1999, 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 $3.7 million plus the net book value of the
purchased assets as of the closing date. The purchase price is expected to be
paid in cash and 1,700 shares of Sonic's convertible preferred stock with a
liquidation preference of $1,000 per share. An additional 150 shares of
convertible preferred stock are issuable upon the satisfaction of certain
obligations between the Company and Sonic.
F-73
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
LUTE RILEY MOTORS, INC.
Richardson, Texas
We have audited the accompanying balance sheet of Lute Riley Motors, Inc.
(the "Company") as of December 31, 1998, and the related statements of income,
stockholder's deficiency, 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, 1998, 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
March 24, 1999
F-74
<PAGE>
LUTE RILEY MOTORS, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ...................................................... $ 6,761,744
Accounts receivable (net of allowance for doubtful accounts of approximately $53,000).... 2,472,446
Inventories, net (Note 2) ............................................................... 11,691,575
Other current assets (Note 5) ........................................................... 375,970
------------
Total current assets .................................................................. 21,301,735
PROPERTY AND EQUIPMENT, NET (Note 3) ..................................................... 3,939,725
DEFERRED INCOME TAXES (Note 5) ........................................................... 80,868
------------
TOTAL .................................................................................... $ 25,322,328
============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
Note payable -- floorplan (Note 2) ...................................................... $ 11,278,895
Notes payable -- related party floorplan (Note 2) ....................................... 3,434,094
Trade accounts payable .................................................................. 2,991,727
Accrued payroll ......................................................................... 1,074,585
Liability for finance chargebacks ....................................................... 2,143,334
Dividends payable ....................................................................... 541,865
Other accrued liabilities ............................................................... 413,954
Current maturities -- long-term debt (Note 4) ........................................... 3,830,995
------------
Total current liabilities ............................................................. 25,709,449
------------
LONG-TERM DEBT (Note 4) .................................................................. 5,236,776
------------
CONTINGENCIES (Note 8)
STOCKHOLDER'S DEFICIENCY:
Common stock ($.01 par value, 500,000 shares authorized, 400,000 shares issued and 40,000
outstanding)
Accumulated deficit ..................................................................... (5,663,897)
------------
Total stockholder's deficiency ........................................................ (5,623,897)
------------
TOTAL .................................................................................... $ 25,322,328
============
</TABLE>
See notes to financial statements.
F-75
<PAGE>
LUTE RILEY MOTORS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUES:
Vehicle sales ................................................. $148,112,258
Parts, service and collision repair ........................... 23,062,505
Finance and insurance (Note 1) ................................ 7,028,307
------------
Total revenues .............................................. 178,203,070
COST OF SALES (Note 1) ......................................... 153,729,945
------------
GROSS PROFIT ................................................... 24,473,125
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................... 18,376,682
DEPRECIATION AND AMORTIZATION .................................. 1,164,043
------------
OPERATING INCOME ............................................... 4,932,400
OTHER INCOME (EXPENSE):
Interest expense -- floorplan (Note 2) ........................ (634,954)
Interest expense -- other (Note 7) ............................ (557,590)
Other income .................................................. 146,477
------------
Total other expense ......................................... (1,046,067)
------------
INCOME BEFORE INCOME TAXES ..................................... 3,886,333
PROVISION FOR INCOME TAXES (Notes 1 and 5) ..................... 90,766
------------
NET INCOME ..................................................... $ 3,795,567
============
PRO FORMA PROVISION FOR INCOME TAXES (Note 1) (unaudited) ...... $ 1,277,967
============
PRO FORMA NET INCOME (Note 1) (unaudited) ...................... $ 2,517,600
============
</TABLE>
See notes to financial statements.
F-76
<PAGE>
LUTE RILEY MOTORS, INC.
STATEMENT OF STOCKHOLDER'S DEFICIENCY
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDER'S
STOCK DEFICIT DEFICIENCY
---------- ---------------- ----------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 ............ $40,000 $ (5,108,501) $ (5,068,501)
Net income ........................... -- 3,795,567 3,795,567
Distributions to stockholder ......... -- (4,350,963) (4,350,963)
BALANCE AT DECEMBER 31, 1998 .......... $40,000 $ (5,663,897) $ (5,623,897)
======= ============= =============
</TABLE>
See notes to financial statements.
F-77
<PAGE>
LUTE RILEY MOTORS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 3,795,567
------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ..................................................... 1,164,043
Deferred income taxes ............................................................. (69,646)
Changes in assets and liabilities that relate to operations:
Increase in accounts receivable .................................................. (582,211)
Increase in inventories .......................................................... (8,191,278)
Increase in other current assets ................................................. (271,040)
Increase in other assets ......................................................... (80,868)
Increase in notes payable -- floorplan ........................................... 5,770,273
Increase in notes payable -- related party floorplan ............................. 2,908,436
Increase in trade accounts payable and accrued liabilities ....................... 575,125
------------
Decrease in dividends payable .................................................... (392,100)
Total adjustments ............................................................... 830,734
------------
Net cash provided by operating activities ....................................... 4,626,301
------------
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchases of property and equipment ................................................. (1,440,554)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ........................................................ 3,250,000
Payments on long-term debt .......................................................... (2,889,263)
------------
Distributions to stockholder ........................................................ (4,350,963)
Net cash used in financing activities ........................................... (3,990,226)
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................................ (804,479)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ......................................... 7,566,223
------------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................................... $ 6,761,744
------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the year:
Interest .......................................................................... $ 1,191,112
============
Income Taxes ...................................................................... $ 180,063
============
Property and equipment acquired under capital lease ............................... $ 1,411,829
============
</TABLE>
See notes to financial statements.
F-78
<PAGE>
LUTE RILEY MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Lute Riley Motors, Inc. d\b\a Lute Riley
Honda and Lute Riley's Body Shop (the "Company") operates an automotive
dealership and a body shop in Dallas, 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 Honda
Motor Company.
REVENUE RECOGNITION -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service and body shop work is
performed.
The Company arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the differences
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 $965,000 for the year ended December 31, 1998.
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.
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 $4,351,000 at December 31, 1998.
INVENTORIES -- All inventories are valued at the lower of cost or market.
Cost is determined using the last-in, first-out ("LIFO") method.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed primarily using accelerated methods over the estimated
useful lives of the assets. The range of estimated useful lives (in years) is
as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings ......................... 40
Leasehold improvements ............ 5
Office equipment and fixtures ..... 5-7
Parts and service equipment ....... 5-7
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
INCOME TAXES -- The Company is organized as an S Corporation for federal
income tax purposes. As such, the Company's Federal taxable income is included
in the personal income tax return of the stockholder. Accordingly, no provision
for Federal income taxes has been included in the Company's statement of
income. However, the Company is subject to Texas income taxes which are
provided for in the financial statements. Deferred taxes result primarily from
certain accruals, capitalized leases 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.
F-79
<PAGE>
LUTE RILEY MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
The unaudited proforma provision for income taxes and the unaudited
proforma net income for the year ended December 31, 1998 reflect estimated
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.
ADVERTISING COSTS -- The Company expenses advertising costs in the period
incurred. Advertising expense for 1998 amounted to approximately $1,800,000.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
cash deposits and accounts receivable. 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 mitigated by the large number of
customers comprising the trade receivables balances. Trade receivables are
concentrated in the Company's market area of Dallas, Texas.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- As of December 31, 1998, the fair
values of the Company's financial instruments including accounts receivable,
trade accounts payable, notes payable -- floor plan and long-term debt
approximate their carrying values due to either their length of maturity or the
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.
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------
<S> <C>
New and demonstrator vehicles ......... $ 9,365,604
Used vehicles ......................... 2,883,430
Rental vehicles ....................... 446,002
Parts and accessories ................. 833,801
------------
13,528,837
LIFO reserve .......................... (1,837,262)
------------
Inventories, net ...................... $ 11,691,575
============
</TABLE>
Had the Company used the first-in, first-out method of valuing
inventories, pretax earnings would have been approximately $3,324,000 in 1998.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions and related parties (see Note 7) in the
amount of $14,712,989 at December 31, 1998. The floor plan notes bear interest,
payable monthly on the outstanding balance at the rate of prime plus 1% to
1-1/2% (prime rate was 7.75% at December 31, 1998). Total floor plan interest
expense amounted to $634,954 in 1998. The notes payable are due when the
related vehicle is sold. As such, these floorplan notes payable are shown as a
current liability in the accompanying balance sheet. The maximum credit
available under the financing arrangements is $16,743,344 at December 31, 1998.
F-80
<PAGE>
LUTE RILEY MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------
<S> <C>
Buildings ........................................... $ 4,061,829
Leasehold improvements .............................. 2,026,917
Office equipment and fixtures ....................... 1,705,674
Parts and service equipment ......................... 702,427
------------
8,496,847
Less accumulated depreciation and amortization ...... (4,557,122)
------------
Property and equipment, net ......................... $ 3,939,725
============
</TABLE>
4. FINANCING ARRANGEMENTS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------
<S> <C>
Unsecured note payable to the stockholder, interest at prime less 1% (prime rate
was 7.75% at December 31, 1998). ................................................ $ 3,325,000
Unsecured note payable in monthly installments totaling $31,248 plus interest
ranging from prime to 7.75%, maturities from August 1999 to August 2003. ........ 1,172,245
Unsecured note payable to a related party in annual installments of $26,000 plus
interest at 5.429%, through August 2002. ........................................ 104,000
Amounts outstanding under $3,250,000 revolving line of credit from Bank One,
Texas, N.A. bearing interest at 30 day LIBOR + 1.88% (6.94% at December 31,
1998) and secured by receivables and inventories ................................ 3,250,000
Capital lease obligations ......................................................... 1,216,526
------------
9,067,771
Less current maturities ........................................................... (3,830,995)
------------
Long-term debt .................................................................... $ 5,236,776
============
</TABLE>
Future maturities of debt and capital lease obligations at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------
<S> <C>
1999 ................... $3,830,995
2000 ................... 510,739
2001 ................... 524,548
2002 ................... 566,965
2003 ................... 3,621,308
Thereafter ............. 13,216
----------
Total .................. $9,067,771
==========
</TABLE>
F-81
<PAGE>
LUTE RILEY MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Current .............. $ 160,412
Deferred ............. (69,646)
---------
Total ................ $ 90,766
=========
</TABLE>
The reconciliation of the statutory state income tax rate with the
Company's overall effective income tax rate is as follows for the year ending
December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Statutory state rate ......... 4.50%
Miscellaneous ................ .03%
----
Effective tax rate ........... 4.53%
====
</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:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Deferred tax assets, primarily relating to differences related to chargebacks and
capitalized losses ............................................................ $ 307,338
Deferred tax liabilities, primarily relating to basis difference in property and
equipment ..................................................................... (37,480)
---------
Net deferred tax assets ......................................................... $ 269,858
=========
</TABLE>
6. EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) profit sharing plan whereby
substantially all of the employees of the Company meeting certain service
requirements are eligible to participate. Contributions by the Company in 1998
were approximately $17,000.
7. RELATED PARTY TRANSACTIONS
Management bonuses of $3,175,000 were paid to the stockholder during 1998.
The Company leases certain buildings and operating facilities directly
from the stockholder. Rent expense under these leases was approximately
$168,000 in 1998. Obligations under related party noncancelable operating
leases are $56,000 through May 1, 1999.
The Company has floorplan notes payable with the stockholder and employees
totaling $3,434,094 at December 31, 1998. Interest expense under these and
other financing arrangements with the stockholder and employees (Note 4) is
$514,219 in 1998.
The Company has deferred compensation agreements with two employees
whereby employee income greater than $180,000 is deferred and retained by the
Company. The funds are used to finance new car purchases. The Company accrues
interest payable to the employees until principal amounts are distributed. At
December 31, 1998, approximately $490,000 in deferred compensation was recorded
within the accompanying Balance Sheet under such arrangements. These amounts
were paid in March 1999.
F-82
<PAGE>
LUTE RILEY MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
In January 1999, 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 $42.1 million plus the net book value of the
purchased assets as of the closing date. The purchase price is expected to be
paid in cash and convertible preferred stock of Sonic (with a liquidation
preference of approximately $10.5 million as of the closing date of the
acquisition).
F-83
<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8,500,000 SHARES
[SONIC LOGO APPEARS HERE]
CLASS A COMMON STOCK
---------------
P R O S P E C T U S
---------------
MERRILL LYNCH & CO.
BANCBOSTON ROBERTSON STEPHENS
STEPHENS INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
APRIL 29, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
