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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------- to -------
Commission file number 1-13395
SONIC AUTOMOTIVE, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
DELAWARE 56-2010790
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5401 EAST INDEPENDENCE BOULEVARD
P.O. BOX 18747
CHARLOTTE, NORTH CAROLINA 28212
(Address of Principle Executive Offices) (Zip Code)
</TABLE>
(704) 532-3320
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Class A Common Stock, $.01 Par Value New York Stock Exchange
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting common stock held by
non-affiliates of the registrant was approximately $252,545,000 based upon the
closing sales price of the registrant's Class A common stock on March 14, 2000
of $8.625 per share. As of March 14, 2000, there were 31,244,512 shares of
Class A common stock, par value $.01 per share, and 12,250,000 shares of Class
B common stock, par value $.01 per share, outstanding. Unless otherwise
indicated, all other share and share price information contained herein takes
into account the effect of the two for one stock split effected as of January
25, 1999 in the form of a 100% stock dividend payable to stockholders of record
as of January 4, 1999 (the "Stock Split").
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held June 5, 2000, are
incorporated by reference into Part III of this Form 10-K.
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FORM 10-K TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business .................................................................................. 4
Item 2. Properties ................................................................................ 16
Item 3. Legal Proceedings ......................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 20
Item 6. Selected Financial Data ................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 28
Item 8. Financial Statements and Supplementary Data ............................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 29
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 30
Item 11. Executive Compensation .................................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 30
Item 13. Certain Relationships and Related Transactions ............................................ 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 31
SIGNATURES ....................................................................................... 35
INDEX TO FINANCIAL STATEMENTS .................................................................... F-1
</TABLE>
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements (including the Notes thereto) appearing
elsewhere herein. This Annual Report on Form 10-K contains 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. These forward-looking statements are not historical facts but only
predictions and generally can be identified by use of statements that include
words such as "believe," "expect," "anticipate," "intend," "plan," "foresee" or
other words or phrases of similar import. Similarly, statements that describe
our objectives, plans or goals are also forward-looking statements. 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 Annual Report on Form 10-K and include statements
regarding our intent, belief or current expectations, or those of our directors
or officers, with respect to, among other things:
o our potential acquisitions;
o trends in our industry;
o our financing plans;
o the effect of the Internet on our business and our ability to implement
our Internet business strategy;
o trends affecting our financial condition or results of operations; and
o our business and growth strategies.
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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
materially 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 the effect of the Internet on our business;
o realization of cost savings; and
o our success in integrating recent and potential future acquisitions.
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PART I
ITEM 1. BUSINESS.
Sonic Automotive, Inc. was incorporated in the State of Delaware in
February 1997. We are the second largest automotive retailer in the United
States, as measured by total revenue, currently operating 172 dealership
franchises and 30 collision repair centers in 13 states. We own and operate
franchises for 31 different brands of cars and light trucks providing
comprehensive services including sales of both new and used cars and light
trucks, replacement parts and vehicle maintenance, warranty, paint and repair
services. We also arrange extended warranty contracts and financing and
insurance ("F&I") for our automotive customers. Our growth in operations has
been strategically focused on high growth metropolitan markets, predominantly
in the Southeast, Southwest and California, that on average are experiencing
population growth that exceeds the national average.
EASTERN DIVISION
o Atlanta
o Baltimore
o Birmingham
o Charleston
o Charlotte
o Chattanooga
o Columbia
o Columbus
o Daytona Beach
o Fort Myers
o Greenville/Spartanburg
o Mobile/Pensacola
o Montgomery
o Nashville
o Tampa/Clearwater
o Washington D.C.
CENTRAL DIVISION
o Dallas
o Houston
o Tulsa
WESTERN DIVISION
o Las Vegas
o Los Angeles
o San Diego
o San Francisco
o San Jose/Silicon Valley
Our leading new vehicle brands accounted for our 1999 revenue as depicted
in the following chart:
[Chart appears here with the following plot points:]
Percentage of New Vehicle Revenue
for Year Ended December 31, 1999
Ford 23.2%
Chrysler (Chrysler, Plymouth, Jeep, Dodge) 14.0%
Honda 6.7%
General Motors (Buick, Cadillac,
Chevrolet, Oldsmobile, Pontiac, GMC) 13.5%
BMW 9.5%
Toyota 7.9%
Nissan 3.1%
Lexus 3.8%
Other 14.1%
Volvo 4.2%
In addition to these brands we also own and operate dealerships
representing the following other brands:
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o Acura o Isuzu o Mercury o Range Rover
o Audi o KIA o Mitsubishi o Subaru
o Hyundai o Lincoln o Porsche o Volkswagen
o Infiniti o Mercedes
</TABLE>
Each of our dealership locations throughout our metropolitan markets
provides similar products and services, including (1) new car sales, (2) used
car sales, (3) parts, service and repair, and (4) finance and insurance
services. As compared to automotive manufacturers, we and other automotive
retailers exhibit relatively low earnings volatility. This is primarily due to
the differing expense structures between automotive manufacturers and
retailers. Roughly 70% of manufacturers' expenses are fixed due to factory
overhead and union contracts, whereas only approximately 32% of our expenses
for the year ended December 31, 1999 were fixed (primarily rent and salaries).
The majority of our variable expenses relates to sales commissions, advertising
and floor plan interest expense, and therefore can be adjusted as demand
patterns change. We believe the diversity of our revenue sources and
profitability as a full service automotive dealership and our flexible expense
structure should serve to mitigate the effects of economic cycles and seasonal
influences. The following charts depict the diversity of our revenue and gross
profit for the year ended December 31, 1999:
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[Charts appear here with the following plot points:]
Revenue Gross Profit
Parts, Service & Repair 11% 34%
New Cars 59% 36%
F&I 2% 15%
Used Cars 28% 15%
BUSINESS STRATEGY
o FURTHER DEVELOP STRATEGIC MARKETS. We intend to continue to capitalize
on the ongoing consolidation of the highly fragmented automotive retailing
industry. We generally seek to acquire larger, well managed multiple franchise
dealerships or multiple dealership groups located in metropolitan or high
growth suburban markets; and smaller, single franchise dealerships that will
allow us to capitalize upon professional management practices and provide
greater breadth of products and services in our markets. We believe that
attractive acquisition opportunities continue to exist for dealership groups
with significant capital and experience in identifying, acquiring and
professionally managing dealerships. The automotive retailing industry is still
highly fragmented, with the largest 100 dealer groups generating less than 10%
of the industry's $650 billion of total automobile sales in 1998 and
controlling less than 5% of all new vehicle dealerships in the United States.
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. We intend to acquire dealerships that have
underperformed the industry average but carry attractive product lines or have
attractive locations and would immediately benefit from our professional
management.
o INCREASE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. We continue to
pursue opportunities to increase our sales of higher-margin products and
services by expanding the following:
RETAIL USED VEHICLES: Retail used vehicle sales typically generate higher
gross margins than new vehicle sales due to limited comparability among
used vehicles and the somewhat subjective nature of their valuation. Our
experience indicates that there are opportunities at acquired dealerships
to improve all aspects of used vehicle operations and used vehicle
inventory control. Retail used vehicle unit sales as a percentage of our
new and used vehicle unit sales increased to 37.4% for the year ended
December 31, 1999, from 37.2% for the year ended December 31, 1998. On a
same store basis, retail used vehicle unit sales increased 12.9% to 24,560
for the year ended December 31, 1999 as compared to the same period in
1998.
FINANCE AND INSURANCE: We currently offer a wide range of nonrecourse
financing, leasing and insurance products to our customers as each sale of
a new or used vehicle provides us the opportunity to earn financing fees
and to sell extended warranty service contracts. We believe there are
opportunities at acquired dealerships to increase earnings from the sale of
financing and insurance as well as warranties. 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 $5.6 million for the year ended December 31,
1999. On a per vehicle basis, our F&I revenue has increased 27.2% to $654.
On a same store basis, F&I revenue has increased 41% to $44.1 million for
the year ended December 31, 1999 as compared to the same period in 1998.
SERVICE AND PARTS: Each of our dealerships offers a fully integrated
service and parts department. We believe there are opportunities to
increase the number of service customers we retain at our dealerships
through continued emphasis on customer service. On a same store basis,
service and parts revenue has increased 10.1% to $150.7 million for the
year ended December 31, 1999 as compared to the same period in 1998.
o UTILIZE THE INTERNET TO DRIVE SALES. We intend to continue to utilize
technology and services available to customers over the Internet to drive
sales. We intend to further distinguish our SonicAutomotive.com web site by
expanding capabilities to provide effectively captive referral leads to our
dealership network. To drive significant customer traffic to our site, we plan
to incorporate our SonicAutomotive.com URL into our $75 million annual print,
radio and television advertising efforts for our dealerships.
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Our acquisition of FirstAmerica enhanced our Internet presence with the
addition of AnyAuto.com. We intend to reposition the AnyAuto.com web site into
our own on-line direct service to compete with on-line auto brokers such as
CarsDirect.com. Our ability to source new vehicles from our extensive network
of 172 dealership franchises provides a substantial competitive advantage over
on-line auto brokers who must purchase new vehicles at a mark-up from a
franchised dealership. We offer the additional advantage of providing service,
warranty and extensive financing alternatives to our AnyAuto.com customers,
further differentiating our capabilities from on-line auto brokers.
While we believe the established local "bricks and mortar" dealership will
continue to serve as the primary point of purchase of automobiles for consumers
for the foreseeable future, we believe the Internet can be a low-cost source of
customer leads for our dealers and an effective means of providing marketing
information and other services to existing and potential customers.
o EMPHASIZE EXPENSE CONTROL. We continually focus on controlling expenses
and expanding margins at the dealerships we acquire and integrate into our
organization. Approximately 68% of our operating costs for the year ended
December 31, 1999 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 advertising (9% of operating costs) and
compensation (46%) 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. Our selling,
general and administrative expense as a percentage of revenue was 9.8% for the
year ended December 31, 1999 compared to an average of 10.6% for the other four
largest publicly-traded automobile retailers.
o TRAIN, DEVELOP AND MOTIVATE QUALIFIED MANAGEMENT. We believe that our
well-trained dealership personnel are 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 professional, multi-tiered
management structure provide us with a competitive advantage over other
dealership groups. This training and organizational structure provides
high-level supervision over the dealerships, accurate financial reporting and
the ability to maintain effective controls as we expand. 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 within our large organization 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 CSI levels (which vary
by manufacturer) are achieved by a dealer. In addition, all 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 programs.
DEALERSHIP MANAGEMENT
Sonic manages its business based on individual dealership operations.
Operations of the dealerships are overseen by Regional Vice Presidents, who
report to the Division Vice President for a particular division. Our divisions
consist of the Eastern Division, the Central Division and the Western Division,
with each of the Division Vice Presidents reporting to the Executive Vice
President of Retail Operations.
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.
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.
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Sonic's dealer operators are also supported by National Directors of Fixed
Operations, Field Operations, Sales and Finance & Insurance, respectively. Each
of these National Directors review the operations and practices of our
dealerships in these specialized areas and assist the dealer operators in
implementing organizational best practices. The National Directors of Fixed
Operations and of Finance & Insurance are each supported by Regional Directors
specializing in these disciplines.
NEW VEHICLE SALES
As of December 31, 1999, Sonic sold 31 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 23.6% of new vehicle sales during
the year ended December 31, 1999 were luxury brands (for example, Mercedes,
Lexus, BMW, Cadillac, Infiniti and Volvo).
The following table presents information with respect to Sonic's new
vehicle sales:
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YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
------------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Unit sales ............ 15,715 41,592 79,294
Sales revenue ......... $ 343,941 $ 962,939 $ 1,968,514
Gross profit .......... $ 26,427 $ 75,494 $ 161,205
Gross margin .......... 7.7% 7.8% 8.2%
</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,
------------------------------------------
1997 1998 1999
------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Retail unit sales ............... 6,712 24,591 47,345
Retail sales revenue ............ $85,132 $324,740 $684,560
Retail gross profit ............. $ 7,294 $ 34,826 $ 72,627
Retail gross margin ............. 8.6% 10.7% 10.6%
Wholesale unit sales ............ 7,287 21,886 39,834
Wholesale sales revenue ......... $38,785 $119,351 $250,794
Wholesale gross profit .......... $ (599) $ (1,166) $ (3,734)
Wholesale gross margin .......... (1.5)% (1.0)% (1.5)%
Total unit sales ................ 13,999 46,477 87,179
Total revenue ................... $123,917 $444,091 $935,354
Total gross profit .............. $ 6,695 $ 33,660 $ 68,893
Total gross margin .............. 5.5% 7.6% 7.4%
</TABLE>
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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.
The following table sets forth information regarding Sonic's service and
parts sales:
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YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sales revenue ......... $ 51,033 $ 146,456 $ 333,161
Gross profit .......... $ 18,118 $ 62,152 $ 139,738
Gross margin .......... 35.5% 42.4% 41.9%
</TABLE>
COLLISION REPAIR
As of December 31, 1999, Sonic operated collision repair centers, or body
shops, at 29 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:
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YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sales revenue ......... $ 6,504 $ 16,204 $ 31,023
Gross profit .......... $ 3,092 $ 8,114 $ 14,933
Gross margin .......... 47.5% 50.0% 48.1%
</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,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commission revenue ......... $ 10,606 $ 34,011 $ 82,771
Gross profit ............... $ 8,856 $ 28,022 $ 69,654
Gross margin ............... 83.5% 82.4% 84.2%
</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. We
also utilize the SonicAutomotive.com internet web site to refer customers to
our individual dealerships for sales of new and used vehicles, servicing of
vehicles and financing
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alternatives. We plan to incorporate the SonicAutomotive.com URL into the
print, radio and television advertising efforts for our dealerships in order to
drive significant customer traffic to the SonicAutomotive.com web site. Sonic's
internet sales efforts also involve utilizing our AnyAuto.com web site as our
own on-line direct service to compete with other on-line auto brokers.
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 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 have developed 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.
Sonic believes that it will be able to renew at expiration all of its existing
franchise agreements.
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.
o Under Sonic's agreement with Ford, Ford may cause Sonic to sell or
resign from one or more of Sonic's Ford, Lincoln or Mercury franchises if any
person or entity acquires securities having 50% or more of the voting power of
Sonic's securities.
o 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.
o Under Sonic's agreement with Honda, Honda may force the sale of one or
more of Sonic's Honda or Acura franchises if (1) an automobile manufacturer or
distributor acquires securities having 5% or more of the voting power of
Sonic's securities, (2) an individual or entity that has either a felony
criminal record or a criminal record based solely in connection with dealings
with an automobile manufacturer, distributor or dealership acquires securities
having 5% or more of the voting power of Sonic's securities or (3) any
individual or entity acquires securities having 20% or more of the voting power
of Sonic's securities and Honda reasonably deems such acquisition to be
detrimental to Honda's interests in any material respect.
o 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.
o Similarly, Chrysler has approved of the public sale of only 50% of our
common stock 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 advance notice to approve any acquisition of
20% or more of Sonic's voting securities.
o Other manufacturers may impose similar restrictions.
Many states, including Alabama, California, Florida, Georgia, Maryland,
Nevada, Ohio, Tennessee and Texas, have placed limitations upon manufacturers'
and distributors' ability to sell new motor vehicles directly to customers in
their respective states in an effort to protect dealers from unfair
competition. In general, these statutes make it unlawful for a
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manufacturer or distributor to compete with a new motor vehicle dealer in the
same line-make operating under an agreement or franchise from the manufacturer
or distributor in the relevant market area. However, a manufacturer or
distributor is not deemed to be competing when:
1. operating a dealership either temporarily or for a reasonable period;
2. in a bona fide retail operation which is for sale; or
3. in a bona fide relationship in which an independent person has made a
significant investment subject to loss in the dealership and can reasonably
expect to acquire full ownership of such dealership on reasonable terms and
conditions.
Certain states, such as Florida, Georgia and North Carolina, limit the
amount of time that a manufacturer may temporarily operate a dealership to one
year. Further, certain states require a person who is attempting to acquire a
dealership from a manufacturer or distributor to invest a specified amount of
money in the dealership.
There are other exceptions to this prohibition on direct sales to
customers that vary from state to state. For instance, certain states such as
North Carolina allow manufacturers to own, operate or control dealerships if
they have been engaged in the retail sale of motor vehicles through the
dealership for a continuous period of time prior to a certain date and if no
other independent dealer is available in the relevant market to own and operate
the franchise. Further, other states such as Tennessee allow manufacturers to
sell trucks of certain weights directly to customers if the manufacturer has
been selling these trucks at retail for a continuous period of time prior to a
grandfathering date.
In addition to these direct selling prohibitions, there are other state
laws that offer dealers protection from manufacturers. In particular, all of
the states in which Sonic dealerships currently do business require
manufacturers to show "good cause" for terminating or failing to renew a
dealer's franchise agreement. Further, each of the states provides some method
for dealers to challenge manufacturers' attempts to establish dealerships of
the same line-make in their relevant market area. A summary of the relevant
states' laws regarding manufacturer/dealer relations is set forth below:
ALABAMA. 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.
CALIFORNIA. California law requires a manufacturer who wishes to terminate
or refuse to continue any existing franchise to provide written notice to the
franchisee and to California's New Motor Vehicle Board. If the dealer protests,
the manufacturer will be required to show the board that there is good cause
for termination. Possible reasons for termination include transfer of any
ownership or interest in the franchise without the consent of the franchisor
(which consent cannot be unreasonably withheld), misrepresentation by the
franchisee in applying for the franchise, insolvency of the franchisee and
failure of the dealer to conduct its customary sales and service operations
during its customary hours of business for 7 consecutive business days. If a
manufacturer wants to establish an additional motor vehicle dealership within a
relevant market area where the same line-make is then represented or seeks to
relocate an existing motor vehicle dealership, the manufacturer must notify the
New Motor Vehicle Board and each franchisee in that line make in the relevant
area. The franchisee may then file a protest to the establishing or relocating
of the dealership. The franchisee has the burden of proof to show that there is
good cause not to allow the establishment or relocation of the additional motor
vehicle dealership.
FLORIDA. 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.
GEORGIA. 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
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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.
MARYLAND. Under Maryland law, it is unlawful for a manufacturer to
terminate, cancel or fail to renew the franchise of a dealer unless the dealer
has failed to comply substantially with the reasonable requirements of the
franchise and the manufacturer has given the dealer notice. If a dealer
receives written notice that his franchise is being terminated, canceled or not
renewed, he may request a hearing to determine whether he had failed to comply
substantially with the reasonable requirements of the franchise. A manufacturer
in Maryland that terminates, cancels or fails to renew the franchise of a
dealer in violation of the law must pay the dealer the fair value of his
business as a going concern. On payment, the dealer is required to convey his
business, free of liens and encumbrances, to the manufacturer.
NEVADA. Nevada law makes it unlawful for a manufacturer to terminate or
refuse to continue any franchise unless it has received the written consent of
the dealer or it gives written notice of its intention to the dealer and Nevada
and either the dealer does not file a protest; or after the dealer has filed a
protest and the state has conducted a hearing on the matter, the state issues
an order authorizing the manufacturer to terminate the franchise or permit it
to lapse. Possible grounds for termination of a franchise include transfer of
an ownership or interest in a dealership without the consent of the
manufacturer unless the consent has been unreasonably withheld, material
misrepresentation by the dealer in applying for franchise, insolvency of the
dealer, revocation of a dealer's license, conviction of the dealer for a
felony, any unfair business practice by the dealer after the manufacturer has
issued a written warning to the dealer to desist from that practice, or closure
by the dealer for a period of longer than 14 days unless the closure was beyond
the dealer's control. In Nevada, a manufacturer may not enter into a franchise
which would establish an additional dealership within the relevant market area
of another dealer in the same line and make of vehicles unless the manufacturer
has given written notice to each dealer in the same line in the relevant market
area and either none of the dealers protest or after a protest is filed the
state finds that there is not good cause for preventing the intended
establishment or relocation of a dealership and issues an order authorizing the
manufacturer or distributor to establish the additional dealership.
NORTH CAROLINA. Under North Carolina law, it is unlawful for a
manufacturer to prevent or refuse to approve the sale or transfer of the
ownership of a dealership or a change in the executive management of a
dealership or the relocation of a dealership to another site within the
dealership's relevant market area, if the Commissioner had determined, if
requested in writing by the dealer within 30 days after receipt of an objection
to the proposed transfer, sale, assignment, relocation or change, and after a
hearing on the matter, that the failure to permit or honor the sale, transfer,
assignment relocation or change is unreasonable under the circumstances.
OHIO. 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.
OKLAHOMA. Under Oklahoma law, it is unlawful for a manufacturer to
terminate, cancel or fail to renew any franchise with a licensed new motor
vehicle dealer unless the manufacturer has provided notice to the dealer and
has good cause for cancellation, termination or nonrenewal. Furthermore, if a
manufacturer seeks to enter into a franchise establishing a new motor vehicle
dealership or relocating an existing new motor vehicle dealership within or
into a relevant market area where the same line-make is then represented, the
manufacturer must provide notice to the dealer and the dealer may file a
protest. Finally, a dealer proposing a sale, transfer or assignment of a
franchise agreement or the business and assets of a dealership or an interest
in a dealership to another person must notify the manufacturer. The
manufacturer may not unreasonably withhold approval.
SOUTH CAROLINA. 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
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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.
TENNESSEE. 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.
TEXAS. 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, 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 limit
the ability of manufacturers to withhold their approval for the relocation of a
franchise or require that disputes be arbitrated. In addition, a manufacturer's
license to distribute vehicles in Texas may be revoked if, among other things,
the manufacturer has forced or attempted to force an automobile dealer to
accept delivery of motor vehicles not ordered by that dealer.
VIRGINIA. Virginia law states that it is unlawful for a manufacturer to
prevent or refuse to approve the sale or transfer of the ownership of a
dealership unless the manufacturer provides written notice and the refusal is
reasonable. It is unlawful for a manufacturer to grant an additional franchise
for a particular line-make of motor vehicle in a relevant market area in which
a dealer or dealers of that line-make are already located unless the
manufacturer has first advised in writing all other dealers in the line-make in
the area. A dealer may request a hearing where a determination will be made as
to whether the market will support all of the dealers in that line-make in the
area. It is unlawful for a manufacturer to terminate, cancel or refuse to renew
the franchise of any dealer without good cause and unless the dealer has
received written notice of the manufacturer's intentions and the state has
determined, if requested in writing by the dealer, that there is good cause for
the termination. In the event of a proposed sale or transfer of a dealership,
the manufacturer has a right of first refusal to acquire the new vehicle
dealer's assets or ownership, subject to certain exceptions.
COMPETITION
The retail automotive industry is a highly competitive business with over
22,400 franchised automobile dealerships in the United States at the beginning
of 1999. Depending on the geographic market, Sonic competes both with 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, and with internet companies who provide customer referrals
to other dealerships or who broker vehicle sales between customers and other
dealerships. 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.
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.
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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, Baltimore, Birmingham,
Charleston, Charlotte, Chattanooga, Columbia, Columbus, Dallas, Daytona Beach,
Ft. Myers, Greenville/Spartanburg, Houston, Las Vegas, Los Angeles,
Mobile/Pensacola, Montgomery, Nashville, San Diego, San Francisco, San
Jose/Silicon Valley, Tampa/Clearwater, Tulsa and Washington, D.C. 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.
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 Alabama, California, Florida, Georgia, Maryland, Nevada, North
Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Virginia 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.
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 use, storage, handling,
recycling and disposal of gasoline, oil and other materials, also apply to us
and our dealership properties.
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 own or
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
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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.
EXECUTIVE OFFICERS AND DIRECTORS; KEY PERSONNEL OF THE REGISTRANT
Sonic's executive officers, directors and key personnel, and their ages as
of the date of this Form 10-K, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH SONIC
- ----- ----- ----------------------
<S> <C> <C>
O. Bruton Smith ..... 73 Chairman, Chief Executive Officer and Director*
Thomas A. Price ..... 56 Vice Chairman and Director*
B. Scott Smith ...... 32 President, Chief Operating Officer and Director*
Theodore M. Wright .. 37 Chief Financial Officer, Vice President, Treasurer
and Director*
Jeffrey C. Rachor ... 38 Executive Vice President of Retail Operations and Director*
Mark J. Iuppenlatz .. 40 Vice President of Corporate Development*
William R. Brooks ... 50 Director
William P. Benton ... 76 Director
William I. Belk ..... 50 Director
H. Robert Heller .... 60 Director
</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 has agreed to
stand for reelection as a Sonic director 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,
Lowe's Motor Speedway at Charlotte, 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. Under his employment
agreement with Sonic, Mr. Smith is required to devote approximately 50% of his
business time to Sonic's business.
Thomas A. Price was appointed Vice Chairman and a director of Sonic on
January 1, 2000. Mr. Price's term as a director of Sonic will expire at the
2002 annual meeting of stockholders. Before joining Sonic, Mr. Price was
chairman of the FirstAmerica Automotive board of directors since August 1999
and had been FirstAmerica's Chief Executive Officer, President and a director
since September 1996. From March 1976 to June 1997, Mr. Price owned and
operated nine vehicle dealerships. Mr. Price has worked in the automotive
industry since 1963 in various capacities including marketing and field
assignments at Ford Motor Company. Mr. Price is currently a member of the Lexus
National Dealer Advisory Board and he is a charter member of the J.D. Power
Superdealer Roundtable.
B. 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.
Theodore M. Wright has been the Chief Financial Officer, Vice President
and Treasurer 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's term as a director of Sonic will expire at
the 2002 annual stockholders meeting.
Jeffrey C. Rachor is Sonic's Executive Vice President of Retail Operations.
In May 1999, Mr. Rachor was appointed a director of Sonic and promoted to
executive officer status. He originally joined Sonic as its Regional Vice
President -- Mid-South region upon Sonic's 1997 acquisition of dealerships in
Chattanooga, Tennessee and was subsequently promoted to Vice President of Retail
Operations in September 1998. Mr. Rachor has agreed to stand for reelection as a
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Sonic director at the 2000 annual meeting of stockholders. Mr. Rachor has over
14 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.
Mark J. Iuppenlatz has been Sonic's Vice President of Corporate
Development since August 1999. Before joining Sonic, Mr. Iuppenlatz served as
the Executive Vice President -- Acquisitions and Chief Operating Officer of Mar
Mar Realty Trust, a real estate investment trust specializing in sale/leaseback
financing of automotive-related real estate, from September 1998 to August
1999. From 1996 to September 1998, Mr. Iuppenlatz was employed by Brookdale
Living Communities, Inc., a publicly-traded company, where he was responsible
for conducting that company's development operations. From 1994 to 1996, he
served as Vice President of Schlotzky's, Inc., a publicly-traded company, where
his responsibilities included the development of over 30 new restaurant
locations in more than 10 states. From 1991 to 1994, Mr. Iuppenlatz served in
Spain as the director of marketing and the assistant director of development
for Kepro S.A., an affiliate of The Prime Group. During his service with Kepro
S.A, Mr. Iuppenlatz was responsible for the marketing and development of a
mixed use planned development comprised of 22 office buildings, a 2.0 million
square foot shopping mall, apartments, cultural facilities and a major urban
park. From 1989 to 1991, Mr. Iuppenlatz served as the director of leasing for
The Prime Group in Chicago, where his responsibilities included the marketing,
negotiating and closing of lease agreements for commercial space in a 1.0
million square foot office tower.
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 was promoted from manager to
controller in 1985 and again to chief financial officer in 1989. Mr. Brooks has
agreed to stand for reelection as a Sonic director 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.
H. Robert Heller was appointed a director of Sonic on January 1, 2000. Mr.
Heller's term as a director of Sonic will expire at the 2002 annual
stockholders meeting. Mr. Heller served as a director of FirstAmerica from
January 1999 until its acquisition by Sonic in December 1999. Mr. Heller has
been a director and Executive Vice President of Fair, Isaac and Company since
1994. At Fair, Isaac and Company, he is responsible for the corporate services
group, including marketing information services, human resources, corporate
affairs and real estate. From 1991 to 1993, Mr. Heller was President and Chief
Executive Officer of Visa U.S.A. Mr. Heller is a former Governor of the Federal
Reserve System, and has had an extensive career in banking, international
finance, government service and education.
Sonic's Board of Directors is divided into three classes, each of which
serves for a three year term, with one class being elected at Sonic's annual
stockholders meeting each year. Messrs. Bruton Smith, Rachor and Brooks belong
to the class of directors whose term expires in 2000, Messrs. Scott Smith,
Benton and Belk belong to the class whose term expires in 2001 and Messrs.
Wright, Price and Heller belong to the class whose term expires in 2002. The
executive officers are elected annually by, and serve at the discretion of,
Sonic's Board of Directors.
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EMPLOYEES
As of December 31, 1999, Sonic employed approximately 8,300 people, of
whom approximately 995 were employed in managerial positions, 2,240 were
employed in non-managerial sales positions, 3,985 were employed in
non-managerial parts and service positions and 1,080 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.
We believe that our relationships with our employees are good.
Approximately 230 of our employees, primarily service technicians formerly
employed by FirstAmerica Automotive, are 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.
ITEM 2: PROPERTIES.
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
affiliates of Capital Automotive REIT. 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 Oldsmobile, 5585 Peachtree Industrial Blvd., Chamblee, GA, (770)
220-2441
o Dyer & Dyer Volvo, 5260 Peachtree Industrial Blvd., Chamblee, GA, (770)
452-0077
o Dyer & Dyer Volvo of Gwinnett, 3373 Sattelite Blvd., Duluth, GA, (678)
475-9330
o Dyer & Dyer Volvo of Southlake, 1345 Southlake Pwy., Morrow, GA, (770)
968-3610
o Global Imports, 500 & 550 Interstate North Pwy., N.W., Atlanta, GA, (770)
951-2697
BALTIMORE MARKET
o Village Volvo, 728 Bel Air Road, Bel Air, MD, (410) 879-3400
BIRMINGHAM MARKET
o Tom Williams Cadillac, 325 S. 20th St., Birmingham, AL, (205) 322-6731
o Tom Williams Imports, 2200 3rd Ave. South, Birmingham, AL, (205) 252-9512
o Tom Williams Lexus, 300 S. 22nd St., Birmingham, AL, (205) 252-5000 or (800)
395-3987
CHARLESTON MARKET
o Altman Dodge, 2049 Remount Rd., Charleston, SC, (843) 747-0461
o Charleston Lincoln-Mercury, 8485 Rivers Ave., North Charleston, SC, (843)
797-2324
o North Charleston Hyundai, 8475 Rivers Ave., North Charleston, SC, (843)
797-8808
CHARLOTTE MARKET
o Freedom Chevrolet Oldsmobile Cadillac, 3112 Hwy. 74 West, Monroe, NC, (704)
289-8444
o Fort Mill Chrysler-Plymouth-Dodge, 3310 Hwy. 51, Fort Mill, SC, (704)
375-4799
o Fort Mill Ford, 788 Gold Hill Rd., Fort Mill, SC, (704) 377-8877
o Infiniti of Charlotte, 9103 E. Independence Blvd., Charlotte, NC, (704)
845-1556
o Lake Norman Chrysler-Plymouth-Jeep, 20435 Chartwell Center Dr., Cornelius,
NC, (704) 896-3800
o Lake Norman Dodge, 2070 Torrence Chapel Rd., Cornelius, NC, (704) 892-7800
o Town & Country Chrysler-Plymouth-Jeep of Rock Hill, 803 North Anderson Rd.,
Rock Hill, SC, (803) 324-4042
o Town & Country Ford, 5401 East Independence Blvd., Charlotte, NC, (704)
536-5600
o Town & Country Toyota, 9101 South Blvd., Charlotte, NC, (704) 552-7600
CHATTANOOGA MARKET
o BMW of Chattanooga, 5949 Brainerd Rd., Chattanooga, TN, (423) 894-5660
o Cleveland Chrysler-Plymouth-Jeep, 717 South Lee Hwy., Cleveland, TN, (423)
339-8756 or (888) 269-2629
o Cleveland Oldsmobile-Cadillac-GMC, 875 Keith St., Cleveland, TN, (423)
478-5201
o Dodge of Chattanooga, 402 West Martin Luther King Blvd., Chattanooga, TN,
(423) 265-0505
o Economy Honda, 2135 Chapman Rd., Chattanooga, TN, (423) 899-1122
o Infiniti of Chattanooga, 5915 Brainerd Rd., Chattanooga, TN, (423) 899-8934
o Volkswagen/KIA of Chattanooga, 6015 International Dr., Chattanooga, TN, (423)
855-4981
16
<PAGE>
o Town & Country Ford of Cleveland, 2496 South Lee Hwy., Cleveland, TN, (423)
472-5454
o Volvo of Chattanooga, 5915 Brainerd Rd., Chattanooga, TN, (423) 899-8934
COLUMBIA MARKET
o Imports of Florence, 2199 David McLeod Blvd., Florence, SC, (843) 662-8711
o Newsome Automotive, 2199 David McLeod Blvd., Florence, SC, (843) 662-8711
o Newsome Chevrolet World, 4013 W. Beltline Blvd. & 6217 Monticello Rd.,
Columbia, SC, (803) 254-1431
COLUMBUS MARKET
o Hatfield Hyundai-Isuzu-Subaru, 1400 Automall Dr., Columbus, OH, (614)
870-9559
o Hatfield Lincoln Mercury, 1495 Automall Dr., Columbus, OH, (614) 870-1495
o Hatfield Volkswagen/KIA West, 1455 Automall Dr., Columbus, OH, (614) 870-5425
o Toyota West, 1500 Automall Dr., Columbus, OH, (614) 870-8200
o Trader Bud's Westside Chrysler Plymouth Jeep, 3700 W. Broad St., Columbus,
OH, (614) 272-8100
o Trader Bud's Westside Dodge, 4000 W. Broad St., Columbus, OH, (614) 272-0000
DALLAS MARKET
o Lute Riley Honda, 1331 North Central Expressway, Richardson, TX, (972)
238-1700
DAYTONA BEACH MARKET
o Bondesen Chevrolet Oldsmobile Cadillac, 2800 South Highway 17-92, DeLand, FL,
(904) 734-2661
o Halifax Ford-Mercury, 1307 N. Dixie Hwy., New Smyrna Beach, FL, (904)
428-9094
o Higginbotham Automobiles, 1720 Mason Ave., Daytona Beach, FL, (904) 274-4775
o Higginbotham Chevy-Olds, 1919 N. Dixie Hwy., New Smyrna Beach, FL, (904)
427-1313
o HMC Finance, 3741 S. Nova Rd., Port Orange, FL, (904) 322-1020
o Sunrise Auto World, 241 Ridgewood Ave., Holly Hill, FL, (904) 254-8441
FORT MYERS MARKET
o BMW of Fort Myers, 7070 Lakes Terrace, Ft. Myers, FL, (941) 433-8306
o Honda of Fort Myers, 14020 S. Tamiami Tr., Ft. Myers, FL, (941) 433-8383
o Mercedes-Benz of Fort Myers, 13880 S. Tamiami Tr., Ft. Myers, FL, (941)
433-8300
o Nissan of Fort Myers, 13950 S. Tamiami Tr., Ft. Myers, FL, (941) 433-8378
o Volkswagen of Fort Myers, 3405 Fowler St., Ft. Myers, FL, (941) 275-4800
GREENVILLE/SPARTANBURG MARKET
o Century BMW, 2752 Laurens Rd., Greenville, SC, (864) 234-6437
o Heritage Lincoln Mercury, 2424 Laurens Rd., Greenville, SC, (864) 234-6400
HOUSTON MARKET
o Baytown Pontiac-GMC-Buick, 1701 I-10 East, Baytown, TX, (281) 843-2067
o Casa Chrysler Plymouth Jeep, 5225 I-10 East, Baytown, TX, (281) 421-9041
o Casa Ford, 4701 I-10 East, Baytown, TX, (281) 421-7111
o LaPorte Ford, 621 New Highway 146 South, LaPorte, TX, (281) 471-1642
o Lone Star Ford, 8477 North Fwy., Houston, TX, (281) 931-3300
o Lone Star Nissan, 12230 Southwest Fwy., Stafford, TX, (281) 243-8600
o Lone Star Oldsmobile, 12230 Southwest Fwy., Stafford, TX, (281) 243-8600
o Ron Craft Chevy-Olds-Cadillac, 3401 N. Main St., Baytown, TX, (281) 427-9525
o Toyota of Baytown, 1701 I-10 East, Baytown, TX, (281) 843-2067
LAS VEGAS MARKET
o Honda West, 4645 W. Tropicana Ave., Las Vegas, NV, (702) 367-1919
o Nevada Dodge, 5750 Sky Pointe Dr., Las Vegas, NV, (702) 396-5886
o Volvo of Las Vegas, 5750 E. Russell Rd., Las Vegas, NV, (702) 317-1000
LOS ANGELES MARKET
o Beverly Hills BMW, 8833 Wilshire Blvd., Beverly Hills, CA, (310) 358-7880
o Honda of Santa Monica, 1726 Santa Monica Blvd., Santa Monica, CA, (310)
264-4900
o South Bay Chrysler Plymouth Jeep, 20900 Hawthorne Blvd., Torrance, CA, (310)
542-0900
o Volkswagen of Woodland Hills, 21141 Ventura Blvd., Woodland Hills, CA, (818)
884-4444
o Volvo of Santa Monica, 1719 Santa Monica Blvd., Santa Monica, CA, (310)
264-4900
MOBILE/PENSACOLA MARKET
o Classic Dodge, 3118 Government Blvd., Mobile, AL, (334) 478-5252
o Lloyd Nissan, 120 E. 23rd St., Panama City, FL, (850) 785-9561
17
<PAGE>
o Lloyd Pontiac-Cadillac-GMC, 100 E. 23rd St., Panama City, FL, (850) 763-6575
o Pensacola Honda, 5600 Pensacola Blvd., Pensacola, FL, (850) 479-9091
MONTGOMERY MARKET
o Capitol Chevrolet, 711 Eastern Blvd., Montgomery, AL, (334) 272-8700 or (800)
225-2771
o Capitol Hyundai & Capitol Mitsubishi, 190 Eastern Blvd., Montgomery, AL,
(334) 279-6555
o Capitol KIA, 845 Eastern Blvd., Montgomery, AL, (334) 260-8791
o Classic Cadillac Pontiac, 2820 Eastern Blvd., Montgomery, AL, (334) 277-3480
o City Chrysler Plymouth Jeep, 833 Eastern Bypass, Montgomery, AL, (334)
279-9300
o Friendly Ford Lincoln Mercury, 4000 Eastern Blvd., Montgomery, AL, (334)
613-5000
NASHVILLE MARKET
o BMW of Nashville, 4040 Armory Oaks Dr., Nashville, TN, (615) 850-4040
o Volkswagen/Mitsubishi of Nashville, 630 Murfreesboro Rd., Nashville, TN,
(615) 254-5641
SAN DIEGO MARKET
o Poway Dodge, 13750 Poway Rd., Poway, CA 94064, (858) 486-2900
o Poway Honda, 14110 Poway Rd., Poway, CA 94064, (858) 486-2900
o Poway Toyota, 13760 Poway Rd., Poway, CA 94064, (858) 486-2900
o Ritchey/Fipp Poway Chevrolet-Oldsmobile, 13742 Poway Rd., Poway, CA 92064,
(858) 486-2900
SAN FRANCISCO MARKET
o Acura of Serramonte, 707 Serramonte Blvd., Colma, CA, (650) 985-2178
o Concord Honda, 1300 Concord Ave., Concord, CA, (925) 825-8000
o Concord Nissan, 1290 Concord Ave., Concord, CA, (925) 676-4400
o Concord Toyota, 1090 Concord Ave., Concord, CA, (925) 682-7131
o Dublin Nissan, 6015 Scarlett Ct., Dublin, CA, (925) 829-0800
o Dublin Volkswagen/Dodge, 6015 Scarlett Ct., Dublin, CA, (925) 829-0800
o First Dodge -- Marin, 513 Francisco Blvd. East, San Rafael, CA, (415)
258-4900
o First Nissan -- Marin, 601 Francisco Blvd. East, San Rafael, CA, (415)
455-1900
o Ford of San Rafael, 619 Francisco Blvd. East, San Rafael, CA, (415) 453-4220
o Honda of Hayward, 24895 Mission Blvd., Hayward, CA, (510) 582-1300
o Honda of Serramonte, 485 Serramonte Blvd., Colma, CA, (650) 758-4800
o Land Rover of Marin, 647 Irwin Dr., San Rafael, CA, (415) 455-5500
o Lexus of Marin, 620 DuBois St., San Rafael, CA, (415) 460-6000
o Lexus of Serramonte, 700 Serramonte Blvd., Colma, CA, (650) 994-2255
o Melody Toyota, 750 El Camino Real, San Bruno, CA, (650) 825-5200
o Serramonte Dodge/Isuzu/Mitsubishi/Nissan, 1500 Collins Ave., Colma, CA, (650)
985-1151
SAN JOSE/SILICON VALLEY MARKET
o Autobahn Motors, 700 Island Pwy., Belmont, CA, (650) 637-2333
o Capitol Nissan, 1120 W. Capitol Expressway, San Jose, CA, (408) 978-1234
o Honda of Stevens Creek, 4590 Stevens Creek Blvd., San Jose, CA, (408)
247-2550
o St. Claire Cadillac/Oldsmobile, 4343 Stevens Creek Blvd., Santa Clara, CA,
(408) 244-1000
o Stevens Creek BMW, 3737 Stevens Creek Blvd., Santa Clara, CA, (408) 249-9070
o Stevens Creek Nissan, 4855 Stevens Creek Blvd., Santa Clara, CA, (408)
983-5947
TAMPA/CLEARWATER MARKET
o Clearwater Collision Center, 2300 Drew St., Clearwater, FL, (727) 797-6335
o Clearwater Mitsubishi, 21699 US Hwy. 19N, Clearwater, FL, (727) 799-6400
o Clearwater Toyota, 21799 US Hwy. 19N, Clearwater, FL, (727) 799-1234
o Freedom Ford, 24825 US Hwy. 19 North, Clearwater & 3925 Tampa Rd., Oldsmar,
FL, (727) 797-2277
o Volvo of Tampa, 6008 N. Dale Mabry Ave., Tampa, FL, (813) 885-2717
TULSA MARKET
o Jim Glover Dodge, 2920 N. Aspen Ave., Broken Arrow, OK, (918) 335-5000
o Larry Miller Chevrolet, 2301 N. Aspen Ave., Broken Arrow, OK, (918)
258-8000(1)
o Riverside Chevrolet, 707 W. 51st St., Tulsa, OK, (918) 446-2200
o Riverside Nissan, 8190 E. Skelly Dr., Tulsa, OK, (918) 628-0280
WASHINGTON, D.C. MARKET
o BMW of Fairfax, 8427 Lee Hwy., Fairfax, VA, (703) 560-2300
o Lexus of Rockville, 15501 Frederick Rd., Rockville, MD, (301) 762-9009
o Nissan Jeep of Waldorf, 2950 Crain Hwy., Waldorf, MD, (301) 645-0800
o Rockville Porsche Audi, 15515 Frederick Rd., Rockville, MD, (301) 881-0900
- ---------
(1) Pending acquisition.
18
<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,
except for the Classic Dodge dealership premises and surplus land adjacent to
Lone Star Nissan, which we currently own. Our leased properties are leased from
affiliates of Capital Automotive REIT and other individuals and entities. We
believe that our facilities are adequate for our current needs.
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 "Business -- Relationships with
Manufacturers."
ITEM 3: LEGAL PROCEEDINGS.
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 the Company 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.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
19
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Sonic's Class A common stock is currently traded on the New York Stock
Exchange ("NYSE") under the symbol "SAH."
As of December 31, 1999, 28,351,837 shares of Class A common stock and
12,250,000 shares of Sonic's Class B common stock were outstanding. As of March
14, 2000, there were 97 record holders of the Class A common stock and 4 record
holders of the Class B common stock. As of March 14, 2000, the closing stock
price for the Class A common stock was $8.63.
Sonic intends to retain future earnings to provide funds for operations
and future acquisitions. As a holding company, Sonic will depend on dividends
and other payments from its subsidiary dealership operations to pay cash
dividends to stockholders, as well as to meet debt service and operating
expense requirements.
We do not anticipate paying any dividends in the foreseeable future. Under
an Indenture dated as of July 1, 1998 (the "Indenture") among Sonic and U.S.
Bank Trust National Association, as trustee, and under the credit agreement
between Sonic and Ford Motor Credit Company ("Ford Motor Credit"), no dividends
may be paid by Sonic. Any decision concerning the payment of dividends on the
common stock will depend upon the results of operations, financial condition
and capital expenditure plans of Sonic, as well as other factors as the Board
of Directors, in its sole discretion, may consider relevant.
The following table sets forth the high and low closing sales prices for
Sonic's Class A common stock for each calendar quarter during the periods
indicated as reported by the NYSE Composite Tape.
<TABLE>
<CAPTION>
1999 HIGH LOW
- --------------------------- ---------- ---------
<S> <C> <C>
First Quarter ........... 18 7/16 13 15/16
Second Quarter .......... 16 3/8 12
Third Quarter ........... 14 15/16 10 5/8
Fourth Quarter .......... 12 1/4 7 7/8
</TABLE>
<TABLE>
<CAPTION>
1998 HIGH LOW
- --------------------------- ----------- -----------
<S> <C> <C>
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
</TABLE>
Set forth below is certain information as to all equity securities sold by
Sonic during the periods discussed that were not registered under the
Securities Act. As to all such transactions, an exemption was claimed under
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder ("Regulation D") as transactions not involving a public offering in
view of sophistication of the purchasers, their access to material information
about Sonic, the disclosures actually made to them by Sonic, the absence of any
general solicitation or advertising, the status of the purchasers as
"accredited investors" as that term is defined in Rule 501 (a) of Regulation D
and the filing by Sonic of the appropriate forms in connection therewith. All
such private sales of Sonic's equity securities were made to the owners of
assets associated with, or the capital stock of, automobile dealerships
acquired by Sonic as a part of Sonic's dealership acquisition strategy.
On December 10, 1999, Sonic privately issued 5,209,415 shares of its Class
A common stock with a value of approximately $53.4 million to acquire
approximately 92% of the outstanding stock and approximately 94% of the
outstanding warrants to purchase shares of stock of FirstAmerica Automotive,
Inc. from certain stock and warrant holders of FirstAmerica.
20
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA.
The selected consolidated statement of operations data for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999 and the selected consolidated
balance sheet data as of December 31, 1995, 1996, 1997, 1998 and 1999 are
derived from Sonic's audited financial statements. 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 and related notes included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1996(1) 1997(1) 1998(1) 1999(1)
----------- ----------- ------------- -------------- ---------------
(DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
New vehicles ....................................... $186,859 $233,979 $ 343,941 $ 962,939 $ 1,968,514
Used vehicles ...................................... 60,766 68,054 85,132 324,740 684,560
Wholesale vehicles ................................. 20,025 25,641 38,785 119,351 250,794
-------- -------- --------- ----------- -----------
Total vehicles .................................... 267,650 327,674 467,858 1,407,030 2,903,868
Parts, service, and collision repair ............... 35,860 42,075 57,537 162,660 364,184
Finance and insurance .............................. 7,813 7,118 10,606 34,011 82,771
-------- -------- --------- ----------- -----------
Total revenues .................................... 311,323 376,867 536,001 1,603,701 3,350,823
Cost of sales ........................................ 272,130 332,122 473,003 1,396,259 2,896,400
-------- -------- --------- ----------- -----------
Gross profit ......................................... 39,193 44,745 62,998 207,442 454,423
Selling, general and administrative expenses ......... 28,091 32,602 46,770 150,130 326,914
Depreciation ......................................... 832 978 776 1,384 3,138
Goodwill Amortization ................................ -- -- 546 3,223 8,561
-------- -------- --------- ----------- -----------
Operating income ..................................... 10,270 11,067 14,906 52,705 115,810
Other Income and Expense:
Interest expense, floor plan ....................... 4,504 5,968 8,007 14,096 22,536
Interest expense, other ............................ 436 433 1,199 9,395 21,586
Other income ....................................... 106 355 298 426 1,286
-------- -------- --------- ----------- -----------
Total other expense ............................... 4,834 6,046 8,908 23,065 42,836
-------- -------- --------- ----------- -----------
Income before income taxes and minority interest ..... 5,436 5,021 5,998 29,640 72,974
Provision for income taxes ........................... 2,176 1,924 2,249 11,083 28,325
-------- -------- --------- ----------- -----------
Income before minority interest ...................... 3,260 3,097 3,749 18,557 44,649
Minority interest in earnings of subsidiary .......... 22 114 47 -- --
-------- -------- --------- ----------- -----------
Net income ........................................... $ 3,238 $ 2,983 $ 3,702 $ 18,557 $ 44,649
======== ======== ========= =========== ===========
Diluted net income per share ......................... -- -- $ 0.27 $ 0.74 $ 1.27
======== ======== ========= =========== ===========
Weighted average number of shares outstanding ........ -- -- 13,898 24,970 35,248
======== ======== ========= =========== ===========
Consolidated Balance Sheet Data:
Working capital ...................................... $ 18,140 $ 19,780 $ 44,098 $ 79,155 $ 177,657
Total assets ......................................... 79,462 110,976 291,450 576,103 1,501,102
Long-term debt (2) ................................... 6,950 6,719 49,653 145,790 425,894
Total liabilities .................................... 62,956 84,367 207,085 433,674 1,098,529
Minority interest .................................... 200 314 -- -- --
Stockholders' equity ................................. 16,306 26,295 84,365 142,429 402,573
</TABLE>
- ---------
(1) Selected Financial Data for the years ended December 31, 1996, 1997, 1998
and 1999 include the results of operations of certain dealerships acquired
during those periods. All such acquisitions were accounted for using the
purchase method of accounting and, as a result, the results of operations
prior to the date of acquisition have been excluded. Accordingly, the
actual financial data for periods after the acquisitions may not be
comparable to data presented for periods prior to the acquisitions.
(2) Long-term debt includes current maturities of long-term debt, the payable
to Sonic's Chairman and the payable to affiliates of Sonic. See Sonic's
Consolidated Financial Statements and related notes included elsewhere in
this Form 10-K.
21
<PAGE>
ITEM 7: 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 and 1999 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 the second largest automotive retailer in the United States, as
measured by total revenue, operating 172 dealership franchises and 30 collision
repair centers in the southeastern, southwestern, mid-western, mid-Atlantic and
western United States. We sell new and used cars and light trucks, sell
replacement parts, provide vehicle maintenance, warranty, paint and repair
services and arrange related F&I for its automotive customers.
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.
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.
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. Approximately 68%
of our operating costs for the year ended December 31, 1999 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
advertising (9% of operating costs) and sales compensation (46%) 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. 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. Our
floor plan expenses are offset by amounts received from manufacturers, in the
form of floor plan inventory incentives. These payments are credited against
our cost of sales. In 1999, the amounts we received in manufacturer inventory
incentives exceeded our floor plan expenses by approximately $0.8 million. This
results in the effective borrowing rate under our floor plan facilities being
reduced to 0% after the incentives are taken into account.
Sonic's business is fundamentally managed based on individual dealership
operating performance. Each of Sonic's dealerships have similar economic and
operating characteristics. Each dealership sells similar products and services
(new and used vehicles, parts, service and collision repair services), uses
similar processes in selling its products and services, and sells its products
and services to similar classes of customers. As a result, Sonic's dealerships
are aggregated into a single operating segment for purposes of reporting
financial condition and results of operations.
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
22
<PAGE>
position and cash flows of each of our dealerships acquired prior to December
31, 1999. 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.
RESULTS OF OPERATIONS
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in Sonic's
Consolidated Statements of Income.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES FOR
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---------- ---------- ----------
REVENUES:
<S> <C> <C> <C>
New vehicle sales ................... 64.2% 60.0% 58.7%
Used vehicle sales .................. 23.1% 27.8% 27.9%
Parts, service, and collision repair 10.7% 10.1% 10.9%
Finance and insurance ............... 2.0% 2.1% 2.5%
Total revenues ...................... 100.0% 100.0% 100.0%
Cost of sales ....................... 88.2% 87.1% 86.4%
Gross profit ........................ 11.8% 12.9% 13.6%
Selling, general, and administrative 9.0% 9.6% 10.1%
Operating income .................... 2.8% 3.3% 3.5%
Interest expense .................... 1.7% 1.5% 1.3%
Income before income taxes .......... 1.5% 1.8% 2.2%
</TABLE>
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1998
REVENUES. Revenues grew in each of our primary revenue areas for 1999 as
compared with 1998, causing total revenues to increase 109% to $3.4 billion.
New vehicle sales revenue increased 104% to $2.0 billion in 1999, compared with
$962.9 million in 1998. The increase was due primarily to a 90.6% increase in
new vehicle unit sales to 79,294 in 1999 from 41,592 in 1998. Of this increase,
approximately 89.6%, or 33,792 units, resulted from acquisitions and 10.4%
resulted from stores owned longer than one year. The remainder of the increase
in new vehicle revenues was due to a 7.2% increase in the average selling price
of new vehicles, resulting primarily from an increase in revenues of higher
priced luxury brands contributed by acquisitions. The percentage of new vehicle
revenues comprised of luxury brands increased to 23.6% in 1999 from 12.3% in
1998.
Used vehicle revenues from retail sales increased 111% to $684.6 million
in 1999 from $324.7 million in 1998. The increase was primarily due to a 92.5%
increase in used vehicle unit sales to 47,345 in 1999 from 24,591 in 1998. Of
this increase, approximately 87.7%, or 19,952 units, resulted from acquisitions
and 12.3% resulted from stores owned longer than one year. The remainder of the
increase was due to a 9.5% increase in the average selling price of used
vehicles, including a 4.3% increase in the average selling price of used
vehicles from stores owned for longer than one year.
Parts, service and collision repair revenue increased 124% to $364.2
million in 1999 compared to $162.7 million in 1998, of which approximately
92.8% resulted from our acquisitions. Finance and insurance revenue increased
$48.8 million, or 143%, principally due to vehicle sales and related financing
contributed by our acquisitions, as well as a 27.2% improvement in finance and
insurance revenues per vehicle resulting from newly implemented programs
designed to improve training and development of finance and insurance sales
people.
GROSS PROFIT. Gross profit increased 119% to $454.4 million in 1999 from
$207.4 million in 1998. Approximately 88.3%, or $218.1 million, of the increase
resulted from acquisitions. Gross profit as a percentage of sales increased to
13.6% from 12.9% due primarily to an increase in revenues contributed by retail
used vehicles, parts, service and collision repair services, and finance and
insurance products, which earn higher margins than new vehicles. Used vehicle
revenues as a percentage of total revenues increased to 27.9% in 1999 from
27.8% in 1998. Parts, service and collision repair revenues as a percentage of
total revenues increased to 10.9% in 1999 from 10.1% in 1998. Finance and
insurance revenues as a percentage of total revenues increased to 2.5% in 1999
from 2.1% in 1998.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding depreciation and amortization, increased
118% to $326.9 million in 1999 from $150.1 million in 1998, resulting
principally from acquisitions. Such expenses as a percentage of revenues
increased to 9.8% in 1999 from 9.4% in 1998. Compensation programs, which
represent over 50% of a dealership's selling, general and administrative
expenses, are primarily based on gross profits. As a result, the improvement in
gross profit margins resulted in an increase in compensation expense as a
percentage of total revenues to 6.0% in 1999 from 5.7% in 1998. In addition,
rent expense increased as a percentage of total revenues to 0.8% in 1999 from
0.7% in 1998 primarily due to acquisitions of dealerships located in higher
rent markets. As a percentage of gross profits, selling, general and
administrative expenses decreased to 71.9% in 1999 from 72.4%, resulting
primarily from benefits of scale which has allowed us to recognize cost
savings, especially in the areas of advertising costs and insurance premiums.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation expense, excluding
goodwill amortization, increased 127% to $3.1 million in 1999 from $1.4 million
in 1998, resulting primarily from acquisitions. As a percentage of total
revenues, depreciation expense was at 0.1% in both 1999 and 1998. Goodwill
amortization expense increased 166% to $8.6 million in 1999 from $3.2 million
in 1998, resulting principally from additional acquisitions.
INTEREST EXPENSE, FLOOR PLAN. Interest expense, floor plan increased 59.9%
to $22.5 million in 1999 from $14.1 million in 1998, due primarily to floor
plan interest expense incurred by dealerships acquired. As a percentage of
total revenues, floor plan interest decreased to 0.7% in 1999 from 0.9% in 1998
resulting from a decrease in the average interest rate under our floor plan
financing arrangements as well as improvement in inventory turnover rates.
INTEREST EXPENSE, OTHER. Interest expense, other increased to $21.6
million in 1999 from $9.4 million in 1998 due primarily to interest incurred on
our senior subordinated notes issued on July 31, 1998 and on additional
borrowings under our Revolving Facility.
PROVISION FOR INCOME TAXES. The effective tax rate for 1999 was 38.82%,
compared to an effective rate of 37.39% in 1998. The increase was primarily
attributable to acquisitions we made during the year which were either (1)
companies operating in states with higher income tax rates, or (2) stock
purchases in which the goodwill amortization is not deductible for income tax
purposes. We expect our effective tax rate to increase in 2000 as the 1999
acquisitions will be part of our results for the full period.
NET INCOME. As a result of the factors noted above, our net income
increased by $26.1 million in 1999 compared to 1998.
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
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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 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.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation expense, excluding
goodwill amortization, increased 78.4% to $1.4 million in 1998 from $0.8 million
in 1997, resulting primarily from acquisitions. As a percentage of total
revenues, depreciation expense was at 0.1% in both 1998 and 1997. Goodwill
amortization expense increased 490% to $3.2 million in 1998 from $0.5 million in
1997, resulting principally from additional acquisitions.
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.
LIQUIDITY AND CAPITAL RESOURCES
Our 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 May 5, 1999, we
completed a public offering of Class A common stock which provided
approximately $86.1 million of additional capital resources for the
consummation of acquisitions and repayment of borrowings under our $350 million
acquisition line of credit with Ford Motor Credit Company (the "Revolving
Facility").
During 1999, net cash provided by operating activities was approximately
$46.1 million. During 1998, net cash provided by operating activities was
approximately $13.0 million. The increase was attributable principally to
increases in net income offset by increases in accounts receivable.
Cash used for investing activities in 1999 was approximately $368.6
million, including $360.7 million paid for acquisitions, net of cash received,
and $21.5 million in capital expenditures. Cash used for investing activities
in 1999 was offset by proceeds received from the sale of real estate at Town
and Country Toyota and Fort Mill Ford of approximately $10.6 million. Cash used
for investing activities in 1998 was approximately $74.9 million, including
$72.2 million paid for acquisitions, net of cash received, and $4.3 million in
capital expenditures. Our principal capital expenditures typically include
building improvements and equipment for use in our dealerships. Of the capital
expenditures in 1999, approximately $9.0 million related to the construction of
new dealerships and collision repair centers. Of this amount, approximately
$3.0 million was subsequently sold to MMR Holdings, LLC, a limited liability
company owned by Bruton Smith and Sonic Financial Corporation ("SFC") and
leased back. There was no gain or loss on the sale. As noted below, MMR
Holdings was subsequently acquired by CAR MMR L.L.C., an affiliate of Capital
Automotive REIT which is not affiliated with Sonic. Other dealerships and
collision repair centers still under construction as of December 31, 1999 are
expected to be either financed separately by Sonic or sold to third parties in
sale-leaseback transactions upon completion.
On August 13, 1999, CAR MMR L.L.C. acquired all of the ownership interests
of MMR Holdings, L.L.C., and two of its affiliates, MMR Viking Investment
Associates, L.P. and MMR Tennessee, L.L.C (collectively, the "MMR Group"). As
of that date, Sonic leased 48 properties for 38 of its dealerships from the MMR
Group under "triple net leases" which
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required Sonic to pay all costs of operating the properties, as well as all
taxes, utilities, insurance, repairs, maintenance and other property related
expenses. Sonic has entered into new leases with CAR MMR L.L.C. with terms
similar to those under Sonic's former leases with the MMR Group. 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. Sonic has agreed to
renew approximately 75% of its lease rental stream for an additional five year
period after the expiration of the initial lease terms. In connection with the
acquisition, Sonic, MMR Holdings and Mar Mar Realty Trust, an affiliate of the
MMR Group, terminated the strategic alliance agreement whereby Mar Mar Realty
Trust had provided Sonic with real estate sale-leaseback financing, acquisition
referral and related services.
As a part of the August 13, 1999 sale of the MMR Group to CAR MMR, Bruton
Smith and SFC signed agreements with Sonic to induce Sonic to enter into a real
estate financing arrangement with CAR MMR and, among other things, amend its
leases with the MMR Group to standardize their terms. Under these agreements,
Mr. Smith and SFC agreed to pay approximately $2.5 million to Sonic, which
amount represented Mr. Smith's and SFC's profits on the sale of the MMR Group
less their selling expenses and a 14% annual return on their initial investment
in the MMR Group, net of any advances made by Sonic to the MMR Group.
During 1999, we acquired 73 dealerships for approximately $420.4 million in
cash, 6,282 shares of Sonic's Class A convertible preferred stock, Series II,
recorded at an estimated value of approximately $6.3 million, 45,783 shares of
Sonic's Class A convertible preferred stock, Series III, recorded at an
estimated value of approximately $45.8 million, and 6,784,347 shares of Sonic's
Class A common stock having an estimated fair value at the time of issuance of
approximately $75.8 million. The cash portion of the purchase price was financed
with a combination of a portion of the proceeds from our public offering of
Class A common stock in May 1999, cash borrowed under our Revolving Facility and
cash generated from our existing operations. The acquisitions were accounted for
using the purchase method of accounting, and the results of operations of such
acquisitions have been included in our consolidated financial statements from
their respective acquisition dates.
Subsequent to December 31, 1999, we acquired 6 dealerships for
approximately $44.8 million in cash and 11,589 shares of Sonic's Class A
convertible preferred stock, Series II, having a liquidation value 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.
Cash provided by financing activities of approximately $353.8 million in
1999 primarily reflects additional borrowings under the Revolving Facility used
for acquisitions, as well as net proceeds received from our public offering of
common stock completed on May 5, 1999.
On November 1, 1999, the total borrowing limit under the Revolving
Facility was increased from $150 million to $350 million. Prior to that date,
amounts outstanding under the Revolving Facility bore 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 (the 1 month commercial finance paper
rate was 5.77% at October 31, 1999). Subsequent to November 1, 1999, amounts
outstanding under the Revolving Facility bear interest at 2.50% above LIBOR
(LIBOR was 5.82% at December 31, 1999). The Revolving Facility will mature in
October 2002, but may be extended for a number of additional one year terms to
be negotiated by us and Ford Motor Credit Company ("Ford Motor Credit"). On May
5, 1999, in connection with the public offering by Sonic of 6,067,230 shares of
Class A common stock, all amounts outstanding under the Revolving Facility were
repaid. Amounts outstanding under the Revolving Facility as of December 31,
1999 total approximately $289.0 million and were used to finance acquisitions
completed in the third and fourth quarters of 1999. Future 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 not to exceed $35
million.
We agreed under the Revolving Facility not to pledge any of our assets to
any third party (with the exception of currently encumbered assets of our
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 current assets to current liabilities (at least 1.25:1),
o earnings before interest, taxes, depreciation and amortization (EBITDA)
and rent less capital expenditures to fixed charges (at least 1.4:1),
o EBITDA to interest expense (at least 2:1) and
o total adjusted debt to EBITDA (no greater than 2.25:1).
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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 is in compliance with all
restrictive covenants as of December 31, 1999.
We currently have an aggregate principal balance of $125 million in senior
subordinated notes which mature on August 1, 2008 and bear interest at a stated
rate of 11.0%. The notes are unsecured and are redeemable at our option after
August 1, 2003. Interest payments are due semi-annually on August 1 and
February 1 and commenced February 1, 1999. The notes are subordinated to all of
our present and future senior indebtedness, 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.
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 have also 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. Sonic is in compliance with all
restrictive covenants as of December 31, 1999.
We currently have standardized floor plan credit facilities with Chrysler
Financial Corporation ("Chrysler Financial") and Ford Motor Credit. The floor
plan credit facility with Chrysler Financial, which was obtained on November 1,
1999, provides up to $750 million for the purchase of vehicles at our Chrysler
dealerships. The floor plan facility with Ford Motor Credit provides up to $550
million for the purchase of vehicles at all of our other dealerships. As of
December 31, 1999, there was an aggregate of approximately $102.7 million
outstanding under the Chrysler Financial floorplan facility and $400.8 million
outstanding under the Ford Motor Credit floor plan facility.
Amounts outstanding under the Chrysler Financial floor plan facility bear
interest at 1.25% above LIBOR (LIBOR was 5.82% at December 31, 1999). Amounts
outstanding under the Ford Motor Credit floor plan facility bear interest at an
effective interest rate of prime less 1.3% (prime was 8.5% at December 31,
1999), 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 us by the
manufacturers on a quarterly basis.
We make monthly interest payments on the amount financed under the floor
plan facilities but are 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 us with
respect to the creation of liens and changes in ownership, officers and key
management personnel. Sonic is in compliance with all restrictive covenants as
of December 31, 1999.
During 1999, Sonic's Board of Directors authorized Sonic to expend up to
$50 million to repurchase shares of its Class A common stock or redeem
securities convertible into Class A common stock. As of December 31, 1999,
Sonic has repurchased 723,600 shares of Class A common stock for approximately
$6.4 million. Through March 17, 2000, Sonic has repurchased 165,757 additional
shares of Class A common stock for approximately $1.5 million and has redeemed
3,500 shares of Class A convertible preferred stock for approximately $3.5
million. Sonic will continue to repurchase shares in the open market from time
to time subject to market conditions.
Subsequent to December 31, 1999, Sonic has sold, signed definitive
agreements to sell, or signed letters of intent to sell three dealerships for
approximately $5.1 million in proceeds. No material gains or losses are
expected from these sales.
We believe that funds generated through future operations and availability
of borrowings under our floor plan financing (or any replacements thereof) and
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. We expect to fund any future acquisitions from 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.
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SEASONALITY
Our 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 ISSUES
We have not experienced any significant disruptions in operations as a
result of Year 2000 related problems, nor have we received indication from our
primary banks, lenders or suppliers that they have experienced any significant
disruptions as a result of Year 2000 related problems. Although we do not
anticipate any significant disruptions as a result of Year 2000 problems,
because of the uncertainties inherent with the Year 2000 computer issue, we
cannot make assurances that Year 2000 problems will not have a material adverse
affect on our results of operations or financial condition.
The costs associated with converting our internal systems to Year 2000
compliant systems have not been material to our financial position or results
of operations. Costs associated with upgrading and converting Dealer Management
Systems and Dealer Communication Systems were covered by monthly maintenance
contracts with the respective suppliers. Costs associated with upgrading or
replacing personal computers and embedded systems were expensed or capitalized
in accordance with our capitalization policy. Any additional costs which may be
necessary for Year 2000 conversions are not expected to be material.
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 gross goodwill balance at December 31, 1998 was $182.5 million
and at December 31, 1999 was $605.1 million. As a percentage of total assets
and stockholders' equity, goodwill, net of accumulated amortization,
represented 31.3% and 126.4%, respectively, at December 31, 1998, and 39.5% and
147.2%, respectively, at December 31, 1999. 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 we attributed a 40 year benefit 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
consideration paid for the businesses acquired. Earnings in later years also
could be significantly affected if management then determined that the
remaining balance of goodwill was impaired. We periodically compare the
carrying value of goodwill with the anticipated undiscounted future cash flows
from operations of the business 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.
The Financial Accounting Standards Board recently proposed new rules
relating to the accounting for business combinations and intangible assets. One
aspect of the proposal would not permit goodwill to be amortized over a period
in excess of 20 years; however, we cannot assure you that such a rule will be
adopted and, if adopted, as to the final provisions of any such rules. If such
a rule is adopted, we have been advised that it would likely only affect the
period over which we amortize goodwill in our future acquisitions.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Sonic's only financial instruments with market risk
exposure are variable rate floor plan notes payable, Revolving Facility
borrowings and other variable rate notes. The total outstanding balance of such
instruments was approximately $243.5 million at December 31, 1998 and $822.0
million at December 31, 1999. A change of one percent in the interest rate
would have caused a change in interest expense of approximately $2.1 million
for the year ended December 31, 1998 and approximately $4.2 million for the
year ended December 31, 1999. Of the total change in interest expense,
approximately $1.7 million for the year ended December 31, 1998 and
approximately $3.3 million for the year ended December 31, 1999 would have
resulted from floor plan notes payable.
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Sonic's exposure with respect to floor plan notes payable is mitigated by
floor plan incentives received from manufacturers which are generally based on
rates similar to those incurred under Sonic's floor plan financing
arrangements. In 1999, the amounts we received from these manufacturer floor
plan incentives exceeded our floor plan interest expense by approximately $0.8
million. As a result, the effective rate incurred under our floor plan
financing arrangements was reduced to 0% after considering these incentives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See "Index to Financial Statements" that appears on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item with respect to compliance by Sonic's
directors, executive officers and certain beneficial owners of Sonic's Common
Stock with Section 16(a) of the Securities Exchange Act of 1934 is furnished by
incorporation by reference to all information under the captions entitled
"Election of Directors" and "Ownership of Capital Securities" in the Proxy
Statement (to be filed hereafter) for Sonic's Annual Meeting of the
Shareholders to be held on June 5, 2000 (the "Proxy Statement"). The
information required by this item with respect to Sonic's executive officers,
directors and key employees appears in Item I of Part I of this Annual Report
on Form 10-K under the caption "Executive Officers and Directors; Key Personnel
of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is furnished by incorporation by
reference to all information under the captions entitled "Executive
Compensation" and "Election of Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is furnished by incorporation by
reference to all information under the caption "General -- Ownership of
Capital Securities" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is furnished by incorporation by
reference to all information under the caption "Certain Transactions" in the
Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The exhibits and other documents filed as a part of this Annual Report on
Form 10-K, including those exhibits which are incorporated by reference herein,
are:
(a)(1) Financial Statements:
See the "Index to Financial Statements" that appears on page F-1 hereof.
(2) Financial Statement Schedules: No financial statement schedules are
required to be filed as part of this Annual Report on Form 10-K.
(3) Exhibits:
Exhibits required in connection with this Annual Report on Form 10-K are
listed below. Certain of such exhibits, indicated by an asterisk, are hereby
incorporated by reference to other documents on file with the Securities and
Exchange Commission with which they are physically filed, to be a part hereof
as of their respective dates.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------------------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation of Sonic (incorporated by reference to Exhibit 3.1 to
Sonic's Registration Statement on Form S-1 (Reg. No. 333-33295) (the "Form S-1")).
3.2 Certificate of Amendment to Sonic's Amended and Restated Certificate of Incorporation effective June 18,
1999.
3.3* Certificate of Designation, Preferences and Rights of Class A Convertible Preferred Stock (incorporated by
reference to Exhibit 4.1 to Sonic's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (the
"March 31, 1998 Form 10- Q")).
3.4* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the Form S-1).
4.1* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated by reference to Exhibit 4.3 to
Sonic's Registration Statement on Form S-4 (Reg. Nos. 333-64397 and 333-64397-001 through
333-64397-044) (the "Form S-4")).
4.2* Indenture dated as of July 1, 1998 among Sonic, as issuer, the subsidiaries of Sonic named therein, as
guarantors, and U.S. Bank Trust National Association, as trustee (the "Trustee"), relating to the 11% Senior
Subordinated Notes due 2008 (incorporated by reference to Exhibit 4.2 to the Form S-4).
4.2a First Supplemental Indenture dated as of December 31, 1999 among Sonic, as issuer, the subsidiaries of Sonic
named therein, as guarantors and additional guarantors, and the Trustee, relating to the 11% Senior
Subordinated Notes due 2008.
4.3* Registration Rights Agreement dated as of June 30, 1997 among Sonic, O. Bruton Smith, Bryan Scott Smith,
William S. Egan and Sonic Financial Corporation (incorporated by reference to Exhibit 4.2 to the Form S-1).
4.4* Letter Agreement dated as of February 25, 2000 by and among Sonic, Joseph Herson, Mollye Mills, Richard
Mills and John Jaffe (incorporated by reference to Exhibit 4.3 to Sonic's Registration Statement on Form S-3
(Reg. No. 333-96023)).
10.1* Employment Agreement between Sonic and O. Bruton Smith (incorporated by reference to Exhibit 10.29 to
the Form S-1).
10.2 Employment Agreement between Sonic and Thomas A. Price.
10.3* Employment Agreement between Sonic and B. Scott Smith (incorporated by reference to Exhibit 10.30 to the
Form S-1).
10.4* Employment Agreement between Sonic and Theodore M. Wright (incorporated by reference to Exhibit 10.31
to the Form S-1).
10.4 a* Employment Agreement between Sonic and Dennis D. Higginbotham (incorporated by reference to Exhibit
10.90 to the Form S-4)
10.5* Tax Allocation Agreement dated as of June 30, 1997 between Sonic and Sonic Financial Corporation
(incorporated by reference to Exhibit 10.33 to the Form S-1).
10.6* Sonic Automotive, Inc. 1997 Stock Option Plan, Amended and Restated as of June 8, 1999 (incorporated by
reference to Exhibit 4.1 to Sonic's Registration Statement on Form S-8 (Reg. No. 333-81053)).
10.7* Sonic Automotive, Inc. Employee Stock Purchase Plan, Amended and Restated as of June 8, 1999
(incorporated by reference to Exhibit 4.1 to Sonic's Registration Statement on Form S-8 (Reg. No.
333-81059)).
10.8* Sonic Automotive, Inc. Nonqualified Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1
to Sonic's Registration Statement on Form S-8 (Reg. No. 333-69899)).
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------------------
<S> <C>
10.9* Sonic Automotive, Inc. Formula Stock Option Plan for Independent Directors (incorporated by reference to
Exhibit 10.69 to Sonic's Amended Annual Report on Form 10-K/A for the year ended December 31, 1997
(the "1997 Form 10-K/ A")).
10.10* FirstAmerica Automotive, Inc. 1997 Stock Option Plan, Amended and Restated as of December 10, 1999
(incorporated by reference to Exhibit 4.1 to Sonic's Registration Statement on Form S-8 (Reg. No.
333-95791)).
10.11* Subscription Agreement dated as of June 30, 1997 between O. Bruton Smith and Sonic (incorporated by
reference to Exhibit 10.36 to the Form S-1).
10.12* Subscription Agreement dated as of June 30, 1997 between Sonic Financial Corporation and Sonic
(incorporated by reference to Exhibit 10.37 to the Form S-1).
10.13* Subscription Agreement dated as of June 30, 1997 between B. Scott Smith and Sonic (incorporated by
reference to Exhibit 10.38 to the Form S-1).
10.14* Subscription Agreement dated as of June 30, 1997 between William S. Egan and Sonic (incorporated by
reference to Exhibit 10.39 to the Form S-1).
10.15* Second Amended and Restated Credit Agreement dated as of July 28, 1999 (the "Credit Agreement") between
Sonic, as borrower, and Ford Motor Credit Company, as lender (incorporated by reference to Exhibit 10.3 to
Sonic's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (the "September 30, 1999
Form 10- Q")).
10.15a First Amendment to the Credit Agreement dated December 6, 1999.
10.16 Fourth Amended and Restated Promissory Note dated December 6, 1999 in the amount of $350 million by
Sonic, as borrower, in favor of Ford Motor Credit Company, as lender under the Credit Agreement.
10.17* Subordinated Promissory Note dated December 1, 1997 (the "Smith Subordinated Note") in the amount of
$5.5 million by Sonic, as borrower, in favor of O. Bruton Smith, as lender (incorporated by reference to
Exhibit 10.72 to the 1997 Form 10-K/A).
10.18* Subordination Agreement dated as of December 15, 1997 between O. Bruton Smith and Ford Motor Credit
Company, and acknowledged by Sonic, re: the Smith Subordinated Note (incorporated by reference to Exhibit
10.73 to the 1997 Form 10-K/A).
10.19* Subordination Agreement dated as of July 31, 1998 between O. Bruton Smith and the Trustee, acting for the
benefit of the holders of the Senior Subordinated Notes, and acknowledged by Sonic, re: the Smith
Subordinated Note (incorporated by reference to Exhibit 10.89 to the Form S-4).
10.20* Asset Purchase Agreement dated as of February 4, 1998 among Sonic, as buyer, Hatfield Jeep Eagle, Inc.,
Hatfield Lincoln Mercury, Inc., Trader Bud's Westside Dodge, Inc., Toyota West, Inc. and Hatfield Hyundai,
Inc., as sellers, and Bud C. Hatfield, Dan E. Hatfield and Dan E. Hatfield, as Trustee of The Bud C. Hatfield,
Sr. Special Irrevocable Trust, as shareholders of the sellers (the "Hatfield Purchase Agreement") (incorporated
by reference to Exhibit 10.3 to the March 31, 1998 Form 10-Q).
10.20a* Amendment No. 1 and Supplement to the Hatfield Purchase Agreement dated as of May 28, 1998
(incorporated by reference to Exhibit 99.6 to Sonic's Current Report on Form 8-K filed July 9, 1998 (the
"July 9, 1998 Form 8- K")).
10.20b* Amendment No. 2 and Supplement to the Hatfield Purchase Agreement dated as of July 8, 1998 (incorporated
by reference to Exhibit 99.3 to Sonic's Current Report on Form 8-K filed July 24, 1998).
10.21* Asset Purchase Agreement dated as of July 7, 1998 among Sonic, HMC Finance Corporation, Inc., Halifax
Ford-Mercury, Inc., Higginbotham Automobiles, Inc., Higginbotham Chevrolet-Oldsmobile, Inc., Sunrise Auto
World, Inc. and Dennis D. Higginbotham (the "Higginbotham Purchase Agreement") (incorporated by
reference to Exhibit 99.14 to the July 9, 1998 Form 8-K).
10.21a* Amendment No. 1 and Supplement to the Higginbotham Purchase Agreement dated as of September 16, 1998
(incorporated by reference to Exhibit 10.85a to the Form S-4).
10.22* Amended and Restated Asset Purchase Agreement dated as of March 16, 1999 among Sonic, Tom Williams
Buick, Inc., Williams Cadillac, Inc., Tom Williams Motors, Inc., Tom Williams Auto, Inc., Thomas P.
Williams, Sr., Charles Clark Williams and Thomas P. Williams, Jr. (incorporated by reference to Exhibit 10.35
to Sonic's Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10- K")).
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -------------------------------------------------------------------------------------------------------------
<S> <C>
10.22a* Agreement and Plan of Merger dated as of March 16, 1999 among Sonic, Williams Cadillac Company, Inc.,
Thomas P. Williams, Sr., Charles Clark Williams, Thomas P. Williams, Jr. and Catherine D. Ward
(incorporated by reference to Exhibit 10.35a to the 1998 Form 10-K).
10.23* Asset Purchase Agreement dated as of November 25, 1998 among Sonic, Global Imports, Inc. and William
Morris Whitmire (the "Global Purchase Agreement") (incorporated by reference to Exhibit 10.36 to the 1998
Form 10-K).
10.23a* Amendment No. 1 and Supplement to the Global Purchase Agreement dated as of February 18, 1999
(incorporated by reference to Exhibit 10.36a to the 1998 Form 10-K).
10.24* Asset Purchase Agreement dated February 26, 1999 by and among Sonic, Lute Riley Motors, Inc. and L.S.
Riley (incorporated by reference to Exhibit 10.37 to the 1998 Form 10-K).
10.25* Agreement and Plan of Merger dated as of April 6, 1999 by and among Sonic, Manhattan Auto, Inc., Joseph
Herson, Mollye Mills, John Jaffe and Richard Mills (the "Manhattan Merger Agreement") (incorporated by
reference to Exhibit 4.10 to Sonic's Registration Statement on Form S-3 (Reg. No. 333-82615) (the "August
1999 Form S-3")).
10.25a* Letter Agreement dated as of August 3, 1999 regarding amendment to the Manhattan Merger Agreement
(incorporated by reference to Exhibit 4.11 to the August 1999 Form S-3).
10.26* Asset Purchase Agreement dated April 6, 1999 by and among Sonic, L.O.R., Inc., Waldorf Automotive, Inc.,
Manhattan Imported Cars, Inc. and the stockholders of L.O.R., Waldorf Automotive and Manhattan Imported
Cars (incorporated by reference to Exhibit 10.3 to Sonic's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (the "June 30, 1999 Form 10- Q")).
10.27* Sonic Agreement dated as of June 30, 1999 by and among Sonic, the subsidiaries of Sonic listed on Schedule
A thereto and CAR MMR, L.L.C. (the "Sonic Agreement") (confidential portions omitted and filed separately
with the SEC) (incorporated by reference to Exhibit 10.4 to the June 30, 1999 Form 10-Q).
10.28* Agreement dated as of August 5, 1999 by and among Sonic, O. Bruton Smith and Sonic Financial
Corporation relating to the transactions contemplated by the Sonic Agreement (incorporated by reference to
Exhibit 10.5 to the June 30, 1999 Form 10-Q).
10.29* Asset Purchase Agreement dated September 30, 1999 by and among Sonic, Riverside Chevrolet, Inc. and the
stockholders of Riverside Chevrolet, Inc. listed on the signature page thereto (incorporated by reference to
Exhibit 10.5 to the September 30, 1999 Form 10-Q).
10.30* Asset Purchase Agreement dated September 30, 1999 by and among Sonic, Jim Glover Dodge, Inc. and the
stockholders of Jim Glover Dodge, Inc. listed on the signature page thereto (incorporated by reference to
Exhibit 10.6 to the September 30, 1999 Form 10-Q).
10.31* Stock Purchase Agreement dated September 30, 1999 by and among Sonic, Riverside Nissan, Inc. and the
stockholders of Riverside Nissan, Inc. listed on the signature page thereto (incorporated by reference to
Exhibit 10.7 to the September 30, 1999 Form 10-Q).
10.32* Amended and Restated Asset Purchase Agreement dated as of October 28, 1999 by and among Sonic,
Freeland & Schuh, Inc., South Gate Motors, Inc., Freeland Holdings, Inc., George T. Freeland, Bernard G.
Freeland and Christopher G. Freeland (incorporated by reference to Exhibit 99.1 to Sonic's Current Report on
Form 8-K filed November 19, 1999).
10.33* Agreement and Plan of Merger and Reorganization dated as of October 31, 1999 by and among Sonic, FAA
Acquisition Corp., FirstAmerica Automotive, Inc. and certain stockholders of FirstAmerica Automotive, Inc.
listed on the signature page therein (incorporated by reference to Exhibit 10.8 to the September 30, 1999
Form 10-Q).
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
- ---------
* Filed previously
(b) Reports on Form 8-K
Sonic filed a report on form 8-K on November 19, 1999, reporting under
Item 5 of such report, that on November 4, 1999, Sonic completed its
acquisition of the assets of Freeland Holdings, Inc., which operates five
automobile dealerships in Fort Myers, Florida, pursuant to an Amended and
Restated Asset Purchase Agreement dated as of October 28, 1999. Sonic also
reported the completed acquisition of Manhattan Automotive Group, which
operated four automobile dealerships in the Washington D.C. metropolitan area,
pursuant to an Agreement and Plan of Merger dated April 6, 1999, and an Asset
Purchase Agreement dated April 6, 1999. The material terms of both acquisitions
are described in the Form 8-K. Financial statements were filed as an amendment
to this Form 8-K filed with the SEC on January 18, 2000.
33
<PAGE>
Sonic filed a report on Form 8-K on November 19, 1999, reporting, under
Item 5 of such report, that on November 4, 1999, Sonic had announced in a press
release that its Board of Directors had authorized a stock repurchase of up to
$25 million. The press release is attached as an exhibit to the Form 8-K. No
financial statements were included in the filing.
Sonic filed a report on Form 8-K on December 22, 1999, reporting under
Item 2 of such report, that on December 10, 1999, Sonic has acquired (i)
approximately 96% of the outstanding shares of Class A Common Stock of
FirstAmerica Automotive, Inc. ("FirstAmerica"), (ii) all of the outstanding
shares of Class B Common Stock of FirstAmerica, (iii) all of the outstanding
shares of Preferred Stock of FirstAmerica, and (iv) approximately 94% of the
outstanding warrants to purchase shares of Common Stock of FirstAmerica. The
material terms of the FirstAmerica acquisition are described in the Form 8-K.
Financial statements were filed in an amendment to this Form 8-K filed with the
SEC on January 27, 2000.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SONIC AUTOMOTIVE, INC.
BY /S/ THEODORE M. WRIGHT
------------------------------------
THEODORE M. WRIGHT
CHIEF FINANCIAL OFFICER,
VICE PRESIDENT AND TREASURER
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------------------------- ---------------
<S> <C> <C>
/S/ O. BRUTON SMITH Chief Executive Officer (principal March 30, 2000
- ------------------------------------ executive officer) and Chairman
O. BRUTON SMITH
/S/ THOMAS A. PRICE Vice Chairman and Director March 30, 2000
- ------------------------------------
THOMAS A. PRICE
/S/ B. SCOTT SMITH President, Chief Operating Officer and March 30, 2000
- ------------------------------------ Director
B. SCOTT SMITH
/S/ THEODORE M. WRIGHT Chief Financial Officer, Vice President and March 30, 2000
- ------------------------------------ Treasurer (Principal Financial and
THEODORE M. WRIGHT Accounting Officer) and Director
/S/ JEFFREY C. RACHOR Executive Vice President of Retail March 30, 2000
- ------------------------------------ Operations and Director
JEFFREY C. RACHOR
/S/ WILLIAM R. BROOKS Director March 30, 2000
- ------------------------------------
WILLIAM R. BROOKS
/S/ WILLIAM P. BENTON Director March 30, 2000
- ------------------------------------
WILLIAM P. BENTON
/S/ WILLIAM I. BELK Director March 30, 2000
- ------------------------------------
WILLIAM I. BELK
/S/ H. ROBERT HELLER Director March 30, 2000
- ------------------------------------
H. ROBERT HELLER
</TABLE>
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT ........................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1998 and 1999 ............................. F-3
Consolidated Statements of Income for the years ended December 31, 1997, 1998 and 1999 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997,
1998 and 1999......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999.................................................................................. F-6
Notes to Consolidated Financial Statements ............................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
SONIC AUTOMOTIVE, INC.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of Sonic
Automotive, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and
1999, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1999. 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 auditing standards generally
accepted in the United States of America. 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, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States
of America.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 17, 2000
F-2
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- -------------
<S> <C> <C>
ASSETS (Note 5)
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ...................................................... $ 51,834 $ 83,111
Receivables (net of allowance for doubtful accounts of $700 and $1,506 at December 31,
1998 and December 31, 1999, respectively) ............................................. 39,902 99,987
Inventories (Note 3) .................................................................... 264,971 630,857
Due from affiliates (Note 7) ............................................................ 1,471 4,188
Other current assets (Note 6) ........................................................... 6,663 17,424
-------- ----------
Total current assets .................................................................. 364,841 835,567
PROPERTY AND EQUIPMENT, NET (Notes 4 and 5) .............................................. 26,250 63,681
GOODWILL, NET (Note 1) ................................................................... 180,081 592,670
OTHER ASSETS ............................................................................. 4,931 9,184
-------- ----------
TOTAL ASSETS ............................................................................. $576,103 $1,501,102
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 3) .................................................... $228,158 $ 517,575
Trade accounts payable .................................................................. 14,994 48,405
Accrued interest ........................................................................ 7,058 11,605
Other accrued liabilities (Note 6) ...................................................... 27,763 72,012
Payable to affiliates ................................................................... 628 --
Payable for acquisitions (Note 2) ....................................................... 2,385 5,925
Current maturities of long-term debt (Note 5) ........................................... 4,700 2,388
-------- ----------
Total current liabilities ............................................................. 285,686 657,910
LONG-TERM DEBT (Note 5) .................................................................. 131,337 417,283
OTHER LONG-TERM LIABILITIES (Note 7) ..................................................... -- 3,923
PAYABLE FOR ACQUISITIONS ................................................................. 275 --
PAYABLE TO THE COMPANY'S CHAIRMAN (Note 7) ............................................... 5,500 5,500
PAYABLE TO AFFILIATES (Note 7) ........................................................... 3,625 723
DEFERRED INCOME TAXES .................................................................... 4,066 8,476
INCOME TAX PAYABLE ....................................................................... 3,185 4,714
COMMITMENTS AND CONTINGENCIES (Notes 7 and 10)
STOCKHOLDERS' EQUITY (Notes 1 and 8):
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 and 28,159 shares are issued
and outstanding at December 31, 1999 .................................................. 20,431 27,191
Class A Common Stock, $.01 par, 100.0 million shares authorized; 11,959,274 shares issued
at December 31, 1998 and 29,075,437 shares issued at December 31, 1999 ................ 120 291
Class B Common Stock, $.01 par (convertible into Class A Common Stock), 30.0 million
shares authorized; 12,400,000 shares issued and outstanding at December 31, 1998 and
12,250,000 shares issued and outstanding at December 31, 1999 ......................... 124 123
Paid-in capital ......................................................................... 87,011 301,934
Retained earnings ....................................................................... 34,743 79,392
Class A Treasury Stock, at cost (723,600 shares at December 31, 1999) ................... -- (6,358)
-------- ----------
Total stockholders' equity ............................................................ 142,429 402,573
-------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................... $576,103 $1,501,102
======== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1998 1999
------------- -------------- ---------------
<S> <C> <C> <C>
REVENUES:
New vehicles ........................................ $ 343,941 $ 962,939 $ 1,968,514
Used vehicles ....................................... 85,132 324,740 684,560
Wholesale vehicles .................................. 38,785 119,351 250,794
--------- ----------- -----------
Total vehicles .................................... 467,858 1,407,030 2,903,868
Parts, service and collision repair ................. 57,537 162,660 364,184
Finance and insurance (Note 1) ...................... 10,606 34,011 82,771
--------- ----------- -----------
Total revenues .................................... 536,001 1,603,701 3,350,823
COST OF SALES (Note 1) ............................... 473,003 1,396,259 2,896,400
--------- ----------- -----------
GROSS PROFIT ......................................... 62,998 207,442 454,423
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ............................................ 46,770 150,130 326,914
DEPRECIATION ......................................... 776 1,384 3,138
GOODWILL AMORTIZATION ................................ 546 3,223 8,561
--------- ----------- -----------
OPERATING INCOME ..................................... 14,906 52,705 115,810
OTHER INCOME AND EXPENSE:
Interest expense, floor plan ........................ 8,007 14,096 22,536
Interest expense, other ............................. 1,199 9,395 21,586
Other income ........................................ 298 426 1,286
--------- ----------- -----------
Total other expense ............................... 8,908 23,065 42,836
--------- ----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST ..... 5,998 29,640 72,974
PROVISION FOR INCOME TAXES ........................... 2,249 11,083 28,325
--------- ----------- -----------
INCOME BEFORE MINORITY INTEREST ...................... 3,749 18,557 44,649
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY .......... 47 -- --
--------- ----------- -----------
NET INCOME ........................................... $ 3,702 $ 18,557 $ 44,649
========= =========== ===========
BASIC NET INCOME PER SHARE (Note 8) .................. $ 0.27 $ 0.81 $ 1.41
========= =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ........ 13,898 22,852 31,744
========= =========== ===========
DILUTED NET INCOME PER SHARE (Note 8) ................ $ 0.27 $ 0.74 $ 1.27
========= =========== ===========
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES
OUTSTANDING ......................................... 13,898 24,970 35,248
========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(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, 1996 ............ -- $ -- -- $ -- 12,500 $125
Capital contribution ......... -- -- -- -- -- --
Public offering of
common stock ................ -- -- 10,000 100 -- --
Stock redemption ............. -- -- -- -- -- --
Dividend ..................... -- -- -- -- -- --
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 Class A
Common Stock
(Note 2) .................... -- -- 975 10 -- --
Shares awarded under
stock compensation
plans ....................... -- -- 252 3 -- --
Issuance of warrants (Note
8) .......................... -- -- -- -- -- --
Conversion of Preferred
Stock ....................... (9) (8,911) 632 6 -- --
Conversion of Class B
Common Stock ................ -- -- 100 1 (100) (1)
Comprehensive income:
Net income .................. -- -- -- -- -- --
Net unrealized loss ......... -- -- -- -- -- --
---- ---------- ------ ---- ------ -----
Total comprehensive
income .................... -- -- -- -- -- --
---- ---------- ------ ---- ------ -----
BALANCE AT
DECEMBER 31, 1998 ............ 22 20,431 11,959 120 12,400 124
Issuance of Preferred
Stock (Note 2) .............. 59 59,045 -- -- -- --
Issuance of Class A
Common Stock (Notes
2 and 8) .................... -- -- 12,852 129 -- --
Shares awarded under
stock compensation
plans ....................... -- -- 281 3 -- --
Conversion of Preferred
Stock (Note 8) .............. (53) (52,285) 3,833 38 -- --
Conversion of Class B
Common Stock ................ -- -- 150 1 (150) (1)
Purchase of Class A
Treasury Stock
(Note 8) .................... -- -- -- -- -- --
Net income ................... -- -- -- -- -- --
----- ---------- ------ ---- ------ -----
BALANCE AT
DECEMBER 31, 1999 ............ 28 $ 27,191 29,075 $291 12,250 $123
===== ========== ====== ==== ====== =====
<CAPTION>
ACCUMULATED
OTHER TOTAL
PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY
----------- ---------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1996 ............ $ 13,271 $12,993 $ -- $ (94) $ 26,295
Capital contribution ......... 3,208 -- -- -- 3,208
Public offering of
common stock ................ 53,577 -- -- -- 53,677
Stock redemption ............. (2,123) -- -- -- (2,123)
Dividend ..................... -- (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 Class A
Common Stock
(Note 2) .................... 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 ....................... 8,905 -- -- -- --
Conversion of Class B
Common Stock ................ -- -- -- -- --
Comprehensive income:
Net income .................. -- 18,557 -- -- 18,557
Net unrealized loss ......... -- -- -- (21) (21)
-------- ------- -------- ----- --------
Total comprehensive
income .................... -- -- -- -- 18,536
-------- ------- -------- ----- --------
BALANCE AT
DECEMBER 31, 1998 ............ 87,011 34,743 -- -- 142,429
Issuance of Preferred
Stock (Note 2) .............. -- -- -- -- 59,045
Issuance of Class A
Common Stock (Notes
2 and 8) .................... 160,665 -- -- -- 160,794
Shares awarded under
stock compensation
plans ....................... 2,011 -- -- -- 2,014
Conversion of Preferred
Stock (Note 8) .............. 52,247 -- -- -- --
Conversion of Class B
Common Stock ................ -- -- -- -- --
Purchase of Class A
Treasury Stock
(Note 8) .................... -- -- (6,358) -- (6,358)
Net income ................... -- 44,649 -- -- 44,649
-------- ------- -------- ----- --------
BALANCE AT
DECEMBER 31, 1999 ............ $301,934 $79,392 $ (6,358) $ -- $402,573
======== ======= ======== ===== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 3,702 $ 18,557 $ 44,649
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ..................................................... 1,322 4,607 11,699
Loss on disposal of property and equipment ........................................ 110 278 249
Deferred income taxes ............................................................. (27) 2,164 2,075
Changes in assets and liabilities that relate to operations:
Receivables ...................................................................... (594) (11,018) (27,860)
Inventories ...................................................................... 1,430 12,030 (45,665)
Other assets ..................................................................... (1,039) (4,169) 7,332
Notes payable -- floor plan ...................................................... 1,632 (16,806) 50,707
Trade accounts payable and other liabilities ..................................... 1,190 7,344 2,886
--------- --------- ----------
Total adjustments ............................................................... 4,024 (5,570) 1,423
--------- --------- ----------
Net cash provided by operating activities ......................................... 7,726 12,987 46,072
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired ....................................... (85,650) (72,205) (360,683)
Purchases of property and equipment ................................................. (2,007) (4,335) (21,548)
Proceeds from sales of property and equipment ....................................... 43 1,655 13,600
Proceeds from sales of marketable equity securities ................................. 784 -- --
--------- --------- ----------
Net cash used in investing activities ............................................. (86,830) (74,885) (368,631)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ........................................................ 45,892 179,851 387,532
Payments on long-term debt .......................................................... (13,353) (84,594) (114,073)
Public offering of Class A common stock ............................................. 53,677 -- 84,990
Purchases of Class A common stock ................................................... -- -- (6,358)
Issuance of shares under stock compensation plans ................................... -- 1,165 2,014
Advances to affiliated companies .................................................... (987) (994) (269)
Advances from the Company's Chairman ................................................ 5,500 -- --
--------- --------- ----------
Net cash provided by financing activities ......................................... 90,729 95,428 353,836
--------- --------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................................ 11,625 33,530 31,277
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ......................................... 6,679 18,304 51,834
--------- --------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................................... $ 18,304 $ 51,834 $ 83,111
========= ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-- Cash paid during the year for:
Interest ............................................................................ $ 8,761 $ 17,504 $ 39,575
Income taxes ........................................................................ $ 1,392 $ 10,919 $ 20,681
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Preferred Stock issued for acquisitions and contingent consideration (Note 2) ....... -- $ 29,342 $ 59,045
Conversion of Preferred Stock ....................................................... -- $ 8,911 $ 52,285
Class A common stock issued for acquisitions (Note 2) ............................... -- $ 8,250 $ 75,802
</TABLE>
See notes to consolidated financial statements.
F-6
<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 the second
largest automotive retailer in the United States (as measured by total
revenue), operating 162 dealership franchises and 29 collision repair centers
in southeastern, southwestern, mid-western, mid-Atlantic and western United
States as of December 31, 1999. 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, 1999, Sonic sold a total of 31 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 Sonic 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 Reorganization 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.
During 1999, Sonic completed the acquisitions of 73 dealerships (see Note
2). Each of these acquisitions has been accounted for using the purchase method
of accounting, and the accompanying consolidated 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 contracts to
customers. Sonic may be assessed a chargeback fee in the event of early
cancellation of a loan or insurance 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.
Sonic also receives commissions from the sale of non-recourse third party
extended service contracts to customers. These contracts provide for no
recourse against Sonic, but instead provide that the applicable manufacturer or
third party warranty company is directly liable for all warranties provided
within the contract. Commission revenue from the sale of these third party
extended service contracts is recorded net of estimated chargebacks at the time
of sale.
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 $1.8
million, $6.0 million and $13.1 million for the years ended December 31, 1997,
1998, and 1999, 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-7
<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 $36.6 million and
$83.1 million at December 31, 1998 and 1999, 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. Other inventories, which primarily include rental and service
vehicles, are stated at the lower of specific cost or market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. The range of estimated useful lives is as follows:
<TABLE>
<CAPTION>
USEFUL LIVES
-------------
<S> <C>
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 gross amount of goodwill at December 31, 1998
was $182.5 million and at December 31, 1999 was $605.1 million. As a percentage
of total assets and stockholders' equity, goodwill, net of accumulated
amortization, represented 31.3% and 126.4%, respectively, at December 31, 1998,
and 39.5% and 147.2%, respectively, at December 31, 1999. 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.
The Financial Accounting Standards Board recently proposed new rules
relating to the accounting for business combinations and intangible assets. One
aspect of the proposal would not permit goodwill to be amortized over a period
in excess of 20 years; however, we cannot assure that such a rule will be
adopted and, if adopted, as to the final provisions of any such rules. If such
a rule is adopted, we have been advised that it would likely only affect the
period over which we amortize goodwill on our 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, the accelerated amortization period for goodwill of 15 years 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
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)
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 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, 1998 and 1999
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, payables for acquisitions 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 fair value of
Sonic's senior subordinated notes based on the quoted bid price as of December
31, 1998 and 1999 was approximately $120.7 million and $121.9 million,
respectively. The carrying value of Sonic's senior subordinated notes as of
December 31, 1998 and 1999 was approximately $120.7 million and $121.0 million,
respectively.
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 $7.0 million, $17.4 million and $33.1 million
for the years ended December 31, 1997, 1998 and 1999, respectively.
SEGMENT INFORMATION -- Sonic's business is fundamentally managed based on
individual dealership operating performance. Each of Sonic's dealerships have
similar economic and operating characteristics. Each dealership sells similar
products and services (new and used vehicles, parts, service and collision
repair services), uses similar processes in selling its products and services,
and sells its products and services to similar classes of customers. As a
result, Sonic's dealerships are aggregated into a single operating segment for
purposes of reporting financial condition and results of operations.
2. BUSINESS ACQUISITIONS
ACQUISITIONS COMPLETED SUBSEQUENT TO DECEMBER 31, 1999
Subsequent to December 31, 1999, Sonic acquired 6 dealerships for
approximately $44.8 million in cash and 11,589 shares of Sonic's Class A
convertible preferred stock, Series II, having a liquidation value of $1,000
per share. The cash portion of the purchase price was financed with a
combination of cash borrowed under Sonic's $350 million acquisition line of
credit (the "Revolving Facility") with Ford Motor Credit Company ("Ford Motor
Credit") and cash generated from Sonic's existing operations. The acquisitions
were accounted for using the purchase method of accounting.
ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 1999
During 1999, Sonic acquired 73 dealerships for approximately $420.4
million in cash, 6,282 shares of Sonic's Class A convertible preferred stock,
Series II, recorded at an estimated value of approximately $6.3 million,
45,783 shares of Sonic's Class A convertible preferred stock, Series III,
recorded at an estimated value of approximately $45.8 million, and 6,784,347
shares of Sonic's Class A common stock having an estimated fair value at the
time of issuance of approximately $75.8 million. The cash portion of the
purchase price was financed with a combination of a portion of the net proceeds
from Sonic's public offering of Class A common stock in May 1999, cash borrowed
under the Revolving Facility and cash generated from Sonic's existing
operations. Payable for acquisitions on the accompanying consolidated
F-9
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS -- (Continued)
balance sheet as of December 31, 1999 includes approximately $3.7 million of
the cash portion of the aggregate purchase price which was paid subsequent to
December 31, 1999.
The acquisitions were 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 aggregate purchase price of these
acquisitions has been allocated to the assets and liabilities acquired based on
their estimated fair market value at the acquisition date as shown in the table
below. Because many of our acquisitions were consummated within the last two
months of the fiscal year, we are still in the process of obtaining data
necessary to complete the allocation of the purchase price of these
acquisitions. As a result, the values of assets and liabilities included in the
table below reflect preliminary estimates where values have not yet been
determined, and may ultimately be different than amounts recorded once actual
values are determined. Any adjustment to the value of assets and liabilities
will be recorded against goodwill.
<TABLE>
<S> <C>
Working capital .................. $ 103,569
Property and equipment ........... 38,497
Goodwill ......................... 417,251
Non-current liabilities assumed .. (11,033)
---------
Total purchase price ............. $ 548,284
=========
</TABLE>
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, with 14,406.3 shares of Class A convertible preferred stock, Series I,
10,054.5 shares of Class A convertible preferred stock, Series II, and 6,273
shares of Class A convertible preferred stock, Series III and with warrants to
purchase an aggregate of 154,000 shares of Class A common stock. 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.
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, 1999, Sonic had paid
approximately $5.0 million in cash and issued 6,717 shares of Class A
convertible preferred stock, Series II, and 263.2 shares of Class A convertible
preferred stock, Series III 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.
<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>
F-10
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS -- (Continued)
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>
<CAPTION>
(IN THOUSANDS)
---------------
<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>
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 year in which the acquisitions were
completed, and at the beginning of the immediately preceding year, 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 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,
1998 1999
--------------- ---------------
(DOLLARS IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
Total revenues ................... $ 4,837,913 $ 5,399,981
Gross profit ..................... $ 649,810 $ 744,717
Net income ....................... $ 24,368 $ 51,553
Diluted income per share ......... $ 0.56 $ 1.14
</TABLE>
F-11
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
New vehicles .................. $190,139 $459,382
Used vehicles ................. 47,033 109,130
Parts and accessories ......... 16,012 44,821
Other ......................... 11,787 17,524
-------- --------
Total ......................... $264,971 $630,857
======== ========
</TABLE>
All new and certain used vehicles are financed with borrowings under floor
plan credit facilities, and are pledged to collateralize amounts borrowed under
those facilities. We currently have standardized floor plan credit facilities
with Chrysler Financial Corporation ("Chrysler Financial") and Ford Motor
Credit. The floor plan credit facility with Chrysler Financial, which was
obtained on November 1, 1999, provides up to $750 million for the purchase of
vehicles at our Chrysler dealerships. The floor plan facility with Ford Motor
Credit provides up to $550 million for the purchase of vehicles at all of our
other dealerships. As of December 31, 1998 there was an aggregate of
approximately $228.2 million outstanding under the Ford Motor Credit floor plan
facility. No amounts were outstanding under the Chrysler Financial floor plan
facility. As of December 31, 1999, there was an aggregate of approximately
$102.7 million outstanding under the Chrysler Financial floor plan facility and
$400.8 million outstanding under the Ford Motor Credit floor plan facility.
Amounts outstanding under the Chrysler Financial floor plan facility bear
interest at 1.25% above LIBOR (LIBOR was 5.82% at December 31, 1999). Amounts
outstanding under the Ford Motor Credit floor plan facility bear interest at an
effective interest rate of prime less 1.3% (prime was 8.5% at December 31,
1999), 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 us by the
manufacturers on a quarterly basis.
We make monthly interest payments on the amount financed under the floor
plan facilities but are 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. As such, these floor plan notes
payable are shown as a current liability in the accompanying consolidated
balance sheets. The floor plan facilities contain a number of covenants,
including among others, covenants restricting us with respect to the creation
of liens and changes in ownership, officers and key management personnel. Sonic
is in compliance with all restrictive covenants as of December 31, 1999.
Other inventories include rental and service vehicles in the amount of
$11.1 million and $16.7 million at December 31, 1998 and 1999, respectively.
Notes payable, floor plan on the accompanying consolidated balance sheets
includes $12.1 million and $14.1 million related to these vehicles at December
31, 1998 and 1999, respectively.
F-12
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Land .................................. $ 4,330 $ 953
Building and improvements ............. 14,085 23,120
Office equipment and fixtures ......... 6,739 22,616
Parts and service equipment ........... 6,495 16,008
Company vehicles ...................... 1,300 4,664
Construction in progress .............. 645 5,785
-------- --------
Total, at cost ........................ 33,594 73,146
Less accumulated depreciation ......... (7,344) (9,465)
-------- --------
Property and equipment, net ........... $ 26,250 $ 63,681
======== ========
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
----------- -----------
(IN THOUSANDS)
<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 and $4.0 million at December 31, 1998 and
1999, respectively ..................................................................... $120,726 $120,988
$350 million revolving credit facility with Ford Motor Credit bearing interest at 2.50% above
LIBOR (LIBOR was 5.82% at December 31, 1999) and maturing in October 2002,
collateralized by all assets of the Company ............................................ 8,887 289,003
Mortgage notes payable .................................................................. 4,091 --
Other notes payable (primarily equipment notes) ......................................... 2,333 9,680
-------- --------
136,037 419,671
Less current maturities ................................................................. (4,700) (2,388)
-------- --------
Long-term debt .......................................................................... $131,337 $417,283
======== ========
</TABLE>
Future maturities of debt at December 31, 1999 are as follows:
<TABLE>
<S> <C>
Year ending December 31, (IN THOUSANDS)
--------------
2000 ................... $ 2,388
2001 ................... 1,886
2002 ................... 290,690
2003 ................... 1,050
2004 ................... 410
Thereafter ............. 123,247
--------
Total .................. $419,671
========
</TABLE>
In January 1999, in connection with the sale of real estate at Town and
Country Toyota and Fort Mill Ford, Sonic repaid all amounts outstanding under
mortgages encumbering such property.
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,
F-13
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT -- (Continued)
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. Sonic is in compliance with all restrictive
covenants as of December 31, 1999.
THE REVOLVING FACILITY
Effective November 1, 1999, the aggregate amount available for borrowing
under the Revolving Facility was increased from $100.0 million to $350.0
million. Prior to November 1, 1999, amounts outstanding under the Revolving
Facility bore 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
(the 1 month commercial finance paper rate was 5.77% at October 31, 1999).
Subsequent to November, amounts outstanding under the Revolving Facility bear
interest at a fluctuating per annum rate equal to 2.50% above LIBOR (LIBOR was
5.82% at December 31, 1999).
The Revolving Facility will mature in October 2002, but may be extended
for a number of additional one year terms to be negotiated by us and Ford Motor
Credit. No assurance can be given that such extensions will be granted. On May
5, 1999, in connection with the public offering by Sonic of 6,067,230 shares of
Class A common stock, all amounts previously outstanding under the Revolving
Facility were repaid. The outstanding balance of $289.0 million at December 31,
1999 represents amounts borrowed to finance certain of Sonic's acquisitions
completed in 1999. 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 $35 million.
Sonic agreed under the Revolving Facility not to pledge any of its assets
to any third party (with the exception of 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 current assets to current liabilities (at least 1.25:1),
o earnings before interest, taxes, depreciation and amortization (EBITDA)
and rent less capital expenditures to fixed charges (at least 1.4:1),
o EBITDA to interest expense (at least 2:1) and,
o total adjusted debt to EBITDA (no greater than 2.25:1).
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 was in compliance with all restrictive covenants as of December 31, 1999.
F-14
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ----------- ----------
<S> <C> <C> <C>
Current:
Federal ............................. $1,890 $ 8,145 $24,198
State ............................... 391 756 2,052
------ ------- -------
2,281 8,901 26,250
Deferred .............................. (27) 2,252 2,075
Change in valuation allowance ......... (5) (70) --
-------- ------- -------
Total ................................. $2,249 $11,083 $28,325
======= ======= =======
</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>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal rate ...................... 34.00% 35.00% 35.00%
Effective state income tax rates ............ 3.70 1.46 2.26
Nondeductible goodwill amortization ......... 1.39 1.13 1.20
Other ....................................... (1.60) (0.20) 0.36
----- ----- -----
Effective tax rates ......................... 37.49% 37.39% 38.82%
===== ===== =====
</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>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts ................... $ 69 $ 824
Inventory ................................. 631 1,515
Warranty reserves ......................... -- 577
Accrued compensation ...................... -- 777
Accrued severance ......................... -- 595
Net operating loss carryforwards .......... 517 124
Other ..................................... 746 2,198
-------- --------
Total deferred tax assets ................. 1,963 6,610
Deferred tax liabilities:
Basis difference in property and equipment (1,276) (637)
Basis difference in goodwill .............. (2,757) (6,726)
Other ..................................... (294) (1,113)
-------- --------
Total deferred tax liability ................ (4,327) (8,476)
-------- --------
Net deferred tax liability .................. $ (2,364) $ (1,866)
======== ========
</TABLE>
Deferred tax assets are included in other current assets on the
accompanying consolidated balance sheets. 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, 1999,
Sonic had state net operating loss carryforwards of $2.0 million which will
expire primarily between 2000 and 2004.
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, 1998 and 1999, this liability was $5.6
F-15
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- (Continued)
million and $7.3 million, respectively, and is generally payable from 2000 to
2002. The current portion of the liability as of December 31, 1999 was $2.6
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"), 341,250 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.
PAYABLE TO COMPANY'S CHAIRMAN
Sonic has a note payable to Mr. Smith in the amount of $5.5 million (the
"Subordinated Smith Loan"). The Subordinated Smith Loan bears interest at Bank
of America's announced prime rate plus 0.5% and has a stated maturity date of
November 30, 2000. Under the terms of certain subordination agreements
currently in effect, however, all amounts owed by Sonic to Mr. Smith under the
Subordinated Smith Loan are to be paid only 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 fully paid in cash.
Accordingly, the Subordinated Smith Loan has been classified as non-current on
the accompanying consolidated balance sheets.
DEALERSHIP LEASES:
In January 1999, Sonic sold to MMR Holdings, L.L.C., a limited liability
company then owned by Bruton Smith and SFC, the real estate at two of its
dealership subsidiaries for an aggregate purchase price of approximately $10.6
million and entered into an agreement with MMR Holdings, L.L.C. to lease back
the real estate over a term of ten years. Sonic realized a gain on the sale of
approximately $2.1 million which was deferred and is currently being amortized
against the rent expense over the term of the lease. The unamortized balance of
the deferred gain at December 31, 1999 was
F-16
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTIES -- (Continued)
approximately $1.9 million, of which approximately $1.7 million is included in
other long-term liabilities on the accompanying consolidated balance sheet.
On August 13, 1999, CAR MMR L.L.C., an affiliate of Capital Automotive
REIT, which is not affiliated with Sonic, acquired all of the ownership
interests of MMR Holdings, L.L.C., and two of its affiliates, MMR Viking
Investment Associates, L.P. and MMR Tennessee, L.L.C (collectively, the "MMR
Group"). As of that date, Sonic leased 48 properties for 38 of its dealerships
from the MMR Group under "triple net leases" which required Sonic to pay all
costs of operating the properties, as well as all taxes, utilities, insurance,
repairs, maintenance and other property related expenses. Sonic has entered
into new leases with CAR MMR L.L.C. with terms similar to those under Sonic's
former leases with the MMR Group. 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. Sonic has agreed to renew approximately
75% of its lease rental stream for an additional five year period after the
expiration of the initial lease terms. In connection with the acquisition,
Sonic, MMR Holdings and Mar Mar Realty Trust, an affiliate of the MMR Group,
terminated the strategic alliance agreement whereby Mar Mar Realty Trust had
provided Sonic with real estate financing, acquisition referral and related
services.
As a part of the August 13, 1999 sale of the MMR Group to CAR MMR, Bruton
Smith and SFC signed agreements with Sonic to induce Sonic to enter into a real
estate financing arrangement with CAR MMR and, among other things, amend its
leases with the MMR Group to standardize their terms. Under these agreements,
Mr. Smith and SFC agreed to pay approximately $2.5 million to Sonic, which
amount represented Mr. Smith's and SFC's profits on the sale of the MMR Group
less their selling expenses and a 14% annual return on their initial investment
in the MMR Group, net of any advances made by Sonic to the MMR Group.
OTHER RELATED PARTY TRANSACTIONS
o Sonic had amounts receivable from affiliates of $1.5 million and $4.2
million at December 31, 1998 and 1999, respectively. Of the $4.2 million
balance at December 31, 1999, approximately $2.5 million represents
amounts owed by SFC. The remaining balances at December 31, 1998 and 1999
primarily represent advances made by Sonic to SFC and Mar Mar Realty
Trust. The amounts receivable from affiliates are non-interest bearing and
are classified as current based on the expected repayment dates.
o Town and Country Toyota has an amount payable to SFC and Bruton Smith,
which payable totals approximately $0.8 million and $0.7 million as of
December 31, 1998 and 1999, respectively. This loan bears interest at
8.75% per annum and is classified as non-current based on the expected
repayment dates.
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. 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
F-17
<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)
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. In December 1998, 6,241.5 shares of Series II Preferred Stock
and 2,313 shares of Series III Preferred Stock having an estimated 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.
During 1999, Sonic issued 12,999 shares of Series II preferred stock and
46,046.2 shares of Series III preferred stock. These shares were recorded at
their estimated value. During the year, 5,605.3 shares of Series I preferred
stock, 9,137 shares of Series II preferred stock, and 38,323.2 shares of Series
III preferred stock having an aggregate estimated value of approximately $52.3
million were converted into 3,833,217 shares of Class A common stock. As of
December 31, 1999 there were 8,801 shares of Series I preferred stock, 7,675
shares of Series II preferred stock, and 11,683 shares of Series III preferred
stock issued and outstanding.
COMMON STOCK -- Sonic has two classes of common stock. Class A common
stock entitles its holder to one vote per share. Class B common stock entitles
its holder to ten votes per share, except in certain circumstances. Each share
of Class B common stock is convertible into one share of Class A common stock
either upon voluntary conversion at the option of the holder, or automatically
upon the occurrence of certain events, as provided in Sonic's charter.
Sonic completed a public offering of 8,500,000 shares of its Class A
common stock on May 5, 1999 at a price of $14.9375 per share. Of the 8,500,000
shares sold in the offering, 6,067,230 shares were sold by Sonic and 2,432,770
shares were sold by certain stockholders of Sonic. Of the $86.1 million in net
proceeds to Sonic from the public offering, approximately $75.5 million was
used to repay the outstanding balance under the Revolving Facility. The
remaining net proceeds were used to finance acquisitions.
At the annual meeting of stockholders held on June 8, 1999, Sonic's
stockholders approved an amendment to Sonic's Amended and Restated Certificate
of Incorporation to increase the number of authorized shares of Class A common
stock from 50 million to 100 million, and to increase the number of authorized
shares of Class B common stock from 15 million to 30 million.
TREASURY STOCK/SHARE REPURCHASE PROGRAM -- During 1999, Sonic's Board of
Directors authorized Sonic to expend up to $50 million to repurchase shares of
its Class A common stock or redeem securities convertible into Class A common
stock. As of December 31, 1999 Sonic has repurchased 723,600 shares of Class A
common stock at an average price per share of approximately $8.7860. Sonic will
continue to repurchase shares in the open market from time to time subject to
market conditions.
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.
WARRANTS -- In connection with Sonic's prior year 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.
F-18
<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)
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 net income per share:
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED FOR THE TWELVE MONTHS ENDED FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------------------- ------------------------------- ------------------------------
PER-SHARE PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- ----------- ---------- -------- ----------- ---------- -------- ----------
(DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME PER
SHARE ...................... $3,702 13,898 $ 0.27 $18,557 22,852 $ 0.81 $44,649 31,744 $ 1.41
====== ====== ======
EFFECT OF DILUTIVE
SECURITIES
Stock compensation plans .... -- -- -- 630 -- 949
Warrants .................... -- -- -- 32 -- 78
Convertible Preferred Stock -- -- -- 1,456 -- 2,477
------ ------ ------- ------ ------- ------
DILUTED NET INCOME PER
SHARE ...................... $3,702 13,898 $ 0.27 $18,557 24,970 $ 0.74 $44,649 35,248 $ 1.27
====== ====== ====== ======= ====== ====== ======= ====== ======
</TABLE>
In addition to the stock options included in the table above, options to
purchase 2,252,269 shares of Class A common stock were outstanding during 1999
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 three option plans, the Sonic Automotive, Inc. 1997
Stock Option Plan (the "Stock Option Plan"), the Sonic Automotive, Inc. Formula
Stock Option Plan (the "Directors' Plan"), and the FirstAmerica Employee Stock
Option Plan.
The Stock Option Plan was adopted by the Board of Directors in order to
attract and retain key personnel. At the 1999 Annual Meeting, the Company's
shareholders approved the increase in the number of shares issuable under the
Stock Option Plan from 2.25 million to 4.5 million. Under the Stock Option
Plan, options to purchase 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.
The Directors' Plan, approved by the shareholders at Sonic's annual
meeting on December 3, 1998, authorizes 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 10,000 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.
FIRSTAMERICA STOCK OPTION PLAN
In connection with its acquisition of FirstAmerica Automotive, Inc., Sonic
agreed to assume FirstAmerica's Employee Stock Option Plan ("FirstAmerica
Plan"). The FirstAmerica Automotive, Inc. 1997 Stock Option Plan has been
amended and restated as of December 10, 1999 to provide that each unexpired
option to purchase FAA's Class A common stock that was outstanding under the
FirstAmerica Plan to be converted into an option to purchase shares of Sonic's
Class
F-19
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS -- (Continued)
A Common Stock. A conversion factor of .32232 shares of Sonic's Class A common
stock for each share covered by options to purchase FAA Class A common stock
was utilized to retain the aggregate intrinsic value of the options immediately
before the change and, accordingly, a new measurement date did not result from
the conversion. Other than the conversion to options for Sonic's stock, there
were no significant changes to the FirstAmerica Plan. Options continue to vest
according to the terms of the original option agreements, generally over a five
year period, and expire if unexercised ten years from the date of grant.
A summary of the status of Sonic's stock option plans as of December 31,
1997, 1998 and 1999 and changes during the years ended on those dates is
presented below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE
OPTIONS PER SHARE PRICE
----------- ---------------- ---------
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
Outstanding at December 31, 1996 ............... --
Granted ....................................... 1,176 $ 6.00 $ 6.00
Outstanding at December 31, 1997 ............... 1,176 6.00 6.00
Granted ....................................... 1,433 7.25-9.19 8.61
Exercised ..................................... (72) 6.00 6.00
Outstanding at December 31, 1998 ............... 2,537 6.00-9.19 7.48
Granted ....................................... 1,643 10.06-18.32 14.27
Options assumed from acquired company ......... 467 2.85-13.12 9.73
Exercised ..................................... (212) 6.00-7.25 6.18
Forfeited ..................................... (248) 6.00-15.44 9.29
-----
Outstanding at December 31, 1999 ............... 4,187 2.85-18.32 10.35
=====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
RANGE OF SHARES AVERAGE AVERAGE SHARES AVERAGE
EXERCISE OUTSTANDING AT REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES 12/31/99 CONTRACTUAL LIFE PRICE AT 12/31/99 PRICE
- ------------------ ---------------- -------------------- ---------- ------------- ---------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 2.85 127 7.53 years $ 2.85 61 $ 2.85
$ 6.00-7.25 1,268 8.00 6.32 739 6.22
$ 9.19-13.12 1,478 9.14 10.14 778 9.64
$ 13.63-18.32 1,314 9.35 15.20 256 15.32
----- ---- ------- --- ------
Totals 4,187 8.81 years $ 10.35 1,834 $ 8.83
===== ==== ======= ===== ======
</TABLE>
F-20
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS -- (Continued)
The weighted average fair value of options granted or assumed was $2.89,
$4.63 and $6.76 per share in 1997, 1998 and 1999, respectively. The fair value
of each option granted during 1997, 1998 and 1999 was estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions.
<TABLE>
<CAPTION>
1997 1998 1999
---------- --------------- ----------------
<S> <C> <C> <C>
EMPLOYEE STOCK PURCHASE PLAN
Dividend yield ................... n/a n/a n/a
Risk free interest rates ......... n/a 5.51% 4.49%-6.15%
Expected lives ................... n/a 1.0 year 0.25-1.0 year
Volatility ....................... n/a 61.31% 53.15%
STOCK OPTION PLANS
Dividend yield ................... n/a n/a n/a
Risk free interest rates ......... 5.60% 4.24%-5.57% 4.53%-6.15%
Expected lives ................... 5 years 5 years 3-5 years
Volatility ....................... 49.55% 61.31% 53.15%
</TABLE>
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 May 5, 1999, the Board of Directors, pursuant to Sonic's ESPP,
increased the authorized shares from 600,000 to 1.2 million and issued options
exercisable for approximately 420,000 shares of Class A common stock, granting
355 shares to each participant 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 June 8, 1999.
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
F-21
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS -- (Continued)
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.
Under both the ESPP and the Nonqualified ESPP, Sonic issued approximately
93,600 and 180,730 shares to employees in 1998 and 1999 at a weighted average
purchase price of $4.10 and $10.70 per share, respectively. The weighted
average fair value of shares granted under both plans was $1.58 and $2.91 per
share in 1998 and 1999, respectively.
Sonic has adopted the disclosure-only provisions of SFAS No. 123. No
compensation cost has been recognized for Sonic's stock-based compensation
plans in the accompanying consolidated financial statements. 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, $16.8 million and $0.67, respectively for 1998, and $39.9 million and
$1.13, respectively for 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. Minimum future rental payments required under noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
RELATED PARTIES THIRD PARTIES TOTAL
Year Ending December 31, ----------------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
2000 ..................... $ 3,092 $ 44,505 $ 47,597
2001 ..................... 3,097 43,389 46,486
2002 ..................... 3,046 41,651 44,697
2003 ..................... 2,970 41,151 44,121
2004 ..................... 2,970 43,464 46,434
Thereafter ............... 23,553 180,941 204,494
------- -------- --------
Total .................... $38,728 $395,101 $433,829
======= ======== ========
</TABLE>
Total rent expense for the years ended December 31, 1997, 1998, and 1999
was approximately $2.4 million, $10.5 million and $26.4 million, respectively.
Of these amounts, $1.3 million, $7.5 million and $7.7 million, respectively,
were paid to related parties. As discussed above in Note 7, RELATED PARTIES,
MMR Holdings was acquired by CAR MMR L.L.C. August 13, 1999. Consequently, rent
expense paid to related parties for 1999 includes amounts paid to MMR Holdings
prior to that time.
OTHER CONTINGENCIES
Sonic is involved in various 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-22
<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 1998 and
1999.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
Year Ended December 31, 1999:
Total revenues ....................... $ 593,452 $ 723,530 $ 869,964 $1,163,877
Gross profit ......................... $ 78,075 $ 94,261 $ 116,654 $ 165,433
Operating income ..................... $ 18,954 $ 24,588 $ 31,012 $ 41,256
Income before taxes .................. $ 10,848 $ 16,230 $ 20,543 $ 25,353
Net income ........................... $ 6,687 $ 10,101 $ 12,583 $ 15,278
Diluted net income per share ......... $ 0.24 $ 0.30 $ 0.33 $ 0.38
</TABLE>
12. SUBSEQUENT EVENTS
SHARE REPURCHASE PROGRAM -- Through March 17, 2000, Sonic has repurchased
165,757 additional shares of Class A common stock for approximately $ 1.5
million and has redeemed 3,500 shares of Class A convertible preferred stock
for approximately $3.5 million.
SALE OF DEALERSHIP SUBSIDIARIES -- Subsequent to December 31, 1999,
Sonic's Board of Directors approved the sale of certain dealerships. Through
March 17, 1999, Sonic has sold, signed definitive agreements to sell, or signed
letters of intent to sell three dealerships for an aggregate of approximately
$5.1 million in proceeds. No material gains or losses are expected from these
sales.
F-23
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
SONIC AUTOMOTIVE, INC.
* * * * * * * * * * * * * * *
Adopted in accordance with the
provisions of Section 242 of the General
Corporation Law of the State of Delaware
* * * * * * * * * * * * * * *
SONIC AUTOMOTIVE, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), DOES
HEREBY CERTIFY as follows:
FIRST: The Board of Directors of the Corporation adopted the resolution
set forth below proposing the amendment to the Amended and Restated Certificate
of Incorporation (the "Amendment") and directed that the Amendment be submitted
to the holders of the issued and outstanding shares of capital stock of the
Corporation entitled to vote thereon for their consideration and approval:
RESOLVED, that the Board of Directors hereby deems that Section 4.01 of
the Corporation's Charter is proposed to be amended by deleting Section
4.01 in its entirety and inserting the following in lieu thereof:
SECTION 4.01. AUTHORIZED CAPITAL STOCK. The aggregate number of
shares of capital stock which the Corporation shall have authority to
issue is one hundred thirty-three million (133,000,000) shares divided
into the following classes:
(a) One hundred million (100,000,000) shares of Class A Common Stock
with a par value of one cent ($.01) per share (the "Class A Common
Stock");
<PAGE>
(b) Thirty million (30,000,000) shares of Class B Common Stock with
a par value of one cent ($.01) per share (the "Class B Common Stock");
and
(c) Three million (3,000,000) shares of Preferred Stock with a par
value of ten cents ($.10) per share (the "Preferred Stock").
Each share of Class A Common Stock and each share of Class B Common
Stock (collectively, the "Common Stock") shall be identical in all
respects and shall have equal voting powers, preferences and relative
rights, except as otherwise provided in this Article IV.
SECOND: The Amendment was duly adopted in accordance with Section 242 of
the General Corporation Law of the State of Delaware at the annual meeting of
the stockholders of the Corporation held June 8, 1999, by the holders of a
majority of the issued and outstanding shares of the Class A Common Stock, by
the holders of a majority of the issued and outstanding shares of the Class B
Common Stock, and by the holders of a majority of the votes entitled to be voted
with respect to the Amendment.
* * * * * * * * * * * * * * *
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by one of its duly authorized officers this 16 day of
June, 1999.
SONIC AUTOMOTIVE, INC.
By: /s/ Theodore M. Wright
--------------------------------------
Theodore M. Wright
Vice President - Finance and Chief
Financial Officer
2
FIRST SUPPLEMENTAL INDENTURE
This FIRST SUPPLEMENTAL INDENTURE dated as of December 31, 1999 (this
"SUPPLEMENTAL INDENTURE") is by and among:
SONIC AUTOMOTIVE-BONDESEN, INC., a Florida corporation,
SONIC AUTOMOTIVE OF TEXAS, L.P., a Texas limited partnership,
SONIC AUTOMOTIVE-1720 MASON AVE., DB, LLC, a Florida limited liability company,
SONIC AUTOMOTIVE-3401 N. MAIN, TX, L.P., a Texas limited partnership,
SONIC AUTOMOTIVE-4701 I-10 EAST, TX, L.P., a Texas limited partnership,
SONIC AUTOMOTIVE-5221 I-10 EAST, TX, L.P., a Texas limited partnership,
SONIC AUTOMOTIVE-6008 N. DALE MABRY, FL, INC., a Florida corporation,
SONIC AUTOMOTIVE-9103 E. INDEPENDENCE, NC, LLC, a North Carolina limited
liability company,
SONIC-2185 CHAPMAN RD., CHATTANOOGA, LLC, a Tennessee limited liability company,
SONIC-CAMP FORD, L.P., a Texas limited partnership,
SONIC-CLASSIC DODGE, INC., an Alabama corporation,
SONIC-FM AUTOMOTIVE, LLC, a Florida limited liability company,
SONIC-FM, INC., a Florida corporation,
SONIC-FM NISSAN, INC., a Florida corporation,
SONIC-FM VW, INC., a Florida corporation,
SONIC-FREELAND, INC., a Florida corporation,
SONIC-GLOBAL IMPORTS, L.P., a Georgia limited partnership,
SONIC-INTEGRITY DODGE LV, LLC, a Nevada limited liability company,
SONIC-LLOYD NISSAN, INC., a Florida corporation,
SONIC-LLOYD PONTIAC-CADILLAC, INC., a Florida corporation,
SONIC-LUTE RILEY, L.P., a Texas limited partnership,
SONIC-MANHATTAN FAIRFAX, INC., a Virginia corporation,
SONIC-MANHATTAN WALDORF, INC., a Maryland corporation,
SONIC-NEWSOME AUTOMOTIVE, LLC, a South Carolina limited liability company,
SONIC-NEWSOME CHEVROLET WORLD, INC., a South Carolina corporation,
SONIC-NEWSOME OF FLORENCE, INC., a South Carolina corporation,
SONIC-NORTH CHARLESTON, INC., a South Carolina corporation,
SONIC-NORTH CHARLESTON DODGE, INC., a South Carolina corporation,
SONIC-READING, L.P., a Texas limited partnership,
SONIC-ROCKVILLE IMPORTS, INC., a Maryland corporation,
SONIC-ROCKVILLE MOTORS, INC., a Maryland corporation,
SONIC-SAM WHITE NISSAN, L.P., a Texas limited partnership,
SONIC-SAM WHITE OLDSMOBILE, L.P., a Texas limited partnership,
SONIC-SHOTTENKIRK, INC., a Florida corporation,
SONIC-SUPERIOR OLDSMOBILE, LLC, a Tennessee limited liability company,
SONIC OF TEXAS, INC., a Texas corporation,
SONIC-VOLVO LV, LLC, a Nevada limited liability company,
SONIC-WILLIAMS BUICK, INC., an Alabama corporation,
<PAGE>
SONIC-WILLIAMS CADILLAC, INC., an Alabama corporation,
SONIC-WILLIAMS IMPORTS, INC., an Alabama corporation,
SONIC-WILLIAMS MOTORS, LLC, an Alabama limited liability company, and
VILLAGE IMPORTED CARS, INC., a Maryland corporation
FIRSTAMERICA AUTOMOTIVE, INC., a Delaware corporation
AUTOBAHN, INC., a California corporation
DON LUCAS INTERNATIONAL, INC., a California corporation
FA SERVICE CORPORATION, a California corporation
FAA AUTO FACTORY, INC., a California corporation
FAA BEVERLY HILLS, INC., a California corporation
FAA CAPITOL N, INC., a California corporation
FAA CONCORD H, INC., a California corporation
FAA CONCORD N, INC., a California corporation
FAA CONCORD T, INC., a California corporation
FAA DEALER SERVICES, INC., a California corporation
FAA DUBLIN N, INC., a California corporation
FAA DUBLIN VWD, INC., a California corporation
FAA HOLDING CORP., a California corporation
FAA LAS VEGAS H, INC., a Nevada corporation
FAA MARIN D, INC., a California corporation
FAA MARIN F, INC., a California corporation
FAA MONTEREY F, INC., a California corporation
FAA POWAY D, INC., a California corporation
FAA POWAY G, INC., a California corporation
FAA POWAY H, INC., a California corporation
FAA POWAY T, INC., a California corporation
FAA SAN BRUNO, INC., a California corporation
FAA SANTA MONICA V, INC., a California corporation
FAA SERRAMONTE H, INC., a California corporation
FAA SERRAMONTE L, INC., a California corporation
FAA SERRAMONTE, INC., a California corporation
FAA STEVENS CREEK, INC., a California corporation
FAA TORRANCE CPJ, INC., a California corporation
FAA WOODLAND HILLS VW, INC., a California corporation
FRANCISCAN MOTORS, INC., a California corporation
KRAMER MOTORS INCORPORATED, a California corporation
LUCAS DEALERSHIP GROUP, INC., a Texas corporation
SANTA CLARA IMPORTED CARS, INC., a California corporation
SMART NISSAN, INC., a California corporation
STEVENS CREEK CADILLAC, INC., a California corporation
TRANSCAR LEASING, INC., a California corporation
WINDWARD, INC., a Hawaii corporation
2
<PAGE>
(hereinafter referred to collectively as the "GUARANTEEING SUBSIDIARIES"), SONIC
AUTOMOTIVE, INC., a Delaware corporation, (the "COMPANY"), the other Guarantors
(as listed on the signature page of the Indenture referred to below) (the
"GUARANTORS") and U.S. BANK TRUST NATIONAL ASSOCIATION, as trustee under the
Indenture referred to below (the "TRUSTEE").
WITNESSETH
WHEREAS, the Company and the Guarantors have heretofore executed and
delivered to the Trustee an Indenture dated as of July 1, 1998, as supplemented
(the "INDENTURE") providing for the issuance in an aggregate principal amount of
up to $125,000,000 of the Company's 11% Senior Subordinated Notes due 2008 (the
"NOTES"); and
WHEREAS, the Indenture provides that under certain circumstances each of
the Guaranteeing Subsidiaries shall execute and deliver to the Trustee a
supplemental indenture pursuant to which each of the Guaranteeing Subsidiaries
shall guarantee all of the Indenture Obligations under the Notes and the
Indenture on the terms and conditions set forth herein (the "NOTE GUARANTEE");
and
WHEREAS, each Guaranteeing Subsidiary is a wholly-owned direct or indirect
subsidiary of the Company; and
WHEREAS, pursuant to Section 901(e) of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture to add the
Guaranteeing Subsidiaries pursuant to the requirements of Section 1013 of the
Indenture; and
WHEREAS, the second paragraph of Section 1314 of the Indenture contains an
erroneous cross-reference to Section 1013(b) where such cross-reference should
be to Section 1013(c);
WHEREAS, pursuant to Section 901(c) of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture to cure any
ambiguity or correct any provision in the Indenture which may be defective or
inconsistent with any other provision of the Indenture; and
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, each of the
Guaranteeing Subsidiaries and the Trustee mutually covenant and agree for the
equal and ratable benefit of the Holders of the Notes as follows:
SECTION 1. CAPITALIZED TERMS. Capitalized terms used herein without
definition shall have the meanings assigned to them in the Indenture.
SECTION 2. AGREEMENT TO GUARANTEE. Each of the Guaranteeing Subsidiaries
hereby agrees as follows (notwithstanding anything to the contrary in this
Supplemental Indenture, such agreements of the Guaranteeing Subsidiaries shall
be construed as identical to those agreements
3
<PAGE>
made by the Guarantors under the Indenture, and the obligations and rights of
the Guaranteeing Subsidiaries hereunder shall be no more and no less than those
of the Guarantors under the Indenture):
(a) GUARANTEEING SUBSIDIARIES' GUARANTEE. Along with the Guarantors named
in the Indenture and in accordance with Article Thirteen of the Indenture and
this Section 2, to guarantee absolutely, fully, unconditionally and irrevocably,
jointly and severally with each other and with each other Person which may
become a Guarantor under the Indenture, to the Trustee and the Holders, as if
the Guaranteeing Subsidiaries were the principal debtor, the punctual payment
and performance when due of all Indenture Obligations (which for purposes of
this Guarantee shall also be deemed to include all commissions, fees, charges,
costs and other expenses (including reasonable legal fees and disbursements of
one counsel) arising out of or incurred by the Trustee or the Holders in
connection with the enforcement of this Guarantee).
(b) CONTINUING GUARANTEE; NO RIGHT OF SET-OFF; INDEPENDENT OBLIGATIONS.
(i) This Guarantee by the Guaranteeing Subsidiaries shall be a
continuing guarantee of the payment and performance of all Indenture Obligations
and shall remain in full force and effect until the payment in full of all of
the Indenture Obligations and shall apply to and secure any ultimate balance due
or remaining unpaid to the Trustee or the Holders. This Guarantee by the
Guaranteeing Subsidiaries shall not be considered as wholly or partially
satisfied by the payment or liquidation at any time or from time to time of any
sum of money for the time being due or remaining unpaid to the Trustee or the
Holders. Each Guaranteeing Subsidiary, jointly and severally, covenants and
agrees to comply with all obligations, covenants, agreements and provisions
applicable to it in the Indenture as if named as a Guarantor therein including
those set forth in Article Eight of the Indenture. Without limiting the
generality of the foregoing, each Guaranteeing Subsidiaries' liability shall
extend to all amounts which constitute part of the Indenture Obligations and
would be owed by the Company under the Indenture and the Securities but for the
fact that they are unenforceable, reduced, limited, impaired, suspended or not
allowable due to the existence of a bankruptcy, reorganization or similar
proceeding involving the Company.
(ii) Each Guaranteeing Subsidiary, jointly and severally, hereby
guarantees that the Indenture Obligations will be paid to the Trustee without
set-off or counterclaim or other reduction whatsoever (whether for taxes,
withholding or otherwise) in lawful currency of the United States of America.
(iii) Each Guaranteeing Subsidiary, jointly and severally,
guarantees that the Indenture Obligations shall be paid strictly in accordance
with their terms regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the rights of the
holders of the Securities.
(iv) Each Guaranteeing Subsidiary's liability to pay or perform or
cause the performance of the Indenture Obligations under this Guarantee shall
arise forthwith after demand for payment or performance by the Trustee has been
given to the Guarantors in the manner prescribed in Section 106 of the
Indenture.
4
<PAGE>
(v) Except as provided in the Indenture, the provisions of Article
Thirteen of the Indenture and this Section 2 cover all agreements between the
parties hereto relative to this Guarantee and none of the parties shall be bound
by any representation, warranty or promise made by any Person relative thereto
or hereto, which is not embodied therein or herein; and it is specifically
acknowledged and agreed that this Guarantee has been delivered by each
Guaranteeing Subsidiary free of any conditions whatsoever and that no
representations, warranties or promises have been made to any Guaranteeing
Subsidiary affecting its liabilities hereunder, and that the Trustee shall not
be bound by any representations, warranties or promises now or at any time
hereafter made by the Company to any Guaranteeing Subsidiary.
(vi) This Guarantee is a guarantee of payment, performance and
compliance and not of collectibility and is in no way conditioned or contingent
upon any attempt to collect from or enforce performance or compliance by the
Company or upon any event or condition whatsoever.
(vii) The obligations of the Guaranteeing Subsidiaries set forth
herein constitute the full recourse obligations of the Guaranteeing Subsidiaries
enforceable against them to the full extent of all their assets and properties.
(c) GUARANTEE ABSOLUTE. The obligations of the Guaranteeing Subsidiaries
hereunder are independent of the obligations of the Company under the Securities
and the Indenture and a separate action or actions may be brought and prosecuted
against any Guaranteeing Subsidiary whether or not an action or proceeding is
brought against the Company and whether or not the Company is joined in any such
action or proceeding. The liability of the Guaranteeing Subsidiaries hereunder
is irrevocable, absolute and unconditional and (to the extent permitted by law)
the liability and obligations of the Guaranteeing Subsidiaries hereunder shall
not be released, discharged, mitigated, waived, impaired or affected in whole or
in part by:
(i) any defect or lack of validity or enforceability in respect
of any Indebtedness or other obligation of the Company or
any other Person under the Indenture or the Securities, or
any agreement or instrument relating to any of the
foregoing;
(ii) any grants of time, renewals, extensions, indulgences,
releases, discharges or modifications which the Trustee or
the Holders may extend to, or make with, the Company, any
Guarantor, any Guaranteeing Subsidiary or any other Person,
or any change in the time, manner or place of payment of, or
in any other term of, all or any of the Indenture
Obligations, or any other amendment or waiver of, or any
consent to or departure from, the Indenture or the
Securities, including any increase or decrease in the
Indenture Obligations;
5
<PAGE>
(iii) the taking of security from the Company, any Guarantor, any
Guaranteeing Subsidiary or any other Person, and the
release, discharge or alteration of, or other dealing with,
such security;
(iv) the occurrence of any change in the laws, rules, regulations
or ordinances of any jurisdiction by any present or future
action of any governmental authority or court amending,
varying, reducing or otherwise affecting, or purporting to
amend, vary, reduce or otherwise affect, any of the
Indenture Obligations and the obligations of any
Guaranteeing Subsidiary hereunder;
(v) the abstention from taking security from the Company, any
Guarantor, any Guaranteeing Subsidiary or any other Person
or from perfecting, continuing to keep perfected or taking
advantage of any security;
(vi) any loss, diminution of value or lack of enforceability of
any security received from the Company, any Guarantor, any
Guaranteeing Subsidiary or any other Person, and including
any other guarantees received by the Trustee;
(vii) any other dealings with the Company, any Guarantor, any
Guaranteeing Subsidiary or any other Person, or with any
security;
(viii) the Trustee's or the Holders' acceptance of compositions
from the Company, any Guarantor or any Guaranteeing
Subsidiary;
(ix) the application by the Holders or the Trustee of all monies
at any time and from time to time received from the Company,
any Guarantor, any Guaranteeing Subsidiary or any other
Person on account of any indebtedness and liabilities owing
by the Company, any Guarantor or any Guaranteeing Subsidiary
to the Trustee or the Holders, in such manner as the Trustee
or the Holders deems best and the changing of such
application in whole or in part and at any time or from time
to time, or any manner of application of collateral, or
proceeds thereof, to all or any of the Indenture
Obligations, or the manner of sale of any collateral;
(x) the release or discharge of the Company, any Guarantor or
any Guaranteeing Subsidiary of the Securities or of any
Person liable directly as surety or otherwise by operation
of law or otherwise for the Securities, other than an
express release in writing given by the Trustee, on behalf
of the Holders, of the liability and obligations of any
Guaranteeing Subsidiary hereunder;
(xi) any change in the name, business, capital structure or
governing instrument of the Company, any Guarantor or any
Guaranteeing
6
<PAGE>
Subsidiary or any refinancing or restructuring of any of the
Indenture Obligations;
(xii) the sale of the Company's, any Guarantor's or any
Guaranteeing Subsidiary's business or any part thereof,
(xiii) subject to Section 1314 of the Indenture, any merger or
consolidation, arrangement or reorganization of the Company,
any Guarantor or any Guaranteeing Subsidiary, any Person
resulting from the merger or consolidation of the Company,
any Guarantor or any Guaranteeing Subsidiary with any other
Person or any other successor to such Person or merged or
consolidated Person or any other change in the corporate
existence, structure or ownership of the Company, any
Guarantor or any Guaranteeing Subsidiary or any change in
the corporate relationship among the Company, any Guarantor
and any Guaranteeing Subsidiary, or any termination of such
relationship;
(xiv) the insolvency, bankruptcy, liquidation, winding-up,
dissolution, receivership, arrangement, readjustment,
assignment for the benefit of creditors or distribution of
the assets of the Company or its assets or any resulting
discharge of any obligations of the Company (whether
voluntary or involuntary) or of any Guarantor (whether
voluntary or involuntary) or any Guaranteeing Subsidiary
(whether voluntary or involuntary) or the loss of corporate
existence;
(xv) subject to Section 1314 of the Indenture, any arrangement or
plan of reorganization affecting the Company, any Guarantor
or any Guaranteeing Subsidiary;
(xvi) any failure, omission or delay on the part of the Company to
conform or comply with any term of the Indenture;
(xvii) any limitation on the liability or obligations of the
Company or any other Person under the Indenture, or any
discharge, termination, cancellation, distribution,
irregularity, invalidity or unenforceability in whole or in
part of the Indenture;
(xviii) any other circumstance (including any statute of
limitations) that might otherwise constitute a defense
available to, or discharge of, the Company, any Guarantor or
any Guaranteeing Subsidiary; or
(xix) any modification, compromise, settlement or release by the
Trustee, or by operation of law or otherwise, of the
Indenture Obligations or the liability of the Company or any
other obligor under the Securities, in whole or in part, and
any refusal of payment by the Trustee, in whole or in part,
from
7
<PAGE>
any other obligor or other guarantor in connection with any
of the Indenture Obligations, whether or not with notice to,
or further assent by, or any reservation of rights against,
each of the Guarantors and the Guaranteeing Subsidiaries.
(d) RIGHT TO DEMAND FULL PERFORMANCE. In the event of any demand for
payment or performance by the Trustee from any Guaranteeing Subsidiary
hereunder, the Trustee or the Holders shall have the right to demand its full
claim and to receive all dividends or other payments in respect thereof until
the Indenture Obligations have been paid in full, and the Guaranteeing
Subsidiaries shall continue to be jointly and severally liable hereunder for any
balance which may be owing to the Trustee or the Holders by the Company under
the Indenture and the Securities. The retention by the Trustee or the Holders of
any security, prior to the realization by the Trustee or the Holders of its
rights to such security upon foreclosure thereon, shall not, as between the
Trustee and any Guaranteeing Subsidiary, be considered as a purchase of such
security, or as payment, satisfaction or reduction of the Indenture Obligations
due to the Trustee or the Holders by the Company or any part thereof. Each
Guaranteeing Subsidiary, promptly after demand, will reimburse the Trustee and
the Holders for all costs and expenses of collecting such amount under, or
enforcing this Guarantee, including, without limitation, the reasonable fees and
expenses of counsel.
(e) WAIVERS.
(i) Each Guaranteeing Subsidiary hereby expressly waives (to the
extent permitted by law) notice of the acceptance of this Guarantee and notice
of the existence, renewal, extension or the nonperformance, non-payment, or
non-observance on the part of the Company of any of the terms, covenants,
conditions and provisions of the Indenture or the Securities or any other notice
whatsoever to or upon the Company, any Guarantor or such Guaranteeing Subsidiary
with respect to the Indenture Obligations, whether by statute, rule of law or
otherwise. Each Guaranteeing Subsidiary hereby acknowledges communication to it
of the terms of this Supplemental Indenture, the Indenture and the Securities
and all of the provisions herein and therein contained and consents to and
approves the same. Each Guaranteeing Subsidiary hereby expressly waives (to the
extent permitted by law) diligence, presentment, protest and demand for payment
with respect to (a) any notice of sale, transfer or other disposition of any
right, title to or interest in the Securities by the Holders or in the
Indenture, (b) any release of any Guaranteeing Subsidiary from its obligations
hereunder resulting from any loss by it of its rights of subrogation hereunder
and (c) any other circumstances whatsoever that might otherwise constitute a
legal or equitable discharge, release or defense of a guarantor or surety or
that might otherwise limit recourse against such Guaranteeing Subsidiary.
(ii) Without prejudice to any of the rights or recourses which the
Trustee or the Holders may have against the Company, each Guaranteeing
Subsidiary hereby expressly waives (to the extent permitted by law) any right to
require the Trustee or the Holders to:
8
<PAGE>
(a) enforce, assert, exercise, initiate or exhaust any
rights, remedies or recourse against the Company, any
Guarantor, any Guaranteeing Subsidiary or any other
Person under the Indenture or otherwise;
(b) value, realize upon, or dispose of any security of the
Company or any other Person held by the Trustee or the
Holders;
(c) initiate or exhaust any other remedy which the Trustee
or the Holders may have in law or equity; or
(d) mitigate the damages resulting from any default under
the Indenture;
before requiring or becoming entitled to demand payment from such Guaranteeing
Subsidiary under this Guarantee.
(f) THE GUARANTEEING SUBSIDIARIES REMAIN OBLIGATED IN EVENT THE COMPANY IS
NO LONGER OBLIGATED TO DISCHARGE INDENTURE OBLIGATIONS. It is the express
intention of the Trustee and the Guaranteeing Subsidiaries that if for any
reason the Company has no legal existence, is or becomes under no legal
obligation to discharge the Indenture Obligations owing to the Trustee or the
Holders by the Company or if any of the Indenture Obligations owing by the
Company to the Trustee or the Holders becomes irrecoverable from the Company by
operation of law or for any reason whatsoever, this Guarantee and the covenants,
agreements and obligations of the Guaranteeing Subsidiaries contained in this
Section Two shall nevertheless be binding upon the Guaranteeing Subsidiaries, as
principal debtor, until such time as all such Indenture Obligations have been
paid in full to the Trustee and all Indenture Obligations owing to the Trustee
or the Holders by the Company have been discharged, or such earlier time as
Section 402 of the Indenture shall apply to the Securities and the Guarantors
and the Guaranteeing Subsidiaries shall be responsible for the payment thereof
to the Trustee or the Holders upon demand.
(g) FRAUDULENT CONVEYANCE, CONTRIBUTION, SUBROGATION.
(i) Each Guaranteeing Subsidiary, and by its acceptance of the
Indenture each Holder, hereby confirms that it is the intention of all such
parties that the Guarantee by such Guaranteeing Subsidiary pursuant to its
Guarantee not constitute a fraudulent transfer or conveyance for purposes of the
Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent
Transfer Act or any similar federal or state law. To effectuate the foregoing
intention, the Holders and such Guaranteeing Subsidiary hereby irrevocably agree
that the obligations of such Guaranteeing Subsidiary under its Guarantee shall
be limited to the maximum amount which, after giving effect to all other
contingent and fixed liabilities of such Guaranteeing Subsidiary, and after
giving effect to any collections from or payments made by or on behalf of any
other Guarantor or Guaranteeing Subsidiary in respect of the obligations of such
other Guarantor or Guaranteeing Subsidiary under its Guarantee or pursuant to
its contribution obligations hereunder and under the Indenture, will result in
the obligations of such Guaranteeing Subsidiary under its Guarantee not
constituting such fraudulent transfer or conveyance.
9
<PAGE>
(ii) Each Guaranteeing Subsidiary that makes a payment or
distribution under its Guarantee shall be entitled to a contribution from each
other Guaranteeing Subsidiary, if any, in a pro rata amount based on the net
assets of each Guarantor and Guaranteeing Subsidiary, determined in accordance
with GAAP.
(iii) Each Guaranteeing Subsidiary hereby waives all rights of
subrogation or contribution, whether arising by contract or operation of law
(including, without limitation, any such right arising under federal bankruptcy
law) or otherwise by reason of any payment by it pursuant to the provisions of
this Section Two until payment in full of all Indenture Obligations.
(h) GUARANTEE IS IN ADDITION TO OTHER SECURITY. This Guarantee shall be in
addition to and not in substitution for any other guarantees or other security
which the Trustee may now or hereafter hold in respect of the Indenture
Obligations owing to the Trustee or the Holders by the Company and (except as
may be required by law) the Trustee shall be under no obligation to marshal in
favor of each of the Guaranteeing Subsidiaries any other guarantees or other
security or any moneys or other assets which the Trustee may be entitled to
receive or upon which the Trustee or the Holders may have a claim.
(i) RELEASE OF SECURITY INTERESTS. Without limiting the generality of the
foregoing and except as otherwise provided herein and in the Indenture, each
Guaranteeing Subsidiary hereby consents and agrees, to the fullest extent
permitted by applicable law, that the rights of the Trustee hereunder, and the
liability of the Guaranteeing Subsidiaries hereunder, shall not be affected by
any and all releases for any purpose of any collateral, if any, from the Liens
and security interests created by any collateral document and that this
Guarantee shall continue to be effective or be reinstated, as the case may be,
if at any time any payment of any of the Indenture Obligations is rescinded or
must otherwise be returned by the Trustee upon the insolvency, bankruptcy or
reorganization of the Company or otherwise, all as though such payment had not
been made.
(j) NO BAR TO FURTHER ACTIONS. Except as provided by law, no action or
proceeding brought or instituted under this Section 2, Article Thirteen of the
Indenture and this Guarantee and no recovery or judgment in pursuance thereof
shall be a bar or defense to any further action or proceeding which may be
brought under Section Two, Article Thirteen of the Indenture and this Guarantee
by reason of any further default or defaults under Section Two, Article Thirteen
of the Indenture and this Guarantee or in the payment of any of the Indenture
Obligations owing by the Company.
(k) FAILURE TO EXERCISE RIGHTS SHALL NOT OPERATE AS A WAIVER, NO
SUSPENSION OF REMEDIES.
(i) No failure to exercise and no delay in exercising, on the part
of the Trustee or the Holders, any right, power, privilege or remedy under this
Section 2, Article Thirteen of the Indenture and this Guarantee shall operate as
a waiver thereof, nor shall any single or partial exercise of any rights, power,
privilege or remedy preclude any other or further exercise thereof,
10
<PAGE>
or the exercise of any other rights, powers, privileges or remedies. The rights
and remedies herein provided for are cumulative and not exclusive of any rights
or remedies provided in law or equity.
(ii) Nothing contained in this Section 2 shall limit the right of
the Trustee or the Holders to take any action to accelerate the maturity of the
Securities pursuant to Article Five of the Indenture or to pursue any rights or
remedies hereunder or under applicable law.
(l) TRUSTEE'S DUTIES; NOTICE TO TRUSTEE.
(i) Any provision in this Section 2 or elsewhere in the Indenture
allowing the Trustee to request any information or to take any action authorized
by, or on behalf of any Guaranteeing Subsidiary, shall be permissive and shall
not be obligatory on the Trustee except as the Holders may direct in accordance
with the provisions of the Indenture or where the failure of the Trustee to
request any such information or to take any such action arises from the
Trustee's negligence, bad faith or willful misconduct.
(ii) The Trustee shall not be required to inquire into the
existence, powers or capacities of the Company, any Guarantor, any Guaranteeing
Subsidiary or the officers, directors or agents acting or purporting to act on
their respective behalf.
(m) SUCCESSORS AND ASSIGNS. All terms, agreements and conditions of this
Section 2 shall extend to and be binding upon each Guaranteeing Subsidiary and
its successors and permitted assigns and shall enure to the benefit of and may
be enforced by the Trustee and its successors and assigns, PROVIDED, HOWEVER,
that the Guaranteeing Subsidiaries may not assign any of their rights or
obligations hereunder other than in accordance with Article Eight of the
Indenture.
(n) RELEASE OF GUARANTEE.
(i) Concurrently with the payment in full of all of the Indenture
Obligations, the Guarantors shall be released from and relieved of their
obligations under this Section 2. Upon the delivery by the Company to the
Trustee of an Officers' Certificate and, if requested by the Trustee, an Opinion
of Counsel to the effect that the transaction giving rise to the release of this
Guarantee was made by the Company in accordance with the provisions of the
Indenture and the Securities, the Trustee shall execute any documents reasonably
required in order to evidence the release of the Guaranteeing Subsidiaries from
their obligations under this Guarantee. If any of the Indenture Obligations are
revived and reinstated after the termination of this Guarantee, then all of the
obligations of the Guaranteeing Subsidiaries under this Guarantee shall be
revived and reinstated as if this Guarantee had not been terminated until such
time as the Indenture Obligations are paid in full, and each Guaranteeing
Subsidiary shall enter into an amendment to this Guarantee, reasonably
satisfactory to the Trustee, evidencing such revival and reinstatement.
(ii) This Guarantee shall terminate with respect to each
Guaranteeing Subsidiary and shall be automatically and unconditionally released
and discharged as provided in Section 1013(c) of the Indenture.
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<PAGE>
(o) EXECUTION AND DELIVERY OF GUARANTEE. Each of the Guaranteeing
Subsidiaries agrees that their Guarantee hereunder shall remain in full force
and effect notwithstanding any failure to endorse on each Note a notation of
their Guarantee. Pursuant to Section 1315(b) of the Indenture, each Guaranteeing
Subsidiary agrees to be subject to the provisions (including the representations
and warranties) of the Indenture as of the date of this Supplemental Indenture
as if named as a Guarantor therein.
SECTION 3. AMENDMENT TO SECTION 1314 OF THE INDENTURE. The cross-reference
at the end of the second paragraph of Section 1314 of the Indenture shall be
amended to read as a cross reference to Section 1013(c) of the Indenture. All
other terms and provisions of the Indenture, except as herein amended and
supplemented, shall remain in full force and effect.
SECTION 4. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW
YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS FIRST SUPPLEMENTAL INDENTURE BUT
WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT
THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED
THEREBY.
SECTION 5. COUNTERPARTS. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
SECTION 6. EFFECT OF HEADINGS. The Section headings herein are for
convenience only and shall not affect the construction hereof.
SECTION 7. THE TRUSTEE. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this Supplemental
Indenture or for or in respect of the recitals contained herein, all of which
recitals are made solely by the Guaranteeing Subsidiaries and the Company.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the 31st day of December,
1999.
THE COMPANY:
------------
SONIC AUTOMOTIVE, INC.
By: /s/ B. Scott Smith
-----------------------
Name: B. Scott Smith
Title: President
GUARANTEEING SUBSIDIARIES:
--------------------------
SONIC AUTOMOTIVE-BONDESEN, INC.
SONIC - 1720 MASON AVE., DB, LLC
SONIC AUTOMOTIVE - 6008 N. DALE MABRY, FL, INC.
SONIC AUTOMOTIVE - 9103 E. INDEPENDENCE, NC, LLC
SONIC - 2185 CHAPMAN RD., CHATTANOOGA, LLC
SONIC - CLASSIC DODGE, INC.
SONIC - FM AUTOMOTIVE, LLC
SONIC - FM, INC.
SONIC - FM NISSAN, INC.
SONIC - FM VW, INC.
SONIC - FREELAND, INC.
SONIC - INTEGRITY DODGE LV, LLC
SONIC - LLOYD NISSAN, INC.
SONIC - LLOYD PONTIAC-CADILLAC, INC.
SONIC -MANHATTAN FAIRFAX, INC.
SONIC - MANHATTAN WALDORF, INC.
SONIC - NEWSOME AUTOMOTIVE, LLC
SONIC - NEWSOME CHEVROLET WORLD, INC.
SONIC - NEWSOME OF FLORENCE, INC.
SONIC - NORTH CHARLESTON, INC.
SONIC - NORTH CHARLESTON DODGE, INC.
SONIC - ROCKVILLE IMPORTS, INC.
SONIC - ROCKVILLE MOTORS, INC.
SONIC - SHOTTENKIRK, INC.
SONIC - SUPERIOR OLDSMOBILE, LLC
SONIC OF TEXAS, INC.
SONIC-VOLVO LV, LLC
[SIGNATURES CONTINUED ON NEXT PAGE]
SONIC - WILLIAMS BUICK, INC.
13
<PAGE>
SONIC - WILLIAMS CADILLAC, INC.
FIRSTAMERICA AUTOMOTIVE, INC.
AUTOBAHN, INC.
DON LUCAS INTERNATIONAL, INC.
FA SERVICE CORPORATION
FAA AUTO FACTORY, INC.
FAA BEVERLY HILLS, INC.
FAA CAPITOL N, INC.
FAA CONCORD H, INC.
FAA CONCORD N, INC.
FAA CONCORD T, INC.
FAA DEALER SERVICES, INC.
FAA DUBLIN N, INC.
FAA DUBLIN VWD, INC.
FAA HOLDING CORP.
FAA LAS VEGAS H, INC.
FAA MARIN D, INC.
FAA MARIN F, INC.
FAA MONTEREY F, INC.
FAA POWAY D, INC.
FAA POWAY G, INC.
FAA POWAY H, INC.
FAA POWAY T, INC.
FAA SAN BRUNO, INC.
FAA SANTA MONICA V, INC.
FAA SERRAMONTE H, INC.
FAA SERRAMONTE L, INC.
FAA SERRAMONTE, INC.
FAA STEVENS CREEK, INC.
FAA TORRANCE CPJ, INC.
FAA WOODLAND HILLS VW, INC.
FRANCISCAN MOTORS, INC.
KRAMER MOTORS INCORPORATED
LUCAS DEALERSHIP GROUP, INC.
SANTA CLARA IMPORTED CARS, INC.
SMART NISSAN, INC.
STEVENS CREEK CADILLAC, INC.
TRANSCAR LEASING, INC.
WINDWARD, INC.
SONIC - WILLIAMS IMPORTS, INC.
[SIGNATURES CONTINUED ON NEXT PAGE]
SONIC - WILLIAMS MOTORS, LLC
VILLAGE IMPORTED CARS, INC.
14
<PAGE>
By: /s/ B. Scott Smith
----------------------------------
Name: B. Scott Smith
Title: Authorized Signatory
Attest: /s/ Theodore M. Wright
------------------------------
Name: Theodore M. Wright
Title: Authorized Signatory
SONIC - GLOBAL IMPORTS, L.P.
By: Sonic Automotive of Georgia, Inc., its general partner
By: /s/ B. Scott Smith
-----------------------------------
Name: B. Scott Smith
Title: Vice President
SONIC - SAM WHITE OLDSMOBILE, L.P.
SONIC - SAM WHITE NISSAN, L.P.
SONIC - LUTE RILEY, L.P.
SONIC - READING, L.P.
SONIC - CAMP FORD, L.P.
SONIC AUTOMOTIVE - 5221 I-10 EAST, TX, L.P.
SONIC AUTOMOTIVE - 4701 I-10 EAST, TX, L.P.
SONIC AUTOMOTIVE - 3401 N. MAIN, TX, L.P.
SONIC AUTOMOTIVE OF TEXAS, L.P.
By: Sonic of Texas, Inc. their general partner
By: /s/ B. Scott Smith
-----------------------------------
Name: B. Scott Smith
Title: Vice President
[SIGNATURES CONTINUED ON NEXT PAGE]
15
<PAGE>
GUARANTORS:
-----------
TOWN AND COUNTRY FORD, INC.
MARCUS DAVID CORPORATION
FRONTIER OLDSMOBILE-CADILLAC, INC.
SONIC DODGE, LLC
SONIC CHRYSLER-PLYMOUTH-JEEP, LLC
FORT MILL FORD, INC.
TOWN AND COUNTRY CHRYSLER-PLYMOUTH-JEEP OF
ROCK HILL, INC.
FORT MILL CHRYSLER-PLYMOUTH-DODGE, INC.
SONIC AUTOMOTIVE OF NEVADA, INC.
SONIC AUTOMOTIVE OF TENNESSEE, INC.
SONIC AUTOMOTIVE - 6025 INTERNATIONAL DRIVE, LLC
SONIC AUTOMOTIVE OF NASHVILLE, LLC
SONIC AUTOMOTIVE OF CHATTANOOGA, LLC
TOWN AND COUNTRY JAGUAR, LLC
TOWN AND COUNTRY CHRYSLER-PLYMOUTH-JEEP, LLC
TOWN AND COUNTRY DODGE OF CHATTANOOGA, LLC
SONIC AUTOMOTIVE - 2490 SOUTH LEE HIGHWAY, LLC
TOWN AND COUNTRY FORD OF CLEVELAND, LLC
FREEDOM FORD, INC.
SONIC AUTOMOTIVE - HWY. 153 AT SHALLOWFORD
ROAD, CHATTANOOGA, INC.
SONIC AUTOMOTIVE 5260 PEACHTREE INDUSTRIAL
BLVD., LLC
SONIC AUTOMOTIVE OF GEORGIA, INC.
SONIC AUTOMOTIVE - CLEARWATER, INC.
SONIC AUTOMOTIVE 21699 U.S. HWY 19 N., INC.
SONIC AUTOMOTIVE COLLISION CENTER OF
CLEARWATER, INC.
SONIC AUTOMOTIVE - 1400 AUTOMALL DRIVE,
COLUMBUS, INC.
SONIC AUTOMOTIVE - 1455 AUTOMALL DRIVE,
COLUMBUS, INC.
SONIC AUTOMOTIVE - 1495 AUTOMALL DRIVE,
COLUMBUS, INC.
SONIC AUTOMOTIVE - 1500 AUTOMALL DRIVE,
COLUMBUS, INC.
SONIC AUTOMOTIVE - 3700 WEST BROAD STREET,
COLUMBUS, INC.
[SIGNATURES CONTINUED ON NEXT PAGE]
16
<PAGE>
SONIC AUTOMOTIVE - 4000 WEST BROAD STREET,
COLUMBUS, INC.
SONIC AUTOMOTIVE 2424 LAURENS RD.,
GREENVILLE, INC.
SONIC AUTOMOTIVE 2752 LAURENS RD.,
GREENVILLE, INC.
SONIC AUTOMOTIVE - 5585 PEACHTREE
INDUSTRIAL BLVD.., LLC
CAPITOL CHEVROLET AND IMPORTS, INC.
SONIC AUTOMOTIVE - 1919 N. DIXIE HWY., NSB, INC.
SONIC AUTOMOTIVE - 1307 N. DIXIE HWY., NSB, INC.
SONIC AUTOMOTIVE - 3741 S. NOVA RD., PO, INC.
SONIC AUTOMOTIVE - 241 RIDGEWOOD AVE., HH, INC.
SONIC AUTOMOTIVE - 1720 MASON AVE., DB, INC.
By: /s/ B. Scott Smith
-----------------------------
Name: B. Scott Smith
Title: Authorized Signatory
Attest: /s/ Theodore M. Wright
--------------------------
Name: Theodore M. Wright
Title: Authorized Signatory
SONIC PEACHTREE INDUSTRIAL BLVD., L.P.
By: Sonic Automotive of Georgia, Inc., its general partner
By: /s/ B. Scott Smith
------------------------
Name: B. Scott Smith
Title: Vice President
[SIGNATURES CONTINUED ON NEXT PAGE]
17
<PAGE>
TRUSTEE:
--------
U.S. BANK TRUST NATIONAL ASSOCIATION,
as Trustee.
By: /S/ LAURIE HOWARD
----------------------------------------
Authorized Signatory
18
Exhibit 10.2
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated December10, 1999, between Sonic
Automotive, Inc. ("Sonic", "Employer" or "Corporation"), and Thomas A. Price
("Executive") becomes effective with the consummation of Sonic's acquisition of
not less than 90% of each class of outstanding capital stock of FirstAmerica
Automotive, Inc. (the "Acquisition"). This Agreement's purpose is to establish
in writing all the terms and conditions of that employment.
SECTION 1. POSITION AND DUTIES.
Executive shall be employed by the Corporation as a Vice-Chairman, Chairman of
the Management Committee and a member of the Board of Directors, reporting to
the Board of Directors and/or O. Bruton Smith. Subject to the supervision and
control of the Board of Directors of the Corporation (the "Board"), Executive
shall use his best efforts to do and perform on a full-time basis all services
and acts necessary or advisable to fulfill the duties and responsibilities of
his position and shall render such services on the terms set forth herein. In
addition, Executive shall have such other executive and managerial powers and
duties with respect to the Corporation as may be assigned to him by the Board,
which include but are not limited to primary executive responsibility for
manufacturer relations, primary executive responsibility for acquisitions review
and generation of western acquisition opportunities and primary operations
executive participant in investor relations. Executive's principal place of
employment shall be San Francisco, California.
SECTION 2. TERM.
The term of this Agreement shall be for a three (3) year period commencing with
the closing of the Acquisition (the "Commencement Date"), unless Executive's
employment and this Agreement are earlier terminated pursuant to Section 5 or
are extended by mutual written agreement.
SECTION 3. BASIC COMPENSATION.
The Employer shall pay compensation to the Executive as set forth herein.
a. Salary. An annual base salary of $600,000 (six hundred thousand
dollars), $50,000 (Fifty thousand dollars) per month gross pay per
month will be paid to Executive, subject to applicable withholding, in
accordance with the Corporation's normal payroll procedures (the "Base
Salary"). Such Base Salary shall be reviewed annually and modified (but
not decreased) as determined by the sole discretion of the
Corporation's Board of Directors.
b. Benefits. The Corporation shall provide the Executive with
employee benefits on the same basis as other executive officers of the
Corporation, including O. Bruton Smith (excluding company automobiles,
which is covered in Section 3.d below). Executive shall have the
opportunity to participate in and to receive benefits under any of the
Corporation's Executive benefit plans, including the major medical,
dental, vision and hospitalization insurance coverage, disability
insurance, life insurance, automobile insurance and similar benefits,
including any retirement plan maintained by the Corporation, for which
he is eligible in accordance with its terms. In addition, Executive
shall be entitled to the benefits afforded to other members of senior
management under the Corporation's vacation, holiday and business
expense reimbursement policies. Executives date of hire for benefit
purposes shall be March 1, 1976, the Executive's original date of hire
with Executive's acquired employer.
<PAGE>
c. Additional Salary and Bonus. For each calendar year during the
term of this Agreement, Executive shall earn an annual salary and bonus
which shall raise his entire cash compensation package to a total
aggregate sum which is $50,000 (fifty thousand dollars)less than the
entire cash compensation package of O. Bruton Smith as Chairman and
CEO of Sonic Automotive, Inc. for such calendar year.
d. Corporate Vehicle: Executive will be provided a corporate
vehicle allowance of Twelve Hundred Dollars ($1200.00) per month plus
associated operation expenses.
e. Expense Reimbursement: Upon receipt of proper documentation
establishing the amount of such expenses, the Corporation shall
reimburse Executive for any reasonable business expenses incurred.
SECTION 4. STOCK OPTIONS.
Executive shall be granted (the "Initial Option") an option to purchase 300,000
shares of the Corporation's Common Stock at a strike price per share equal to
the New York Stock Exchange closing price on the date of close of the
Acquisition. Provided Executive remains an employee of the Corporation, this
option shall vest at the rate of 100,000 shares per year on each of the first,
second and third anniversaries of the Commencement Date. In the event that
Employee is terminated Without Cause (as defined in Section 7.c below) during a
year of the term of this Agreement, then Employee shall become immediately
vested pro rata at the rate of 8,333.33 shares per month during such year to the
date of termination.
The Initial Grant shall be made pursuant to the Sonic Automotive, Inc. 1997
Stock Option Plan Amended and Restated as of June 8, 1999 (the "Stock Option
Plan") and, except as provided above, shall be subject to all of the provisions
and terms of the Stock Option Plan. Executive shall be eligible for further
grants of options under the Stock Option Plan at times and in amounts which are
consistent with the grants of options for similar employees of Corporation (not
including O. Bruton Smith). Any such further grants of options under the Stock
Option Plan shall be subject to ratification at the discretion of Employer's
Board of Directors. The terms and conditions of any further options granted to
Executive pursuant to the Stock Option Plan shall otherwise be governed by the
provisions of the Stock Option Plan.
SECTION 5. RESTRICTIVE COVENANTS.
For purposes of this Agreement "Restrictive Covenants" mean the provisions of
this Section 5. It is stipulated and agreed that the Corporation is engaged in
the business of owning and operating automobile and/or truck dealerships, which
business includes, without limitation, the marketing and selling of new and used
vehicles, the servicing of automobiles and trucks, collision repair services and
the sale of financing and insurance products to automobile customers (the
"Business"). It is further stipulated and agreed that as a result of Executive's
employment by the Corporation, and as a result of Executive's continued
employment hereunder, Executive has and will have access to valuable, highly
confidential, privileged and proprietary information relating to the
Corporation's Business, including, without limitation, existing and future
inventory information, customer lists, sales methods and techniques, costs and
costing methods, pricing techniques and strategies, sales agreements with
customers, profits and product line profitability information, unpublished
present and future marketing strategies and promotional programs, and other
information regarded by the Corporation as proprietary and confidential (the
"Confidential Information"). Confidential information shall not include
information available in the public domain. It is further acknowledged that
unauthorized use or disclosure by Employee of any of the Confidential
Information would seriously damage the Corporation in its Business.
<PAGE>
In consideration of the provisions of this Section 5, the compensation and
benefits referred to in Sections 3 and 4 hereof, which Executive acknowledges
are legally sufficient to support enforceability by the Corporation of the
Restrictive Covenants against Executive, Executive agrees as follows:
(a) During the term of this Agreement and after its termination or
expiration for any reason, Executive will not, without
Corporations' prior written consent, divulge, disclose,
furnish or make accessible to any third person, company or
other entity, any aspect of the Confidential Information
(other than as required in the ordinary discharge of
Executive's duties hereunder).
(b) During the term of this Agreement and, with respect to clauses
(i) and (iii) below only, for a period of one year after the
date of the expiration or termination of this Agreement for
any reason (the "Restrictive Period"), Executive shall not,
directly or indirectly (general media advertising excluded):
(i) Solicit the employment of any person, who at any time
during the twelve (12) calendar months immediately
preceding the termination or expiration of this
Agreement, was employed by the Corporation or any of
its subsidiaries;
(ii) Provide or solicit, except as provided herein, the
provision of products or services, similar to those
provided by Corporation or any of its subsidiaries to
any person or entity who purchase or leased
automobiles, trucks, parts, supplies, inventory or
services at any time during the twelve (12) calendar
months immediately preceding the termination or
expiration of this Agreement for any reason;
(iii) Interfere or attempt to interfere with the terms or
other aspects of the relationship between the
Corporation or any of its subsidiaries and any person
or entity from who the Corporation or any of its
subsidiaries has purchased automobiles, trucks,
parts, supplies, inventory or services at any time
during the twelve (12) calendar months immediately
preceding the termination or expiration of this
Agreement for any reason;
(iv) Provide information to, solicit or sell for,
organize or own any interest in (either directly or
through any parent, affiliate or subsidiary
corporation, partnership, or other entity), or become
employed or engaged by, or act as agent for, any
person, corporation or other entity that is directly
or indirectly engaged in a business which is
substantially similar to the Business or competitive
with the Corporation's business; provided, however,
that nothing herein shall preclude the Executive from
owning (A) a one-third (1/3 rd) interest in Sunnyvale
Acura, Sunnyvale, California with buy-sell provisions
with other partners, (B) having a significant
interest in DSW Associates, Inc., d/b/a AutoTown, a
California Corporation in the automotive computer
software and technology business, (C) having an
interest in Imotors, Inc. an automotive internet
company or (D) acquiring a one hundred percent (100%)
interest in Jaguar Marin, San Rafael, California, so
long as such ownership and activities do not prevent
the Executive from performing his obligations and
duties under this Agreement.
In the event that the term of this Agreement shall be extended, these
Restrictive Covenants shall apply during such extended term and, where
applicable, the one year period thereafter. These Restrictive Covenants shall
survive the termination of this Agreement in accordance with their terms.
<PAGE>
SECTION 6. RETURN OF CORPORATION PROPERTY.
Immediately upon the termination of Executive's employment, Executive shall
return to the Corporation all of its property, equipment, documents, records,
lists, files and any and all other Corporation materials including, without
limitation, computerized or electronic information, that is in Executive's
possession (the "Corporation Property") by delivering the Corporation Property
to the Corporation's principal executive offices on or before the date of such
term. It is specifically acknowledged that all art work located at 601 Brannan
St., San Francisco, California at date of this agreement is owned exclusively by
Executive. Unless otherwise agreed by the Corporation in writing, Executive
shall not retain any Corporation Property or any copies thereof.
SECTION 7. TERMINATION OF EMPLOYMENT. This Agreement shall terminate as
follows:
a. Death or Disability. The Executive's employment shall
terminate automatically upon theExecutive's death during the
Employment Period. If the Corporation determines in good faith
that the Executive becomes unable to perform the essential
functions of his position, with or without reasonable
accommodation, and that such inability is likely to continue
for a period of more than six (6) months, then the Corporation
shall give to the Executive written notice of its intention
to terminate the Executive's employment. In such event, the
Executive's employment with the Corporation shall terminate
effective on the thirtieth (30th) day after receipt of such
notice by the Executive provided that, within the thirty (30)
days after such receipt, the Executive shall not have returned
to full time performance of the Executive's duties.
b. Cause. The Corporation may terminate the Executive's
employment at any time, without notice and with immediate
effect for Cause. For purposes of this Agreement "Cause"
shall mean
(i) A material breach by the Executive of the
Executive's obligations as set forth herein
(other than due to disability) which material
breach is not remedied within fourteen (14)
business days after receipt of written notice
from the Corporation specifying such a
breach;
(ii) The conviction of the Executive of a felony;
(iii) Willful failure of Executive to comply with
reasonable directives of the Corporation's
Board of Directors;
(iv) Chronic absenteeism of the Executive which
continues for a 30 day period after written
notice by the Corporation; or
(v) Willful misconduct of Executive resulting in
damage to the Corporation.
c. Without Cause. Corporation may terminate this Agreement at any
time, for any reason other than for Cause or the Executive's
death or disability, or without any reason. Any such
termination for the Corporation pursuant to this Section 7.c
shall be deemed a termination "Without Cause". Executive may
also terminate this Agreement at any time for any reason, or
without any reason.
d. Payment Upon Termination Without Cause. If Executive's
employment is terminated by the Corporation Without Cause,
Executive shall be entitled to the following separation
benefits:
<PAGE>
(i) Continuation of Executive's Base Salary at the
rate in effect on the date of termination for a
period of one year, such salary continuation
payments to be made in twelve equal monthly
installments, commencing with the first month
after such termination occurs, in accordance
with the Corporation's ordinary payroll
procedures without regard to whether Executive
obtains alternative employment in the interim;
and
(ii) Payment of a bonus for the year in which the
termination occurs in an amount not less than
fifty percent (50%) of the then current rate of
Base Salary, with such bonus to be made in
twelve equal monthly installments, commencing
with the first month after such termination
occurs.
It shall be a condition to the Corporation's obligation to pay the Base Salary
and bonus contemplated above that Executive continue to observe the Restrictive
Covenants in clauses (i) and (iii) of Section 5.b during such twelve month
period. Payment of such Base Salary and bonus contemplated above shall be in
lieu of all other severance benefits to which Executive would otherwise be
entitled.
e. Resignation for Good Reason. For purposes of this Agreement,
Executive's resignation for Good Reason shall constitute a
termination Without Cause. For purposes of this Agreement,
"Good Reason" means any of the following conditions, which
notice must be given by the Executive within 30 days after the
occurrence of any such condition (failure to timely give such
notice to constitute a waiver of Executive's right to
terminate for Good Reason):
(i) a decrease in Executive's base salary and/or
a material decrease in Executive's bonus
plan or Executive benefits;
(ii) a material, adverse change in Executive's
title, authority, responsibilities or
duties;
(iii) any material breach by the Corporation of any
provision of this Agreement, which breach is
not cured within fourteen (14) days following
written notice of such breach from Executive;
or,
(iv) if there is a Change in Control of Employer
during the term of this Agreement. As used
herein, a "Change of Control" shall mean:
(A) a sale of all or substantially all
of the assets of the Corporation to
a person who is not an Affiliate (as
used herein the term "Affiliate"
means a person or entity which
controls, is controlled by or is
under common control with the
Corporation and the concept of
control means the ownership of
voting securities representing more
than 50% of the voting power of the
entity in question);
(B) a merger, consolidation or
reorganization of the Corporation as
a result of which stockholders of
the Corporation holding more than
50% of the voting power of all
voting securities of the Corporation
immediately before the merger,
consolidation or reorganization do
not hold more than 50% of the voting
power
<PAGE>
of all voting securities of the
Corporation after the merger,
consolidation or reorganization;
(C) the acquisition by a person or group
of persons who are not Affiliates of
the Corporation in one transaction
or a series of related transactions
of voting securities which have more
than 50% of the voting power of all
voting securities of the
Corporation;
(D) if the Chairman in place at the time
of the execution of this Agreement
either resigns or is removed from
office as Chairman of the Board of
Directors;
f. Upon termination of this Agreement for any reason or upon
termination of Executive's employment with Corporation for any
reason, Executive will resign all directorships he may then
hold with Corporation or any of its subsidiaries.
SECTION 8. BENEFITS UPON TERMINATION OTHER THAN A TERMINATION WITHOUT CAUSE.
In the event Executive terminates this Agreement under Section 7.c above or
voluntarily resigns from his employment with the Corporation, or in the event
that Executive's employment terminates for Cause or as a result of his death or
disability or as a result of the expiration of the term of this Agreement,
Executive shall be entitled to no compensation or benefits from the Corporation
other than his Base Salary under Section 3.a and his benefits under Section 3.b
above until the date of termination.
SECTION 9. REMEDY FOR BREACH.
The Executive acknowledges that a violation of any of the provisions of this
Agreement, including its restrictive covenants, will cause irreparable damage to
the Employer, its successors and assigns. The Executive consents that any
violation shall entitle the Employer or its successors and assigns, in addition
to any other rights or remedies it, or they, may have, to an immediate
injunction restraining any violation.
SECTION 10. NOTICES.
All notices, requests, demands, and other communications that are required or
may be given under this Agreement shall be in writing and shall be deemed to
have been duly given if delivered personally or sent by registered or certified
mail, return receipt requested, postage prepaid addressed to the intended
recipient as follows or at such other address as is provided by either party to
the other:
<PAGE>
If to the Corporation: With a copy to:
Sonic Automotive, Inc. Parker, Poe, Adams & Bernstein L.L.P.
5401 East Independence Boulevard 2500 Charlotte Plaza
P.O. Box 18747 Charlotte, NC 28244
Charlotte, NC 28218 Telecopier No.: (704) 334-4706
Telecopier No.: (704) 532-3323 Attn: Edward W. Wellman, Jr.
Attention: Chief Financial Officer
If to Executive: With a copy to:
Mr. Thomas A. Price Gray, Cary, Ware & Friedenrich LLP
55 Peninsula Drive 400 Hamilton Avenue
Belvedere, CA 94920 Palo Alto, CA 94301-1825
Telecopier No. (415) 435-2133 Telecopier No.: (650) 327-3699
Attn: Andrew Zeif
SECTION 11. GOVERNING LAWS.
This Agreement shall be construed and enforced in accordance with the laws of
the State of California excluding its conflict of law provisions.
SECTION 12. ENTIRE AGREEMENT.
This Agreement contains the entire agreement among the parties regarding
Executive's pay plan and the employment relationship. All prior negotiations,
agreements, and understandings are superseded. This Agreement may not be amended
or revised except by a writing signed by all the parties.
SECTION 13. BINDING EFFECT; ASSIGNMENT.
This Agreement shall be binding upon and inure to the benefit of the heirs,
legal representatives, and successors of the respective parties; provided
however, that this Agreement and all its rights may not be assigned by any party
except by or with the written consent of the other parties, except that the
Corporation shall have the right to assign this Agreement to an assignee who
acquires all or substantially all of the business and assets of the Corporation.
SECTION 14. SURVIVAL.
In the event of termination of Executive's employment and this Agreement for any
reason by Executive or the Corporation, Executive and/or the Corporation, as the
case may be, nevertheless shall continue to be bound by the terms and conditions
set forth in Section 13 herein.
<PAGE>
SECTION 15. ATTORNEYS' FEES.
The prevailing party shall be entitled to recover from the losing party its
attorneys' fees and costs incurred in any action brought to enforce any right
arising out of this Agreement.
IT IS SO UNDERSTOOD AND AGREED:
EXECUTIVE:
Signature: /s/ Thomas A. Price
-------------------
Thomas A. Price
EMPLOYER:
Sonic Automotive, Inc.
By: /s/ O. Bruton Smith
-------------------
Its: Chairman and Chief
Executive Officer
EXHIBIT 10.15a
FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
--------------------------------------------
THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT
(this "Amendment"), dated December 6, 1999, is entered into between SONIC
AUTOMOTIVE, INC., a Delaware corporation ("Borrower"), whose address is 5401
East Independence Boulevard, P.O. Box 18747, Charlotte, North Carolina 28218,
and FORD MOTOR CREDIT COMPANY, a Delaware corporation ("Lender"), whose address
is 6302 Fairview Road, Suite 500, Charlotte, North Carolina 28210.
WHEREAS, pursuant to the terms of a certain Credit Agreement dated as
of October 15, 1997, as amended by that certain Credit Agreement Amendment dated
November 12, 1997, as amended by that certain Amended and Restated Credit
Agreement dated as of December 15, 1997, as amended by that certain Letter
Agreement dated July 28, 1998, as amended by that certain Letter Agreement dated
September 21, 1998, as amended by that certain Letter Agreement dated October
15, 1998, as amended by that certain Amendment to Amended and Restated Credit
Agreement dated March 2, 1999, as further amended by that certain Second Amended
and Restated Credit Agreement dated July 28, 1999 between Borrower and Lender
(collectively, the "Agreement") Lender extended to Borrower a revolving loan
facility in an amount not to exceed $150,000,000.00 (the "Original Loan
Facility"); and
WHEREAS, the Original Loan Facility is evidenced by a certain
Promissory Note dated as of October 15, 1997, made by Borrower to the order of
Lender in the principal amount of $26,000,000.00, as amended by that certain
Amended and Restated Promissory Note dated December 15, 1997, made by Borrower
to the order of Lender in the principal amount of $75,000,000.00, as amended by
that certain Second Amended and Restated Promissory Note dated March 2, 1999
made by Borrower to the order of Lender in the principal amount of
$100,000,000.00, as further amended and restated by that certain Third Amended
and Restated Promissory Note dated July 28, 1999 made by Borrower to the order
of Lender in the principal amount of $150,000,000.00 (the "Original Note"); and
WHEREAS, Borrower has requested that Lender amend certain provisions of
the Original Loan Facility and increase the principal balance available to
Borrower thereunder to $350,000,000.00 for additional working capital and to
purchase dealership assets, pursuant to the terms of the Fourth Amended and
Restated Promissory Note dated as of even date herewith in the principal amount
of $350,000,000.00 and made by Borrower to the order of Lender (the "Amended
Note" and with the Original Note collectively referred to as the "Note"); and
WHEREAS, Lender is willing to amend and increase the Original Loan
Facility if and only if (a) Borrower executes this Amendment and the Amended
Note, and (b) each Sonic Dealership (as defined in the Agreement) and each
Subsidiary Holding Company (as defined in the Agreement) executes the
Reaffirmation of Guaranty dated as of even date herewith reaffirming their
guaranty of the indebtedness and obligations of the Borrower and each other
Sonic Dealership and Subsidiary Holding Company to Lender under the Wholesale
Lines (as defined in the Agreement) and the Original Loan Facility, as amended
and increased;
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and intending to be legally bound hereby, Borrower and Lender
agree as follows:
<PAGE>
1. Incorporation by Reference and Defined Terms. The parties hereby
incorporate the foregoing recitals in this Amendment as though fully set forth
herein, agreeing that such recitals are material, true and correct. Except as
modified herein, all capitalized terms shall have the meanings set forth in the
Agreement and the Note.
2. Loan Facility. The term "Loan Facility" shall mean the Original Loan
Facility, as amended by this Amendment.
3. Amendment of Agreement. The Agreement is hereby amended to provide
as follows:
(a) The definition of "Applicable Commercial Paper Rate" set
forth in Article I, Section 1.1 of the Agreement is hereby deleted in its
entirety and the following shall be substituted therefor:
"APPLICABLE LIBOR RATE" means as of any Payment Date, the
LIBOR Rate plus two and fifty hundredths percent (2.50%) per annum."
(b) The definition of "Average Scaled Assets" set forth in
Article I, Section 1.1 of the Agreement is hereby deleted in its entirety.
(c) The definition of "Commercial Paper Rate" set forth in
Article I, Section 1.1 of the Agreement is hereby deleted in its entirety and
the following shall be substituted therefor:
"LIBOR RATE" means the monthly arithmetic average of the per
annum interest rate announced from time to time as the one month London
Interbank Offered Rates quoted each Monday for the previous Friday
under the Money Rates Column of the Wall Street Journal, or as
published in such other publications as Lender may designate. In the
event such rate is not quoted on Monday for the previous Friday, the
rate quoted on the first business day of the week for the last business
day of the previous week shall be utilized."
(d) The definition of "Commitment" set forth in Article I,
Section 1.1 of the Agreement is hereby deleted in its entirety and the following
shall be substituted therefor:
"COMMITMENT" means the lesser of (a) $350,000,000.00 and (b)
the Scaled Assets of the Sonic Group plus $100,000,000.00; provided,
however, that for purposes of Section 2.9(C) hereof, "Commitment" shall
mean the lesser of (a) $350,000,000.00 and (b) the amount to which the
Commitment has been reduced from time to time pursuant to Section 2.3
hereof "
(e) The definition of "Contribution Agreement" set forth in
Article I, Section 1.1 of the Agreement is hereby deleted in its entirety and
the following shall be substituted therefor:
"CONTRIBUTION AGREEMENT" means that certain Amended and
Restated Contribution Agreement, dated as of October 20, 1997, as
amended by the Second Amended and Restated Contribution Agreement,
dated as of December 15, 1997, as amended by the Third Amended and
Restated Contribution Agreement, dated as of March 24, 1998, as amended
and restated by the Fourth Amended and Restated Contribution Agreement,
dated as of December 1, 1998, as amended and restated by the Fifth
Amended and Restated Contribution Agreement dated March 2, 1999, as
amended and restated by the Sixth Amended and Restated Contribution
Agreement dated July 28,
-2-
<PAGE>
1999, as amended and restated by the Seventh Amended and Restated
Contribution Agreement dated December 6, 1999, and as such agreement
may be further amended, restated or otherwise modified and in effect
from time to time."
(f) The definition of "Daily Adjustment Amount" set forth in
Article I, Section 1.1 of the Agreement, is hereby deleted in its entirety.
(g) The definition of "Note" as set forth in Article I,
Section 1.1 of the Agreement is hereby deleted in its entirety and the following
shall be substituted therefor:
"NOTE" means that Promissory Note dated October 15, 1997 duly
executed by the Borrower and payable to the order of the Lender in the
principal amount of $26,000,000.00, as amended and restated by that
certain Amended and Restated Promissory Note dated December 15, 1997
duly executed by the Borrower and payable to the order of Lender in the
principal amount of $75,000,000.00, as amended and restated by that
certain Second Amended and Restated Promissory Note dated March 2, 1999
duly executed by the Borrower and payable to the order of Lender in the
principal amount of $100,000,000.00, as amended and restated by that
certain Third Amended and Restated Promissory Note dated July 28, 1999
duly executed by the Borrower and payable to the order of Lender in the
principal amount of $150,000,000.00, as further amended and restated by
that certain Fourth Amended and Restated Promissory Note dated
December 6, 1999 duly executed by the Borrower and payable to the
order of Lender in the principal amount of $350,000,000.00 including
any amendment, restatement, modification, renewal, increase or
replacement of such Note."
(h) The definition of "Quarter" as set forth in Article I,
Section 1.1 of the Agreement is hereby deleted in its entirety.
(i) The definition of "Quarterly Payment Date" as set forth in
Article I, Section 1.1 of the Agreement is hereby deleted in its entirety.
(j) The definition of "Reaffirmation of Guaranty" as set forth
in Article I, Section 1.1 of the Agreement is hereby deleted in its entirety and
the following shall be substituted therefor:
"REAFFIRMATION OF GUARANTY" means, collectively, the
Reaffirmation of Guaranty dated July 28, 1999 and the Reaffirmation of Guaranty
dated December 6, 1999 from each Dealership Guarantor and each Subsidiary
Holding Company to Lender, pursuant to which each Dealership Guarantor and each
Subsidiary Holding company reaffirmed its guaranty of the Obligations as such
Obligations have been amended, restated and/or increased."
(k) The definition of "Scaled Assets Adjustment Amount" as set
forth in Article I, Section 1.1 of the Agreement is hereby deleted in its
entirety.
(l) The definition of "Termination Date" as set forth in
Article I, Section 1.1 of the Agreement is hereby deleted in its entirety and
the following shall be substituted therefor:
"TERMINATION DATE" means the earlier of (a) October 31, 2002
and (b) the date of termination of the Commitment pursuant to either of
Section 2.3 or Section 7.1 hereof."
(m) Section 2.1 of the Agreement entitled "Advances" is hereby
deleted in its entirety and the following shall be substituted therefor:
-3-
<PAGE>
"2.1 Advances. Upon the satisfaction of the conditions precedent set
forth in Sections 3.1 and 3.2, from and including the date of this Agreement and
prior to the Termination Date, the Lender shall, on the terms and conditions set
forth in this Agreement, make Advances to the Borrower from time to time, in
Dollars, in an amount not to exceed the Revolving Credit Availability at such
time; provided, however, at no time shall the Revolving Credit Obligations
exceed the Commitment at such time. Subject to the terms of this Agreement, the
Borrower may borrow, repay and re-borrow Advances at time prior to the
Termination Date. The Borrower shall repay in full the outstanding principal
balance of each Advance on or before the Termination Date."
(n) Section 2.2(A) of the Agreement entitled "Optional
Payments" is hereby deleted in its entirety and the following shall be
substituted therefor:
"2.2(A) Optional Payments. The Borrower may from time to time repay or
prepay, without penalty or premium all or any part of outstanding Advances;
provided, however, that the Borrower may not so prepay Advances unless it shall
have provided notice to the Lender of such prepayment by 12:00 p.m. on the day
such payment will be made, and the amount of such prepayment is not less than
$500,000.00."
(o) Section 2.3 of the Agreement entitled "Changes in the
Commitment. Reduction of Commitment." is hereby deleted in its entirety and the
following shall be substituted therefor:
"2.3 Changes in the Commitment. Reduction of Commitment. The Borrower
may permanently reduce the Commitment in whole, or in part, in an aggregate
minimum amount of $5,000,000.00 and integral multiples of $1,000,000.00 in
excess of that amount (unless the Commitment is reduced in whole), upon at least
three (3) Business Day's written notice to the Lender, which notice shall
specify the amount of any such reduction, and upon payment of a
termination/reduction fee equal to the amount by which the Commitment is reduced
multiplied by:
-4-
<PAGE>
(a) one-half of one percent (.50%), if Borrower terminates the
Commitment on or before November 1, 2000; or
(b) three-eighths of one percent (.375%), if Borrower terminates the
Commitment after November 1, 2000 but on or before November 1,
2001; or
(c) one-quarter of one percent (0.25%), if Borrower terminates the
Commitment after November 1, 2001 but before October 31, 2002.
Notwithstanding the foregoing, the amount of the Commitment may not be
reduced below the aggregate principal amount of the outstanding
Revolving Credit Obligations. All accrued commitment fees and
termination fees shall be payable on the effective date of any partial
or complete termination of the obligations of the Lender to make
Advances hereunder."
(p) Section 2.4 of the Agreement entitled "Method of
Borrowing" is hereby deleted in its entirety and the following shall be
substituted therefor:
"Method of Borrowing. The Borrower shall give the Lender
irrevocable notice in substantially the form of Exhibit B hereto (a
"BORROWING NOTICE") not later than 10:00 a.m. (Eastern Standard Time)
on the Business Day preceding the Borrowing Date of each Advance,
specifying: (i) the Borrowing Date (which shall be a Business Day) of
such Advance; (ii) the aggregate amount of such Advance; (iii) the use
of proceeds of such Advance, and (iv) the account or accounts into
which the Advances should be funded. Not later than 2:00 p.m. (Eastern
Standard Time) on each Borrowing Date, the Lender shall make available
its Advance, in funds immediately available to the Borrower at such
account or accounts as shall have been notified to the Lender. Each
Advance shall bear interest from and including the date of the making
of such Advance to (but not including) the date or repayment thereof at
the Applicable LIBOR Rate, changing when and as the underlying LIBOR
Rate changes, which such interest shall be payable in accordance with
Section 2.9(B)."
(q) Section 2.6 of the Agreement, entitled "Default Rate: Late
Payment Fee" is hereby deleted in its entirety and the following shall be
substituted therefor:
"Default Rate: Late Payment Fee. After the occurrence and
during the continuation of an Event of Default, at the option of the
Lender, the interest rate(s) applicable to the Advances shall be equal
to the Applicable LIBOR Rate plus three percent (3.0%) per annum. To
the extent not in excess of the Maximum Rate and in accordance with
applicable law, any amount not paid by the Borrower when due shall
accrue interest at an additional five percent (5.0%) per annum above
the rate applicable thereto until such amounts have been paid in full
and shall be payable on demand by the Lender and at any rate no later
than the next succeeding Payment Date."
(r) Section 2.9(B)(i) of the Agreement, entitled "Interest
payable on Advances" is hereby deleted in its entirety and the following shall
be substituted therefor:
"Interest Payable on Advances. Interest accrued on each
Advance shall be payable on each Payment Date, commencing with the
first such date to occur after the date hereof and at maturity (whether
by acceleration or otherwise). On each Payment
-5-
<PAGE>
Date from and after November 1, 1999 to maturity, the Borrower
shall pay interest at the Applicable LIBOR Rate on each Advance
outstanding on such date."
(s) Section 2.10 of the Agreement, entitled "Termination Date"
is hereby deleted in its entirety and the following shall be substituted
therefor:
"Termination Date. This Agreement shall be effective until the
Termination Date. Notwithstanding the termination of this Agreement on
the Termination Date, until all of the Obligations (other than
contingent indemnity obligations, but including all Floor Plan
Indebtedness) shall have been fully and indefeasibly paid and satisfied
and all financing arrangements between the Borrower and the Lender in
connection with this Agreement shall have been terminated (other than
with respect to Hedging Obligations), all of the rights and remedies
under this Agreement and the other Loan Documents shall survive and the
Lender shall be entitled to retain its security interest in and to all
existing and future Collateral."
(t) Section 5.2(K) of the Agreement, entitled "Use of
Proceeds" is hereby deleted in its entirety and the following shall be
substituted therefor:
"Use of Proceeds. The Borrower shall use the proceeds of the
Advances to (i) fund Permitted Acquisitions and (ii) provide funds for
working capital needs and other general corporate purposes of the
Borrower. The proceeds of Advances hereunder may not be used to make
any mandatory prepayment under Section 2.2(B). The Borrower will not
nor will it permit any Subsidiary to, use any of the proceeds of the
Loans to purchase or carry any "Margin Stock" or to make any
Acquisition, other than any Permitted Acquisition pursuant to Section
5.3(F)."
(u) Section 5.3(E) of the Agreement, entitled "Restricted
Payments" is hereby deleted in its entirety and the following shall be
substituted therefor:
"Restricted Payments. Neither the Borrower nor any of its
Subsidiaries shall declare or make any Restricted Payments, except:
(i) where the consideration therefor consists solely of
Equity Interests (but excluding Disqualified Stock) of
the Borrower or its Subsidiaries provided no Change of
Control would occur as a result thereof;
(ii) in connection with the payment of dividends by a
Subsidiary to the Borrower; and
(iii) the redemption or repurchase by Borrower of any Equity
Interests of the Borrower or a Subsidiary of Borrower,
now or hereafter outstanding, provided that after giving
effect to such redemption or repurchase, Borrower remains
in compliance with the Financial Covenants set forth in
Section 5.4 hereof."
(v) Section 5.4(B) of the Agreement, entitled "Total Adjusted
Debt to Tangible Base Capital Ratio" is hereby deleted in its entirety.
(w) Section 5.4(C) of the Agreement, entitled "Fixed Charge
Coverage Ratio" is hereby deleted in its entirety and the following shall be
substituted therefor:
-6-
<PAGE>
"Fixed Charge Coverage Ratio. The Borrower shall maintain a
ratio ("FIXED CHARGE COVERAGE RATIO") of (i) EBITDAR less Capital
Expenditures, to (ii) (a) Interest Expense plus (b) scheduled
amortization of the principal portion of all Indebtedness for money
borrowed plus (c) Rentals plus (d) taxes paid in cash during such
period of the Borrower and its consolidated Subsidiaries of at least
1.4:1 for each fiscal quarter ending from and after the Effective Date.
In each case the Fixed Charge Coverage Ratio shall be determined as of
the last day of each fiscal quarter for the four-quarter period ending
on such day."
4. Warranties and Representations of Borrower. Borrower represents and
warrants to Lender that the representations and warranties contained in Article
IV of the Agreement are true and correct as of the date hereof and that Borrower
is not in default under the Original Note, the Agreement or any other loan
document delivered to Lender in connection therewith, nor is there a
circumstance which, upon the giving of notice or the passage of time or both,
would constitute a default under any provision thereof. Borrower stipulates and
declares to Lender that Borrower has no charge, claim, demand, plea or set-off
upon, for or against the Original Note, the Agreement or any other loan
documents delivered in connection therewith.
5. Rights Granted Lender. All rights granted to Lender under this
Amendment shall be in addition to any rights granted to Lender under the Note,
the Agreement or any other loan document delivered in connection therewith.
6. Amendment. The terms and conditions of the Agreement shall apply
equally to the indebtedness evidenced by the Note, and the covenants of the
Agreement, as amended by this Amendment and shall remain in full force and
effect until the Principal Balance of the Note and interest thereon is paid in
full and all of the obligations of Borrower to Lender under the Agreement, as
amended, and the Note are fully performed and observed. Except as otherwise
amended in this Amendment, the terms and conditions of the Agreement shall
remain in full force and effect in accordance with the provisions thereof. The
Loan Facility may be further renewed or extended only upon such terms and
conditions and at such rate of interest as the parties hereby may agree upon in
writing.
-7-
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment
under seal as of the date set forth above intending to be legally bound hereby.
FORD MOTOR CREDIT COMPANY,
a Delaware corporation
By: /s/ William J. Beck IV (SEAL)
----------------------------
Name: William J. Beck IV
--------------------------
Title: National Account Manager
--------------------------
SONIC AUTOMOTIVE, INC.,
a Delaware corporation
By: /s/ B. Scott Smith (SEAL)
---------------------------
Name: B. Scott Smith
Title: President
-8-
EXHIBIT 10.16
FOURTH AMENDED AND RESTATED PROMISSORY NOTE
(Acquisition/Revolving Line of Credit)
(LIBOR Rate)
$350,000,000.00 Charlotte, North Carolina
December 6, 1999
FOR VALUE RECEIVED, SONIC AUTOMOTIVE, INC., a Delaware corporation
("Borrower"), whose address is 5401 East Independence Blvd., P.O. Box 18747,
Charlotte, North Carolina 28218, promises to pay to FORD MOTOR CREDIT COMPANY, a
Delaware corporation ("Lender"), or order, at 6302 Fairview Road, Suite 500,
Charlotte, North Carolina 28210, or at such other place as Lender may from time
to time in writing designate, in lawful money of the United States of America,
the principal sum of THREE HUNDRED FIFTY MILLION AND 00/100 DOLLARS
($350,000,000.00), or so much thereof as may be advanced from time to time,
together with interest, adjusted monthly, on the principal balance outstanding
from time to time (the "Principal Balance"), in like money, from the date of
this Fourth Amended and Restated Promissory Note (this "Note"), to and including
the Termination Date, at the rate of two and fifty hundredths percent (2.50%)
per annum above the LIBOR Rate (as defined herein) in effect from time to time
(the "Applicable Interest Rate"):
Capitalized terms used herein and not otherwise defined herein shall
have the meaning given to such terms in the Agreement.
For purposes of computing interest during the term of this Note, the
Applicable Interest Rate for each month shall be based on the LIBOR Rate in
effect on the last day of the prior month. All changes in the Applicable
Interest Rate shall become effective on the first day of a month following a
change in the LIBOR Rate and shall be deemed in effect throughout such month.
The Principal Balance and interest thereon at the Applicable Interest
Rate shall be due and payable as hereinafter set forth.
The outstanding Principal Balance hereunder may fluctuate up and down
from time to time as Advances are made, and Borrower repays the Principal
Balance, or any portion thereof; provided, however, that at any one time, the
aggregate of all Advances made hereunder may not exceed the lesser of (a)
$350,000,000.00 and (b) the Scaled Assets of the Sonic Group plus
$100,000,000.00.
This Note amends, restates, replaces and supersedes the Promissory Note
dated as of October 15, 1997 in the original principal amount of $26,000,000.00,
as amended and restated by that certain Amended and Restated Promissory Note
dated December 15, 1997, in the original principal amount of $75,000,000.00, as
amended and restated by that certain Second Amended and Restated Promissory Note
dated March 2, 1999 in the principal amount of $100,000,000.00, as further
amended and restated by that certain Third Amended and Restated Promissory Note
dated July 28, 1999 in the principal amount of $150,000,000.00 from Borrower to
Lender (collectively, the "Original Note"). Any interest accrued on the Original
Note as of the date hereof will be included in the next monthly payment due
hereunder.
<PAGE>
The term "AGREEMENT" shall mean the Credit Agreement dated as of
October 15, 1997, as amended by that certain Credit Agreement Amendment dated
November 12, 1997, as amended and restated by that certain Amended and Restated
Credit Agreement dated as of December 15, 1997, as amended by that certain
Letter Agreement dated July 28, 1998, as amended by that certain Letter
Agreement dated September 21, 1998, as amended by that certain Letter Agreement
dated October 15, 1998, as amended by that certain Amendment to Amended and
Restated Credit Agreement dated March 2, 1999, as amended and restated by that
certain Second Amended and Restated Credit Agreement dated July 28, 1999, as
further amended by that certain First Amendment to Second Amended and Restated
Credit Agreement dated as of even date herewith between Borrower and Lender.
The term "LIBOR RATE" shall mean the monthly arithmetic average of the
per annum interest rate announced from time to time as the one month London
Interbank Offered Rates quoted each Monday for the previous Friday under the
Monday Rates Column of the Wall Street Journal, or as published in such other
publications as Lender may designate. In the event such rate is not quoted on
Monday for the previous Friday, the rate quoted on the first business day of the
week for the last business day of the previous week shall be utilized.
The term "PAYMENT DATE" shall mean the fifteenth day of each calendar
month, provided, however, if such day is not a Business Day, then the Payment
Date shall be the next succeeding Business Day following such fifteenth day.
The term "SECURITY DOCUMENTS" shall mean the Agreement and any and all
of the documents now or hereafter executed by Borrower and/or others, and by or
in favor of Lender, which wholly or partially guarantee or secure this Note or
are executed in connection with this Note.
The term "TERMINATION DATE" shall mean the earlier of (a) October 31,
2002 and (b) the date of the termination of the Commitment pursuant to either of
Section 2.3 or Section 7.1 of the Agreement.
From November 1, 1999 to and including the Termination Date, the
Principal Balance and interest thereon shall be due and shall be payable as
follows:
(a) consecutive monthly installments of interest at the Applicable
Interest Rate on the unpaid Principal Balance outstanding
commencing on the first Payment Date following the date hereof and
continuing thereafter on each Payment Date through and including
the Termination Date; and
(b) if at any time and for any reason the outstanding Principal
Balance exceeds the lesser of (i) $350,000,000.00 and (ii) the
Scaled Assets of Sonic Group plus $100,000,000.00, the Borrower
shall immediately make a mandatory prepayment in an amount equal
to such excess; and
(c) on the Termination Date, a final installment which shall include
all unpaid amounts of the Principal Balance and interest accrued
and unpaid thereon and any and all other payments due under this
Note and the Security Documents.
Each of such payments shall be applied first to interest at the
Applicable Interest Rate and the balance to reduction of the Principal Balance.
-2-
<PAGE>
Except for a prepayment of the Principal Balance in whole made in
connection with Borrower's termination of the Commitment, Borrower may prepay
the unpaid Principal Balance in whole or from time to time in part, upon payment
of interest accrued on the unpaid Principal Balance outstanding through the day
of prepayment and all other charges, without premium. Prepayments of the
Principal Balance shall be applied to installments of the Principal Balance
remaining unpaid in the inverse order of their maturity and shall be credited to
the Principal Balance as of the date of receipt by Lender. Notwithstanding the
foregoing, the Borrower may not so prepay the unpaid Principal Balance unless
Borrower shall have provided notice to the Lender of such prepayment by 12:00
p.m. on the day such payment will be made and the amount of such prepayment is
not less than $500,000.00.
Any prepayments of the Principal Balance made in connection with the
reduction or termination of the Commitment shall be subject to the terms and
conditions of Section 2.3 of the Agreement, including but not limited to the
payment of a termination/reduction fee equal to the amount by which the
Commitment has been reduced multiplied by:
(a) one-half of one percent (0.50%), if Borrower terminates the
Commitment on or before November 1, 2000; or
(b) three-eighths of one percent (0.375%), if Borrower terminates the
Commitment after November 1, 2000 but on or before November 1,
2001; or
(c) one-quarter of one percent (0.25%), if Borrower terminates the
Commitment on or after November 1, 2001 but before October 31,
2002.
Payment of this Note is secured by the Security Documents. All of the
agreements, conditions, covenants, provisions and stipulations contained in the
Security Documents which are to be kept and performed by Borrower are hereby
made a part of this Note to the same extent and with the same force and effect
as if they were fully set forth herein, and Borrower covenants and agrees to
keep and perform them, or cause them to be kept and performed, strictly in
accordance with their terms.
Time is of the essence hereof and if any of the Principal Balance or
interest on this Note or other sum due hereunder is not paid when due, to the
extent not in excess of the Maximum Rate (as such term is defined in the
Agreement) and in accordance with applicable law, any amount not paid by the
Borrower when due shall accrue interest at an additional five percent (5.0%) per
annum above the rate applicable thereto until such amounts have been paid in
full and shall be payable on demand by the Lender and at any rate not later than
the next succeeding Payment Date. If any Event of Default shall occur, then
Lender, at its option and without further notice, demand or presentment for
payment to Borrower or others, may declare immediately due and payable the
unpaid Principal Balance and interest accrued thereon to the date of such Event
of Default and thereafter at the Applicable Rate plus three percent (3%) per
annum, together with all other sums owed by Borrower under this Note and the
Security Documents.
This Note is the "Note" referred to in, and is entitled to the benefits
of, the Agreement. The Agreement, among other things, (i) provides for the
making of Advances by the Lender to the Borrower from time to time in an
aggregate amount not to exceed at any time outstanding the U.S. Dollar amount
first above mentioned, the indebtedness of the Borrower resulting from each such
advance being evidenced by this Note, and (ii) contains provisions for
acceleration of the maturity hereof upon the happening of certain stated events
and also for the prepayment of the principal hereof prior to the Termination
Date upon the terms and conditions therein specified.
-3-
<PAGE>
Principal and interest are payable in lawful money of the United States
of America to the Lender, so such domestic account as the Lender may designate,
in same day funds. At the time of each Advance, and upon each payment or
prepayment of principal of each Advance, the Lender shall make a notation either
on the schedule attached hereto and made a part hereof, or in such Lender's own
books and records, in each case specifying the amount of such Advance, or the
amount of principal paid or prepaid with respect to such Advance, as the case
may be; PROVIDED that the failure of the Lender to make any such recordation or
notation shall not affect the Obligations of the Borrower hereunder or under the
Agreement.
The remedies of Lender, as provided in this Note and the Security
Documents, shall be cumulative and concurrent and may be pursued singularly,
successively or together, at the sole discretion of Lender, and may be exercised
as often as occasion therefor shall occur; and the failure to exercise any such
right or remedy shall in no event be construed as a waiver or release thereof.
Borrower waives presentment for payment, demand, notice of demand,
notice of nonpayment or dishonor, protest and notice of protest of this Note,
and all other notices in connection with the delivery, acceptance, performance,
default, or enforcement of the payment of this Note.
Lender shall not be deemed, by any act of omission or commission, to
have waived any of its rights or remedies hereunder unless such waiver is in
writing and signed by Lender and, then, only to the extent specifically set
forth in the writing. A waiver with reference to one event shall not be
construed as continuing or as a bar to or waiver of any right or remedy as to a
subsequent event.
This instrument shall be interpreted, and the rights and liabilities of
the parties hereto determined, in accordance with the internal laws (as
distinguished from the conflicts of law provisions) of the State of North
Carolina.
Whenever used, the singular shall include the plural, the plural shall
include the singular, and the words "Lender" and "Borrower" shall be deemed to
include their respective heirs, administrators, executors, successors and
assigns. The provisions of this Note shall be binding upon and inure to the
benefit of said heirs, administrators, executors, successors and assigns.
Borrower's successors and assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for Borrower.
In the event any one or more of the provisions hereof shall be invalid,
illegal or unenforceable in any respect, the validity of the remaining
provisions hereof shall be in no way affected, prejudiced or disturbed hereby.
This Note amends and restates in full the Original Note and is issued
in substitution for and not in payment of such prior Original Note and is not
intended to constitute a novation thereof.
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
duly executed this Note under seal, the day and year first above written.
-4-
<PAGE>
SONIC AUTOMOTIVE, INC.,
a Delaware corporation
By: /s/ B. Scott Smith (SEAL)
--------------------------
Name: B. Scott Smith
Title: President
-5-
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF
NAME OF ENTITY INCORPORATION ASSUMED NAME
-------------- ------------- ------------
<S> <C> <C>
Autobahn, Inc. California Autobahn Motors
Capitol Chevrolet and Imports, Inc. Alabama Capitol Kia
Capitol Chevrolet
Capitol Hyundai
Capitol Mitsubishi
Casa Ford of Houston, Inc. Texas
Don Lucas International, Inc. California Stevens Creek BMW
FA Service Corporation California First Automotive Service Corp.
FAA Auto Factory, Inc. California
FAA Beverly Hills, Inc. California Beverly Hills BMW
FAA Capitol N, Inc. California Capitol Nissan
FAA Concord H, Inc. California Concord Honda
FAA Concord N, Inc. California Concord Nissan
FAA Concord T, Inc. California Concord Toyota
FAA Dealer Services, Inc. California
FAA Dublin N, Inc. California Dublin Nissan
FAA Dublin VWD, Inc. California Dublin Volkswagen
Dublin Dodge
FAA Holding Corp. California
FAA Las Vegas H, Inc. Nevada Honda West
FAA Marin D, Inc. California First Dodge - Marin
FAA Marin F, Inc. California Ford of San Rafael
FAA Poway D, Inc. California Poway Dodge
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF ENTITY INCORPORATION ASSUMED NAME
-------------- ------------- ------------
<S> <C> <C>
FAA Poway G, Inc. California Ritchey/Fipp Poway
Chevrolet/Oldsmobile
FAA Poway H, Inc. California Poway Honda
FAA Poway T, Inc. California Poway Toyota
FAA San Bruno, Inc. California Melody Toyota
FAA Santa Monica V, Inc. California Volvo of Santa Monica
FAA Serramonte H, Inc. California Honda of Serramonte
FAA Serramonte L, Inc. California Lexus of Serramonte
FAA Serramonte, Inc. California Serramonte Auto Plaza
Serramonte Dodge
Serramonte Isuzu
Serramonte Mitsubishi
Serramonte Nissan
FAA Stevens Creek, Inc. California Stevens Creek Nissan
FAA Torrance CPJ, Inc. California South Bay Chrysler,
Plymouth, Jeep
FAA Woodland Hills VW, Inc. California Volkswagen of Woodland Hills
FirstAmerica Automotive, Inc. Delaware
Fort Mill Chrysler-Plymouth-Dodge
Inc. South Carolina
Fort Mill Ford, Inc. South Carolina
Franciscan Motors, Inc. California Acura of Serramonte
Freedom Ford, Inc. Florida
Frontier Oldsmobile-Cadillac, Inc. North Carolina Frontier Hyundai
Freedom Chevrolet-
Oldsmobile-Cadillac
Kramer Motors Incorporated California Honda of Santa Monica
Lone Star Ford, Inc. Texas
Lucas Dealership Group, Inc. Texas
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF ENTITY INCORPORATION ASSUMED NAME
-------------- ------------- ------------
<S> <C> <C>
Marcus David Corporation North Carolina Town & Country Toyota
Northpoint Volvo LLC Georgia
Ron Craft Chevrolet-Cadillac- Texas
Oldsmobile, Inc.
Santa Clara Imported Cars, Inc. California Honda of Stevens Creek
Smart Nissan, Inc. California First Nissan-Marin
Sonic Automotive - Bondesen, Inc. Florida Fred Bondesen Chevrolet,
Oldsmobile, Cadillac, Inc.
Sonic Automotive of Chattanooga, LLC Tennessee Town and Country Volvo
of Chattanooga
BMW of Chattanooga
Volvo of Chattanooga
Sonic Automotive-Clearwater, Inc. Florida Clearwater Toyota
Sonic Automotive Collision Center of Florida
Clearwater, Inc.
Sonic Automotive F&I, LLC Nevada
Sonic Automotive Finance, LLC North Carolina
Sonic Automotive of Georgia, Inc. Georgia
Sonic Automotive-Hwy. 153 at Tennessee
Shallowford Road, Chattanooga, Inc.
Sonic Automotive of Nashville, LLC Tennessee BMW of Nashville
Town and Country
Volkswagen of Nashville
Volkswagen of Nashville
Sonic Automotive Body Shop
Sonic Automotive of Nevada, Inc. Nevada
Sonic Automotive Servicing Company, Nevada
LLC
Sonic Automotive of Tennessee, Inc. Tennessee
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF ENTITY INCORPORATION ASSUMED NAME
-------------- ------------- ------------
<S> <C> <C>
Sonic Automotive of Texas, L.P. Texas Lone Star Ford
Sonic Automotive West, LLC Nevada
Sonic Automotive - 1307 N. Dixie Hwy. Florida Halifax Ford-Mercury
NSB, Inc. Halifax Ford Truck Center
Halifax Ford Used Cars
Sonic Automotive-1400 Automall Drive, Ohio Hatfield Hyundai
Columbus, Inc.
Sonic Automotive-1455 Automall Drive, Ohio
Columbus, Inc.
Sonic Automotive-1495 Automall Drive, Ohio Hatfield Lincoln-Mercury
Columbus, Inc.
Sonic Automotive-1500 Automall Drive, Ohio
Columbus, Inc.
Sonic Automotive - 1720 Mason Ave., Florida Higginbotham
DB, Inc. Automobiles
Sonic Automotive - 1720 Mason Ave., Florida Higginbotham
DB, LLC Automobiles
Sonic Automotive - 1919 N. Dixie Hwy. Florida Higginbotham Chevrolet-
NSB, Inc. Oldsmobile
Sonic Automotive - 21699 Florida Clearwater Mitsubishi
U.S. Hwy 19 N., Inc.
Sonic Automotive - 241 Ridgewood Ave. Florida Sunrise Auto World
HH, Inc. Sunrise Fleet Sales
Sonic Automotive 2424 Laurens Rd., South Carolina
Greenville, Inc.
Sonic Automotive 2752 Laurens Rd., South Carolina Century BMW
Greenville, Inc.
Sonic Automotive - 3401 N. Main, TX, Texas Ron Craft Chevrolet-
L.P. Cadillac-Oldsmobile
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF ENTITY INCORPORATION ASSUMED NAME
-------------- ------------- ------------
<S> <C> <C>
Sonic Automotive-3700 West Broad Ohio
Street, Columbus, Inc.
Sonic Automotive - 3741 S. Nova Florida HMC Finance
Rd., PO, Inc.
Sonic Automotive-4000 West Ohio
Broad Street, Columbus, Inc.
Sonic Automotive - 4701 I-10 Texas Casa Ford
East, TX, L.P.
Sonic Automotive - 5221 I-10 Texas Ron Craft Chrysler Plymouth Jeep
East, TX, L.P. Casa Chrysler-Plymouth-Jeep
Sonic Automotive 5260 Georgia Dyer and Dyer
Peachtree Industrial Blvd., LLC
Dyer & Dyer Volvo of Southlake
Sonic Automotive-5585 Georgia Dyer & Dyer Oldsmobile
Peachtree Industrial Blvd., LLC
Sonic Automotive - 6008 N. Florida Volvo of Tampa
Dale Mabry, FL, Inc.
Sonic Automotive - 6025 Tennessee Town and Country KIA of Chattanooga
International Drive, LLC
Town and Country Volkswagen
Volkswagen of Chattanooga
Kia of Chattanooga
Sonic Automotive - 9103 E. North Carolina Infiniti of Charlotte
Independence, NC, LLC
Sonic - 2185 Chapman Rd., Tennessee Economy Honda Cars
Chattanooga, LLC
Sonic Automotive Collision Center
Sonic-Birmingham Used Cars, Alabama
Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF ENTITY INCORPORATION ASSUMED NAME
-------------- ------------- ------------
<S> <C> <C>
Sonic - Camp Ford, L.P. Texas LaPorte Ford
Sonic Chrysler-Plymouth-Jeep, North Carolina Lake Norman Chrysler-
LLC Plymouth-Jeep
Lake Norman Used Car Center
Lake Norman Pre-Owned
Sonic - Classic Dodge, Inc. Alabama Classic Dodge
Sonic Dodge, LLC North Carolina Lake Norman Dodge
Sonic - Fitzgerald Chevrolet, North Carolina Not New Car Store
LLC
Sonic - FM Automotive, LLC Florida Mercedes-Benz of Fort Myers
Sonic - FM , Inc. Florida BMW of Fort Myers
Sonic - FM Nissan, Inc. Florida Nissan of Fort Myers
Sonic - FM VW, Inc. Florida Volkswagen of Fort Myers
Sonic - Freeland, Inc. Florida Honda of Fort Myers
Sonic - Global Imports, L.P. Georgia
Sonic-Glover, Inc. Oklahoma Jim Glover Dodge
Sonic - Integrity Dodge LV, Nevada Nevada Dodge
LLC
Sonic - Lloyd Nissan, Inc. Florida Lloyd Nissan
Lloyd Automotive
Sonic - Lloyd Pontiac - Florida Lloyd Pontiac-Cadillac-GMC
Cadillac, Inc.
Sonic - Lute Riley, L. P. Texas Lute Riley Honda
Sonic - Manhattan Fairfax, Inc. Virginia BMW of Fairfax
Sonic - Manhattan Waldorf, Maryland Nissan Jeep of Waldorf
Inc.
Sonic - Naples Nissan, Inc. Florida Nissan of Naples
Sonic - Newsome Automotive, South Carolina Newsome Automotive
LLC
Sonic - Newsome Chevrolet South Carolina Newsome Chevrolet World
World, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF ENTITY INCORPORATION ASSUMED NAME
-------------- ------------- ------------
<S> <C> <C>
Sonic - Newsome of Florence, South Carolina Newsome Automotive
Inc. Imports of Florence
Newsome Chevrolet
Isuzu of Florence
Sonic - North Charleston, Inc. South Carolina Charleston Lincoln-Mercury
North Charleston Hyundai
Sonic - North Charleston South Carolina Altman Dodge
Dodge, Inc.
Sonic Peachtree Industrial Georgia
Blvd., L.P.
Sonic - Reading, L.P. Texas Reading Buick-Pontiac-GMC
Reading Toyota
Toyota of Baytown
Baytown Pontiac-GMC-Buick
Sonic-Riverside, Inc. Oklahoma Riverside Chevrolet
Sonic - Rockville Imports, Inc. Maryland Rockville Porsche-Audi
Sonic - Rockville Motors, Inc. Maryland Lexus of Rockville
Sonic - Sam White Nissan, L.P. Texas Lone Star Nissan
Lone Star Oldsmobile
Lone Star Nissan-Oldsmobile
Sonic - Sam White Oldsmobile, Texas
L.P.
Sonic - Shottenkirk, Inc. Florida Pensacola Honda
Sonic - Superior Oldsmobile, Tennessee Cleveland Oldsmobile-
LLC Cadillac-GMC
Sonic of Texas, Inc. Texas
Sonic-Volvo LV, LLC Nevada Volvo of Las Vegas
Sonic - Williams Buick, Inc. Alabama
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF ENTITY INCORPORATION ASSUMED NAME
-------------- ------------- ------------
<S> <C> <C>
Sonic - Williams Cadillac, Inc. Alabama
Sonic - Williams Imports, Inc. Alabama
Sonic - Williams Motors, LLC Alabama
Stevens Creek Cadillac, Inc. California St. Claire Cadillac/Oldsmobile
Town and Country Chrysler- Tennessee Cleveland Chrysler-Plymouth-
Plymouth-Jeep, LLC Jeep
Town and Country Chrysler- South Carolina Town and Country Hyundai
Plymouth-Jeep of Rock Hill,
Inc.
Town and Country Dodge of Tennessee Dodge of Chattanooga
Chattanooga, LLC
Town and Country Ford, North Carolina
Incorporated
Town and Country Ford of Tennessee
Cleveland, LLC
Town and Country Jaguar, LLC Tennessee Town and Country Infiniti of
Chattanooga
Town and Country Jaguar of
Chattanooga
Jaguar of Chattanooga
Infiniti of Chattanooga
Transcar Leasing, Inc. California Serramonte Pontiac Buick GMC
Village Imported Cars, Inc. Maryland Village Volvo
Windward, Inc. Hawaii Honda of Hayward
</TABLE>
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
Sonic Automotive, Inc.:
We consent to the incorporation by reference in the following Registration
Statements of Sonic Automotive, Inc.:
Registration Statement No. 333-82615 on Form S-3;
Registration Statement No. 333-81059 on Form S-8;
Registration Statement No. 333-81053 on Form S-8;
Registration Statement No. 333-71803 on Form S-3;
Registration Statement No. 333-69907 on Form S-8;
Registration Statement No. 333-69901 on Form S-8;
Registration Statement No. 333-69899 on Form S-8;
Registration Statement No. 333-68183 on Form S-3;
Registration Statement No. 333-65447 on Form S-8;
Registration Statement No. 333-49113 on Form S-8;
Registration Statement No. 333-96023 on Form S-3;
and Registration Statement No. 333-95791 on Form S-8,
of our report dated March 17, 2000, appearing in this Annual Report on Form
10-K of Sonic Automotive, Inc. for the year ended December 31, 1999.
Charlotte, North Carolina
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 83,111
<SECURITIES> 0
<RECEIVABLES> 101,493
<ALLOWANCES> 1,506
<INVENTORY> 630,857
<CURRENT-ASSETS> 835,567
<PP&E> 73,146
<DEPRECIATION> 9,465
<TOTAL-ASSETS> 1,501,102
<CURRENT-LIABILITIES> 657,910
<BONDS> 419,671
0
27,191
<COMMON> 414
<OTHER-SE> 374,968
<TOTAL-LIABILITY-AND-EQUITY> 1,501,102
<SALES> 3,350,823
<TOTAL-REVENUES> 3,350,823
<CGS> 2,896,400
<TOTAL-COSTS> 2,896,400
<OTHER-EXPENSES> (1,286)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,122
<INCOME-PRETAX> 72,974
<INCOME-TAX> 28,325
<INCOME-CONTINUING> 44,649
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,649
<EPS-BASIC> 1.41
<EPS-DILUTED> 1.27
</TABLE>
