AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1997
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SONIC AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 5511 56-2010790
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
5401 EAST INDEPENDENCE BOULEVARD
P.O. BOX 18747
CHARLOTTE, NORTH CAROLINA 28218
TELEPHONE (704) 532-3301
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
MR. O. BRUTON SMITH
CHIEF EXECUTIVE OFFICER
SONIC AUTOMOTIVE, INC.
5401 EAST INDEPENDENCE BOULEVARD
P.O. BOX 18747
CHARLOTTE, NORTH CAROLINA 28218
TELEPHONE (704) 532-3301
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
COPIES TO:
GARY C. IVEY, ESQ. STUART H. GELFOND, ESQ.
PARKER, POE, ADAMS & BERNSTEIN L.L.P. FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
2500 CHARLOTTE PLAZA ONE NEW YORK PLAZA
CHARLOTTE, NORTH CAROLINA 28244 NEW YORK, NEW YORK 10004
TELEPHONE (704) 372-9000 TELEPHONE (212) 859-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. ( )
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. ( )
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ( ) .
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. ( )
CALCULATION OF REGISTRATION FEE
TITLE OF CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE (1)(2) REGISTRATION FEE
Class A Common Stock,
par value $.01 per share.............. $104,000,000 $31,516
(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8 (A), MAY DETERMINE.
SONIC AUTOMOTIVE, INC.
CROSS-REFERENCE SHEET
PURSUANT TO SECTION 501(B)(4) OF REGULATION S-K SHOWING LOCATION
IN THE PROSPECTUS OF INFORMATION REQUIRED BY
ITEMS OF PART I OF FORM S-1
REGISTRATION STATEMENT ITEM AND CAPTION PROSPECTUS HEADING OR LOCATION
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.......... Facing Page; Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... Inside Front and Outside Back Cover Pages; Additional Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges....................... Prospectus Summary; Risk Factors
4. Use of Proceeds................................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price................. Outside Front Cover Page; Underwriting
6. Dilution........................................ Dilution
7. Selling Security Holders........................ Not Applicable
8. Plan of Distribution............................ Outside Front Cover Page; Underwriting
9. Description of Capital Stock to be Registered... Outside Front Cover Page; Dividend Policy; Description of Capital
Stock
10. Interests of Named Experts and Counsel.......... Not Applicable
11. Information with Respect to the Registrant...... Outside Front Cover Page; Prospectus Summary; Risk Factors; The
Reorganization; The Acquisitions; Use of Proceeds; Dividend Policy;
Capitalization; Selected Combined and Consolidated Financial Data;
Pro Forma Combined and Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition and Results of
Operations; Business; Management; Certain Transactions; Principal
Stockholders; Description of Capital Stock; Shares Eligible for
Future Sale; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.. Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 1997
PROSPECTUS
SHARES
[LOGO TO COME] SONIC AUTOMOTIVE, INC.
CLASS A COMMON STOCK
All of the shares of Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"), offered hereby are being sold by Sonic Automotive,
Inc. ("Sonic" or the "Company").
Each share of Class A Common Stock entitles its holder to one vote per
share. Each share of Class B Common Stock, par value $.01 per share (the "Class
B Common Stock," and together with the Class A Common Stock, the "Common
Stock"), entitles the holder to ten votes per share, except in certain limited
circumstances. All of the shares of Class B Common Stock are held by the members
of the Smith Group (as defined herein), who are all of the stockholders of the
Company prior to the consummation of the Offering. After consummation of the
Offering, the Smith Group will beneficially own shares representing
approximately % of the combined voting power of the Company's Common Stock
(approximately % if the underwriters' over-allotment option is exercised in
full). See "Description of Capital Stock -- Common Stock."
Prior to the Offering, there has been no public market for the Class A
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. For a discussion of factors to be
considered in determining the initial public offering price, see "Underwriting."
The Company intends to apply for listing of the Class A Common Stock on the
New York Stock Exchange under the symbol "DLR."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
Per Share........................................... $ $ $
Total (3)........................................... $ $ $
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of additional
shares of Class A Common Stock solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Class A Common Stock are being offered by the several
Underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the shares of Class A Common Stock will be made
in New York, New York on or about , 1997.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
WHEAT FIRST BUTCHER SINGER
The date of this Prospectus is , 1997.
[Photographs of various of the Company's dealerships and a map of the United
States showing locations of the Company's operations]
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and will make available copies of its quarterly reports for the first three
quarters of each year.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK
TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
This Prospectus includes statistical data regarding the retail automotive
industry. Unless otherwise indicated herein, such data is taken or derived from
information published by a division of Intertec Publishing Corp. in its "Ward's
Dealer Business", Crain's Communications, Inc. in its "Automotive News" and
"1997 Market Data Book" and by the Industry Analysis Division of the National
Automobile Dealers Association ("NADA") in its "Industry Analysis and Outlook"
and "Automotive Executive Magazine" publications.
No Manufacturer (as defined in this Prospectus) has been involved, directly
or indirectly, in the preparation of this Prospectus or in the Offering being
made hereby. Although, as described in this Prospectus, Manufacturers will have
granted consents for various of the Acquisitions (as defined herein) and for
this Offering, no Manufacturer has made any statements or representations for
the purpose of such statements or representations being included in this
Prospectus, and no Manufacturer has any responsibility for the accuracy or
completeness of this Prospectus.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES
IN THIS PROSPECTUS TO "SONIC" OR THE "COMPANY" (I) ARE TO SONIC AUTOMOTIVE, INC.
AND, UNLESS THE CONTEXT INDICATES OTHERWISE, ITS CONSOLIDATED SUBSIDIARIES AND
THEIR RESPECTIVE PREDECESSORS, (II) GIVE EFFECT TO A RECENTLY COMPLETED
REORGANIZATION (AS DEFINED BELOW) OF THE COMPANY AND (III) ASSUME THAT THE
COMPANY HAS CONSUMMATED THE ACQUISITION OF THE ASSETS OR ALL THE CAPITAL STOCK
OF SIX ADDITIONAL DEALERSHIPS OR DEALERSHIP GROUPS, AS DESCRIBED HEREIN, IN
NORTH CAROLINA, TENNESSEE, FLORIDA, GEORGIA AND SOUTH CAROLINA (THE
"ACQUISITIONS"). SEE "THE ACQUISITIONS." REFERENCES TO THE "OFFERING" ARE TO THE
OFFERING OF CLASS A COMMON STOCK MADE HEREBY. UNLESS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS GIVES RETROACTIVE EFFECT TO A -FOR-1 STOCK
SPLIT TO BE CONSUMMATED IMMEDIATELY PRIOR TO THE CONSUMMATION OF THE OFFERING
(THE "STOCK SPLIT") AND ASSUMES THAT THE UNDERWRITERS'OVER-ALLOTMENT OPTION IS
NOT EXERCISED. THE ACQUISITIONS WILL BE CONSUMMATED ON OR BEFORE THE CLOSING OF
THE OFFERING.
THE COMPANY
Sonic Automotive, Inc. is one of the leading automotive retailers in the
United States, operating 20 dealerships, four standalone used vehicle facilities
and eight collision repair centers in the southeastern and southwestern United
States. Sonic sells new and used cars and light trucks, sells replacement parts,
provides vehicle maintenance, warranty, paint and repair services and arranges
related financing and insurance ("F&I") for its automotive customers. The
Company's business is geographically diverse, with dealership operations in the
Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta
markets, each of which the Company believes are experiencing favorable
demographic trends. Sonic sells 17 domestic and foreign brands, which consist of
BMW, Cadillac, Chrysler, Dodge, Eagle, Ford, Honda, Infiniti, Jaguar, Jeep, KIA,
Oldsmobile, Plymouth, Saturn, Toyota, Volkswagen and Volvo. In several of its
markets, the Company has a significant market share for new cars and light
trucks, including 13.7% in Charlotte and 12.6% in Chattanooga in 1996. Pro forma
for the Acquisitions, the Company had revenues of $916.1 million and retail
unit sales of 24,114 new and 13,453 used vehicles in 1996. The Company believes
that in 1996, based on pro forma retail unit sales it would have been one of the
ten largest dealer groups out of a total of more than 15,000 dealer groups in
the United States and, based on pro forma revenues, it would have had three of
the top 100 single-point dealerships in the United States.
The Company's founder and Chief Executive Officer, O. Bruton Smith, has
over 30 years of automotive retailing experience. In addition, the Company's
other executive officers, regional vice presidents and executive managers have
on average 18 years of automotive retailing experience. The Company's
dealerships have won the highest attainable awards from various manufacturers
measuring quality and customer satisfaction. These awards include the Five Star
Award from Chrysler, the Chairman's Award from Ford, the President's Award from
BMW and the President's Circle Award from Infiniti. In addition, the Company was
named to Ford's Top 100 Club, which consists of Ford's top 100 retailers based
on retail volume and consumer satisfaction. Also, various members of the
management team have served on several manufacturer dealer councils which act as
liaisons between the manufacturers and dealer groups. As an example of the
industry's recognition of the Company's executives, Nelson E. Bowers, II, the
Company's Executive Vice President, participated in the development of the
Saturn brand and was awarded in 1990 the first Saturn dealership in the United
States.
The Company intends to pursue an acquisition growth strategy led by a
management team that has experience in the consolidation of both automotive
retailing as well as motor sports businesses. Bruton Smith, who is also the
Chief Executive Officer of Speedway Motorsports, Inc., the owner and operator of
several motor sports facilities, first entered the automotive retailing business
in the mid-1960's. Mr. Smith will devote approximately 50% of his business time
to the Company. Since 1990, Mr. Smith has successfully acquired three
dealerships and increased revenues from his dealerships from $199.4 million in
1992 to $376.6 million in 1996, without giving effect to the Acquisitions. In
the Tennessee market, Mr. Bowers has acquired or opened eight dealerships since
1992 and increased revenues from $36.0 million in 1992 to $181.9 million in
1996.
The Company believes the competitive advantages which differentiate it from
its local competitors include the reputation of the Company's management in the
automotive retailing industry, regional and national economies of scale, brand
and geographic diversity, and the established customer base and local name
recognition of the Company's dealerships. The Company has developed and
implemented several growth strategies to capitalize on these competitive
advantages. One of these is to continue to expand its operations in the
Southeast and Southwest by acquiring additional dealerships both within its
current markets and in new markets. The Company also is seeking additional
growth from the increased sale of higher margin products and services such as
wholesale parts, after-market products, collision repair services and F&I.
3
The Company believes that an opportunity exists for dealership groups with
significant equity capital and experience in identifying, acquiring and
professionally managing dealerships, to acquire additional dealerships and
capitalize on changes in the automotive retailing industry. With approximately
$640 billion in 1996 sales, automotive retailing is the largest consumer retail
market in the United States. The industry today is highly fragmented, with the
largest 100 dealer groups generating less than 10% of total sales revenues and
controlling less than 5% of all new vehicle dealerships. The Company believes
that these factors, together with increasing capital costs of operating
automobile dealerships, the lack of alternative exit strategies (especially for
larger dealerships) and the aging of many dealership owners provide attractive
consolidation opportunities.
GROWTH STRATEGY
(Bullet) ACQUIRE DEALERSHIPS. The Company plans to implement a "hub and spoke"
acquisition program primarily by pursuing (i) well-managed dealerships
in new metropolitan and growing suburban geographic markets, and (ii)
dealerships that will allow the Company to capitalize on regional
economies of scale, offer a greater breadth of products and services in
any of its markets or increase brand diversity.
NEW MARKETS. The Company looks to acquire well-managed dealerships in
geographic markets it does not currently serve, principally in the
Southeast and Southwest regions of the United States. The Company will
target dealers having superior operational and financial management.
Generally, the Company will seek to retain the acquired dealerships'
operational and financial management, and thereby benefit from their market
knowledge, name recognition and local reputation.
EXISTING MARKETS. The Company seeks growth in its operations within
existing markets by acquiring dealerships that increase the brands,
products and services offered in those markets. These acquisitions should
produce opportunities for additional operating efficiencies, promote
increased name recognition and provide the Company with better
opportunities for repeat and referral business.
(Bullet) PURSUE OPPORTUNITIES IN ANCILLARY PRODUCTS AND SERVICES. The Company
intends to pursue opportunities to increase its sales of higher-margin
products and services by expanding its collision repair centers and its
wholesale parts and after-market products businesses, which, other than
after market products, are not directly related to the new vehicle
cycle.
COLLISION REPAIR CENTERS. The Company's collision repair business
provides favorable margins and is not significantly affected by economic
cycles or consumer spending habits. The Company believes that, because of
the high capital investment required for collision repair shops, and the
cost of complying with environmental and worker safety regulations, large
volume body shops will be more successful in the future than smaller volume
shops. The Company believes that this industry will consolidate and that it
will be able to expand its collision repair business. The Company believes
that opportunities exist for those automotive retailers that can establish
relationships with major insurance carriers. The Company currently
participates in 35 direct repair programs with major insurance companies
and its relationships with these carriers provide a source of collision
repair customers. The Company currently has eight collision repair centers
accounting for approximately $8.9 million in pro forma revenue for the year
ended 1996.
WHOLESALE PARTS. Over time, the Company plans to capitalize on its
growing representation of numerous manufacturers in order to increase its
sales of factory authorized parts to wholesale buyers such as independent
mechanical and body repair garages and rental and commercial fleet
operators.
AFTER-MARKET PRODUCTS. The Company intends to expand its offerings of
after-market products in many of its dealership locations. After-market
products, such as custom wheels, performance parts, telephones and other
accessories, enable the dealership to capture incremental revenue on new
and used vehicle sales.
(Bullet) ENHANCE PROFIT OPPORTUNITIES IN FINANCE AND INSURANCE. The Company
offers its customers a wide range of financing and leasing alternatives
for the purchase of vehicles, as well as credit life, accident and
health and disability insurance and extended service contracts. As a
result of its size and scale, the Company believes it will be able to
negotiate with the lending institutions that purchase its financing
contracts to increase the Company's revenues. Likewise, the Company
expects to negotiate to increase the commissions it earns on extended
service and insurance products.
(Bullet) INCREASE USED VEHICLE SALES. The Company believes that there will be
opportunities to improve the used vehicle departments at several of its
dealerships. The Company currently operates four standalone used
vehicle facilities. In 1998, the Company intends to convert part of an
existing facility in Nashville to a used vehicle facility. It also
intends to develop facilities in other markets where management
believes an opportunity exists.
4
OPERATING STRATEGY
(Bullet) OPERATE MULTIPLE DEALERSHIPS IN GEOGRAPHICALLY DIVERSE MARKETS. The
Company operates dealerships in Charlotte, Chattanooga, Nashville,
Tampa-Clearwater, Houston and Atlanta. By operating in several
locations throughout the United States, the Company believes it will be
better able to insulate its earnings from local economic downturns. In
addition, the Company believes that by establishing a significant
market presence in its operating regions, it will be able to provide
superior customer service through a market-specific sales, service,
marketing and inventory strategy. The Company's market share in its
Charlotte and Chattanooga markets was 13.7% and 12.6%, respectively in
1996.
(Bullet) ACHIEVE HIGH LEVELS OF CUSTOMER SATISFACTION. Customer satisfaction has
been and will continue to be a focus of the Company. The Company's
personalized sales process is intended to satisfy customers by
providing high-quality vehicles in a positive, "consumer friendly"
buying environment. Manufacturers generally measure customer
satisfaction with an index ("CSI"), which is a result of a survey given
to new vehicle buyers. Some Manufacturers offer specific performance
incentives, on a per vehicle basis, if certain CSI levels (which vary
by Manufacturer) are achieved by a dealer. Manufacturers can withhold
approval of acquisitions if a dealer fails to maintain a minimum CSI
score. Historically, the Company has not been denied Manufacturer
approval of acquisitions based on CSI scores or other reasons. To keep
management focused on customer satisfaction, the Company includes CSI
results as a component of its incentive compensation program.
(Bullet) TRAIN AND DEVELOP QUALIFIED MANAGEMENT. Sonic requires all of its
employees, from service technicians to regional vice presidents, to
participate in in-house training programs. The Company leverages the
experience of senior management, along with third party trainers from
manufacturers, industry affiliates and vendors, to formally train all
employees. This training has also become a convenient and effective way
to share best practices among the Company's employees at all levels of
the various dealerships. The Company is developing an off-site
education center (the "Education Center") to be equipped with
classrooms specifically designed on a departmental basis. The Company
believes that its comprehensive training of all employees at every
level of their career path offers the Company a competitive advantage
over other dealership groups in the development and retention of its
workforce.
(Bullet) OFFER A DIVERSE RANGE OF AUTOMOTIVE PRODUCTS AND SERVICES. Sonic offers
a broad range of automotive products and services, including a wide
selection of new and used vehicles, vehicle financing and insurance
programs, replacement parts and maintenance and repair programs.
Offering numerous new vehicle brands enables the Company to satisfy a
variety of customers, reduces dependence on any one Manufacturer and
reduces exposure to supply problems and product cycles.
(Bullet) CAPITALIZE ON EFFICIENCIES IN OPERATIONS. Because management
compensation is based primarily on dealership performance, expense
reduction and operating efficiencies are a significant management
focus. As the Company pursues its acquisition strategy, the Company's
size and market presence should enable it to negotiate favorable
contracts on such expense items as advertising, purchasing, bank
financings, employee benefit plans and other vendor contracts.
(Bullet) UTILIZE PROFESSIONAL MANAGEMENT PRACTICES AND INCENTIVE BASED
COMPENSATION PROGRAMS. As a result of Sonic's size and geographic
dispersion, the Company's senior management has instituted a
multi-tiered management structure to supervise effectively its
dealership operations. In an effort to align management's interest with
that of stockholders, a portion of the incentive compensation program
for each officer, vice president and executive manager is provided in
the form of Company stock options, with additional incentives based on
the performance of individual profit centers. Sonic believes that this
organizational structure, with room for advancement and the opportunity
for equity participation, serves as a strong motivation for its
employees.
(Bullet) APPLY TECHNOLOGY THROUGHOUT OPERATIONS. The Company believes that, with
the customized technology it has introduced in certain markets, it has
been able to improve its operations over time by integrating its
systems into all aspects of its business. In these markets the Company
uses computer-based technology to monitor its dealerships' operating
performance and quickly adjust to market changes, and to integrate
computer systems into its sales, F&I and parts and service operations.
The Company intends to expand this computer system into all of its
dealerships and markets as the existing contracts for computer systems
expire.
THE REORGANIZATION
The Company was recently incorporated and capitalized with the stock of the
existing automobile dealerships that have been under the control of Bruton Smith
comprised of Town & Country Ford, Town & Country Toyota, Lone Star Ford, Fort
5
Mill Ford and Frontier Oldsmobile-Cadillac (the "Sonic Dealerships"). As of June
30, 1997, the Company effected a reorganization (the "Reorganization") pursuant
to which: (i) the Company acquired all of the capital stock or limited liability
company interests of the Sonic Dealerships (the "Dealership Securities"); and
(ii) the Company issued Class B Common Stock in exchange for the Dealership
Securities. In connection with the Reorganization and the Offering, the Company
intends to convert from the last-in-first-out method (the "LIFO Method") of
inventory accounting to the first-in-first-out method (the "FIFO Method") of
inventory accounting (the "FIFO Conversion"), conditioned upon the closing of
the Offering. The FIFO Conversion will increase retained earnings by
approximately $7.5 million and will result in a tax liability of approximately
$5.5 million as of June 30, 1997 in connection with a restatement of the
Company's financial statements. See "The Reorganization."
THE ACQUISITIONS
In the past four months, the Company has consummated or signed definitive
agreements to purchase six dealerships or dealership groups for an aggregate
purchase price of approximately $100.7 million. These acquisitions consist of
Ken Marks Ford located in Clearwater, Florida (the "Ken Marks Acquisition"), the
Bowers Transportation Group, which consists of eight dealerships in Chattanooga,
Tennessee and one dealership in Nashville, Tennessee (the "Bowers Acquisition"),
Lake Norman Dodge and Lake Norman Chrysler-Plymouth-Jeep Eagle located in
Cornelius, North Carolina (the "Lake Norman Acquisition"), Dyer & Dyer Volvo
located in Atlanta, Georgia (the "Dyer Acquisition"), Jeff Boyd
Chrysler-Plymouth-Dodge, located in Fort Mill, South Carolina (the "Fort Mill
Acquisition"), and Williams Motors located in Rock Hill, South Carolina (the
"Williams Acquisition") (collectively, the "Acquisitions"). The dealerships
underlying the Acquisitions had aggregate total revenues of approximately $569.4
million in 1996 and enhance the Company's market presence in the Southeast. See
"The Acquisitions."
The Company's principal executive office is located at 5401 East
Independence Boulevard, Charlotte, North Carolina. Its mailing address is P.O.
Box 18747, Charlotte, North Carolina 28218, and its telephone number is (704)
532-3301.
6
THE OFFERING
Class A Common Stock Offered by the Company........... shares (1)
Common Stock to be outstanding after the Offering:
Class A Common Stock................................ shares (2)
Class B Common Stock................................ shares
Total.......................................... shares
Voting Rights......................................... The Class A Common Stock and Class B Common Stock vote as a single
class on all matters, except as otherwise required by law, with each
share of Class A Common Stock entitling its holders to one vote and
each share of Class B Common Stock entitling its holder to ten votes
except with respect to certain limited matters. See "Description of
Capital Stock."
Use of proceeds....................................... The net proceeds of the Offering will be used to fund the
Acquisitions, including repaying indebtedness incurred by the Company
in connection with the Acquisitions. See "The Acquisitions" and "Use
of Proceeds."
Listing............................................... The Company intends to apply for listing of the Class A Common Stock
on the New York Stock Exchange (the "NYSE"), under the symbol "DLR."
7
(1) Does not include up to an aggregate of shares of Class A Common Stock
that may be sold by the Company upon exercise of the over-allotment option
granted to the Underwriters. See "Underwriting."
(2) Excludes shares of Class A Common Stock reserved for future issuance
to Company employees under the Company's stock option plan (including up to
shares of Class A Common Stock reserved for issuance upon exercise of
options granted to date pursuant to the Company's Stock Option Plan (as
defined herein)) and excludes shares of Class A Common Stock
( shares if the Underwriters' over-allotment option is exercised)
reserved for issuance under the Dyer Warrant (defined herein). See "The
Acquisitions -- The Dyer Acquisition" and "Management -- Stock Option Plan."
8
SUMMARY HISTORICAL AND PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL DATA
The following summary historical and pro forma combined and consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Combined and
Consolidated Financial Statements of the Company and the related notes and "Pro
Forma Combined and Consolidated Financial Data" included elsewhere in this
Prospectus. The Company acquired Fort Mill Ford, Inc. and Fort Mill
Chrysler-Plymouth-Dodge in February 1996 and in June 1997, respectively. Both of
these acquisitions were accounted for using the purchase method of accounting.
As a result the Summary Historical Combined and Consolidated Financial Data
below does not include the results of operations of these dealerships prior to
the date they were acquired by the Company. Accordingly, the actual historical
data for the periods after the acquisition may not be comparable to data
presented for periods prior to the acquisitions of Fort Mill Ford and Fort Mill
Chrysler-Plymouth-Dodge. Additionally, the Summary Historical and Pro Forma
Combined and Consolidated Financial Data below is not necessarily indicative of
the results of operations or financial position which would have resulted had
the Reorganization, FIFO Conversion, the Acquisitions and Offering occurred
during the periods presented.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
PRO
ACTUAL FORMA ACTUAL
1992 1993 1994 1995 1996(2) 1996(1) 1996(2) 1997(3)
(IN THOUSANDS, EXCEPT PER SHARE AND VEHICLES UNIT DATA)
COMBINED AND CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Vehicle sales...................... $171,065 $203,630 $227,960 $267,308 $326,842 $802,528 $164,333 $185,078
Parts, service and collision
repair........................... 24,543 30,337 33,984 35,860 42,644 96,098 21,005 22,906
Finance and insurance.............. 3,743 3,711 5,181 7,813 7,118 17,483 4,277 4,763
Total revenues................... 199,351 237,678 267,125 310,981 376,604 916,109 189,615 212,747
Cost of sales........................ 174,503 210,046 234,461 272,179 332,407 800,583 167,191 188,368
Gross profit (4)..................... 24,848 27,632 32,664 38,802 44,197 115,526 22,424 24,379
Selling, general and administrative
expenses........................... 20,251 22,738 24,632 29,343 33,678 87,461 16,590 18,413
Depreciation and amortization........ 682 788 838 832 1,076 3,772 360 396
Operating income..................... 3,915 4,106 7,194 8,627 9,443 24,293 5,474 5,570
Interest expense floor plan.......... 2,215 2,743 3,001 4,505 5,968 11,493 2,801 3,018
Interest expense, other.............. 290 263 443 436 433 973 184 269
Other income......................... 1,360 613 609 449 619 3,135 369 274
Income before income taxes and
minority interest (4).............. 2,770 1,713 4,359 4,135 3,661 14,962 2,858 2,557
Provision for income taxes........... 108 107 1,560 1,675 1,400 6,085 1,093 937
Income before minority interest...... 2,662 1,606 2,799 2,460 2,261 8,877 1,765 1,620
Minority interest in (earnings) loss
of subsidiary...................... 31 22 15 22 114 -- 41 47
Net income........................... $ 2,693 $ 1,628 $ 2,784 $ 2,438 $ 2,147 $ 8,877 $ 1,724 $ 1,573
Net income per share (5)............. $ --
PRO
FORMA
1997(1)
COMBINED AND CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Vehicle sales...................... $426,820
Parts, service and collision
repair........................... 51,125
Finance and insurance.............. 9,781
Total revenues................... 487,726
Cost of sales........................ 427,898
Gross profit (4)..................... 59,828
Selling, general and administrative
expenses........................... 43,754
Depreciation and amortization........ 1,731
Operating income..................... 14,343
Interest expense floor plan.......... 6,373
Interest expense, other.............. 583
Other income......................... 1,736
Income before income taxes and
minority interest (4).............. 9,123
Provision for income taxes........... 3,571
Income before minority interest...... 5,552
Minority interest in (earnings) loss
of subsidiary...................... --
Net income........................... $ 5,552
Net income per share (5)............. $ --
OTHER COMBINED AND
CONSOLIDATED OPERATING DATA:
New vehicle units sold............... 8,060 9,429 9,686 10,273 11,693 24,114 6,027 6,553
Used vehicle units sold -- retail
(6)................................ 3,892 4,104 4,374 5,172 5,488 13,453 2,836 2,638
New vehicle revenues................. $126,230 $152,525 $164,361 $186,517 $233,146 $549,285 $117,850 $136,798
Used vehicle revenues -- retail
(6)................................ 33,636 37,719 47,489 60,758 68,053 186,828 35,200 32,666
Parts, service and collision repair
revenues........................... 22,543 30,337 33,984 35,860 42,644 96,098 21,005 22,906
Gross profit margin (FIFO) (7)....... 12.6% 12.2% 12.8% 12.9% 12.1% 12.6% 11.6% 11.2%
New vehicle gross margin (FIFO)
(7)................................ 6.9% 7.2% 7.0% 7.3% 7.4% 7.4% 6.5% 6.6%
Used vehicle gross margin (retail)
(FIFO) (7)(6)...................... 10.4% 16.1% 10.9% 9.5% 8.4% 9.1% 8.4% 8.5%
Parts, service and collision repair
gross margin....................... 36.4% 36.5% 35.9% 36.1% 36.5% 42.4% 35.4% 35.8%
New vehicle units sold............... 12,816
Used vehicle units sold -- retail
(6)................................ 7,222
New vehicle revenues................. $289,909
Used vehicle revenues -- retail
(6)................................ 98,992
Parts, service and collision repair
revenues........................... 51,126
Gross profit margin (FIFO) (7)....... 12.3%
New vehicle gross margin (FIFO)
(7)................................ 7.2%
Used vehicle gross margin (retail)
(FIFO) (7)(6)...................... 8.9%
Parts, service and collision repair
gross margin....................... 42.5%
AS OF AS OF
DECEMBER 31, JUNE 30, 1997
1996 ACTUAL PRO FORMA
COMBINED AND CONSOLIDATED BALANCE SHEET DATA:
Working capital.............................................................. $ 6,201 $ 4,287 $ 51,169
Total assets................................................................. 94,930 106,859 317,489
Long-term debt............................................................... 5,286 5,137 10,422
Total liabilities............................................................ 79,181 86,499 189,049
Minority interest............................................................ 314 -- --
Stockholders' equity (4)..................................................... 15,749 20,360 128,440
(FOOTNOTES ON FOLLOWING PAGE)
9
(1) For information regarding the pro forma adjustments made to the Company's
historical financial data, which give effect to the Reorganization, the FIFO
Conversion, the Acquisitions, and the Offering, see "Pro Forma Combined and
Consolidated Financial Data."
(2) The actual statement of operations data for the year ended December 31, 1996
includes the results of Fort Mill Ford, Inc. from the date of acquisition,
February 1, 1996.
(3) The actual statement of operations data for the six months ended June 30,
1997 include the results of Fort Mill Chrysler-Plymouth-Dodge, Inc. from the
date of acquisition June 6, 1997.
(4) The Company currently utilizes the LIFO Method of inventory accounting. See
Note 3 to the Company's Combined and Consolidated Financial Statements. The
Company intends to file an election with the Internal Revenue Service to
convert, upon the closing of the Offering, to the FIFO Method of inventory
accounting and report its earnings for tax purposes and in its financial
statements on the FIFO Method. If the Company had previously utilized the
FIFO Method, gross profit and income before income taxes and minority
interest for the periods shown in the table, and stockholders' equity as of
December 31, 1996 and June 30, 1997, would have been as follows:
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
(IN THOUSANDS)
Gross profit............................ $28,192 $29,034 $34,114 $40,103 $45,571 $22,423 $27,434
Income before income taxes and minority
interest.............................. 2,560 3,102 5,809 5,436 5,021 2,858 2,612
AS OF AS OF
DECEMBER 31, 1996 JUNE 30, 1997
(IN THOUSANDS)
Stockholders' equity..................................................................... $18,215 $20,360
(5) Historical net income per share is not presented, as the historical capital
structure of the Company prior to the Offering is not comparable with the
capital structure that will exist after the Offering.
(6) The term "retail" describes sales to consumers as compared to sales to
wholesalers.
(7) Data is presented on the FIFO Method of inventory accounting. The Company
has historically used the LIFO Method of inventory accounting and intends to
convert to the FIFO Method conditioned and effective upon the closing of the
Offering. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
10
RISK FACTORS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF
THE INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING THE RISK FACTORS SET
FORTH BELOW.
DEPENDENCE ON AUTOMOBILE MANUFACTURERS
Each of the Company's dealerships operates pursuant to a franchise
agreement between the applicable automobile manufacturer (or authorized
distributor thereof) (the "Manufacturer") and the subsidiary of the Company that
operates such dealership. The Company is dependent to a significant extent on
its relationship with such Manufacturers.
After giving effect to the Reorganization and the Acquisitions, vehicles
manufactured by Ford Motor Company ("Ford"), Chrysler Corporation ("Chrysler"),
Toyota Motor Sales (U.S.A.) ("Toyota") and Volvo Motors ("Volvo"), accounted for
approximately 62.3%, 16.9%, 5.8% and 5.7%, respectively, of the Company's 1996
pro forma unit sales of new vehicles. No other Manufacturer accounted for more
than 5% of the new vehicle sales of the Company during 1996. See
"Business -- New Vehicle Sales," and " -- Relationships with Manufacturers."
Accordingly, a significant decline in the sale of Ford, Chrysler, Toyota, or
Volvo new cars could have a material adverse effect on the Company.
Manufacturers exercise a great degree of control over dealerships, and the
franchise agreement provides for termination or non-renewal for a variety of
causes. The Company believes that it is in compliance in all material respects
with all its franchise agreements except that, as set forth in Note 8 to the
Combined Financial Statements for Lake Norman Dodge, Inc. and Affiliated
Companies, Lake Norman Dodge (one of the dealerships whose assets are being
purchased in the Lake Norman Acquisition) is in violation of its franchise
agreement with Chrysler. The Company does not have any reason to believe that
this will have an effect on its ability to consummate the Lake Norman
Acquisition. The Company's franchise agreements generally expire at various
times between 1997 and 2000, although some franchise agreements have no specific
expiration date and continue in effect unless terminated pursuant to certain
limited circumstances. The Company has no reason to believe that it will not be
able to renew all of its franchise agreements upon expiration, but there can be
no assurance that any of such agreements will be renewed or that the terms and
conditions of such renewals will be favorable to the Company. If a Manufacturer
terminates or declines to renew one or more of the Company's significant
franchise agreements, such action could have a material adverse effect on the
Company and its business. Actions taken by Manufacturers to exploit their
superior bargaining position in negotiating the terms of such renewals or
otherwise could also have a material adverse effect on the Company. See
"Business -- Relationships with Manufacturers."
The Company also depends on its Manufacturers to provide it with a
desirable mix of popular new vehicles that produce the highest profit margins
and which may be the most difficult to obtain from the Manufacturers. If the
Company is unable to obtain a sufficient allocation of the most popular
vehicles, its profitability may be materially adversely affected. In some
instances, in order to obtain additional allocations of these vehicles, the
Company purchases a larger number of less desirable models than it would
otherwise purchase and its profitability may be materially adversely affected
thereby. The Company's dealerships depend on the Manufacturers for certain sales
incentives and other programs that are intended to promote dealership sales or
support dealership profitability. Manufacturers have historically made many
changes to their incentive programs during each year. A reduction or
discontinuation of a Manufacturer's incentive programs may materially adversely
affect the profitability of the Company.
The success of each of the Company's dealerships depends to a great extent
on the financial condition, marketing, vehicle design, production capabilities
and management of the Manufacturers which the Company represents. Events such as
strikes and other labor actions by unions, or negative publicity concerning a
particular Manufacturer or vehicle model, may materially and adversely affect
the Company. Although, the Company has attempted to lessen its dependence on any
one Manufacturer by establishing dealer relationships with a number of different
domestic and foreign automobile Manufacturers, adverse conditions affecting
Ford, Chrysler, Toyota and Volvo in particular, could have a material adverse
affect on the Company. See "Business -- New Vehicle Sales" and " -- Relationship
with Manufacturers."
Many Manufacturers attempt to measure customers' satisfaction with their
sales and warranty service experiences through systems, which vary from
Manufacturer to Manufacturer but which are generally known as CSI. These
Manufacturers may use a dealership's CSI scores as a factor in evaluating
applications for additional dealership acquisitions and other matters such as
vehicle inventory allocations. The components of CSI have been modified from
time to time in the past, and there is no assurance that such components will
not be further modified or replaced by different systems in the future. To date,
the Company has not been adversely affected by these standards and has not been
denied approval of any acquisition.
11
However, there can be no assurance that the Company will be able to comply with
such standards in the future. Failure of the Company's dealerships to comply
with the standards imposed by Manufacturers at any given time may have a
material adverse effect on the Company.
The Company must also obtain approvals by the applicable Manufacturer for
any of its acquisitions. See " -- Risks Associated with Acquisitions."
COMPETITION
Automobile retailing is a highly competitive business with over 22,000
franchised automobile dealerships in the United States at the beginning of 1996.
The Company's competition includes franchised automobile dealerships selling the
same or similar makes of new and used vehicles offered by the Company in the
same markets as the Company and sometimes at lower prices than those of the
Company. These dealer competitors may be larger and have greater financial and
marketing resources than the Company. Other competitors include other franchised
dealers, private market buyers and sellers of used vehicles, used vehicle
dealers, service center chains and independent service and repair shops. Gross
profit margins on sales of new vehicles have been declining since 1986. The
Company has also had margin pressure on its used vehicle sales over the last 18
months. The used car market faces increasing competition from non-traditional
outlets such as used-car "superstores," which use sales techniques such as one
price shopping and the Internet. Several groups have begun to establish
nationwide networks of used vehicle superstores. In Charlotte and Atlanta, where
the Company has significant operations, CarMax Superstores operate in
competition with the Company. In addition, car superstores operate in many of
the Company's other markets. "No negotiation" sales methods are also being tried
for new cars by at least one of these superstores and by dealers for Saturn and
other dealerships. Some recent market entrants may be capable of operating on
smaller gross margins compared to the Company. In addition, certain
Manufacturers have publicly announced that they may directly enter the retail
market in the future which could have a material adverse effect on the Company.
The increased popularity of short-term vehicle leasing also has resulted, as
these leases expire, in a large increase in the number of late model vehicles
available in the market, which puts added pressure on margins. As the Company
seeks to acquire dealerships in new markets, it may face increasingly
significant competition (including from other large dealer groups and dealer
groups that have publicly-traded equity) as it strives to gain market share
through acquisitions or otherwise.
The Company's franchise agreements (other than with Saturn) do not give the
Company the exclusive right to sell a Manufacturer's product within a given
geographic area. The Company could be materially adversely affected if any of
its Manufacturers award franchises to others in the same markets where the
Company is operating. A similar adverse affect could occur if existing competing
franchised dealers increase their market share in the Company's markets. The
Company's gross margins may decline over time as it expands into markets where
it does not have a leading position. These and other competitive pressures could
materially adversely affect the Company's results of operations. See
"Business -- Competition."
OPERATING CONDITION OF ACQUIRED BUSINESSES
Although the Company has conducted what it believes to be a prudent level
of investigation regarding the operating condition of the assets to be purchased
in the Acquisitions in light of the circumstances of each transaction, certain
unavoidable levels of risk remain regarding the actual operating condition of
these assets. Until the Company actually assumes operating control of such
assets, it will not be able to ascertain their actual value and, therefore, will
be unable to ascertain whether the price paid for the Acquisitions represented a
fair valuation. The same risk regarding the actual operating condition of
businesses to be acquired will also apply to future acquisitions by the Company.
RISKS OF CONSOLIDATING OPERATIONS AS A RESULT OF THE ACQUISITIONS
In connection with the Acquisitions, Sonic acquired six dealerships or
dealership groups. Each of these dealerships or groups has been operated and
managed as a separate independent entity to date, and the Company's future
operating results will depend on its ability to integrate the operations of
these businesses and manage the combined enterprise. The Company's management
group has been expanded in connection with these Acquisitions. There can be no
assurance that the management group will be able effectively and profitably
integrate in a timely manner each of the dealerships included in the
Acquisitions or any future acquisitions, or to manage the combined entity. The
inability of the Company to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
12
RISKS ASSOCIATED WITH ACQUISITIONS
The retail automobile industry is considered a mature industry in which
minimal growth is expected in unit sales of new vehicles. Accordingly, the
Company's future growth will depend in large part on its ability to acquire
additional dealerships as well as on its ability to manage expansion, control
costs in its operations and consolidate dealership acquisitions, including the
Acquisitions, into existing operations. In pursuing a strategy of acquiring
other dealerships, including the Acquisitions, the Company faces risks commonly
encountered with growth through acquisitions. These risks include, but are not
limited to, incurring significantly higher capital expenditures and operating
expenses, failing to assimilate the operations and personnel of the acquired
dealerships, disrupting the Company's ongoing business, dissipating the
Company's limited management resources, failing to maintain uniform standards,
controls and policies, impairing relationships with employees and customers as a
result of changes in management and causing increased expenses for accounting
and computer systems, as well as integration difficulties. Installing new
computer systems has in the past disrupted existing operations as management and
salespersons adjust to new technologies. In addition, as contracts with existing
suppliers of the Company's computer systems expire, the Company's strategy may
be to install new systems at its existing dealerships. The Company expects that
it will take one to two years to fully integrate an acquired dealership into the
Company's operations and realize the full benefit of the Company's strategies
and systems. There can be no assurance that the Company will be successful in
overcoming these risks or any other problems encountered with such acquisitions,
including in connection with the Acquisitions. Acquisitions may also result in
significant goodwill and other intangible assets that are amortized in future
years and reduce future stated earnings. See "The Acquisitions," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Growth Strategy."
Although there are many potential acquisition candidates that fit the
Company's acquisition criteria, there can be no assurance that the Company will
be able to consummate any such transactions in the future or identify those
candidates that would result in the most successful combinations or that future
acquisitions will be able to be consummated at acceptable prices and terms. The
magnitude, timing and nature of future acquisitions will depend upon various
factors, including the availability of suitable acquisition candidates,
competition with other dealer groups for suitable acquisitions, the negotiation
of acceptable terms, the Company's financial capabilities, the availability of
skilled employees to manage the acquired companies and general economic and
business conditions.
In addition, the Company's future growth as a result of its acquisition of
automobile dealerships will depend on its ability to obtain the requisite
Manufacturer approvals. There can be no assurance that Manufacturers will grant
such approvals. It is also possible that one or more Manufacturers might object
to ownership by one company of many of its franchises. For example, it is
currently the policy of Toyota to restrict any company from holding more than
seven Toyota or more than three Lexus franchises and to impose restrictions
based on the number of franchises held within certain geographic areas. Although
the Company has been to date able to obtain Manufacturer approvals for its
acquisitions on acceptable terms, there can be no assurance that it will be able
to do so in the future.
In certain cases, the Company may be required to file applications and
obtain clearances, under applicable federal antitrust laws before consummation
of an acquisition. These regulatory requirements may restrict or delay the
Company's acquisitions, and may increase the cost of completing such
transactions.
FINANCIAL RESOURCES AVAILABLE FOR ACQUISITIONS
The Company intends to finance acquisitions with cash on hand, through
issuances of equity or debt securities and through borrowings under credit
arrangements. The Company is currently negotiating new credit arrangements,
although none has been consummated and no assurance can be given that any
lending or credit arrangement will be consummated or that such arrangements will
adequately meet the Company's financing needs on acceptable terms. Similarly,
there is no assurance that the Company will be able to obtain additional debt or
equity securities financing. Using cash to complete acquisitions could
substantially limit the Company's operating or financial flexibility. Using
stock to consummate acquisitions may result in significant dilution of
stockholders' percentage interest in the Company, which dilution may be
prohibited by the Company's franchise agreements with Manufacturers. See
" -- Stock Ownership/Issuance Limits." If the Company is unable to obtain
financing on acceptable terms, the Company may be required to reduce
significantly the scope of its presently anticipated expansion, which could
materially adversely affect the Company's business. See "The Acquisitions,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources" and "Business -- Growth Strategy."
In addition, the Company is dependent to a significant extent on its
ability to finance the purchase of inventory, which in the automotive retail
industry involves significant sums of money in the form of floor plan financing.
As of June 30, 1997 on
13
a pro forma basis for the Acquisitions, the Company had approximately $140.6
million of floor plan indebtedness. Substantially all the assets of the
Company's dealerships are pledged to secure such indebtedness, which may impede
the Company's ability to borrow from other sources. Many floor plan lenders are
associated with Manufacturers with whom the Company has franchise agreements.
Consequently, deterioration of the Company's relationship with a Manufacturer
could adversely affect its relationship with the affiliated floor plan lender
and vice-versa. In addition, the Company must obtain new floor plan financing or
obtain consents to assume such financing in connection with its acquisition of
dealerships. See " -- Dependence on Automobile Manufacturers."
STOCK OWNERSHIP/ISSUANCE LIMITS
Standard automobile franchise agreements prohibit transfers of any
ownership interests of a dealership and its parent, such as Sonic, and,
therefore, often do not by their terms accommodate public trading of the capital
stock of a dealership or its parent. While, prior to the Offering and as a
condition thereto, all of the Manufacturers of which Company subsidiaries are
franchisees will have agreed to permit the Offering and trading in the Class A
Common Stock, a number of Manufacturers will continue to impose restrictions
upon the transferability of the Common Stock. Any transfer of shares of the
Company's Common Stock, including a transfer by members of the Smith Group, will
be outside the control of the Company and, if such transfer results in a change
in control of the Company, could result in the termination or non-renewal of one
or more of its franchise agreements. Moreover, these issuance limitations may
impede the Company's ability to raise capital through additional equity
offerings or to issue Common Stock as consideration for, and therefore, to
consummate, future acquisitions. Such restrictions also may prevent or deter
prospective acquirors from acquiring control of the Company and, therefore, may
adversely impact the Company's equity value. See " -- Financial Resources
Available for Acquisitions."
Upon consummation of the Offering, % of the Common Stock (on a fully
diluted basis) will be publicly owned (assuming full exercise of the
Underwriters' over-allotment option). The Company has contractual obligations to
provide "piggyback" registration rights to holders of Class B Common Stock to
register their shares under the Securities Act under certain circumstances.
Additionally, such shares will become in the future, eligible for sale pursuant
to the terms of Rule 144 under the Securities Act ("Rule 144"). See "Certain
Transactions -- Registration Rights Agreement" and "Shares Eligible for Future
Sale."
POTENTIAL CONFLICTS OF INTEREST
Bruton Smith, the Chairman and Chief Executive Officer of the Company, will
continue to serve as the Chairman and Chief Executive Officer of Speedway
Motorsports. Accordingly, the Company will compete with Speedway Motorsports for
the management time of Mr. Smith. Under his employment agreement with the
Company, Mr. Smith is required to devote approximately 50% of his business time
to the affairs of the Company. The remainder of his business time may be devoted
to other entities including Speedway Motorsports.
The Company has in the past and will likely in the future enter into
transactions with entities controlled by either Mr. Smith, Nelson Bowers or Ken
Marks or other affiliates of the Company. The Company believes that all of these
arrangements are favorable to the Company and were entered into on terms that,
taken as a whole, reflect arms'-length negotiations, although certain lease
provisions included in such transactions may be at below-market rates. Since no
independent appraisals evaluating these business transactions were obtained,
there can be no assurance that such transactions are on terms no less favorable
than could have been obtained from unaffiliated third parties. Certain of the
existing arrangements will continue after the Offering. Potential conflicts of
interest could also arise in the future between the Company and these affiliated
parties in connection with the enforcement, amendment or termination of these
arrangements. See "Certain Transactions." The Company anticipates renegotiating
its leases with all related parties at lease expiration at fair market rentals,
which may be higher than current rents. For further discussion of these related
party leases, see "Certain Transactions -- Certain Dealership Leases."
In addition to his interest and responsibilities with the Company, Nelson
Bowers has ownership interests in several non-Company entities, including a
Toyota dealership in Cleveland, Tennessee, an auto body shop in Chattanooga,
Tennessee and a used-car auction house. These enterprises are involved in
businesses that are related to, and that compete with, the businesses of the
Company. Pursuant to his employment agreement, Mr. Bowers is not permitted to
participate actively in the operation of those businesses and is only permitted
to maintain a passive investment in these enterprises.
Under Delaware Law generally, a corporate insider is precluded from acting
on a business opportunity in his individual capacity if that opportunity is one
which the corporation is financially able to undertake, is in the line of the
corporation's
14
business, is of practical advantage to the corporation and is one in which the
corporation has an interest or reasonable expectancy. Accordingly, corporate
insiders are generally required to engage in new business opportunities of the
Company only through the Company unless a majority of the Company's
disinterested directors decide under the standards discussed above that it is
not in the best interest of the Company to pursue such opportunities.
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") contains provisions providing that transactions between the
Company and its affiliates must be no less favorable to the Company than would
be available in corporate transactions in arms'-length dealing with an unrelated
third party. Moreover, any such transactions involving aggregate payments in
excess of $500,000 must be approved by a majority of the Company's directors and
a majority of the Company's independent directors. Otherwise, the Company must
obtain an opinion as to the financial fairness of the transaction to be issued
by an investment banking or appraisal firm of national standing.
LACK OF INDEPENDENT DIRECTORS
As of the date hereof, all of the members of the Company's Board of
Directors are employees and/or majority shareholders of the Company or
affiliates thereof. Although the Company intends to appoint at least two
independent directors following completion of the Offering, such directors will
not constitute a majority of the Board, and the Company's Board may not have a
majority of independent directors in the future. In the absence of a majority of
independent directors, the Company's executive officers, who also are principal
stockholders and directors, could establish policies and enter into transactions
without independent review and approval thereof, subject to certain restrictions
under the Certificate. In addition, although the Company intends to establish
audit and compensation committees which will consist entirely of outside
directors, until those committees are established, audit and compensation
policies could be approved without independent review. These and other
transactions could present the potential for a conflict of interest between the
Company and its stockholders generally and the controlling officers,
stockholders or directors. See "Management."
DEPENDENCE ON KEY PERSONNEL AND LIMITED MANAGEMENT AND PERSONNEL RESOURCES
The Company's success depends to a significant degree upon the continued
contributions of its management team (particularly its senior management) and
service and sales personnel. The loss of the services of one or more of these
key employees could have a material adverse effect on the Company. Although the
Company has employment agreements with Bruton Smith, Bryan Scott Smith, Nelson
Bowers, Theodore M. Wright, O. Ken Marks, Jr. and Jeffrey C. Rachor, the Company
will not have employment agreements in place with other key personnel. In
addition, as the Company expands it may need to hire additional managers. The
market for qualified employees in the industry and in the regions in which the
Company operates, particularly for general managers and sales and service
personnel, is highly competitive and may subject the Company to increased labor
costs in periods of low unemployment. The loss of the services of key employees
or the inability to attract additional qualified managers could have a material
adverse effect on the Company. In addition, the lack of qualified management or
employees employed by the Company's potential acquisition candidates may limit
the Company's ability to consummate future acquisitions. See "Business -- Growth
Strategy," "Business -- Competition" and "Management."
MATURE INDUSTRY; CYCLICAL AND LOCAL NATURE OF AUTOMOBILE SALES
The United States automobile dealership industry generally is considered a
mature industry in which minimal growth is expected in unit sales of new
vehicles. As a consequence, growth in the Company's revenues and earnings are
likely to be significantly affected by the Company's success in acquiring and
integrating dealerships and the pace and size of such acquisitions. See
" -- Risks Associated with Acquisitions" and "Business -- Growth Strategy."
The automobile industry is cyclical and historically has experienced
periodic downturns, characterized by oversupply and weak demand. Many factors
affect the industry, including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
credit availability. For the six months ended June 30, 1997, industry retail
sales were down 2% as a result of retail car sales declines of 5.3% and retail
truck sales gains of 2.4% from the same period in 1996. Future recessions may
have a material adverse effect on the Company's business.
Local economic, competitive and other conditions also affect the
performance of dealerships. The Sonic Dealerships are located in the Charlotte
and Houston markets. Pursuant to the Acquisitions, the Company is acquiring
dealerships in the metropolitan areas of Charlotte, Chattanooga, Nashville,
Tampa-Clearwater and Atlanta. While the Company intends to pursue acquisitions
outside of these markets, the Company expects that the majority of its
operations will continue to be concentrated in these areas for the foreseeable
future. As a result, the Company's results of operations will depend
substantially on general economic conditions and consumer spending habits in the
Southeast and, to a lesser extent, in the Houston market, as
15
well as various other factors, such as tax rates and state and local
regulations, specific to North Carolina, Tennessee, Florida, Texas, Georgia and
South Carolina. There can be no assurance that the Company will be able to
expand geographically, or that any such expansion will adequately insulate it
from the adverse effects of local or regional economic conditions. See
"Business -- Growth Strategy."
SEASONALITY
The Company's business is seasonal, with a disproportionate amount of sales
occurring in the second, third and fourth fiscal quarters. See "Managements's
Discussion and Analysis of Financial Condition and Results of Operations."
IMPORTED PRODUCTS
Certain motor vehicles retailed by the Company, as well as certain major
components of vehicles retailed by the Company, are of foreign origin.
Accordingly, the Company is subject to the import and export restrictions of
various jurisdictions and is dependent to some extent upon general economic
conditions in and political relations with a number of foreign countries,
particularly Japan. Additionally, fluctuations in currency exchange rates may
adversely affect the Company's sales of vehicles produced by foreign
manufacturers. Imports into the United States may also be adversely affected by
increased transportation costs.
GOVERNMENTAL REGULATIONS; ENVIRONMENTAL MATTERS
The Company is subject to a wide range of federal, state and local laws and
regulations, such as local licensing requirements, consumer protection laws and
regulations relating to gasoline storage, waste treatment and other
environmental matters. Future acquisitions by the Company may also be subject to
regulation, including antitrust reviews. The Company believes that it complies
in all material respects with all laws and regulations applicable to its
business, but future regulations may be more stringent and require the Company
to incur significant additional costs.
The Company's facilities and operations are subject to federal, state and
local laws and regulations relating to environmental protection and human health
and safety, including those governing wastewater discharges, air emissions, the
operation and removal of underground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials and the remediation
of contamination associated with such disposal. Certain of these laws and
regulations may impose joint and several liability on certain statutory classes
of persons for the costs of investigation or remediation of contaminated
properties, regardless of fault or the legality of the original disposal. These
persons include the present or former owner or operator of a contaminated
property and companies that generated, disposed of or arranged for the disposal
of hazardous substances found at the property.
Past and present business operations of the Company subject to such laws
and regulations include the use, storage handling and contracting for recycling
or disposal of hazardous or toxic substances or wastes, including
environmentally sensitive materials such as motor oil, waste motor oil and
filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner,
batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels.
The Company is subject to other laws and regulations as a result of the past or
present existence of underground storage tanks at many of the Company's
properties. The Company, like many of its competitors, has incurred, and will
continue to incur, capital and operating expenditures and other costs in
complying with such laws and regulations. In addition, soil and groundwater
contamination exist at certain of the Company's properties, and there can be no
assurance that other properties have not been contaminated by any leakage from
underground storage tanks or by any spillage or other releases of hazardous or
toxic substances or wastes.
Certain laws and regulations, including those governing air emissions and
underground storage tanks, have been amended so as to require compliance with
new or more stringent standards as of future dates. The Company cannot predict
what other environmental legislation or regulations will be enacted in the
future, how existing or future laws or regulations will be administered or
interpreted or what environmental conditions may be found to exist in the
future. Compliance with new or more stringent laws or regulations, stricter
interpretation of existing laws or the future discovery of environmental
conditions may require additional expenditures by the Company, some of which may
be material. See "Business -- Governmental Regulations and Environmental
Matters."
CONCENTRATION OF VOTING POWER AND ANTI-TAKEOVER PROVISIONS
The Common Stock is divided into two classes with different voting rights,
which allows for the maintenance of control of the Company by the holders of the
Class B Common Stock. Holders of Class A Common Stock are entitled to one vote
per share on all matters submitted to a vote of the stockholders of the Company.
Holders of Class B Common Stock are entitled
16
to ten votes per share on all matters, except that the Class B Common Stock is
entitled to only one vote per share with respect to any transaction proposed or
approved by the Company's Board of Directors, proposed by or on behalf of the
holders of the Class B Common Stock or their affiliates or as to which any
members of the Smith Group or any affiliate thereof has a material financial
interest (other than as a then existing stockholder of the Company) constituting
a (a) "going private" transaction (as defined herein), (b) disposition of
substantially all of the Company's assets, (c) transfer resulting in a change in
the nature of the Company's business, or (d) merger or consolidation in which
current holders of Common Stock would own less than 50% of the Common Stock
following such transaction. The two classes vote together as a single class on
all matters, except where class voting is required by Delaware Law, which
exception would apply, among other situations, to a vote on any proposal to
modify the voting rights of the Class B Common Stock. See "Description of
Capital Stock." Upon completion of this Offering (assuming the Underwriters'
over-allotment option is not exercised), the existing holders of Class B Common
Stock will have approximately % of the combined voting power of the Common
Stock (in those circumstances in which the Class B Common Stock has ten votes
per share) and % of the outstanding Common Stock. Accordingly such holders of
Class B Common Stock will effectively have the ability to elect all of the
directors of the Company and to control all other matters requiring the approval
of the Company's stockholders. In addition, the Company may issue additional
shares of Class B Common Stock to members of the Smith Group in the future for
fair market value. See "Principal Stockholders."
The disproportionate voting rights of the Class B Common Stock under the
above-mentioned circumstances could have a material adverse effect on the market
price of the Class A Common Stock. Such disproportionate voting rights may make
the Company a less attractive target for a takeover than it otherwise might be,
or render more difficult or discourage a merger proposal, a tender offer or a
proxy contest, even if such actions were favored by a majority of the holders of
the Class A Common Stock.
Certain provisions of the Certificate and the Company's Bylaws make it more
difficult for stockholders of the Company to effect certain corporate actions.
See "Description of Capital Stock -- Delaware Law, Certain Charter and Bylaw
Provisions and Certain Franchise Agreement Provisions." Under the Company's
Stock Option Plan, options outstanding thereunder become immediately exercisable
upon a change in control of the Company. See "Management -- Employment
Agreements" and " -- Stock Option Plan." The agreements, corporate documents and
laws described above, as well as provisions of the Company's franchise
agreements described in " -- Dependence on Automobile Manufacturers" above
permitting Manufacturers to terminate such agreements upon a change of control,
may have the effect of delaying or preventing a change in control of the Company
or preventing stockholders from realizing a premium on the sale of their shares
of Class A Common Stock upon an acquisition of the Company.
The Certificate authorizes the Board of Directors of the Company to issue
three million shares of "blank check" preferred stock with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights or preferences that could adversely affect the voting
power or other rights of the holders of the Class A Common Stock. In the event
of issuance, the preferred stock could be utilized, under certain circumstances,
as a method of discouraging, delaying, or preventing a change in control of the
Company. The issuance of preferred stock could also prevent stockholders from
realizing a premium upon the sale of their shares of Class A Common Stock upon
an acquisition of the Company. Although the Company has no present intention to
issue any shares of its preferred stock, there can be no assurance that the
Company will not do so in the future. See "Description of Capital Stock."
Additionally, the Company's Bylaws provide: (i) for a Board of Directors
divided into three classes serving staggered terms; (ii) that special meetings
of stockholders may be called only by the Chairman or by the Company's Secretary
or Assistant Secretary at the request in writing of a majority of the Board of
Directors; (iii) that no stockholder action may be taken by written consent; and
(iv) that stockholders seeking to bring business before an annual meeting of
stockholders, or to nominate candidates for election as directors at an annual
or a special meeting of stockholders must provide timely notice thereof in
writing. These provisions will impair the stockholders' ability to influence or
control the Company or to effect a change in control of the Company, and may
prevent stockholders from realizing a premium on the sale of their shares of
Class A Common Stock upon an acquisition of the Company. See "Description of
Capital Stock."
NO PRIOR PUBLIC MARKET FOR CLASS A COMMON STOCK AND POSSIBLE VOLATILITY OF STOCK
PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock. The Company intends to apply for a listing of the Class A Common
Stock on the NYSE. The initial public offering price of the Class A Common Stock
will be determined by negotiations among the Company and representatives of the
Underwriters. See "Underwriting." There can
17
be no assurance that the market price of the Class A Common Stock prevailing at
any time after this Offering will equal or exceed the initial public offering
price. Quarterly and annual operating results of the Company, variations between
such results and the results expected by investors and analysts, changes in
local or general economic conditions or developments affecting the automobile
industry, the Company or its competitors could cause the market price of the
Class A Common Stock to fluctuate substantially. As a result of these factors,
as well as other factors common to initial public offerings, the market price
could fluctuate substantially from the initial offering price. In addition, the
stock market has, from time to time, experienced extreme price and volume
fluctuations, which could adversely effect the market price for the Class A
Common Stock without regard to the financial performance of the Company.
DILUTION
Purchasers of Class A Common Stock in the Offering will experience
immediate and substantial dilution in the amount of $ per share in net
tangible book value per share from the initial offering price. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
The shares of Class B Common Stock owned beneficially by existing
stockholders of the Company and the shares of Class A Common Stock underlying
options granted by the Company under the Stock Option Plan and to an outstanding
warrant issued in connection with the Dyer Acquisition, are "restricted
securities" as defined in Rule 144 under the Securities Act, and may in the
future be resold in compliance with Rule 144. See "Management -- Stock Option
Plan" and "The Acquisitions -- The Dyer Acquisition." In addition, shares
of Common Stock constituting restricted securities are subject to certain
piggyback registration rights. See "Certain Transactions -- Registration Rights
Agreements." No prediction can be made as to the effect that resale of shares of
Common Stock, or the availability of shares of Common Stock for resale, will
have on the market price of the Class A Common Stock prevailing from time to
time. The resale of substantial amounts of Common Stock, or the perception that
such resales may occur, could materially and adversely affect prevailing market
prices for the Common Stock and the ability of the Company to raise equity
capital in the future. The Company has agreed not to issue, and all executive
officers of the Company and all owners of the Class B Common Stock have agreed
not to resell, any shares of Common Stock or other equity securities of the
Company for 180 days after the date of this Prospectus without the prior written
consent of the representatives of the Underwriters. See "Management -- Stock
Option Plan," "Shares Eligible for Future Sale" and "Underwriting."
18
THE REORGANIZATION
The Company was recently incorporated and capitalized with the stock of the
Sonic Dealerships, which have been under the control of Bruton Smith and which
are comprised of Town & Country Ford, Town & Country Toyota, Lone Star Ford,
Fort Mill Ford and Frontier Oldsmobile-Cadillac. As of June 30, 1997, the
Company effected the Reorganization pursuant to which: (i) the Company acquired
all of the Dealership Securities; and (ii) the Company issued Class B Common
Stock in exchange for the Dealership Securities. See "Certain
Transactions -- Other Transactions." Subsequent to the Reorganization, the
Company intends to convert from the LIFO Method of inventory accounting to the
industry standard FIFO Method of inventory accounting, conditioned upon the
closing of the Offering. As a result of the Reorganization and the FIFO
Conversion, the historical combined financial information included in this
Prospectus is not necessarily indicative of the results of operations, financial
position and cash flows of the Company in the future or of those which would
have resulted had the Reorganization and FIFO Conversion been in effect during
the periods presented in the Company's Combined and Consolidated Financial
Statements included elsewhere in this Prospectus. Upon election of the FIFO
Method, the Company will be required under generally accepted accounting
principles to restate its historical financial statements. The FIFO Conversion
will increase retained earnings by $7.5 million and will result in a tax
liability of approximately $5.5 million as of June 30, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
THE ACQUISITIONS
In the last four months, the Company consummated or signed definitive
agreements to purchase six additional dealerships or dealership groups for an
aggregate purchase price of approximately $100.7 million. These acquisitions
consist of the Ken Marks Acquisition, the Bowers Acquisition, the Lake Norman
Acquisition, the Dyer Acquisition, the Fort Mill Acquisition and the Williams
Acquisition.
The closing of the Offering is contingent upon the Company consummating the
Acquisitions. The Company intends to use the proceeds from the Offering to pay
the purchase prices of the Acquisitions and to repay indebtedness, if any,
incurred in connection with the Acquisitions. See "Use of Proceeds." In
addition, the Company intends to refinance all of the floor plan indebtedness of
the dealerships constituting the Acquisitions.
THE KEN MARKS ACQUISITION. Ken Marks Ford is located in Clearwater,
Florida. Ken Marks, Jr., together with the other stockholders of Ken Marks Ford,
and the Company entered into a definitive stock purchase agreement in July 1997,
providing for the acquisition by the Company of all of the outstanding stock of
Ken Marks Ford. Ken Marks Ford had retail sales of approximately 4,369 new and
1,764 used vehicles, had aggregate revenues of approximately $147.4 million in
1996, and, based on revenues, is one of the 20 largest Ford dealerships in the
United States. This acquisition further implements the Company's growth strategy
by adding a well-managed dealership with significant presence in a new market.
Ken Marks, Jr., with over 13 years of automotive retailing experience in central
Florida, will continue to serve as the Executive Manager of Ken Marks Ford and
will join the senior management team of the Company as the Regional Vice
President for Florida.
In the Ken Marks Acquisition, the Company has agreed to purchase all of the
outstanding capital stock of Ken Marks Ford for a total of approximately $25.0
million. At closing, the Company will pay the stockholders of Ken Marks Ford the
sum of approximately $25.0 million, less $0.5 million which will be deposited
into escrow for certain contingencies. The $25.0 million sum will be adjusted
downward to the extent that the net book value of Ken Marks Ford as of the
closing is less than approximately $5.1 million. At the closing, Ken Marks Ford
will lease its facilities from an affiliate of the original stockholders of Ken
Marks Ford. See "Business -- Facilities" and "Certain Transactions -- Certain
Dealership Leases." If the Company fails to perform its obligation to close the
Ken Marks Acquisition by October 15, 1997, it has agreed to pay a termination
fee.
THE BOWERS ACQUISITION. European Motors of Nashville (a BMW and Volkswagen
dealership), European Motors (a BMW and Volvo dealership), Jaguar of Chattanooga
(a Jaguar and Infiniti dealership), Cleveland Chrysler-Plymouth-Jeep-Eagle,
Nelson Bowers Dodge, Cleveland Village Imports (a Honda dealership), Saturn of
Chattanooga, Nelson Bowers Ford, L.P. and KIA of Chattanooga (a KIA and
Volkswagen dealership), (collectively, the "Bowers Dealerships") and the
Company, as well as the persons and entities controlling the Bowers Dealerships,
have entered into a definitive asset purchase agreement dated as of June 24,
1997. The Bowers Dealerships are located in the Chattanooga, Tennessee
metropolitan area, with the exception of European Motors of Nashville, which is
located in Nashville, Tennessee. The Bowers Dealerships had retail sales of
approximately 3,196 new and 2,388 used vehicles, and had aggregate revenues of
approximately $127.1 million in 1996. The Bowers Dealerships estimate that their
combined market share of total new vehicle unit sales in the Chattanooga
metropolitan market was approximately 12.6% for 1996. This acquisition serves
the Company's growth strategy by
19
adding a group of well-managed dealerships with a substantial portion of its
sales in luxury vehicles. Nelson Bowers, the Bowers Dealerships' chief
executive, and Jeffrey Rachor, their chief operating officer, have over 20 and
10 years of experience in the automotive industry, respectively. Mr. Bowers will
join the Company's senior management team as Executive Vice President. Mr.
Rachor will be the Company's Regional Vice President for Tennessee, Georgia,
Kentucky and Alabama.
The Company will acquire substantially all the Bowers Dealerships' assets,
excluding real property, and assume substantially all the liabilities associated
with the purchased assets. For the Bowers Acquisition, the Company agreed to pay
up to $33.5 million. At closing, the Company will pay $27.5 million in cash to
the sellers and will deposit $1.0 million into an escrow account, all subject to
certain potential downward adjustments based on the net book value of the
purchased assets and assumed liabilities as of the closing. The balance (up to
$5.0 million) of the purchase price will be evidenced by the Company's
promissory notes that will be payable in 28 equal quarterly installments and
will bear interest at NationsBank's prime rate less 0.5%. The sellers or their
affiliates will retain ownership of certain real property underlying some of the
dealerships and will lease such property to the Company. See
"Business -- Facilities" and "Certain Transactions -- Certain Dealership
Leases." In the event the Company fails to close the Bowers Acquisition by
October 31, 1997, it has agreed to pay a termination fee.
THE LAKE NORMAN ACQUISITION. Lake Norman Chrysler-Plymouth-Jeep-Eagle and
Lake Norman Dodge (collectively, the "Lake Norman Dealerships") are both located
in Cornelius, North Carolina approximately 20 miles north of Charlotte. The Lake
Norman Dealerships had retail sales of approximately 3,572 new and 2,320 used
vehicles, and had aggregate revenues of approximately $137.7 million in 1996.
The existing management of the Lake Norman Dealerships will continue with the
Company.
The Company will acquire substantially all the Lake Norman Dealerships'
assets, excluding real property, and assume substantially all of the sellers'
liabilities. For the Lake Norman Acquisition, the Company agreed in May 1997 to
pay up to $18.2 million. At closing, the Company will pay $17.7 million in cash
to the sellers and deposit $0.5 million into an escrow account. At the sellers'
option, the payment of the total purchase price may be made in two installments:
one at closing and one on January 1, 1998, the second being evidenced by a
Company promissory note. The purchase price will be adjusted downward based on
the net book value of the purchased assets and assumed liabilities as of the
closing date, to be determined after the closing. The sellers of the assets will
retain ownership of the three tracts of real property underlying the dealerships
and will lease such property to the Company. See "Business -- Facilities." In
the event the Company fails to close the Lake Norman Acquisition by September
30, 1997, it has agreed to pay a termination fee secured by a letter of credit.
THE DYER ACQUISITION. Dyer & Dyer, Inc. ("Dyer Volvo"), which is located in
Atlanta, Georgia, is the largest Volvo dealership in the United States in terms
of retail unit sales. For 1996, Dyer Volvo had retail sales of approximately
1,284 new and 1,493 used vehicles, and had aggregate revenues of approximately
$72.6 million. This acquisition is a significant step in the Company's growth
strategy in that it adds a large, well-managed dealership in a new geographic
market and increases the Company's presence in the luxury car market. Richard
Dyer, who has over 25 years in the automotive retailing industry, will continue
as the Company's Executive Manager of Dyer Volvo.
The Company will acquire all of the operating assets of Dyer Volvo for
$18.0 million plus assumption of substantially all of Dyer Volvo's existing
recorded liabilities and obligations. The $18.0 million purchase price is
subject to adjustment in the event that net book value of the purchased assets,
less assumed liabilities, is more or less than $10.5 million as of the date of
the closing. At the closing, the Company will pay $17.0 million in cash to the
seller and deposit $1.0 million into an escrow account. In addition, the Company
will issue a warrant to Richard Dyer to purchase 0.375% of the Company's
outstanding shares of Common Stock (in the form of Class A Common Stock) after
consummation of the Offering ( shares if the Underwriters' over-allotment
option is exercised in full) pursuant to his employment agreement with the
Company at a per share exercise price equal to the initial public offering per
share price (the "Dyer Warrant"). The Dyer Warrant is exercisable immediately
and will expire five years after the consummation of the Dyer Acquisition. The
Dyer Warrant is in addition to stock options that are to be granted to Richard
Dyer pursuant to the Company's Stock Option Plan. Dyer Volvo leases its
dealership premises and the Company will assume Dyer Volvo's obligations under
the leases at the closing. See "Business -- Facilities." The closing of the Dyer
acquisition will occur no later than November 1, 1997. If the Company fails to
perform its obligation to close by that date, it has agreed to pay a termination
fee.
THE FORT MILL ACQUISITION. Fort Mill Chrysler-Plymouth-Dodge is located in
Fort Mill, South Carolina, which is a part of the Charlotte market. In 1996,
Jeff Boyd Chrysler-Plymouth-Dodge (the predecessor to Fort Mill
Chrysler-Plymouth-Dodge) had retail sales of approximately 632 new and 842 used
vehicles, and had total revenues of $20.3 million.
The Company purchased in June 1997 certain dealership assets, excluding
real property, of Jeff Boyd Chrysler-
20
Plymouth-Dodge for a total purchase price of approximately $3.7 million in cash
and assumed the floor plan liabilities of the sellers. Of the $3.7 million
purchase price paid, $3.5 million was advanced to the Company by Bruton Smith
and is to be repaid with proceeds from the Offering. See "Certain
Transactions -- The Smith Advance." An affiliate of Jeff Boyd
Chrysler-Plymouth-Dodge will retain ownership of the real property underlying
the dealership and will lease the property to the Company. See
"Business -- Facilities."
THE WILLIAMS ACQUISITION. Williams Motors, Inc.
(Chrysler-Plymouth-Jeep-Eagle dealerships) is located in Rock Hill, South
Carolina, approximately 35 miles south of Charlotte. In 1996, Williams Motors
had retail sales of approximately 248 new and 280 used vehicles, and had total
revenues of $9.6 million.
The Company has entered into a definitive asset purchase agreement to
acquire substantially all of the operating assets of Williams Motors (excluding
primarily used car inventory and real estate) for up to $1.8 million plus
assumption of floor plan indebtedness to Chrysler Credit Corporation. The exact
price will depend upon the net book value of the purchased assets, less assumed
liabilities, as of the closing. The Company will also lease the dealership
premises from the sellers for one to five years, at the Company's option. See
"Business -- Facilities."
FUTURE ACQUISITIONS. The Company intends to pursue acquisitions in the
future that will be financed with cash or debt or equity financing or a
combination thereof. Although the Company has identified and has held
preliminary discussions with several potential acquisition candidates, at this
time, the Company has no agreements to effect any such acquisitions other than
the Acquisitions. There is no assurance that the Company will consummate any
future acquisition, that they will be on favorable terms to the Company or that
financing for such acquisitions will be available. All future acquisitions by
the Company will be contingent upon the consent of the applicable manufacturer.
Although no assurance can be given that any such consents will be obtained, the
Company historically has not been denied manufacturer approval of acquisitions.
The Company is currently negotiating with several lending institutions for
credit arrangements to finance acquisitions and general corporate purposes,
although there can be no assurance that the Company will obtain any such
financing. See "Risk Factors -- Risks Associated with Acquisitions" and
" -- Financial Resources Available for Acquisitions," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
21
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Class A Common
Stock offered hereby are estimated to be approximately $ million ($
million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $ per share (the midpoint of
the range of the initial public offering price set forth on the cover page of
this Prospectus) and after deducting the underwriting discount and estimated
expenses of the Offering. The net proceeds will be used to pay the purchase
price for the Acquisitions or repay short-term borrowings incurred to finance
any of the Acquisitions that close before the consummation of the Offering,
including approximately $3.5 million to repay a loan advanced by Bruton Smith in
connection with the Acquisitions, which bears interest at 3.83% per annum. See
"The Acquisitions" and "Certain Transactions -- The Smith Advance."
DIVIDEND POLICY
The Company intends to retain all of its earnings to finance the growth and
development of its business, including future acquisitions, and does not
anticipate paying any cash dividends on its Common Stock for the foreseeable
future. Any future change in the Company's dividend policy will be made at the
discretion of the Board of Directors of the Company and will depend upon the
Company's operating results, financial condition, capital requirements, general
business conditions and such other factors as the Board of Directors deems
relevant. In addition, any lending arrangement negotiated by the Company is
expected to include limitations on the ability of the Company to pay dividends
without the consent of the lender. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Capital Stock."
22
CAPITALIZATION
The following table sets forth, as of June 30, 1997, the capitalization of
the Company (a) on an actual basis, including the Reorganization which is
effective as of June 30, 1997, (b) on a pro forma basis, as adjusted to reflect
the FIFO Conversion and the Acquisitions, and (c) on a pro forma basis,
additionally adjusted to reflect the Offering and the application of the
estimated net proceeds to be received by the Company. See "Use of Proceeds."
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the unaudited Pro
Forma Combined and Consolidated Financial Statements of the Company and the
related notes thereto included elsewhere in this Prospectus.
JUNE 30, 1997
PRO FORMA
FOR THE
FIFO CONVERSION PRO FORMA
AND THE FOR THE
ACTUAL ACQUISITIONS(1) OFFERING(2)
(DOLLARS IN THOUSANDS)
Short-term debt:
Notes payable -- floor plan.................................................... $67,855 $144,490 $ 144,490
Current maturities of long-term debt........................................... 487 1,286 1,286
Total short-term debt....................................................... $68,342 $145,776 $ 145,776
Long-term debt................................................................... $ 5,137 $ 10,422 $ 10,422
Stockholders' equity:
Preferred Stock, $.10 par value, 3,000,000 shares authorized; no shares issued
and outstanding............................................................. -- -- --
Class A Common Stock, $.01 par value, 50,000,000 shares authorized; no shares
issued and outstanding, actual; shares issued and outstanding, as
adjusted (3)(4)............................................................. -- --
Class B Common Stock, $.01 par value, 15,000,000 shares authorized; 10,000
shares issued and outstanding, actual; shares issued and outstanding,
as adjusted (5)............................................................. -- --
Additional paid-in capital..................................................... 16,604 16,604 116,604
Retained earnings and members' and partners' equity............................ 6,486 14,566 14,566
Due from Affiliates............................................................ (2,633) (2,633) (2,633)
Unrealized loss on marketable equity securities............................. (97) (97) (97)
Total stockholders' equity.................................................. 20,360 28,440 128,440
Total capitalization...................................................... $25,497 $ 38,862 $ 138,862
(1) Adjusted to give pro forma effect to the FIFO Conversion and the
Acquisitions. See "Pro Forma Combined and Consolidated Financial Data."
(2) Adjusted to give pro forma effect to the FIFO Conversion, the Acquisitions
and the Offering.
(3) shares if the Underwriters' overallotment option is exercised in
full. Excludes shares of Class A Common Stock reserved for future issuance
under the Company's Stock Option Plan (including up to shares of
Class A Common Stock reserved for issuance upon exercise of options granted
to date pursuant to the Stock Option Plan) and excludes shares of
Class A Common Stock ( shares if the Underwriters' over-allotment
option is exercised in full) reserved for issuance under the Dyer Warrant.
See "The Acquisitions -- The Dyer Acquisition" and "Management -- Stock
Option Plan."
(4) The number of shares of Class A Common Stock offered hereby, may be reduced
to the extent the Company elects to finance a portion of the purchase price
of the Acquisitions through borrowings under a revolving credit facility or
other form of indebtedness. In such event, pro forma debt will increase by
the amount of such borrowings.
(5) Actual shares of Class B Common Stock do not include the effect of the Stock
Split (which will be effected in the form of a stock dividend).
23
DILUTION
The pro forma net tangible book value of the Company (after giving effect
to the FIFO Conversion and the Acquisitions) as of June 30, 1997 was $ per
share of Common Stock. Pro forma net tangible book value per share is determined
by dividing the pro forma tangible net worth of the Company (pro forma total
assets less goodwill less pro forma total liabilities) by the total number of
outstanding shares of Common Stock. After giving effect to the sale of the
shares of Class A Common Stock offered hereby and the receipt of an assumed
$ million of net proceeds from the Offering (based on an assumed initial
public offering price of $ per share and net of the underwriting discounts
and estimated offering expenses), pro forma net tangible book value of the
Company at June 30, 1997 would have been $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to the new
investors purchasing Class A Common Stock in the Offering. The following table
illustrates the per share dilution:
Assumed initial public offering price per share................................................. $
Pro forma net tangible book value per share before giving effect to the Offering..............
Increase in pro forma net tangible book value per share attributable to the Offering..........
Pro forma net tangible book value per share after giving effect to the Offering.................
Dilution per share to new investors............................................................. $
The following table sets forth, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid to the
Company by existing stockholders and new investors purchasing shares from the
Company in the Offering (before deducting underwriting discounts and commissions
and estimated offering expenses):
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
Existing stockholders (1)............................................... % $ % $
New investors (2).......................................................
Total.............................................................. 100.0% $ 100.0%
(1) Does not reflect the possible exercise of options to purchase
shares of Class A Common Stock reserved for issuance under the Company's
Stock Option Plan including options to purchase shares of Class A
Common Stock that will be granted immediately before the completion of the
Offering with an exercise price equal to the initial public offering price
and the possible exercise of the Dyer Warrant to purchase shares of
Class A Common Stock. See "Management -- Stock Option Plan" and "Certain
Transactions."
(2) Assumes that the Underwriters' over-allotment option is not exercised. Sales
pursuant to the exercise by the Underwriters of the over-allotment option
will cause the total number of shares purchased by new investors, total
consideration paid by new investors, percent of total consideration paid by
new investors and average price per share for all investors to increase to
, $ , % and $ , respectively.
24
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
The selected combined and consolidated statement of operations data for the
years ended December 31, 1994, 1995 and 1996 and the selected combined balance
sheet data as of December 31, 1995 and 1996 are derived from the Company's
audited financial statements, which are included elsewhere in this Prospectus.
The selected combined and consolidated statement of operations data for the
years ended December 31, 1992 and 1993 and the selected combined and
consolidated balance sheet data as of December 31, 1992, 1993 and 1994 are
derived from the Company's unaudited financial statements, which are not
included in this Prospectus. The selected combined and consolidated results of
operations data for the six months ended June 30, 1996 and 1997, and the
selected combined and consolidated balance sheet data at June 30, 1997, are
derived from the unaudited financial statements of the Company, which are
included elsewhere in this Prospectus. In the opinion of management, these
unaudited financial statements reflect all adjustments necessary for a fair
presentation of its results of operations and financial condition. All such
adjustments are of a normal recurring nature. The results of operations for an
interim period are not necessarily indicative of results that may be expected
for a full year or any other interim period. This selected combined and
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Combined and Consolidated Financial Statements and related notes included
elsewhere in this Prospectus.
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1992 1993 1994 1995 1996(1)(5) 1996(1)(5) 1997(2)(5)
(IN THOUSANDS)
COMBINED AND CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Vehicle sales......................... $171,065 $203,630 $227,960 $267,308 $326,842 $164,333 $185,078
Parts, service and collision repair... 24,543 30,337 33,984 35,860 42,644 21,005 22,906
Finance and insurance................. 3,743 3,711 5,181 7,813 7,118 4,277 4,763
Total revenues..................... 199,351 237,678 267,125 310,981 376,604 189,615 212,747
Cost of sales........................... 174,503 210,046 234,461 272,179 332,407 167,191 188,368
Gross profit(3)......................... 24,848 27,632 32,644 38,802 44,197 22,424 24,379
Selling, general and administrative
expenses.............................. 20,251 22,738 24,632 29,343 33,678 16,590 18,413
Depreciation and amortization........... 682 788 838 832 1,076 360 396
Operating income........................ 3,915 4,106 7,194 8,627 9,443 5,474 5,570
Interest expense, floor plan............ 2,215 2,743 3,001 4,505 5,968 2,801 3,018
Interest expense, other................. 290 263 443 436 433 184 269
Other income............................ 1,360 613 609 449 619 369 274
Income before income taxes and minority
interest(3)........................... 2,770 1,713 4,359 4,135 3,661 2,858 2,557
Provision for income taxes.............. 108 107 1,560 1,675 1,400 1,093 937
Income before minority interest......... 2,662 1,606 2,799 2,460 2,261 1,765 1,620
Minority interest in (earnings) loss of
subsidiary............................ 31 22 15 22 114 41 47
Net income(4)........................... $ 2,693 $ 1,628 $ 2,784 $ 2,438 $ 2,147 $ 1,724 $ 1,573
COMBINED AND CONSOLIDATED BALANCE SHEET
DATA:
Working capital (deficit)............... $ (1,985) $ 160 $ 2,327 $ 5,920 $ 6,201 $ 8,405 $ 4,287
Total assets............................ 40,656 45,448 58,142 67,242 94,930 87,236 106,859
Long-term debt.......................... 3,904 4,142 3,773 3,561 5,286 4,825 5,137
Total liabilities....................... 40,035 42,905 52,602 57,980 79,181 68,719 86,499
Minority interest....................... 139 161 177 200 314 240 --
Stockholders' equity(3)................. 482 2,382 5,166 9,062 15,749 18,517 20,360
(1) The statement of operations data includes the results of Fort Mill Ford,
Inc. from the date of acquisition, February 1, 1996.
(2) The statement of operations data for the six months ended June 30, 1997
includes the results of Fort Mill Chrysler-Plymouth-Dodge, Inc. from the
date of acquisition, June 3, 1997.
(FOOTNOTES CONTINUED ON NEXT PAGE)
25
(3) The Company currently utilizes the LIFO Method of inventory accounting.
See Note 3 to the Company's Combined and Consolidated Financial
Statements. The Company intends to file an election with the IRS to
convert, effective January 1, 1997, to the FIFO Method of inventory
accounting and report its earnings for tax purposes and in its
financial statements on the FIFO Method. If the Company had previously
utilized the FIFO Method, gross profit and income before income taxes
and minority interest for the periods shown in the table, and
stockholders' equity as of December 31, 1996 and June 30, 1997, would
have been as follows:
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1992 1993 1994 1995 1996 1996 1997
(IN THOUSANDS)
Gross profit............................ $28,192 $29,034 $34,114 $40,103 $45,571 $22,423 $27,434
Income before income taxes and minority
interest.............................. 2,560 3,102 5,809 5,436 5,021 2,858 2,612
AS OF AS OF
DECEMBER 31, 1996 JUNE 30, 1997
(IN THOUSANDS)
Stockholders' equity............................................................... $18,215 $20,360
(4) Historical net income per share is not presented, as the historical
capital structure of the Company prior to the Offering is not
comparable with the capital structure that will exist after the
Offering.
(5) The Company acquired Fort Mill Ford, Inc. and Fort Mill
Chrysler-Plymouth-Dodge in February 1996 and in June 1997,
respectively. Both of these acquisitions were accounted for using the
purchase method of accounting. As a result, the Selected Combined and
Consolidated Financial Data below does not include the results of
operations of these dealerships prior to the date they were acquired by
the Company. Accordingly, the actual historical data for periods after
the acquisition may not be comparable to data presented for periods
prior to the acquisition of Fort Mill Ford and Fort Mill
Chrysler-Plymouth-Dodge.
26
PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma combined and consolidated statements of
operations for the year ended December 31, 1996 and for the six months ended
June 30, 1997 reflect the historical accounts of the Company for those periods,
adjusted to give pro forma effect to the Reorganization, the FIFO Conversion,
the Acquisitions and the Offering, as if these events had occurred at January 1,
1996. The following unaudited pro forma consolidated balance sheet as of June
30, 1997 reflects the historical accounts of the Company as of that date
adjusted to give pro forma effect to the FIFO Conversion, the Acquisitions and
the Offering as if these events had occurred on June 30, 1997. The Acquisitions
will be consummated on or before the closing of the Offering and are conditions
precedent to the closing of the Offering. The Company intends to convert to the
FIFO Method of inventory accounting conditioned and effective upon the closing
of the Offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
The pro forma combined and consolidated financial data and accompanying
notes should be read in conjunction with the Combined and Consolidated Financial
Statements and related notes of the Company as well as the financial statements
and related notes of the Bowers Dealerships, the Lake Norman Dealerships, Ken
Marks Ford and Dyer Volvo, all of which are included elsewhere in this
Prospectus. The Company believes that the assumptions used in the following
statements provide a reasonable basis on which to present the pro forma
financial data. The pro forma combined financial data is provided for
informational purposes only and should not be construed to be indicative of the
Company's financial condition or results of operations had the transactions and
events described above been consummated on the dates assumed, and are not
intended to project the Company's financial condition on any future date or its
results of operation for any future period.
27
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
COMPANY
PRO FORMA
ADJUSTMENTS THE ACQUISITIONS
FOR THE PRO FORMA
REORGANI- ADJUSTMENTS FOR
ZATION AND BOWERS THE
THE FIFO DEALERSHIPS LAKE NORMAN KEN MARKS DYER ACQUISITIONS
ACTUAL (1) CONVERSION PRO FORMA (2) DEALERSHIPS FORD (3) VOLVO (4)(5)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Vehicle sales............... $ 326,842 $ $ 159,417 $ 124,539 $ 130,859 $60,871 $
Parts, service and collision
repair.................... 42,644 18,579 9,543 14,224 11,163 (55)(11)
Finance and insurance....... 7,118 3,888 3,617 2,317 543
Total revenues............ 376,604 181,884 137,699 147,400 72,577 (55)
Cost of sales................. 332,407 (1,360)(8) 156,910 121,806 128,850 62,547 (545)(12)
(31)(11)
Gross profit.................. 44,197 1,360 24,974 15,893 18,550 10,030 522
Selling, general and
administrative expenses..... 33,677 20,366 14,215 16,190 6,921 (1,333)(13)
(3,355)(14)
127 (11)
(527)(15)
Depreciation and
amortization................ 1,076 75(9) 846 89 94 202 (8)(11)
(193)(16)
1,654(17)
63(15)
Operating income.............. 9,444 1,285 3,762 1,589 2,266 2,907 3,420
Interest expense, floor
plan(6)..................... 5,968 1,545 1,553 2,054 373
Interest expense, other....... 433 383 49 400(18)
(292)(15)
Other income.................. 618 742 258 1,064 453
Income before income taxes and
minority interest........... 3,661 1,285 2,576 245 1,276 2,987 3,312
Provision for income taxes.... 1,400 513(10) 61 546 955 (1,401) (9)
(2,254)(20)
(61)(21)
955(22)
Income before minority
interest.................... 2,261 772 2,515 245 730 2,032 550
Minority interest in earnings
of subsidiary............... 114 114(9)
Net income.................... $ 2,147 $ 886 $ 2,515 $ 245 $ 730 $ 2,032 $ 550
Net income per share (7)......
Weighted average shares
outstanding.................
PRO FORMA
FOR THE
REORGANI-
ZATION, FIFO
CONVERSION,
PRO FORMA THE
ADJUSTMENTS ACQUISITIONS
FOR THE AND THE
OFFERING OFFERING
Revenues:
Vehicle sales............... $ $802,528
Parts, service and collision
repair.................... 96,098
Finance and insurance....... 17,483
Total revenues............ 916,109
Cost of sales................. 800,583
Gross profit.................. 115,526
Selling, general and
administrative expenses..... 380(23) 87,461
Depreciation and
amortization................ 3,772
Operating income.............. (380) 24,293
Interest expense, floor
plan(6)..................... 11,493
Interest expense, other....... 973
Other income.................. 3,135
Income before income taxes and
minority interest........... (380) 14,962
Provision for income taxes.... (152) (24) (6,085)
Income before minority
interest.................... (228) 8,877
Minority interest in earnings
of subsidiary...............
Net income.................... $ (228) $ 8,877
Net income per share (7)...... $ .89
Weighted average shares
outstanding................. 10,000
28
PRO FORMA COMBINED AND CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
COMPANY
PRO FORMA
ADJUSTMENTS THE ACQUISITIONS
FOR THE PRO FORMA
REORGANI- ADJUSTMENTS
ZATION AND BOWERS FOR THE
THE FIFO DEALERSHIPS LAKE NORMAN KEN MARKS ACQUISITIONS
ACTUAL(1) CONVERSION PRO FORMA (2) DEALERSHIPS FORD (3) DYER VOLVO (4)(5)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Vehicle sales................ $ 185,077 $ $75,874 $69,798 $ 64,698 $31,373 $
Parts, service and collision
repair..................... 22,907 12,184 5,321 5,999 5,960 (1,246)(11)
Finance and insurance........ 4,763 1,910 1,950 1,029 129
Total revenues............. 212,747 89,968 77,069 71,726 37,462 (1,246)
Cost of sales.................. 188,367 54(8) 76,541 68,272 63,402 32,377 (372)(12)
(743)(11)
Gross profit................... 24,380 (54) 13,427 8,797 8,324 5,085 (131)
Selling, general and
administrative expenses.... 18,413 10,358 6,937 7,547 3,498 (1,421)(13)
(1,743)(14)
(324)(11)
263(15)
Depreciation and
amortization............... 397 36(9) 445 47 47 151 (45)(11)
(100)(16)
827(17)
(38)(15)
Operating income............... 5,570 (90) 2,624 1,813 730 1,436 2,450
Interest expense, floor plan
(6).......................... 3,018 969 1,185 925 276
Interest expense, other........ 269 211 68 200(18)
(165)(15)
Other income................... 274 489 176 550 247
Income before income taxes and
minority interest............ 2,557 (90) 1,933 736 355 1,407 2,415
Provision for income taxes..... 937 (36)(10) 31 147 894(19)
1,591(20)
83(21)
Income before minority
interest..................... 1,620 (54) 1,902 736 208 1,407 (153)
Minority interest in earnings
of subsidiary................ 47 (47)(9)
Net income..................... $ 1,573 $ (7) $1,902 $ 736 $ 208 $1,407 $ (153)
Net income per share (7).......
Weighted average shares
outstanding..................
PRO FORMA FOR THE
REORGANI-
PRO FORMA ZATION, FIFO
ADJUSTMENTS CONVERSION, THE
FOR THE ACQUISITIONS AND THE
OFFERING OFFERING
Revenues:
Vehicle sales................ $ $426,820
Parts, service and collision
repair..................... 51,125
Finance and insurance........ 9,781
Total revenues............. 487,726
Cost of sales.................. 427,898
Gross profit................... 59,828
Selling, general and
administrative expenses.... -- (43,718)
190(23)
Depreciation and
amortization............... (1,767)
Operating income............... (190) 14,343
Interest expense, floor plan
(6).......................... 6,373
Interest expense, other........ -- 583
Other income................... 1,736
Income before income taxes and
minority interest............ (190) 9,123
Provision for income taxes..... (76) (24) (3,571)
Income before minority
interest..................... (114) 5,552
Minority interest in earnings
of subsidiary................
Net income..................... $ (114) $ 5,552
Net income per share (7)....... $
Weighted average shares
outstanding..................
(1) The actual combined statement of operations data for the Company includes
the results of Fort Mill Ford from February 1, 1996, the effective date of
its acquisition. Pro forma adjustments have not been presented to include
the results of operations for Fort Mill Ford for the one month period ended
February 1, 1996 because management believes such results are not material.
The actual consolidated statement of operations data for the six months
ended June 30, 1997 include the results of Fort Mill
Chrysler-Plymouth-Dodge from June 3, 1997, the date of its acquisition.
(FOOTNOTES CONTINUED ON NEXT PAGE)
29
(2) During 1996 and 1997, Nelson Bowers acquired three automobile dealerships
whose operating results, from their respective dates of acquistion, are
included in the historical combined and consolidated statement of
operations in the table below. The results of operations of one of the
acquisitions, European Motors of Chattanooga, for the period from January
1, 1996 to May 1, 1996 (the date of its acquisition), have been excluded
because the former owner of this dealership would not provide the Company
with this information. The Company believes the exclusion of such results
is not material to the Bowers Dealerships pro forma combined statements of
operations. The following table adjusts the historical combined and
consolidated statements of operations to include two of the acquirees as if
two of the acquisitions, European Motors of Nashville and Nelson Bowers
Dodge, had occurred on January 1, 1996.
YEAR ENDED DECEMBER 31, 1996
BOWERS EUROPEAN NELSON BOWERS
DEALERSHIPS(A) MOTORS OF BOWERS PRO FORMA DEALERSHIPS
(HISTORICAL) NASHVILLE(B) DODGE(B) ADJUSTMENTS (PRO FORMA)
(IN THOUSANDS)
Revenues:
Vehicle sales............................................. $113,363 $ 21,827 $24,227 $ $159,417
Parts, service and collision repair....................... 10,405 4,740 3,434 18,579
Finance and insurance..................................... 3,348 199 341 3,888
Total revenues.......................................... 127,116 26,766 28,002 181,884
Cost of sales............................................... 109,373 23,054 24,483 156,910
Gross profit................................................ 17,743 3,712 3,519 24,974
Selling, general and administrative expenses................ 14,887 2,636 2,843 20,366
Depreciation and amortization............................... 515 86 106 139(d) 846
Operating income............................................ 2,341 990 570 139 3,762
Interest expense, floor plan................................ 1,288 208 49 1,545
Interest expense, other..................................... 380 -- 3 383
Other income................................................ 158 166 418 742
Income before income taxes and minority interest............ 831 948 936 139 2,576
Provision for income taxes.................................. 61 61
Net Income.................................................. $ 770 $ 948 $ 936 $ 139 $ 2,515
SIX MONTHS ENDED JUNE 30, 1997
BOWERS NELSON BOWERS
DEALERSHIPS(A) BOWERS PRO FORMA DEALERSHIPS
(HISTORICAL) DODGE(C) ADJUSTMENTS (PRO FORMA)
(IN THOUSANDS)
Revenues:
Vehicle sales.......................................................... $ 72,605 $ 3,269 $ $ 75,874
Parts, service and collision repair.................................... 11,597 587 12,184
Finance and insurance.................................................. 1,868 42 1,910
Total revenues....................................................... 86,070 3,898 89,967
Cost of sales............................................................ 73,096 3,445 76,541
Gross profit............................................................. 12,974 453 13,426
Selling, general and administrative expenses............................. 9,908 450 10,358
Depreciation and amortization............................................ 416 14 15(d) 445
Operating income......................................................... 2,650 (11) 15 2,624
Interest expense, floor plan............................................. 965 4 969
Interest expense, other.................................................. 211 -- 211
Other income............................................................. 452 37 489
Income before income taxes and minority interest......................... 1,926 22 15 1,933
Provision for income taxes............................................... 31 31
Net Income............................................................... $ 1,895 $ 22 $ 15 $ 1,902
(a) The historical statement of operations data for the Bowers Dealerships
includes the results of Nelson Bowers Dodge from March 1, 1997, the
date of its acquisition by the owners of the Bowers Dealerships. Such
statement also includes the results of European Motors of Nashville
and European Motors of Chattanooga from October 1, 1996 and May 1,
1996, respectively, which were acquired by the owners of the Bowers
Dealerships on those dates.
(FOOTNOTES CONTINUED ON NEXT PAGE)
30
(b) Reflects the results of operations of (i) Nelson Bowers Dodge for the
year ended December 31, 1996; and (ii) European Motors of Nashville
for the period from January 1, 1996 to October 1, 1996, the date of
its acquisition by the owners of the Bowers Dealerships. Such data was
obtained from monthly financial statements prepared by the dealership
as required by the manufacturers.
(c) Reflects the results of operations of (i) Nelson Bowers Dodge for the
period from January 1, 1997 to March 1, 1997, the date of its
acquisition by the owners of the Bowers Dealerships. Such data was
obtained from monthly financial statements prepared by the dealership
as required by the manufacturers.
(d) Reflects the amortization of goodwill resulting from the acquisition
of Nelson Bowers Dodge, European Motors of Nashville and European
Motors of Chattanooga over an assumed amortization period of 40 years
for the period not included in the historical financial statements,
assuming that such acquisitions were consummated on January 1, 1996.
(3) Ken Marks Ford's fiscal year ends on April 30 of each year. Accordingly,
the Statement of Operations data for Ken Marks Ford for the year ended
December 31, 1996 was derived by adjusting the data for the year ended
April 30, 1997 to include results from January 1, 1996 through April 30,
1996, and exclude results from January 1, 1997 through April 30, 1997. The
Statement of Operations data for the six months ended June 30, 1997 was
similarly derived by adjusting the historical financial statements for the
year ended April 30, 1997 to include results from May 1, 1997 through June
30, 1997, and excludes results from May 1, 1996 through December 31, 1996.
(4) The Company has excluded (i) the results of operations of Fort Mill
Chrysler-Plymouth-Dodge for the year ended December 31, 1996 and the period
ended June 3, 1997 and (ii) the historical results of operations and
related pro forma adjustments related to the Williams Acquisition because
management believes such results and adjustments are not material to the
Pro Forma Combined and Consolidated Statement of Operations.
(5) Prior to the Company's acquisition of the Lake Norman Dealerships, its
former owners directed $550,000 and $150,000 in contributions to charitable
organizations during the year ended December 31, 1996 and the six months
ended June 30, 1997, respectively. It is the Company's intention to
maintain the level of charitable contributions already reflected in the
Company's historical combined financial statements. Although no pro forma
adjustment to eliminate this expense has been included in the accompanying
Pro Forma Combined and Consolidated Statements of Operations, the Company
believes disclosure and consideration of the Lake Norman Dealerships
contributions is appropriate to understand the continuing impact on the
Company's results of operations of the acquisition of the Lake Norman
Dealerships.
(6) The Company intends to raise sufficient funds in the Offering to fund the
Acquisitions. In the event that the Company determines not to raise
sufficient funds in the Offering to acquire the dealerships being acquired
in the Acquisitions, the Company would incur additional indebtedness and
the related interest expense. The Pro Forma Combined and Consolidated
Statements of Operations do not give effect to any additional interest
expense that would be incurred.
(7) Pro forma net income per share is based upon the assumption that
shares of Class A Common Stock are outstanding after the
Offering. This amount represents shares of Class A Common Stock
to be issued in the Offering, and shares of Common Stock owned by
the Company's stockholders immediately following the Reorganization and the
Acquisitions. See "Principal Stockholders" and Note 1 to the Company's
Combined and Consolidated Financial Statements included elsewhere in this
Prospectus.
(8) Reflects the conversion from the LIFO Method of inventory accounting to the
FIFO Method of inventory accounting. The Company intends to convert to the
FIFO Method conditioned and effective upon the closing of the Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
(9) Reflects the elimination of minority interest in earnings as a result of
the acquisition of the 31% minority ownership interest in Town & Country
Toyota, Inc. for $3.2 million of Class B Common Stock in connection with
the Reorganization, and the amortization of approximately $2.8 million in
related goodwill over 40 years arising from such acquisition.
(10) Reflects the net increase in the provision for income taxes due to the
conversion to the FIFO Method and the amortization of goodwill related to
the acquisition of the minority interest pursuant to the Reorganization,
calculated at the effective rate of 39.9%.
(11) Reflects the elimination of the operations of one of the Bowers
Dealerships' collision repair businesses that will not be acquired by the
Company.
(12) Adjustment reflects the conversion from the LIFO Method of inventory
accounting to the FIFO Method of inventory accounting at the Lake Norman
Dealerships, Ken Marks Ford and Dyer Volvo in the amount of $169,000,
$572,000 and $116,000, respectively for the year ended December 31, 1996
and $324,000, $47,000 at the Lake Norman Dealerships and Ken Marks Ford for
31
period ended June 30, 1997. The Company intends to convert to the FIFO
Method conditioned upon the closing of the Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
(13) Reflects the net decrease in selling, general and administrative expenses
related to the net reduction in salaries and fringe benefits of owners and
officers of the acquired dealerships who will become employees of the
Company after the Offering, consistent with reduced salaries pursuant to
employment agreements with the Company, effective upon consummation of the
Offering.
(14) The decrease in selling, general and administrative expenses reflects the
elimination of salaries paid to owners of certain dealerships acquired in
the Acquisitions whose positions and salaries will be eliminated in
conjunction with the Offering.
(15) Reflects the Company's estimate of the increase in rent expense related to
lease agreements entered into with the sellers of the Bowers Dealerships
for the dealerships' real property that will not be acquired by the
Company, and decreases in depreciation expense and interest expense related
to mortgage indebtedness encumbering such property.
(16) Reflects the elimination of amortization expense related to goodwill that
arose in previous acquisitions in the Bowers Dealerships, assuming that
each of the acquisitions giving rise to goodwill was consummated on January
1, 1996. See Note 5.
(17) Reflects the amortization over an assumed amortization period of 40 years
of approximately $66.2 million in intangible assets, which consist
primarily of goodwill, resulting from the Acquisitions which were assumed
to occur on January 1, 1996. See "Acquisitions" and "Pro Forma Combined and
Consolidated Balance Sheet."
(18) In connection with the Bowers Acquisition, the Company will issue a
promissory note of up to $5.0 million that will bear interest at
NationsBank's prime rate less 0.5%. This adjustment reflects an increase in
interest expense related to the promissory note assuming a prime rate of
8.5%.
(19) Reflects the net increase in provision for income taxes resulting from
adjustments 11 through 18 above, computed using effective income tax rates
ranging from 38.5% to 40.9%.
(20) Certain of the Bowers Dealerships, the Lake Norman Dealerships, and Dyer
Volvo were not subject to federal and state income taxes because they were
either S corporations, partnerships, or limited liability companies during
the period indicated. This adjustment reflects an increase in the federal
and state income tax provision as if these entities had been taxable at the
combined statutory income tax rate of 39%. Upon completion of the
Acquisitions, these businesses that have historically not been subject to
corporate income tax will thereafter be subject to federal and state income
tax as C corporations.
(21) Reflects an increase from the Company's historical effective tax rate
resulting from a higher statutory tax rate used due to an increase in
taxable income to above $10.0 million for the pro forma combined entity and
from an additional pro forma permanent difference for non-taxable goodwill
amortization.
(22) Reflects the elimination of federal and state tax expense which were
assessed on the recapture of the LIFO inventory reserve which was required
by tax law pursuant to the conversion of Dyer Volvo from a C corporation to
an S corporation during 1997.
(23) Reflects the increase in salaries of existing and new officers who have
entered into employment agreements with the Company, effective upon
consummation of the Offering.
(24) Reflects the net increase in provision for income taxes resulting from
adjustment 23 above, computed using an effective income tax rate of 40.6%.
(FOOTNOTES CONTINUED ON NEXT PAGE)
32
PRO FORMA COMBINED AND CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
PRO-FORMA THE ACQUISITIONS
ADJUSTMENTS FOR PRO-FORMA
ACTUAL FIFO BOWERS LAKE NORMAN KEN MARKS ADJUSTMENTS FOR
ASSETS (1) CONVERSION DEALERSHIPS DEALERSHIPS FORD DYER VOLVO THE ACQUISITIONS
(IN THOUSANDS)
Current Assets:
Cash and cash equivalents... $ 9,238 $ 5,797 $ 3,467 $ 3,711 $ 173 $ (88,267)(3)
Marketable equity
securities................ 769
Receivables................. 12,897 3,398 2,535 1,473 2,535 (76)(4)
Inventories................. 59,885 13,580(2) 34,071 22,778 14,802 11,129 4,332(5)
(88)(4)
Deferred income taxes....... 256 95
Other current assets........ 818 2,453 244 277 32
Total current assets.... 83,863 13,580 45,719 29,024 20,358 13,869 (84,099)
Property and equipment, net... 13,270 8,744 567 489 1,156 (4,052)(6)
400(18)
Goodwill, net................. 9,463 8,286 (1,887)(4)
66,150(3)
(8,285)(7)
Other assets.................. 263 257 462 14 297 (20)(4)
Total assets............ $106,859 $13,580 $63,006 $30,053 $20,861 $ 15,322 $ (32,193)
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Notes payable-floor plan.... $ 67,855 $29,071 $25,865 $16,165 $ 5,534
Notes payable-other......... 4,590 28
Trade accounts payable...... 3,848 1,425 1,352 622 (89)(4)
Accrued interest............ 492 178
Other accrued liabilities... 3,394 1,739 472 1,582 512 (33)(4)
Taxes payable............... 917(2) 243 239 170(8)
Payable to Company's
chairman.................. 3,500
Current maturities of
long-term debt............ 487 558 71 357(3)
Total current
liabilities........... 79,576 917 37,561 27,788 18,611 6,285 406
Long-term debt................ 5,137 4,365 786 (3,157)(6)
4,643(3)
(1,351)(4)
Payable to affiliated
companies.................... 855
Deferred income taxes......... 931 4,583(2) 24 850(8)
Other long-term liabilities... 238
Minority interest.............
Stockholders' Equity:
Common Stock of combined
companies................. 1,000 75 1 153 (1,229)(3)
Class A Common Stock........
Class B Common Stock........
Warrant (3)
Paid-in capital............. 16,604 600 424 28 (1,052)(3)
Treasury stock.............. (4,976) 4,976(7)
Retained earnings and
members' and partners'
equity.................... 6,486 8,080(2) 20,941 804 1,801 13,594 4,332(5)
(1,020)(8)
(894)(6)
(30,673)(3)
(599)(4)
(8,286)(7)
Due from affiliates......... (2,633) (861) 861(3)
Unrealized loss on
marketable equity
securities................ (97)
Total stockholders'
equity................ 20,360 8,080 21,080 1,479 2,226 8,798 (33,584)
Total liabilities and
stockholders' equity......... $106,859 $13,580 $63,006 $30,053 $20,861 $ 15,322 $ (32,193)
PRO-FORMA
ADJUSTMENTS FOR
ASSETS THE OFFERING TOTAL
Current Assets:
Cash and cash equivalents... 100,000(9) $ 34,119
Marketable equity
securities................ 769
Receivables................. 22,762
Inventories................. 160,488
Deferred income taxes....... 351
Other current assets........ 3,824
Total current assets.... 100,000 222,314
Property and equipment, net... 18,287
Goodwill, net................. 75,613
Other assets.................. 1,275
Total assets............ $ 100,000 $317,489
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Notes payable-floor plan.... $144,490
Notes payable-other......... 4,618
Trade accounts payable...... 7,157
Accrued interest............ 669
Other accrued liabilities... 7,668
Taxes payable............... 1,568
Payable to Company's
chairman.................. 3,500
Current maturities of
long-term debt............ 1,474
Total current
liabilities........... 171,145
Long-term debt................ 10,422
Payable to affiliated
companies.................... 855
Deferred income taxes......... 6,388
Other long-term liabilities... 239
Minority interest.............
Stockholders' Equity:
Common Stock of combined
companies.................
Class A Common Stock........ --
Class B Common Stock........
Warrant (3)
Paid-in capital............. 100,000(9) 116,604
Treasury stock..............
Retained earnings and
members' and partners'
equity.................... 14,566
Due from affiliates......... (2,633)
Unrealized loss on
marketable equity
securities................ (97)
Total stockholders'
equity................ 100,000 128,440
Total liabilities and
stockholders' equity......... $ 100,000 $317,489
(FOOTNOTES CONTINUED ON NEXT PAGE)
33
(1) The Reorganization, including the acquisition of the 31% minority interest
in Town & Country Toyota for $3.2 million in Class B Common Stock in
exchange therefor, was effective as of June 30, 1997 and is therefore
reflected in the actual balance sheet as of that date. The acquisition of
the minority interest resulted in the recognition of $2.8 million of
additional goodwill.
(2) Reflects the conversion from the LIFO Method of inventory accounting to the
FIFO Method of inventory accounting and the amount of taxes payable that
will result from this conversion. The Company intends to convert to the FIFO
Method conditioned upon the closing of the Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
(3) Reflects the preliminary allocation of the aggregate purchase price of the
Acquisitions based on the estimated fair value of the net assets acquired.
Because the carrying amount of the net assets acquired, which primarily
consist of accounts receivable, inventory, equipment accounts receivable and
floor plan indebtedness, approximates their fair value, management believes
the application of purchase accounting will not result in an adjustment to
the carrying amount of those net assets. Under the acquisition agreement,
the negotiated purchase prices for the Acquisitions will be adjusted
downward to the extent that the fair value of the tangible net assets as of
the closing is less than an agreed upon amount. The Company expects that the
sellers of these dealerships will withdraw cash or other assets from these
dealerships to the extent that the carrying amount of the tangible net
assets sold exceeds the negotiated minimum value. Under the provisions of
purchase accounting, the Company has one year from the date of acquisition
to finalize the allocation of the purchase price to the assets and
liabilities acquired. Thus, the amount of goodwill and the corresponding
amortization may ultimately be different from the amounts estimated here.
The estimated purchase price allocation consists of the following:
BOWERS DEALERSHIPS KEN MARKS FORD LAKE NORMAN DEALERSHIPS DYER VOLVO TOTAL
Estimated total consideration:
Cash.............................. $ 28,500 $ 25,500 $18,200 $ 18,000 $90,200
Promissory note issued............ 5,000 5,000
Warrant issued....................
Total......................... 33,500 25,500 18,200 18,000 95,200
Less negotiated minimum fair value
of tangible net assets acquired... 10,500 5,050 3,000 10,500 29,050
Excess of purchase price over fair
value of net tangible assets
acquired.......................... $ 23,000 $ 20,450 $15,200 $ 7,500 $66,150
In connection with the acquisition of Dyer Volvo, the Company will issue a
warrant that will entitle the holder to acquire Class A shares representing a
0.375% ownership interest in the Company at an exercise price per share equal
to the price offered in the Company's public offering. Because the number of
underlying shares and the exercise price of the underlying shares is not
determinable at this time, the Company is currently not able to value this
warrant. Accordingly, the Pro Forma Combined and Consolidated Balance Sheet
does not give effect to the issuance of this warrant, however, management
believes the effect on the Company's financial position and results of
operations would not be materially different from that which is presented.
The difference between the purchase price and the fair market value of the
net tangible assets acquired will be allocated to intangible assets,
primarily goodwill and amortized over 40 years.
(4) Reflects the elimination of the assets and liabilities of one of the Bowers
Dealerships' collision repair businesses that will not be acquired by the
Company.
(5) Reflects the conversion from the LIFO Method of inventory accounting to the
FIFO Method of inventory accounting at the Lake Norman Dealerships, Ken
Marks Ford and Dyer Volvo in the amounts of $1,564,000, $2,652,000 and
$116,000, respectively. The Company intends to convert to the FIFO Method
conditioned upon the closing of the Offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
(6) Reflects the distribution of real property of the Bowers Dealerships with a
net depreciated cost of approximately $4.1 million, which are not being
acquired in the Acquisitions, and the related mortgage indebtedness in the
amount of approximately $3.2 million. See "Certain Transactions."
(7) Reflects the elimination of goodwill that arose in previous acquisitions of
the Bowers Dealerships.
(8) Reflects the amount of taxes payable that will result from the FIFO
conversion at Ken Marks Ford in the amount of $1,020,000.
(9) Reflects the issuance of Class A Common Stock in the Offering. See "Use of
Proceeds."
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition should be read in conjunction with the Sonic Automotive, Inc. and
Affiliated Companies Combined and Consolidated Financial Statements and the
related notes thereto included elsewhere in this Prospectus.
OVERVIEW
Sonic Automotive, Inc. is one of the leading automotive retailers in the
United States, operating 20 dealerships, four standalone used vehicle facilities
and eight collision repair centers in the southeastern and southwestern United
States. Sonic sells new and used cars and light trucks, sells replacement parts,
provides vehicle maintenance, warranty, paint and repair services and arranges
related F&I for its automotive customers. The Company's business is
geographically diverse, with dealership operations in the Charlotte,
Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta markets, each of
which the Company believes are experiencing favorable demographic trends. Sonic
sells 17 domestic and foreign brands, which consist of BMW, Cadillac, Chrysler,
Dodge, Eagle, Ford, Honda, Infiniti, Jaguar, Jeep, KIA, Oldsmobile, Plymouth,
Saturn, Toyota, Volkswagen and Volvo. In several of its markets, the Company has
a significant market share for new cars and light trucks, including 13.7% in
Charlotte and 12.6% in Chattanooga in 1996. Pro forma for the Acquisitions, the
Company had revenues of $916.1 million and retail unit sales of 24,114 new and
13,453 used vehicles in 1996. The Company believes that in 1996, based on pro
forma retail unit sales it would have been one of the ten largest dealer groups
out of a total of more than 15,000 dealer groups in the United States and, based
on pro forma revenues, it would have had three of the top 100 single-point
dealerships in the United States.
The Company intends to pursue an acquisition growth strategy led by a
management team that has experience in the consolidation of both automotive
retailing as well as motor sports businesses. Bruton Smith, who is also the
Chief Executive Officer of Speedway Motorsports, Inc., the owner and operator of
several motor sports facilities, first entered the automotive retailing business
in the mid-1960's. Mr. Smith will devote approximately 50% of his business time
to the Company. Since 1990, Mr. Smith has successfully acquired three
dealerships and increased revenues from his dealerships from $199.4 million in
1992 to $376.6 million in 1996, without giving effect to the Acquisitions. In
the Tennessee market, Mr. Bowers has acquired or opened eight dealerships since
1992 and increased revenues from $36.0 million in 1992 to $127.6 million in
1996.
New vehicle revenues include the sale and lease of new vehicles. Used
vehicle revenues include amounts received for used vehicles sold to retail
customers, other dealers and wholesalers. Other operating revenues include parts
and services revenues, fees and commissions for arranging F&I and sales of third
party extended warranties for vehicles (collectively, "F&I transactions"). In
connection with vehicle financing contracts, the Company receives a fee (a
"finance fee") from the lender for originating the loan. If within 90 days of
origination the customer pays off the loans through refinancing or
selling/trading in the vehicle, or defaults on the loan the finance company will
assess a charge (a "chargeback") for a portion of the original commission. The
amount of the chargeback depends on how long the related loan was outstanding.
As a result, the Company has established reserves based on its historical
chargeback experience. The Company also sells warranties provided by third party
vendors, and recognizes a commission at the time of sale.
While the automotive retailing business is cyclical, Sonic sells several
products and services that are not closely tied to the sale of new and used
vehicles. Such products and services include the Company's parts and service and
collision repair businesses, both of which are not dependent upon near-term new
vehicle sales volume. One measure of cyclical exposure in the automotive
retailing business is based on the dealerships' ability to cover fixed costs
with gross profit from revenues independent of vehicle sales. According to this
measurement of "fixed coverage," a higher percentage of non-vehicle sales
revenue to fixed costs indicates a lower exposure to economic cycles. Each
manufacturer requires its dealerships to report fixed coverage according to a
specific method, and the methods used vary widely among the manufacturers and
are not comparable. However, on an aggregate basis, the Company believes its
exposure to cyclicality may be measured by dividing the sum of the gross profit
for parts, service and collision repair by the sum of all operating expenses
with the exception of advertising expenses and variable payroll ("Fixed
Coverage"). Under this definition, the Company's Fixed Coverage was 89.3% in
1996. For the first half of 1997, the Sonic Dealership's Fixed Coverage was
84.2% compared to 89.7% in the first half of 1996.
The Company's cost of sales and profitability are also affected by the
allocations of new vehicles which its dealerships receive from Manufacturers.
When the Company does not receive allocations of new vehicle models adequate to
meet customer demand, it purchases additional vehicles from other dealers at a
premium to the manufacturer's invoice, reducing the
35
gross margin realized on the sales of such vehicles. In addition, the Company
follows a disciplined approach in selling vehicles to other dealers and
wholesalers when the vehicles have been in the Company's inventory longer than
the guidelines set by the Company. Such sales are frequently at or below cost
and, therefore, affect the Company's overall gross margin on vehicle sales. The
Company's salary expense, employee benefits costs and advertising expenses
comprise the majority of its selling, general and administrative ("SG&A")
expenses. The Company's interest expense fluctuates based primarily on the level
of the inventory of new vehicles held at its dealerships, substantially all of
which is financed (such financing being called "floor plan financing").
The Company has historically accounted for all of its dealership
acquisitions using the purchase method of accounting and, as a result, does not
include in its financial statements the results of operations of these
dealerships prior to the date they were acquired by the Company. The combined
and consolidated financial statements of the Company discussed below reflect the
results of operations, financial position and cash flows of each of the
Company's dealerships acquired prior to June 30, 1997. As a result of the
foregoing effects of the Reorganization, as well as the effects of the
Acquisitions and the Offering, the historical combined and consolidated
financial information described in the Management's Discussion and Analysis is
not necessarily indicative of the results of operations, financial position and
cash flows of the Company in the future or the results of operations, financial
position and cash flows which would have resulted had the Reorganization and
Acquisitions occurred at the beginning of the periods presented in the Combined
and Consolidated Financial Statements.
The Company's total revenues have increased from $199.4 million in 1992 to
$376.6 million in 1996, for a compound annual growth rate of 17.2%. Operating
income during this period experienced faster growth, with operating income
increasing from $3.9 million in 1992 to $9.4 million in 1996, for a 24.6% annual
compounded growth rate. Income before income taxes and minority interest,
however, has only increased at a compound annual growth rate of 7.2% primarily
because interest expense on floor plan obligations has increased from 1.1% of
total revenues in 1992 to 1.6% of total revenues in 1996. Inventory and floor
plan balances increased during 1995 and 1996 to support the Company's strategy
of increasing market share. In early 1997, the Company instituted additional
inventory controls in order to reduce interest costs to levels typical of the
industry. Interest expense on floor plan obligations as a percentage of total
revenues has improved from 1.5% for the six months ended June 30, 1996 to 1.4%
for the six months ended June 30, 1997.
As of June 30, 1997, the Company effected the Reorganization pursuant to
which the Company (i) acquired all of the capital stock of the Sonic Dealerships
and (ii) issued Class B Common Stock in exchange for the Dealer Securities. The
Company will acquire these minority interests in purchase transactions at a
price in excess of their book value by approximately $2.5 million. This excess
will be capitalized as goodwill and amortized over forty years. In May, June and
July 1997, the Company consummated or signed definitive agreements to purchase
six additional dealerships or dealership groups for an aggregate purchase price
of $100.7 million. The Company intends to use the proceeds from the Offering to
pay the purchase price of the Acquisitions. In connection with the Acquisitions,
the Company will book approximately $66.2 million of goodwill which will be
amortized over forty years.
The Company currently utilizes the LIFO Method of accounting for inventory
but intends to convert to the FIFO Method of accounting, upon the closing of the
Offering, effective January 1, 1997. If the FIFO Method of inventory accounting
had been used by the Company in prior periods, income before taxes and minority
interest would have been higher by $1.5 million, $1.3 million and $1.4 million
for the years ended December 31, 1994, 1995 and 1996, respectively, and
immaterially changed for the six months ended June 30, 1996 and 1997,
respectively, from the reported results under the LIFO Method. Upon election of
the FIFO Method, the Company will be required under generally accepted
accounting principles to restate its historical financial statements. The
Company estimates that it will incur a tax liability of approximately $5.5
million in connection with this conversion to the FIFO Method.
The automobile industry is cyclical and historically has experienced
periodic downturns, characterized by oversupply and weak demand. Many factors
affect the industry including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
available credit. During the five years ended December 31, 1996, the automobile
industry was generally in a growth period with new vehicles sales growing at a
compound rate of 10.5% as a result of price increases of 6.2% and unit sales
increases of 4.0%. During the first six months of 1997, however, industry sales
of new cars declined by 2.0%, although the Company's new car and light truck
unit sales increased by 7.0% during the period. During these periods, interest
rates were relatively stable.
36
RESULTS OF OPERATIONS
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in the Company's
statement of operations.
PERCENTAGE OF TOTAL REVENUES FOR
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1994 1995 1996 1996 1997
Revenues:
New vehicle sales........................................................ 61.5 % 60.0 % 61.9 % 61.0 % 64.4 %
Used vehicle sales....................................................... 23.9 % 26.0 % 24.9 % 25.6 % 22.6 %
Parts, service and collision repair...................................... 12.7 % 11.5 % 11.3 % 11.1 % 10.8 %
Finance and insurance.................................................... 1.9 % 2.5 % 1.9 % 2.3 % 2.2 %
Total revenues........................................................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales............................................................ 87.8 % 87.5 % 88.3 % 88.2 % 88.5 %
Gross profit............................................................. 12.2 % 12.5 % 11.7 % 11.8 % 11.5 %
Selling, general and administrative...................................... 9.2 % 9.4 % 8.9 % 8.8 % 8.7 %
Operating income......................................................... 2.7 % 2.8 % 2.5 % 2.6 % 2.4 %
Interest expense......................................................... 1.3 % 1.6 % 1.7 % 1.6 % 1.6 %
Income before income taxes............................................... 1.6 % 1.3 % 1.0 % 1.4 % 1.2 %
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues grew in each of the Company's primary revenue areas,
except for used vehicles, for the first half of 1997 as compared with the first
half of 1996, causing total revenues to increase 12.2% to $212.7 million. New
vehicle sales revenue increased 18.4% to $137.0 million, compared with $115.7
million. New vehicle unit sales increased from 6,027 to 6,553, accounting for
47.3% of the increase in vehicle sales revenues. The remainder of the increase
was primarily due to a 8.9% increase in the average selling price resulting from
changes in vehicle prices, particularly a shift in customer preference to higher
cost light trucks and sport utility vehicles.
Used vehicle revenues from retail sales declined 7.2% from $35.2 million in
the first half of 1996 to $32.7 million in the first half of 1997. The decline
in used vehicle revenues was due principally to declines in used vehicle unit
sales at the Company's Town & Country Ford and Lone Star Ford locations, which
related to weak consumer demand.
The Company's parts, service and collision repair revenue increased 9.0% to
$22.9 million from $21.0 million, and declined as a percentage of revenue to
10.8% from 11.1%. The increase in service and parts revenue was due principally
to increased parts revenue, including wholesale parts, from the Company's Lone
Star Ford and Fort Mill Ford locations. F&I revenue increased $0.5 million, due
principally to increased new vehicle sales and related financings.
GROSS PROFIT. Gross profit increased 8.7% in the 1997 period to $24.4
million from $22.4 million in the 1996 period due to increases in revenues of
new vehicles principally at the Company's Lone Star Ford and Fort Mill Ford
locations. Parts and service revenue increases also contributed to the increase
in gross profit. Gross profit as a percentage of sales declined from 11.8% to
11.5% due principally to reductions in higher margin used vehicle sales from the
prior period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased 10.9%
from $16.6 million to $18.4 million. These expenses increased due to increases
in sales volume as well as expenses associated with the Acquisitions and the
Offering.
INTEREST EXPENSE. The Company's interest expense increased 10.8% from $3.0
million to $3.3 million. The increase in interest expense was due to the
acquisition of Fort Mill Chrysler Plymouth Dodge dealership in June of 1997,
increases in interest rates on floor plan debt and increased new vehicle
inventory levels at existing dealerships.
NET INCOME. As a result of the factors noted above, the Company's net
income decreased by $0.2 million in the first half of 1997 compared to the first
half of 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. The Company's total revenue increased 21.1% to $376.6 million in
1996 from $311.0 million in 1995. New vehicle sales increased 25.0% to $233.1
million in 1996 from $186.5 million in 1995, primarily because of the
acquisition in
37
February 1996 of the Company's Fort Mill Ford dealership. The inclusion of the
results of the Fort Mill Ford dealership accounted for 65.3% of the Company's
overall increase in new vehicle sales in 1996. Of the increase in sales, 55.3%
was attributable to increases in unit sales from 1995 to 1996. The remainder of
the increase in new vehicle sales in 1996 was largely attributable to an
increase in average unit selling costs of 9.8% which the Company believes was
primarily due to changes in inventory mix (particularly shifting customer
preferences to light trucks and sport utility vehicles) and general increases in
new vehicle sales prices.
Used vehicle revenues from retail sales increased 12.0% to $68.0 million in
1996 from $60.8 million in 1995. The inclusion of the results of the Company's
Fort Mill Ford dealership accounted for substantially all of this increase in
used vehicle sales. The Company attributes the remainder of the increase in its
used vehicle sales in 1996 to increases of approximately 5.6% in the average
retail selling price per vehicle sold. Increases in average retail selling
prices were due to changes in product mix and general price increases.
The Company's parts, service and collision repair revenue increased 19.0%
to $42.6 million for 1996, compared to $35.9 million in 1995. Of this increase,
$4.4 million and 64.5% was due to the inclusion of the Company's Fort Mill Ford
dealership in the 1996 results of operations. The remainder of the increase was
principally the result of improved service operations and wholesale parts
distribution at the Company's Town and Country Ford dealership. F&I revenues
declined $0.7 million, or 8.9%, due principally to reductions in sales of
finance and insurance products at Town and Country Ford.
GROSS PROFIT. Gross profit increased 13.9% in 1996 to $44.2 million from
$38.8 million in 1995 primarily due to the addition of the Fort Mill Ford
dealership. Gross profit decreased from 12.5% to 11.7% as a percentage of sales
due principally to declines in F&I income and declines in gross profit margins
on the sale of used vehicles. Gross margins on new vehicles increased primarily
due to increases in the average selling price per unit due to a change in mix of
new vehicles sold, particularly higher margin light trucks and sport utility
vehicles.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's SG&A expenses
increased $4.3 million, or 14.8%, from $29.3 million in 1995 to $33.7 million in
1996. However, as a percentage of revenue, SG&A expenses decreased from 9.4% to
8.9%. Expenses associated with the Fort Mill Ford dealership acquired by the
Company in 1996 accounted for approximately 97.1% of this increase. The Company
attributes the remainder of the increase in selling, general and administrative
expenses primarily to higher compensation levels in 1996 and to an increase in
advertising expenses.
INTEREST EXPENSE. The Company's interest expense in 1996 increased 29.6% to
$6.4 million from $4.9 million in 1995. Of this increase $1.0 million or 70.0%
is attributable to floor plan financing at the Company's Fort Mill Ford
dealership acquired in February 1996. The remainder of the increase primarily
reflects interest expense on the debt assumed in the acquisition of Fort Mill
Ford and an increase in floor plan interest rates during 1996.
NET INCOME. The Company's net income in 1996 decreased 11.9% to $2.1
million from $2.4 million in 1995. This decrease was principally caused by
increased interest costs related to floor plan financing and debt assumed in the
acquisition of Fort Mill Ford.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. The Company's total revenue increased 16.4% to $311.0 million in
1995 from $267.1 million in 1994. New vehicle sales increased 13.5% to $186.5
million in 1995 from $164.4 million in 1994. The Company attributes the increase
in new vehicle sales to unit sales increases of 6.1% primarily from the Town &
Country Ford and Lone Star Ford dealerships which increased 9.3% and 7.1%,
respectively. The remainder of the increase was due to increased sales of higher
priced light trucks and sport utility vehicles and general price increases.
Used vehicle revenues from retail sales increased by 27.9% to $60.8 million
in 1995, compared with $47.5 million in 1994. The increase in used vehicle unit
sales was due principally to increases at the Company's Lone Star Ford, Town &
Country Ford and Frontier Cadillac-Oldsmobile locations. Unit sales volume
increased 18.2%, or 798 units, accounting for 65.3% of the increase in used
vehicle revenues. The remainder of the increase was due to improvements in
product mix and general increases in used vehicle selling prices.
The Company's parts, service and collision repair revenue increased 5.5% or
$1.9 million, from $34.0 million in 1994 to $35.9 million in 1995. Wholesale
parts sale increases at the Company's Lone Star Ford dealership and improved
service operations at the Company's Town and Country Toyota dealership account
for the majority of the increase. F&I revenue increased $2.6 million due
principally to additional sales of F&I products at the Company's Town and
Country Ford and Lone Star Ford dealerships.
38
GROSS PROFIT. Gross profit increased 18.8% in 1995 to $38.8 million from
$32.6 million in 1994. Gross profit as a percentage of sales increased from
12.2% to 12.5% due principally to a 50.8% increase in high margin finance and
insurance product sales. Gross margins on used vehicles improved due to the
Company's strategy of improved inventory management and the purchase of quality
used vehicles.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's SG&A expenses
increased $4.7 million to $29.3 million or 19.1% and represented 9.4% in total
revenues in 1995 from $24.6 million or 9.2% of total revenues in 1994.
INTEREST EXPENSE. The Company's interest expense in 1995 increased 43.4% to
$4.9 million from $3.4 million in 1994. Increased interest expense was due to
increases in inventory levels and related floor plan borrowings.
NET INCOME. The Company's net income in 1995 decreased 12.4% to $2.4
million from $2.8 million in 1994. This decrease was caused by the increase in
floor plan financing due to an increase in vehicle inventory levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for capital resources are to finance
acquisitions, debt service and working capital requirements. Historically, the
Company has relied primarily upon internally generated cash flows from
operations, borrowing under its various credit facilities and borrowings and
capital contributions from its stockholders to finance its operations and
expansion. After the Offering, the Company does not expect to receive any
additional financing from its existing stockholders.
The Company has historically maintained a separate revolving floor plan
credit facility for each dealership which has been used to finance vehicle
inventory. The Company currently has floor plan credit facilities with Ford
Motor Credit, Chrysler Financial Corporation and World Omni Financial
Corporation. As of June 30, 1997 there was an aggregate of $67.9 million
outstanding under the floor plan credit facilities. These floor plan facilities
bear interest at variable rates ranging from LIBOR plus 2.75% to prime plus
1.0%. The Company makes monthly interest payments on the amount financed under
the floor plan lines but is not required to make loan principal repayments prior
to the sale of the vehicles. The underlying notes are due when the related
vehicles are sold and are collateralized by vehicle inventories and other assets
of the Company. The floor plan financing agreements contain a number of
covenants, including among others, covenants restricting the Company with
respect to limitations on liens and changes in ownership, officers and key
management personnel.
Prior to consummation of the Offering, the Company intends to consolidate
its new vehicle floor plan lines and obtain an additional revolving line of
credit. The Company is currently negotiating with credit sources for more
favorable terms. Based on current discussions with these lenders, the Company
expects the interest rate on its floor plan debt to decrease compared to the
interest rates currently being charged. The additional credit facility will be
used principally for acquisitions.
The Company leases various facilities and equipment under operating lease
agreements including leases with related parties. See "Certain
Transaction -- Leases."
During the first six months of 1997, the Company generated net cash of $5.6
million from operating activities. Net cash used for operating activities was
$2.1 million in 1996 and was primarily attributable to increased inventory
levels and accounts receivable, partially offset by increased floor plan
indebtedness and accounts payable. The increase in inventory levels in 1996
reflects an increase in the volume of sales and the timing of shipments from the
Manufacturers. Increased receivables reflect increased sales primarily
attributable to Fort Mill Ford and Fort Mill Chrysler-Plymouth-Dodge acquired in
1996 and 1997, respectively. The Company generated net cash from operations of
$3.0 million in 1995 and 1994.
Cash used for investing activities was approximately $2.9 million for the
first six months of 1997 and related primarily to acquisitions of property and
equipment. Cash provided by (used in) investing activities was ($11.5) million,
$0.3 million and ($1.7) million in 1996, 1995 and 1994, respectively, including
$1.9 million, $1.5 million and $1.4 million of capital expenditures during such
periods.
In 1996, cash provided by financing activities reflected the purchase of
capital stock by a stockholder of the Company, the proceeds of which were used
to fund the acquisition of Fort Mill Ford and the purchase of stock by a
stockholder of Town & Country Ford. Cash used in financing activities for the
six months ended June 30, 1997 was $0.2 million principally due to scheduled
payments on long-term debt.
Capital expenditures, excluding amounts paid in acquisitions, were $0.9
million, $1.9 million, $1.5 million and $1.4 million in the first six months of
1997 and in 1996, 1995 and 1994, respectively. The Company's principal capital
expenditures typically include building improvements and equipment for use in
the Company's dealerships. Capital expenditures in
39
1996 and 1995 were primarily attributable to expenditures for the addition of a
used car lot in 1996 and other capital improvements at the Lone Star Ford
dealership. Excluding the purchase price for the Acquisitions and future
acquisitions, the Company is anticipating total capital expenditures in the
second half of 1997 to be approximately $1.0 million. The Company expects to
increase its capital expenditures over the next few years as part of its
acquisition and growth strategy.
The Company believes that funds generated through future operations and
availability of borrowings under the floor plan financing (or any replacements
thereof) and its other credit arrangements, and the proceeds from the Offering
will be sufficient to fund its debt service and working capital requirements and
any seasonal operating requirements, including its currently anticipated
internal growth for the foreseeable future. The Company estimates that it will
incur a tax liability of approximately $5.5 million in connection with the
change in its tax basis of accounting for inventory from LIFO to FIFO. The
Company believes that it will be required to pay this liability in three to six
equal annual installments, beginning in March 1998, and believes that it will be
able to pay such obligation with cash provided by operations. The Company
expects to fund any future acquisitions from its future cash flow from
operations, additional debt financing, or Class A Common Stock issuances. The
Company does not currently have in place any credit facilities for acquisitions.
There can be no assurance that additional financing can be obtained on terms
favorable to the Company, or that the Company will be able to use its common
stock to fund any future acquisitions. See "Risk Factors -- Financial Resources
Available for Acquisitions."
SEASONALITY
The Company's operations are subject to seasonal variations. The first
quarter generally contributes less revenue and operating profits than the
second, third and fourth quarters. Seasonality is principally caused by weather
conditions and timing of manufacturer incentive programs and model changeovers.
Set forth below is revenue information with respect to the Company's
operations for the most recent six quarters.
1996 1997
1ST 2ND 3RD 4TH 1ST 2ND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
Revenues................................................ $85,382 $103,659 $93,509 $94,053 $98,426 $113,694
EFFECTS OF INFLATION
Due to the relatively low levels of inflation in 1994, 1995 and 1996 and
the first half of 1997, inflation did not have a significant effect on the
Company's results of operations for those periods.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." This Statement
specifies the computation, presentation and disclosure requirements for earnings
per share. The Company believes that the adoption of such Statement would not
result in earnings per share materially different than pro forma earnings per
share presented in the accompanying statements of income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
standard establishes standards of reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. This
Statement will be effective for the Company's fiscal year ending December 31,
1998, and the Company does not intend to adopt this statement prior to the
effective date. Had the Company adopted this Statement as of January 1, 1994, it
would have reported comprehensive income of $2.8 million, $2.4 million and $2.1
million for the years ended December 31, 1994, 1995 and 1996, respectively.
40
BUSINESS
OVERVIEW
Sonic Automotive, Inc. is one of the leading automotive retailers in the
United States, operating 20 dealerships, four standalone used vehicle facilities
and eight collision repair centers in the southeastern and southwestern United
States. Sonic sells new and used cars and light trucks, sells replacement parts,
provides vehicle maintenance, warranty, paint and repair services and arranges
related F&I for its automotive customers. The Company's business is
geographically diverse, with dealership operations in the Charlotte,
Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta markets, each of
which the Company believes are experiencing favorable demographic trends. Sonic
sells 17 domestic and foreign brands, which consist of BMW, Cadillac, Chrysler,
Dodge, Eagle, Ford, Honda, Infiniti, Jaguar, Jeep, KIA, Oldsmobile, Plymouth,
Saturn, Toyota, Volkswagen and Volvo. In several of its markets, the Company has
a significant market share for new cars and light trucks, including 13.7% in
Charlotte and 12.6% in Chattanooga in 1996. Pro forma for the Acquisitions, the
Company had revenues of $916.1 million and retail unit sales of 24,114 new and
13,453 used vehicles in 1996. The Company believes that in 1996, based on pro
forma retail unit sales it would have been one of the ten largest dealer groups
out of a total of more than 15,000 dealer groups in the United States and, based
on pro forma revenues, it would have had three of the top 100 single-point
dealerships in the United States.
The Company's founder and Chief Executive Officer, O. Bruton Smith, has
over 30 years of automotive retailing experience. In addition, the Company's
other executive officers, regional vice presidents and executive managers have
on average 18 years of automotive retailing experience. The Company's
dealerships have won the highest attainable awards from various manufacturers
measuring quality and customer satisfaction. These awards include the Five Star
Award from Chrysler, the Chairman's Award from Ford, the President's Award from
BMW and the President's Circle Award from Infiniti. In addition, the Company was
named to Ford's Top 100 Club, which consists of Ford's top 100 retailers based
on retail volume and consumer satisfaction. Also, various members of the
management team have served on several manufacturer dealer councils which act as
liaisons between the manufacturers and dealer groups. As an example of the
industry's recognition of the Company's executives, Nelson Bowers, the Company's
Executive Vice President, participated in the development of the Saturn brand
and was awarded in 1990 the first Saturn dealership in the United States.
The Company intends to pursue an acquisition growth strategy led by a
management team that has experience in the consolidation of both automotive
retailing as well as motor sports businesses. Bruton Smith, who is also the
Chief Executive Officer of Speedway Motorsports, Inc., the owner and operator of
several motor sports facilities, first entered the automotive retailing business
in the mid-1960's. Mr. Smith will devote approximately 50% of his business time
to the Company. Since 1990, Mr. Smith has successfully acquired three
dealerships and increased revenues from his dealerships from $199.4 million in
1992 to $376.6 million in 1996, without giving effect to the Acquisitions. In
the Tennessee market, Mr. Bowers has acquired or opened 8 dealerships since 1992
and increased revenues from $36.0 million in 1992 to $181.9 million in 1996.
The Company believes the competitive advantages which differentiate it from
its local competitors include the reputation of the Company's management in the
automotive retailing industry, regional and national economies of scale, brand
and geographic diversity, and the established customer base and local name
recognition of the Company's dealerships. The Company has developed and
implemented several growth strategies to capitalize on these competitive
advantages. One of these is to continue to expand its operations in the
Southeast and Southwest by acquiring additional dealerships both within its
current markets and in new markets. The Company also is seeking additional
growth from the increased sale of higher margin products and services such as
wholesale parts, after-market products, collision repair services and F&I.
GROWTH STRATEGY
The Company's objective is to capitalize on the consolidation of the
automotive retailing industry. Key elements of the Company's strategy to achieve
this objective include the acquisition of additional dealerships and the
leveraging of the Company's new vehicle franchises to increase sales of higher
margin products and services.
(Bullet) ACQUIRE DEALERSHIPS. The Company plans to implement a "hub and spoke"
acquisition program primarily by pursuing (i) well-managed dealerships
in new metropolitan and growing suburban geographic markets, and (ii)
dealerships that will allow the Company to capitalize on regional
economies of scale, offer a greater breadth of products and services in
any of its markets or increase brand diversity. The growth generated
through acquisitions creates opportunities for economies of scale,
including more favorable financing terms from lenders and cost savings
from the consolidation of administrative functions such as employee
benefits, risk management and employee training.
41
NEW MARKETS. The Company looks to acquire well-managed dealerships in
geographic markets it does not currently serve, principally in the
Southeast and Southwest regions of the United States. The Company will
target dealers having superior operational and financial management.
Generally, the Company will seek to retain the acquired dealerships'
operational and financial management, and thereby benefit from their market
knowledge, name recognition and local reputation. The Company also
anticipates that management teams at the acquired dealerships will enable
the Company to identify more effectively additional acquisition
opportunities in these markets.
EXISTING MARKETS. The Company seeks growth in its operations within
existing markets by acquiring dealerships that increase the brands,
products and services offered in those markets. These acquisitions should
produce opportunities for additional operating efficiencies, promote
increased name recognition and provide the Company with better
opportunities for repeat and referral business. Such acquisitions should
also create opportunities for regional economies of scale in areas such as
vendor consolidation, facility and personnel utilization and advertising
spending. Additionally, cost savings may be achieved by consolidating
certain administrative functions on a regional basis that would not be
efficient on a national basis, such as accounting, information systems,
title work, credit and collection.
(Bullet) PURSUE OPPORTUNITIES IN ANCILLARY PRODUCTS AND SERVICES. The Company
intends to pursue opportunities to increase its sales of higher-margin
products and services by expanding its collision repair centers and its
wholesale parts and after-market products businesses, which, other than
after market products, are not directly related to the new vehicle
cycle.
COLLISION REPAIR CENTERS. The Company's collision repair business
provides favorable margins and is not significantly affected by economic
cycles or consumer spending habits. The Company believes that, because of
the high capital investment required for collision repair shops, and the
cost of complying with environmental and worker safety regulations, large
volume body shops will be more successful in the future than smaller volume
shops. The Company believes that this industry will consolidate and that it
will be able to capitalize on this trend by expanding its collision repair
business. The Company also believes that opportunities exist for those
automotive retailers that can establish relationships with major insurance
carriers. The Company currently participates in 35 direct repair programs
with major insurance companies and its relationships with these carriers
provide a source of collision repair customers. The Company currently has
eight collision repair centers accounting for approximately $8.9 million in
pro forma revenue for the year ended 1996. Sonic intends over the next
several years to establish collision repair centers at various of its other
facilities as market conditions warrant.
WHOLESALE PARTS. Over time, the Company plans to capitalize on its
growing representation of numerous manufacturers in order to increase its
sales of factory authorized parts to wholesale buyers such as independent
mechanical and body repair garages and rental and commercial fleet
operators.
AFTER-MARKET PRODUCTS. The Company intends to expand its offerings of
after-market products in many of its dealership locations. After-market
products, such as custom wheels, performance parts, telephones and other
accessories, enable the dealership to capture incremental revenue on new
and used vehicle sales.
(Bullet) ENHANCE PROFIT OPPORTUNITIES IN FINANCE AND INSURANCE. The Company
offers its customers a wide range of financing and leasing alternatives
for the purchase of vehicles, as well as credit life, accident and
health and disability insurance and extended service contracts. As a
result of its size and scale, the Company believes it will be able to
negotiate with the lending institutions that purchase its financing
contracts to increase the Company's revenues. Likewise, the Company
expects to negotiate to increase the commissions it earns on extended
service and insurance products. It also expects that the integration of
innovative computer technologies and in-depth sales training will serve
as an important tool in enhancing F&I profitability.
(Bullet) INCREASE USED VEHICLE SALES. The Company believes that there will be
opportunities to improve the used vehicle departments at several of its
dealerships. The Company currently operates four standalone used
vehicle facilities. In 1998, the Company intends to convert part of an
existing facility in Nashville to a used vehicle facility. It also
intends to develop facilities in other markets where management
believes an opportunity exists.
OPERATING STRATEGY
Sonic's operating objectives are to focus on customer satisfaction
throughout the organization in order to build long-term customer relationships
and to capitalize on operating efficiencies which will enhance its financial
performance. The Company seeks to achieve these objectives by implementing the
following operating strategies.
42
(Bullet) OPERATE MULTIPLE DEALERSHIPS IN GEOGRAPHICALLY DIVERSE MARKETS. The
Company operates dealerships in Charlotte, Chattanooga, Nashville,
Tampa-Clearwater, Houston and Atlanta. By operating in several
locations throughout the United States, the Company believes it will be
better able to insulate its earnings from local economic downturns. In
addition, the Company believes that by establishing a significant
market presence in its operating regions, it will be able to provide
superior customer service through a market-specific sales, service,
marketing and inventory strategy. It is the Company's strategy, for
instance, that the savings in a market on reduced advertising costs
will be re-deployed into customer service and customer retention
programs. The Company's market share in its Charlotte and Chattanooga
markets was 13.7% and 12.6%, respectively in 1996.
(Bullet) ACHIEVE HIGH LEVELS OF CUSTOMER SATISFACTION. Customer satisfaction has
been and will continue to be a focus of the Company. The Company's
personalized sales process is intended to satisfy customers by
providing high-quality, affordable vehicles in a positive, "consumer
friendly" buying environment. The Company's service department also
seeks to provide its customers with a professional and reliable service
experience of a consistently high standard. Beyond establishing strong
consumer loyalty, this focus on customer satisfaction engenders good
relations with Manufacturers. Manufacturers generally measure CSI,
which is a result of a survey given to new vehicle buyers. Some
Manufacturers offer specific performance incentives, on a per vehicle
basis, if certain CSI levels (which vary by Manufacturer) are achieved
by a dealer. Manufacturers can withhold approval of acquisitions if a
dealer fails to maintain a minimum CSI score. Historically, the Company
has not been denied Manufacturer approval of acquisitions based on CSI
scores or other reasons. To keep management focused on customer
satisfaction, the Company includes CSI results as a component of its
incentive compensation program.
(Bullet) TRAIN AND DEVELOP QUALIFIED MANAGEMENT. Sonic requires all of its
employees, from service technicians to regional vice presidents, to
participate in in-house training programs. The Company leverages the
experience of senior management, along with third party trainers from
manufacturers, industry affiliates and vendors, to formally train all
employees. This training regimen has resulted in many of the Company's
regional vice presidents, executive managers and salespeople being
certified by NADA, and has become a convenient and effective way to
share best practices among the Company's employees at all levels of the
various dealerships. The Company is developing the Education Center to
be equipped with classrooms specifically designed on a departmental
basis. The F&I classroom in the Education Center, for example, is to be
equipped with simulation software that replicates the dealers' systems
and allows the employee to handle all facets of an F&I transaction. The
Company believes that its comprehensive training of all employees at
every level of their career path offers the Company a competitive
advantage over other dealership groups in the development and retention
of its workforce.
(Bullet) OFFER A DIVERSE RANGE OF AUTOMOTIVE PRODUCTS AND SERVICES. Sonic offers
a broad range of automotive products and services, including a wide
selection of new and used vehicles, vehicle financing and insurance
programs, replacement parts and maintenance and repair programs. The
Company offers 17 product lines ranging from economy to luxury brands
consisting of BMW, Cadillac, Chrysler, Dodge, Eagle, Ford, Honda,
Infiniti, Jaguar, Jeep, KIA, Oldsmobile, Plymouth, Saturn, Toyota,
Volkswagen and Volvo. The Company also offers a variety of used
vehicles at a broad range of prices. Offering numerous new vehicle
brands enables the Company to satisfy a variety of customers, reduces
dependence on any one Manufacturer and reduces exposure to supply
problems and product cycles.
(Bullet) CAPITALIZE ON EFFICIENCIES IN OPERATIONS. Because management
compensation is based primarily on dealership performance, expense
reduction and operating efficiencies are a significant management
focus. As the Company pursues its acquisition strategy, the Company's
size and market presence should enable it to negotiate favorable
contracts on such expense items as advertising, purchasing, bank
financings, employee benefit plans and other vendor contracts. In
addition, the Company has instituted both regional and national
operations committees that meet on a regular basis to share best
practices to improve dealership performance.
(Bullet) UTILIZE PROFESSIONAL MANAGEMENT PRACTICES AND INCENTIVE BASED
COMPENSATION PROGRAMS. As a result of Sonic's size and geographic
dispersion, the Company's senior management has instituted a
multi-tiered management structure to supervise effectively its
dealership operations. In addition to the officers of the Company, this
structure includes executive managers who are responsible for
individual dealership operations, as well as regional vice presidents
responsible for various regions throughout the country. In an effort to
align management's interest with that of stockholders, a portion of the
incentive compensation program for each officer, vice president and
executive manager is provided in the form of Company stock options,
with additional incentives based on the performance of individual
profit centers. Sonic believes that this organizational structure, with
room for advancement and the opportunity for equity participation,
serves as a strong motivation for its employees.
43
(Bullet) APPLY TECHNOLOGY THROUGHOUT OPERATIONS. The Company believes that, with
the customized technology it has introduced in certain markets, it has
been able to improve its operations over time by integrating its
systems into all aspects of its business. In these markets the Company
uses computer-based technology to monitor its dealerships' operating
performance and quickly adjust to market changes, and to integrate
computer systems into its sales, F&I and parts and service operations.
For example, sales managers use a database to identify and solicit
prospective customers, and to design appropriate financing packages for
prospective buyers. Service and parts managers utilize computer
technology to coordinate between the two departments and to service
customers more efficiently. In addition to these uses, the Company's
technology also plays a role in its inventory management. The Company
intends to expand this computer system into all of its dealerships and
markets as the existing contracts for computer systems expire.
INDUSTRY OVERVIEW
Automotive retailing, with approximately $640 billion in 1996 retail sales,
is the largest consumer retail market in the United States, representing
approximately 8% of the domestic gross product based on data collected by NADA
and the U.S. Department of Commerce. Retail sales of new vehicles, which are
sold exclusively through new vehicle dealers, were approximately $328 billion.
In addition, used vehicle retail sales in 1996 were estimated at $311 billion,
with approximately $260 billion in sales by franchised and independent dealers
and the balance in privately negotiated transactions. From 1992 to 1996, new
vehicles sales have grown at an annual compound rate of 10.5%, while used
vehicle sales have grown at a rate of 15.8% for retail used vehicle sales and
6.7% for wholesale used vehicle sales. This significant increase in sales
revenue is primarily because the average price of a new vehicle has risen at a
compound average rate of 6.2% from 1992 to 1996 and newer, high-quality used
vehicles now comprise a larger part of the used vehicle market. During this
period, unit sales grew at rates of only 4.0% for new vehicles, 6.4% for retail
used vehicles and 1.4% for wholesale used vehicles. For the six months ended
June 30, 1997, industry retail sales were down 2% as a result of retail car
sales declines of 5.3% and retail truck sales gains of 2.4% from the same period
in 1996.
The following table sets forth information regarding vehicle sales by new
vehicle dealerships for the periods indicated.
UNITED STATES NEW VEHICLE DEALERS' VEHICLE SALES
(1)
1992 1993 1994 1995 1996
(UNITS IN MILLIONS; DOLLARS IN BILLIONS)
New vehicle unit sales................................................. 12.9 13.9 15.1 14.7 15.1
New vehicle sales (2).................................................. $220.3 $253.3 $289.1 $301.2 $328.4
Used vehicle unit sales-retail......................................... 9.3 9.9 10.9 11.5 11.9
Used vehicle sales-retail (2).......................................... $ 77.1 $ 90.7 $110.6 $126.9 $137.9
Used vehicle unit sales-wholesale...................................... 6.9 6.4 6.9 7.0 7.3
Used vehicle sales -- wholesale (2).................................... $ 26.2(3) $ 24.3 $ 27.9 $ 30.4 $ 33.9
Total vehicle sales.................................................... $323.6 $368.3 $427.6 $458.5 $500.2
Annual growth in total vehicle sales................................... -- 13.8% 16.1% 7.2% 9.1%
(1) Reflects new vehicle dealership sales at retail and wholesale. In addition,
sales by independent retail used vehicle dealers were approximately $81,
$100, $134, $130 and $122 billion, respectively, and casual used car sales
were estimated at approximately $36, $33, $40, $52 and $51 billion,
respectively, for each of the five years ended December 31, 1996.
(2) Sales figures are calculated by multiplying unit sales by the average sales
price for the year.
(3) The NADA did not report the averages sales price for wholesale transactions
prior to 1993. As a result, the 1992 wholesale used vehicle sales were
calculated using the 1993 average wholesale price for used vehicles.
In addition to new and used vehicles, dealerships offer a wide range of
other products and services, including repair and warranty work, replacement
parts, extended warranty coverage, financing and credit insurance. In 1996, the
average dealership's revenue consisted of 57.7% new vehicles sales, 30.4% used
vehicle sales, and 11.9% other products and services. As a result of intense
competition for new vehicle sales, the average dealership generates the majority
of its profits from the sale of used vehicles and other products and services,
including finance and insurance, mechanical and collision repair, and parts and
service. In 1996, for example, a used vehicle earned an average gross margin of
11.0% as compared to a new vehicle's average gross margin of 6.4%, in each case
for sales by new vehicle dealerships. As is typical in the retailing industry,
dealership profitability varies widely across different stores and, ultimately,
profitability depends on effective management of inventory, competition,
marketing, quality control and, most importantly, responsiveness to the
customer.
44
NEW VEHICLE SALES. Franchised dealerships were originally established by
automobile manufacturers for the distribution of their new vehicles. In return
for exclusive distribution rights within specified territories, manufacturers
exerted significant influence over their dealers by limiting the transferability
of ownership in dealerships, designating the dealerships location, and managing
the supply and composition of the dealership's inventory. These arrangements
resulted in the proliferation of small, single-owner operations that, at their
peak in the late 1940's, totaled almost 50,000. As a result of competitive,
economic and political pressures during the 1970's and 1980's, significant
changes and consolidation occurred in the automotive retail industry. One of the
most significant changes was the increased penetration by foreign manufacturers
and the resulting loss of market share by domestic car makers, which forced many
dealerships to close or sell to better-capitalized dealership groups. According
to industry data, the number of franchised dealerships has declined from
approximately 25,000 dealerships in 1990 to approximately 22,000 in 1996.
Although significant consolidation has taken place since the automotive
retailing industry's inception, the industry today remains highly fragmented,
with the largest 100 dealer groups generating less than 10% of total sales
revenues and controlling less than 5% of all franchised dealerships.
USED VEHICLE SALES. Sales of used vehicles have increased over the past
five years, primarily as a result of the substantial increase in new vehicle
prices and the greater availability of newer used vehicles due to the increased
popularity of short-term leases. Like the new vehicle market, the used vehicle
market is highly fragmented, with approximately 22,000 new vehicle dealers
accounting for approximately $172 billion in 1996 sales. In addition, an even
greater number of independent used car dealers accounted for approximately $122
billion in 1996 sales. Privately negotiated transactions accounted for the
remaining 1996 sales, estimated at $51 billion. In addition, an increasing
number of used vehicles are being sold by "superstore" outlets, which market
only used vehicles and offer a wide selection of low mileage, popular models. In
1996, the top 100 new vehicle dealer groups accounted for less than 2% of used
vehicle sales.
INDUSTRY CONSOLIDATION. The Company believes that further consolidation is
likely due to increased capital requirements of dealerships, the limited number
of viable alternative exit strategies for dealership owners, and the desire of
certain manufacturers to strengthen their brand identity by consolidating their
franchised dealerships. The Company also believes that an opportunity exists for
dealership groups with significant equity capital, and experience in
identifying, acquiring and professionally managing dealerships, to acquire
additional dealerships for cash, stock, debt or a combination thereof. Publicly
owned dealer groups, such as the Company, are able to offer prospective sellers
tax advantaged transactions through the use of publicly traded stock which may,
in certain circumstances, make them more attractive to prospective sellers.
DEALERSHIP OPERATIONS
Upon completion of the Reorganization and the Acquisitions, the Company
will own eight dealerships in the Charlotte market, eight dealerships in the
Chattanooga market, one dealership in the Nashville market, one dealership in
the Houston market, one dealership in the Clearwater market and one dealership
in the Atlanta market.
The following table sets forth, for each of those areas, information
relating to the Company's pro forma performance for the year ended December 31,
1996 and the six months ended June 30, 1997:
NASHVILLE/ TAMPA/
CHARLOTTE CHATTANOOGA HOUSTON CLEARWATER ATLANTA
MARKET MARKET MARKET MARKET MARKET TOTAL
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996 SALES:
New vehicles........................................ $ 229,179 $ 108,089 $ 83,763 $ 88,262 $39,940 $549,233
Used vehicles....................................... 105,034 51,277 33,402 42,597 20,931 253,241
Parts, service and collision repair................. 33,317 18,524 18,927 14,224 11,163 96,155
Finance and insurance............................... 7,396 3,887 3,338 2,317 542 17,480
Total............................................. 374,926 181,777 139,430 147,400 72,576 916,109
SIX MONTHS ENDED JUNE 30, 1997 SALES:
New vehicles........................................ $ 123,130 $ 45,972 $ 55,902 $ 45,308 $19,597 $289,909
Used vehicles....................................... 57,979 29,901 17,865 19,390 11,778 136,913
Parts, service and collision repair................. 18,542 10,261 10,363 5,999 5,960 51,125
Finance and insurance............................... 4,464 1,910 2,249 1,029 129 9,781
Total............................................. 204,115 88,044 86,379 71,726 37,464 487,728
45
Since 1990 the Company has grown significantly, as a result of the
acquisition and integration of new vehicle dealerships and an increase in
revenues at its existing dealerships. The following table sets forth the name,
brands, year of acquisition and location of the dealerships acquired by or
awarded to the Company or one of the Bowers Dealerships since 1990:
YEAR
ACQUIRED LOCATION
DEALERSHIP AND BRANDS CURRENTLY REPRESENTED
SONIC AUTO WORLD
Town & Country Toyota............................................................. 1990 Charlotte
Fort Mill Ford.................................................................... 1996 Charlotte
Fort Mill Chrysler-Plymouth-Dodge................................................. 1997 Charlotte
BOWERS DEALERSHIPS
Nelson Bowers Ford................................................................ 1993 Chattanooga
Cleveland Village Honda/Infiniti.................................................. 1994 Chattanooga
Cleveland Chrysler-Plymouth-Jeep-Eagle............................................ 1995 Chattanooga
Jaguar of Chattanooga (awarded franchise)......................................... 1995 Chattanooga
European Motors of Nashville
"BMW, Volkswagen"............................................................... 1996 Nashville
European Motors
"BMW, Volvo".................................................................... 1996 Chattanooga
Nelson Bowers Dodge............................................................... 1997 Chattanooga
KIA -- VW of Chattanooga (awarded franchise)...................................... 1997 Chattanooga
DEALERSHIP MANAGEMENT
Operations of the dealerships are overseen by Regional Vice Presidents, who
report to the Company's Chief Operating Officer. Each of the Company's
dealerships is managed by an Executive Manager who is responsible for the
operations of the dealership and the dealership's financial and customer
satisfaction performance. The Executive Manager is responsible for selecting,
training and retaining dealership personnel. All Executive Managers report to
the Company's senior management on a regular basis and prepare a comprehensive
monthly financial and operating statement of their dealership. In addition, the
Company's senior management meets on a monthly basis with its Executive Managers
to address changing customer preferences, operational concerns and to share best
practices, such as maintaining a customer-friendly buying environment,
maximizing potential revenues per new vehicle sale through increased F&I
penetration, using customer calling and coupon programs to attract and retain
service customers, and continued training of dealership personnel.
Each Executive Manager is complemented by a team which includes two senior
managers that aid in the operation of the dealership. The General Sales Manager
is primarily responsible for the operations, personnel, financial performance
and customer satisfaction performance of the new vehicle sales, used vehicle
sales, and finance and insurance departments. The Parts and Service Director is
primarily responsible for the operations, personnel, financial and customer
satisfaction performance of the service, parts and collision repair departments
(if applicable). Each of the departments of the dealership typically has a
manager who reports to the General Sales Manager or Parts and Service Director.
Each Executive Manager is complemented by a team which includes two senior
managers that aid in the operation of the dealership. The General Sales Manager
is primarily responsible for the operations, personnel, financial performance
and customer satisfaction performance of the new vehicle sales, used vehicle
sales, and finance and insurance departments. The Parts and Service Director is
primarily responsible for the operations, personnel and financial and customer
satisfaction performance of the service, parts and collision repair departments
(if applicable). Each of the departments of the dealership typically has a
manager who reports to the General Sales Manager or Parts and Service Director.
After the Acquisitions, the Company's Regional Vice Presidents will be as
listed, with their region of responsibility and other information, on the
following table:
NAME AGE REGION OF RESPONSIBILITY
Ken Marks, Jr. 35 Florida
Jeffrey C. Rachor 35 Tennessee, Georgia, Kentucky and Alabama
Ivan A. Tufty 57 Texas
William Sullivan 65 North Carolina and South Carolina
NEW VEHICLE SALES
The Company sells 17 brands of cars, light trucks and sport utility
vehicles. The products have a broad range of prices from lower priced, or
economy vehicles, to luxury vehicles. The Company believes that its brand,
product and price diversity
46
reduces the risk of changes in customer preferences, product supply shortages
and aging products. Sales of new vehicles in 1996 were approximately 43% cars
and 57% trucks. Approximately 14% of sales in 1996 were luxury brands (BMW,
Cadillac, Infiniti, Jaguar and Volvo). See "Risk Factors -- Dependence on
Automobile Manufacturers."
The following table sets forth, by vehicle brand, information relating to
the Company's pro forma new vehicle sales for 1996 and the first six months of
1997:
NEW VEHICLE SALES
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 (1) JUNE 30,
PERCENTAGE OF 1997 (1)
NEW VEHICLE NEW VEHICLE NEW VEHICLE
REVENUES REVENUES REVENUES
(REVENUE AMOUNTS IN THOUSANDS)
VEHICLE BRAND/MANUFACTURER
BMW................................................................... $ 10,838 2.1% $ 13,993
Cadillac.............................................................. 2,029 0.4% 770
Chrysler/Dodge/Plymouth/Jeep/Eagle.................................... 88,951 17.5% 50,935
Ford.................................................................. 297,169 58.3% 164,768
Honda................................................................. 11,599 2.3% 4,992
Infiniti.............................................................. 6,618 1.3% 3,247
Jaguar................................................................ 2,296 0.5% 1,405
KIA................................................................... -- -- 685
Oldsmobile............................................................ 2,212 0.4% 1,055
Saturn................................................................ 13,488 2.6% 4,984
Toyota................................................................ 30,520 6.0% 19,246
Volvo................................................................. 43,060 8.5% 21,478
Volkswagen............................................................ 732 0.1% 257
Total............................................................... $ 509,512 100.0% $ 287,815
PERCENTAGE OF
NEW VEHICLE
REVENUES
VEHICLE BRAND/MANUFACTURER
BMW................................................................... 4.9%
Cadillac.............................................................. 0.3%
Chrysler/Dodge/Plymouth/Jeep/Eagle.................................... 17.7%
Ford.................................................................. 57.2%
Honda................................................................. 1.7%
Infiniti.............................................................. 1.1%
Jaguar................................................................ 0.5%
KIA................................................................... 0.2%
Oldsmobile............................................................ 0.4%
Saturn................................................................ 1.7%
Toyota................................................................ 6.7%
Volvo................................................................. 7.5%
Volkswagen............................................................ 0.1%
Total............................................................... 100.0%
(1) Does not include Nelson Bowers Dodge as it was purchased March 1997 and
KIA-VW of Chattanooga which was purchased April 1997. European Motors of
Nashville and European Motors were purchased in October 1996 and May 1996,
respectively, and information for such dealerships is included from their
purchase dates through December 1996.
The Company seeks to provide customer oriented service and build lasting
customer relationships that will result in repeat and referral business. Sales
techniques and processes vary depending on the product line and local market
conditions. All of the Company's dealerships use computer technology for
prospecting and customer follow-up and extensively train sales staff to meet the
needs of customers. Certain of the dealerships use computer kiosks to allow
customers to browse vehicle inventories at their leisure. Depending on brand and
local market, dealerships may use "greeters" rather than sales people to
initially assist customers entering a dealership.
Substantially all of the Company's new vehicles are acquired from
Manufacturers. Allocation of vehicle inventory from Manufacturers is based
primarily on sales volume and input from dealers. Vehicle purchases are financed
through revolving credit facilities known in the industry as floor plan lending.
The following table presents information with respect to the Company's new
vehicle sales:
SONIC DEALERSHIPS
SONIC DEALERSHIPS SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
PRO FORMA
FOR THE
ACTUAL ACQUISITIONS ACTUAL
1992 1993 1994 1995 1996 1996 1996 1997
(IN THOUSANDS, EXCEPT VEHICLE UNIT DATA)
Unit sales............ 8,060 9,429 9,686 10,273 11,693 24,114 6,027 6,553
Sales revenue......... $126,230 $152,525 $164,361 $186,517 $233,146 $549,285 $117,850 $136,798
Gross profit.......... $ 8,799 $ 8,872 $ 10,043 $ 12,338 $ 15,809 $ 39,811 $ 7,672 $ 8,892
Gross profit margin... 7.0% 5.8% 6.1% 6.6% 6.8% 7.3% 6.6% 6.5%
PRO FORMA
FOR THE
ACQUISITIONS
1997
Unit sales............ 12,816
Sales revenue......... $289,908
Gross profit.......... $ 20,881
Gross profit margin... 7.2%
New vehicle sales include retail lease transactions and lease-type
transactions, both of which are arranged by the Company. New vehicle leases
generally have short terms. Lease customers, therefore, return to the new
vehicle market more
47
frequently. Leases also provide a source of late-model, generally low mileage,
vehicles for its used vehicle inventory. Generally, leased vehicles are under
warranty for the entire lease term, which allows the Company to provide repair
service to the lessee throughout the term of the lease.
USED VEHICLE SALES
The Company sells a broad variety of makes and models of used cars, vans,
trucks and sport utility vehicles. In 1996, the Company sold 9,541 used car and
3,949 used truck (including sport utility vehicles) units. Used vehicle retail
sales for 1996 represented 38.7% of pro forma total retail unit sales.
Used vehicles are obtained by the Company through customer trade-ins, at
"closed" auctions which may be attended only by new vehicle dealers and which
offer off-lease, rental and fleet vehicles, and at "open" auctions which offer
repossessed vehicles and vehicles sold by other dealers. The Company sells its
used vehicles to retail customers and, in the case of vehicles in poor condition
or vehicles which remain unsold for a specified period of time, to other dealers
or wholesalers. Sales to other dealers or wholesalers are frequently close to or
below cost and therefore negatively affect the Company's gross margin on used
vehicle sales.
The Company emphasizes retail sales of used vehicles in order to offer a
wider variety of vehicles and to benefit from the higher gross margins from used
vehicle sales. To improve the marketability of used vehicles the Company employs
both manufacturer supported and in-house used car certification programs and
sale of extended warranties on used vehicles. At certain locations, the Company
provides a five day money back guarantee on the sale of all used vehicles. The
Company intends to expand this guarantee program to all locations.
After the Acquisitions, the Company will operate four standalone used car
facilities. As the Company enters new markets and gains market share in existing
markets, the Company intends to expand its standalone used car facilities to
take advantage of the high quality sources of vehicles available to new vehicle
retailers.
The following table sets forth information on the Company's used vehicle
sales:
SONIC DEALERSHIPS
SONIC DEALERSHIPS SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
PRO FORMA
FOR THE
ACTUAL ACQUISITIONS ACTUAL
1992 1993 1994 1995 1996 1996 1996 1997
(IN THOUSANDS, EXCEPT VEHICLE UNIT DATA)
Retail units sold.......... 3,891 4,104 4,372 5,172 5,488 13,453 2,836 2,638
Retail revenue............. $33,636 $37,742 $47,537 $60,766 $68,054 $186,828 $35,200 $32,666
Retail gross profit........ 3,545 3,964 5,182 5,776 5,748 14,761 2,968 2,772
Retail gross margin........ 10.5% 10.5% 10.9% 9.5% 8.5% 7.9% 8.4% 8.5%
Wholesale unit sales....... 3,756 4,189 4,656 5,009 5,344 12,469 2,751 2,750
Wholesale revenue.......... $$11,198 $13,362 $16,109 $20,025 $25,642 $ 66,415 $13,411 $15,342
Wholesale gross profit..... 16 27 43 (45) (23) 1,160 (12) (145)
Wholesale gross margin..... 0.1% 0.2% 0.3% (0.2)% (0.1)% 1.8% (0.9)% (1.0)%
Total unit sales........... 7,647 8,293 9,028 10,181 10,832 25,922 5,587 5,388
Total revenue.............. $44,834 $51,104 $63,646 $80,791 $93,696 $253,243 $48,611 $48,008
Total gross profit......... 3,561 3,991 5,225 5,731 5,725 15,921 2,956 2,627
Total gross margin......... 7.9% 7.8% 8.2% 7.1% 6.1% 6.3% 6.1% 5.5%
PRO FORMA
FOR THE
ACQUISITIONS
1997
Retail units sold.......... 7,222
Retail revenue............. $ 98,992
Retail gross profit........ 6,463
Retail gross margin........ 6.5%
Wholesale unit sales....... 6,639
Wholesale revenue.......... $ 37,921
Wholesale gross profit..... 2,060
Wholesale gross margin..... 5.4%
Total unit sales........... 13,861
Total revenue.............. $ 136,913
Total gross profit......... 8,523
Total gross margin......... 6.2%
SERVICE AND PART SALES
The Company provides service and parts at each of its franchised
dealerships. The Company provides maintenance and repair services at its 20 new
vehicle dealerships and three used vehicle facilities. The Company utilizes
approximately 400 service bays in providing both warranty and non-warranty
services. Service and parts sales provide higher gross margins than vehicle
sales. In 1996, the Company's service and parts operations generated $76.8
million in revenues and $31.2 million in gross profit, representing 8.9% and
30.7% of total revenues and gross profit, respectively.
Historically, the automotive repair industry has been highly fragmented.
However, the Company believes the increased use of advanced technology in
vehicles has made it difficult for independent repair shops to perform major or
technical repairs. Additionally, manufacturers permit warranty work to be
performed only at franchised dealerships. Given the increasing technological
complexity of motor vehicles and the trend to long term warranties, the Company
believes an increasing percentage of repair work will be performed at franchised
dealerships.
The Company regards its service operations as an integral part of its
overall approach to customer service. Vehicle service provides additional
opportunities to build long-term customer relationships. The Company uses
customer calling,
48
coupon programs and other techniques to attract and retain service customers.
Although individual dealerships vary based on markets and brands, many Company
dealerships use service "teams" and variable rate or "menu" pricing structures
to improve customer satisfaction with repair service.
Sales of factory authorized equipment and parts to wholesale customers are
an integral component of parts operations at certain of the Company's
dealerships. For example, the Company's Lone Star Ford dealership sold
approximately $9.3 million in wholesale parts in 1996. The Company plans to
capitalize on its representation of numerous manufacturers and its experience as
a wholesale parts distributor in order to increase sales of factory authorized
equipment and parts to wholesale customers.
The following table sets forth information regarding the Company's parts
and service sales:
SONIC DEALERSHIPS
SONIC DEALERSHIPS SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
PRO FORMA
FOR THE
ACTUAL ACQUISITIONS ACTUAL
1992 1993 1994 1995 1996 1996 1996 1997
(IN THOUSANDS)
Sales Revenue.............. $21,778 $27,242 $30,298 $31,957 $35,764 $ 87,168 $18,603 $20,220
Gross Profit............... 7,307 9,540 10,344 11,003 13,106 32,161 6,317 6,822
Gross Profit Margin........ 33.6% 35.0% 34.1% 34.4% 36.7% 36.9% 34.0% 33.7%
PRO FORMA
FOR THE
ACQUISITIONS
1997
Sales Revenue.............. $ 46,582
Gross Profit............... 17,780
Gross Profit Margin........ 38.2%
COLLISION REPAIR
The Company operates collision repair centers, or body shops, at eight of
its dealership locations. In 1996, collision repair accounted for $8.9 million,
or 1.0%, of the Company's pro forma revenues and 4.5% of the Company's gross
profit. The Company's collision repair business provides favorable margins and,
similar to service and parts, is not significantly affected by business cycles
or consumer preferences. In addition, because of the higher cost of used
vehicles, insurance adjusters are more hesitant to declare a vehicle a total
loss, resulting in more significant, and higher cost, repair jobs. The Company
believes that, because of the high capital investment required for collision
repair shops and the cost of complying with governmental regulations, large
volume body shops will be more successful in the future than smaller volume
shops. The Company believes the collision repair business will consolidate and
that it will be able to capitalize on this consolidation.
The following table sets forth information regarding the Company's
collision repair operations:
SONIC
DEALERSHIPS
SONIC DEALERSHIPS SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
PRO FORMA
FOR THE
ACTUAL ACQUISITIONS ACTUAL
1992 1993 1994 1995 1996 1996 1996 1997
(IN THOUSANDS)
Sales Revenue...................... $2,765 $3,093 $3,685 $3,903 $4,942 $8,930 $2,398 $2,687
Gross Profit....................... 1,232 1,516 1,816 1,947 2,452 4,975 1,201 1,284
Gross Profit Margin................ 44.6% 49.0% 49.3% 49.9% 49.6% 55.7% 50.1% 47.8%
PRO FORMA
FOR THE
ACQUISITIONS
1997
Sales Revenue...................... $6,478
Gross Profit....................... 3,371
Gross Profit Margin................ 52.0%
FINANCE AND INSURANCE
The Company offers its customers a wide range of financing and leasing
alternatives for the purchase of vehicles. In addition, as part of each sale,
the Company offers customers credit life, accident and health and disability
insurance to cover the financing cost of their vehicle, as well as warranty or
extended service contracts. During the past five years, the Company's pro forma
revenue from financing, insurance and extended warranty transactions has grown
from $6.9 million in 1992 to $18.1 million in 1996.
The Company believes that its customers' ability to obtain financing at its
dealerships significantly enhances the Company's ability to sell new and used
vehicles. The Company provides a variety of financing and leasing alternatives
in order to meet the specific needs of each potential customer. The Company
believes its ability to obtain customer-tailored financing on a "same day" basis
provides it with an advantage over many of its competitors, particularly smaller
competitors which do not generate sufficient volume to attract the diversity of
financing sources that are available to the Company. The dealership will then be
able to provide a customer with a broader array of lease payment alternatives
and, consequently, appeal to a term buyer who is trying to purchase a vehicle of
choice at or below a specific monthly payment. During 1996, the Company arranged
for financing for approximately 44.7% of its new vehicle sales and 53.6% of its
used vehicle sales.
49
The Company assigns its vehicle financing contracts and leases to other
parties, instead of directly financing sales, which reduces the Company's
exposure to loss from financing activities. The Company receives a commission
from the lender for originating and assigning the loan or lease but is assessed
a chargeback fee by the lender if a loan is canceled, in most cases, within 120
days of making the loan. Early cancellation can result from early repayment
because of refinancing of the loan, the sale or trade-in of the vehicle, or
default on the loan. The Company establishes an allowance to absorb estimated
chargebacks and refunds. The Company believes that its high volume of business
makes the Company's retail contracts more attractive to lenders, which may
enable the Company to negotiate higher commission rates in contrast to lower
volume dealerships.
In addition to its financing activities, the Company offers extended
service contracts in connection with the sale of new and used vehicles. Extended
service contracts on new vehicles supplement the warranties offered by the
vehicle manufacturer, and on used vehicles, such contracts supplement any
remaining manufacturer warranty or serve as the primary service contract on the
vehicle. The extended service contracts sold by the Company are issued by
third-party insurers that pay the Company a commission upon sale of the
contract. In 1996, the Company sold extended service contracts on 24.0% and
36.1% respectively, of its new and used retail vehicle sales. The Company also
offers its customers credit life, health and accident insurance when they
finance an automobile purchase, and receives a commission on each policy sold.
SALES AND MARKETING
The Company's marketing and advertising activities vary among its
dealerships and among its markets. Generally, the Company advertises primarily
through television, newspapers, radio and direct mail and regularly conducts
special promotions designed to focus vehicle buyers on its product offerings.
The Company intends to continue tailoring its marketing efforts to the relevant
marketplace in order to reach the Company's targeted customer base. The Company
also has computer technology to aid sales people in prospecting for customers.
Under arrangements with manufacturers, the Company receives a subsidy for a
portion of its advertising expenses incurred in connection with a manufacturer's
vehicles. Because of the Company's leading market presence in certain markets,
the Company believes it has been able to realize cost savings on its advertising
expenses due to volume discounts and other concessions from media. The Company
also believes its consolidated marketing campaigns within particular markets
result in enhanced name recognition and sales volume when compared with smaller
competitors in the same market.
RELATIONSHIPS WITH MANUFACTURERS
Each of the Company's dealerships operates under a separate franchise or
dealer agreement (a "Dealer Agreement") which governs the relationship between
the dealership and the Manufacturer. In general, each Dealer Agreement specifies
the location of the dealership for the sale of vehicles and for the performance
of certain approved services in a specified market area. The designation of such
areas generally does not guarantee exclusivity within a specified territory. In
addition, most Manufacturers allocate vehicles on a "turn and earn" basis which
rewards high volume. A Dealer Agreement requires the dealer to meet specified
standards regarding showrooms, the facilities and equipment for servicing
vehicles, inventories, minimum net working capital, personnel training, and
other aspects of the business. The Dealer Agreement with each dealership also
gives each Manufacturer the right to approve the dealership's general manager
and any material change in management or ownership of the dealership. Each
Manufacturer may terminate a Dealer Agreement under certain circumstances, such
as a change in control of the dealership without Manufacturer approval, the
impairment of the reputation or financial condition of the dealership, the
death, removal or withdrawal of the dealership's general manager, the conviction
of the dealership or the dealership's owner or general manager of certain
crimes, a failure to adequately operate the dealership or maintain wholesale
financing arrangements, insolvency or bankruptcy of the dealership or a material
breach of other provisions of the Dealer Agreement. In connection with the
Offering, the Company is amending its Dealer Agreements to revise those
provisions which would have prohibited the Company from selling its Common Stock
to the public. See "Description of Capital Stock -- Delaware Law, Certain
Charter and Bylaw Provisions and Certain Franchise Agreement Provisions."
Many automobile manufacturers are still developing their policies regarding
public ownership of dealerships. The Company believes that these policies will
continue to change as more dealership groups sell their stock to the public, and
as the established, publicly-owned dealership groups acquire more franchises. To
the extent that new or amended manufacturer policies restrict the number of
dealerships which may be owned by a dealership group, or the transferability of
the Company's Common Stock, such policies could have a material adverse effect
on the Company. See "Risk Factors -- Dependence on Automobile Manufacturers" and
" -- Concentration of Voting Power and Anti-Takeover Provisions."
Certain state statutes in Florida and other states limit manufacturers'
control over dealerships. Under Florida law, notwithstanding any contrary terms
in a dealer agreement, manufacturers may not unreasonably withhold approval for
the sale of
50
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 automaker's license to distribute vehicles in Florida may
be revoked if, among other things, the automaker has forced or attempted to
force an automobile dealer to accept delivery of motor vehicles not ordered by
that dealer.
Under Texas law, despite the terms of contracts between manufacturers and
dealers, manufacturers may not unreasonably withhold approval of a transfer of a
dealership. It is unreasonable under Texas law for a manufacturer to reject a
prospective transferee of a dealership who is of good moral character and who
otherwise meets the manufacturer's written, reasonable and uniformly applied
standards or qualifications relating to the prospective transferee's business
experience and financial qualifications. In addition, under Texas law and the
laws of other states, franchised dealerships may challenge manufacturers'
attempts to establish new franchises in the franchised dealers' markets, and
state regulators may deny applications to establish new dealerships for a number
of reasons, including a determination that the manufacturer is adequately
represented in the region. Texas law limits the ability of manufacturers to
terminate or fail to renew franchises. In addition, other laws in Texas and
elsewhere limit the ability of manufacturers to withhold their approval for the
relocation of a franchise or require that disputes be arbitrated. In addition, a
manufacturer's license to distribute vehicles in Texas may be revoked if, among
other things, the manufacturer has forced or attempted to force an automobile
dealer to accept delivery of motor vehicles not ordered by that dealer.
Georgia law provides that no manufacturer may arbitrarily reject a proposed
change of control or sale of an automobile dealership, and any manufacturer
challenging such a transfer of a dealership must provide written reasons for its
rejection to the dealer. Manufacturers bear the burden of proof to show that any
disapproval of a proposed transfer of a dealership is not arbitrary. If a
manufacturer terminates a franchise agreement due to a proposed transfer of the
dealership or for any other reason not considered to constitute good cause under
Georgia law, such termination will be ineffective. As an alternative to
rejecting or accepting a proposed transfer of a dealership or terminating the
franchise agreement, Georgia law provides that a manufacturer may offer to
purchase the dealership on the same terms and conditions offered to the
prospective transferee.
Under Tennessee law, a manufacturer may not modify, terminate or refuse to
renew a franchise agreement with a dealer except for good cause, as defined in
the statutes. Further, a manufacturer may be denied a Tennessee license, or have
an existing license revoked or suspended if the manufacturer modifies,
terminates, or suspends a franchise agreement due to an event not constituting
good cause. Good cause includes material shortcomings in the character,
financial condition or business experience of the dealer. A manufacturer's
Tennessee license may also be revoked if the manufacturer prevents or attempts
to prevent the sale or transfer of the dealership by unreasonably withholding
consent to the transfer.
COMPETITION
The retail automotive industry is highly competitive. Depending on the
geographic market, the Company competes with both dealers offering the same
brands and product line as the Company and dealers offering other automakers'
vehicles. The Company also competes for vehicle sales with auto brokers and
leasing companies. The Company competes with small, local dealerships and with
large multi-franchise auto dealerships. Many of the Company's larger competitors
are larger and have greater financial and marketing resources and are more
widely known than the Company. Some of the Company's competitors also may
utilize marketing techniques, such as Internet visibility or "no negotiation"
sales methods, not currently used by the Company.
The Company also competes with regional and national car rental companies,
which sell their used rental cars, and used automobile "superstores," such as
AutoNation and CarMax. In the future, new competitors may enter the automotive
retailing market, including automobile manufacturers that may decide to open
additional retail outlets or acquire other dealerships. In addition, the used
vehicle superstores generally offer a greater and more varied selection of
vehicles than the Company's dealerships. As the Company seeks to acquire
dealerships in new markets, it may face significant competition (including
competition from other publicly-owned dealer groups) as it strives to gain
market share. See "Risk Factors -- Competition"
The Company believes that the principal competitive factors in vehicle
sales are the marketing campaigns conducted by automakers, the ability of
dealerships to offer a wide selection of the most popular vehicles, the location
of dealerships and the quality of customer service. Other competitive factors
include customer preference for makes of automobiles, pricing (including
manufacturer rebates and other special offers) and warranties.
51
In addition to competition for vehicle sales, the Company also competes
with other auto dealers, service stores, auto parts retailers and independent
mechanics in providing parts and service. The Company believes that the
principal competitive factors in parts and service sales are price, the use of
factory-approved replacement parts, the familiarity with a dealer's makes and
models and the quality of customer service. A number of regional and national
chains offer selected parts and service at prices that may be lower than the
Company's prices.
In arranging or providing financing for its customers' vehicle purchases,
the Company competes with a broad range of financial institutions. The Company
believes that the principal competitive factors in offering financing are
convenience, interest rates and contract terms.
The Company's success depends, in part, on national and regional
automobile-buying trends, local and regional economic factors and other regional
competitive pressures. The Company sells its vehicles in the Charlotte,
Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta markets.
Conditions and competitive pressures affecting these markets, such as
price-cutting by dealers in these areas, or in any new markets the Company
enters, could adversely affect the Company, although the retail automobile
industry as a whole might not be affected. See "Risk Factors -- Competition."
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
A number of regulations affect the Company's business of marketing,
selling, financing and servicing automobiles. The Company also is subject to
laws and regulations relating to business corporations generally.
Under North Carolina, South Carolina, Tennessee, Florida, Georgia and Texas
law as well as the laws of other states into which the Company may expand, the
Company must obtain a license in order to establish, operate or relocate a
dealership or operate an automotive repair service. These laws also regulate the
Company's conduct of business, including its advertising and sales practices.
Other states may have similar requirements.
The Company's operations are also subject to laws governing consumer
protection. Automobile dealers and manufacturers are subject to so-called "Lemon
Laws" that require a manufacturer or the dealer to replace a new vehicle or
accept it for a full refund within one year after initial purchase if the
vehicle does not conform to the manufacturer's express warranties and the dealer
or manufacturer, after a reasonable number of attempts, is unable to correct or
repair the defect. Federal laws require certain written disclosures to be
provided on new vehicles, including mileage and pricing information.
The imported automobiles purchased by the Company are subject to United
States customs duties and, in the ordinary course of its business, the Company
may, from time to time, be subject to claims for duties, penalties, liquidated
damages, or other charges. Currently, United States customs duties are generally
assessed at 2.5% of the customs value of the automobiles imported, as classified
pursuant to the Harmonized Tariff Schedule of the United States. See "Risk
Factors -- Imported Products."
The Company's financing activities with its customers are subject to
federal truth-in-lending, consumer leasing and equal credit opportunity
regulations as well as state and local motor vehicle finance laws, installment
finance laws, usury laws and other installment sales laws. Some states regulate
finance fees that may be paid as a result of vehicle sales. State and federal
environmental regulations, including regulations governing air and water quality
and the storage and disposal of gasoline, oil and other materials, also apply to
the Company.
The Company believes that it complies in all material respects with the
laws affecting its business. Possible penalties for violation of any of these
laws include revocation of the Company's licenses and fines. In addition, many
laws may give customers a private cause of action.
As with automobile dealerships generally, and service parts and body shop
operations in particular, the Company's business involves the use, storage,
handling and contracting for recycling or disposal of hazardous or toxic
substances or wastes, including environmentally sensitive materials such as
motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon,
waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing
agents, gasoline and diesel fuels. The Company's business also involves the past
and current operation and/or removal of aboveground and underground storage
tanks containing such substances or wastes. Accordingly, the Company is subject
to regulation by federal, state and local authorities establishing health and
environmental quality standards, and liability related thereto, and providing
penalties for violations of those standards. The Company is also subject to
laws, ordinances and regulations governing remediation of contamination at
facilities it operates or to which it sends hazardous or toxic substances or
wastes for treatment, recycling or disposal.
The Company believes that it does not have any material environmental
liabilities and that compliance with environmental laws and regulations will
not, individually or in the aggregate, have a material adverse effect on the
Company's
52
results of operations or financial condition. However, soil and groundwater
contamination is known to exist at certain properties used by the Company.
Furthermore, environmental laws and regulations are complex and subject to
frequent change. There can be no assurance that compliance with amended, new or
more stringent laws or regulations, stricter interpretations of existing laws or
the future discovery of environmental conditions will not require additional
expenditures by the Company, or that such expenditures will not be material. See
"Risk Factors -- Government Regulation; Environmental Matters."
53
FACILITIES
The Company's principal executive offices are located at 5401 East
Independence Boulevard, Charlotte, North Carolina 28218, and its telephone
number is (704) 532-3301. These executive offices are located on the premises
owned by Town & Country Ford. The following table identifies, for each of the
properties to be utilized by the Company's dealership operations the location,
the owner/lessor, and the term and rental rate of the Company's lease for such
property, if applicable:
1997
OWNERSHIP MONTHLY EXPIRATION
DEALERSHIP STATUS OWNER/LESSOR RENT (2) DATE FACILITY
Town & Country Ford.................. Lease STC Properties (1) $ 34,083 2000 Main Bldg.
Body Shop
5401 East Independence Blvd.,
Charlotte
Lone Star Ford....................... Lease Viking Investments (1) $ 30,000 2005 Main Bldg.
Used Car Bldg.
8477 North Freeway, Houston Body Shop
Fleet Bldg.
Fort Mill Ford....................... Own -- -- -- Main Bldg.
Body Shop
788 Gold Hill Rd., Fort Mill, SC
Fort Mill Chrysler-Plymouth-Dodge.... Lease Jeffrey Boyd $ 16,667 2002 Main Bldg.
Used Car Bldg.
3310 Hwy. 51, Fort Mill, SC
Town & Country Toyota................ Own -- -- -- Main Bldg.
Body Shop
9101 South Blvd., Charlotte
Frontier Olsmobile-Cadillac.......... Lease Landers Oldsmobile-Cadillac $ 17,000 1998(3 ) Main Bldg.
Body Shop
2501 Roosevelt Blvd., Monroe, NC Used Car Bldg.
Ken Marks Ford....................... Lease Marks Holding Company (1) $ 95,000 2007(3 ) Main Bldg.
24825 US Hwy. 19 North, Clearwater
&
3925 Tampa Rd., Oldsmar, FL
Dyer Volvo........................... Lease D&R Investments (1) $ 50,000 2009(3 ) Main Bldg.
5260 Peachtree Industrial Blvd.,
Atlanta
Lake Norman Lease Phil M. and Quinton M. Gandy $ 40,000 (4) 2007(3 ) Main Bldg.
Chrysler-Plymouth-Jeep-Eagle....... and affiliates
Chartwell Center Dr., Cornelius, NC
Lake Norman Dodge.................... Lease Phil M. and Quinton M. Gandy $ 40,000 (4) 2007(3 ) Main Bldg.
and affiliates Truck Center
I-77 & Torrence Chapel Rd.,
Cornelius, NC
KIA/VW of Chattanooga................ Lease KIA Land Development (1) $ (5) 2007(3 ) Main Bldg.
6015 International Dr., Chattanooga
European Motors of Nashville......... Lease Third National Bank, $ 21,070 1998(3 ) Main Bldg.(7)
David P'Pool,
630 Murfreeboro Pike, Nashville Stella P'Pool
European Motors...................... Lease Nelson Bowers (1) $ 16,846 (4) 2007(3 ) Main Bldg.
5949 Brainerd Rd., Chattanooga
Jaguar of Chattanooga................ Lease JAG Properties LLC, Thomas $ 22,010 2017(3 ) Main Bldg.
Green, Jr. and
5915 Brainerd Rd., Chattanooga Nelson Bowers (1)
Cleveland Lease Cleveland Properties LLC (1) $ 14,000 2011(3 ) Main Bldg.
Chrysler-Plymouth-Jeep-Eagle.......
2496 South Lee Hwy., Cleveland, TN
Nelson Bowers Dodge.................. Lease Edward & Barbara Wright $ 16,800 2001(3 ) Main Bldg.
402 West Martin Luther King Blvd.,
Chattanooga
Cleveland Village Imports............ Lease Thomas Green, Jr. and Nelson $ 8,398 1997(3 ) Main Bldg.(8)
Bowers (1)
2490 & 2492 South Lee Hwy.,
Cleveland, TN
Saturn of Chattanooga................ Lease Nelson Bowers (1) $ 27,054 (4) 2007(3 ) Main Bldg.
6025 International Dr., Chattanooga
Nelson Bowers Ford................... Lease Robert G. Card, Jr. $ 9,000 Month to ) Main Bldg.
Month(3
717 South Lee Hwy., Cleveland, TN
Williams Motors...................... Lease J.T. Williams $ 15,000 1998(6 ) Main Bldg.
803 North Anderson Rd., Rock Hill,
SC
DEALERSHIP SQ. FT. ACRES
Town & Country Ford.................. 85,013 12.48
24,768
5401 East Independence Blvd.,
Charlotte
Lone Star Ford....................... 79,725 24.76
2,125
8477 North Freeway, Houston 26,450
1,500
Fort Mill Ford....................... 34,162 10.00
11,275
788 Gold Hill Rd., Fort Mill, SC
Fort Mill Chrysler-Plymouth-Dodge.... 9,809 5.50
1,470
3310 Hwy. 51, Fort Mill, SC
Town & Country Toyota................ 50,800 5.70
17,840
9101 South Blvd., Charlotte
Frontier Olsmobile-Cadillac.......... 14,825 7.08
11,250
2501 Roosevelt Blvd., Monroe, NC 2,200
Ken Marks Ford....................... 79,100 22.00
24825 US Hwy. 19 North, Clearwater
&
3925 Tampa Rd., Oldsmar, FL
Dyer Volvo........................... 60,000 6.00
5260 Peachtree Industrial Blvd.,
Atlanta
Lake Norman 26,000 6.00
Chrysler-Plymouth-Jeep-Eagle.......
Chartwell Center Dr., Cornelius, NC
Lake Norman Dodge.................... 25,000 6.00
5,000
I-77 & Torrence Chapel Rd.,
Cornelius, NC
KIA/VW of Chattanooga................ 8,445 3.75
6015 International Dr., Chattanooga
European Motors of Nashville......... 49,385 4.00
630 Murfreeboro Pike, Nashville
European Motors...................... 40,295 12.24
5949 Brainerd Rd., Chattanooga
Jaguar of Chattanooga................ 34,850 3.57
5915 Brainerd Rd., Chattanooga
Cleveland 17,750 5.60
Chrysler-Plymouth-Jeep-Eagle.......
2496 South Lee Hwy., Cleveland, TN
Nelson Bowers Dodge.................. 30,000 4.88
402 West Martin Luther King Blvd.,
Chattanooga
Cleveland Village Imports............ 15,760 2.05
2490 & 2492 South Lee Hwy.,
Cleveland, TN
Saturn of Chattanooga................ 20,100 6.22
6025 International Dr., Chattanooga
Nelson Bowers Ford................... 19,725 1.40
717 South Lee Hwy., Cleveland, TN
Williams Motors...................... 15,000(9) 3.0(9)
803 North Anderson Rd., Rock Hill,
SC
(FOOTNOTES ON FOLLOWING PAGE)
54
(1) These lessors are affiliates of the Company's stockholders and/or executive
officers. See "Risk Factors -- Potential Conflicts of Interest," "Certain
Transactions -- Certain Dealership Leases" and "Principal Stockholders."
(2) All of the Company's leases are "triple net" leases and require the Company
to pay all real estate taxes, maintenance and insurance costs for the
property.
(3) Each of these leases provides for two renewal terms of five years each, at
the option of the Company.
(4) Monthly rent expense based on estimate from the purchase agreement relating
to the Acquisition.
(5) Lease rent currently under negotiation.
(6) This lease provides for four renewal terms of one year each, at the option
of the Company.
(7) European Motors of Nashville has entered into a 20-year lease with H.G. Hill
Realty Company, an entity unaffiliated with the Company, regarding a new BMW
facility to be constructed at a site separate from its existing facility.
The monthly rent payments under this lease are not presently fixed and will
depend upon the final construction costs of the new facility. The lease term
will begin when the Company occupies these premises.
(8) Cleveland Village Imports also leases a used-car lot across the street from
its main facility from individuals not affiliated with the Company for a
term expiring in 2002 and providing for $3,000 in monthly rent.
(9) Estimated size.
All of the Company's dealerships are located along major U.S. or interstate
highways. One of the principal factors considered by the Company in evaluating
an acquisition candidate is its location. The Company prefers to acquire
dealerships located along major thoroughfares, primarily interstate highways
with ease of access, which can be easily visited by prospective customers.
The Company owns certain of the real estate associated with Town & Country
Toyota and Frontier Oldsmobile-Cadillac. The remainder of the properties
utilized by the Company's dealership operations are leased as set forth in the
foregoing table. The Company believes that its facilities are adequate for its
current needs. In connection with its acquisition strategy, the Company intends
to lease the real estate associated with a particular dealership whenever
practicable.
Under the terms of its franchise agreements, the Company must maintain an
appropriate appearance and design of its facilities and is restricted in its
ability to relocate its dealerships. See " -- Relationships with Manufacturers."
EMPLOYEES
As of June 30, 1997 the Company employed 1,574 people, of whom
approximately 210 were employed in managerial positions, 594 were employed in
non-managerial sales positions, 346 were employed in non-managerial parts and
service positions and 424 were employed in administrative support positions.
The Company believes that many dealerships in the retail automobile
industry have difficulty in attracting and retaining qualified personnel for a
number of reasons, including the historical inability of dealerships to provide
employees with an equity interest in the profitability of the dealerships. The
Company intends, upon completion of the Offering, to provide certain executive
officers, managers and other employees with stock options and all employees with
a stock purchase plan and believes this type of equity incentive will be
attractive to existing and prospective employees of the Company. See
"Management -- Stock Option Plan" and " -- Employee Stock Purchase Plan" and
"Risk Factors -- Dependence on Key Personal and Limited Management and Personnel
Resources."
The Company believes that its relationship with its employees is good. None
of the Company's employees is represented by a labor union. Because of its
dependence on the Manufacturers, however, the Company may be affected by labor
strikes, work slowdowns and walkouts at the Manufacturer's manufacturing
facilities. See "Risk Factors -- Dependence on Automobile Manufacturers."
LEGAL PROCEEDINGS AND INSURANCE
From time to time, the Company is named in claims involving the manufacture
of automobiles, contractual disputes and other matters arising in the ordinary
course of the Company's business. Currently, no legal proceedings are pending
against or involve the Company that, in the opinion of management, could
reasonably be expected to have a material adverse effect on the business,
financial condition or results of operations of the Company.
55
Because of their vehicle inventory and nature of business, automobile
retail dealerships generally require significant levels of insurance covering a
broad variety of risks. The Company's insurance includes an umbrella policy as
well as insurance on its real property, comprehensive coverage for its vehicle
inventory, general liability insurance, employee dishonesty coverage and errors
and omissions insurance in connection with its vehicle sales and financing
activities.
56
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS; KEY PERSONNEL
The executive officers, directors and key personnel of the Company, and
their ages as of the date of this Prospectus, are as follows:
NAME AGE POSITION(S) WITH THE COMPANY
O. Bruton Smith..................... 70 Chairman, Chief Executive Officer and Director*
Bryan Scott Smith................... 29 President, Chief Operating Officer and Director*
Nelson E. Bowers, II................ 53 Executive Vice President and Director Nominee*
Theodore M. Wright.................. 35 Chief Financial Officer, Vice President-Finance, Secretary and Director*
William R. Brooks................... 47 Director
Jeffrey C. Rachor................... 35 Regional Vice President-Mid South Region
O. Ken Marks, Jr.................... 35 Regional Vice President-Florida
Ivan A. Tufty....................... 57 Regional Vice President-Texas
William M. Sullivan................. 65 Regional Vice President-North and South Carolina
* Executive Officer
O. BRUTON SMITH has been the Chairman, Chief Executive Officer and a
director of the Company since its organization in 1997 and presently is the
controlling shareholder of the Company through his direct and indirect ownership
of Class B Common Stock. Mr. Smith has been the president and controlling
shareholder of Sonic Financial since its formation, which prior to the
Reorganization owned a controlling interest in all of the Company's dealerships
except Town & Country Toyota and presently owns a controlling interest in the
Company's Common Stock. Mr. Smith, prior to the Reorganization, owned a
controlling interest in Town & Country Toyota. Mr. Smith currently is, and since
their acquisition by Sonic Financial has been, a director and the president of
each of the Company's dealerships. Mr. Smith has worked in the retail automobile
industry since 1966. Mr. Smith's initial term as a director of the Company will
expire at the annual meeting of stockholders of the Company to be held in 2000.
Mr. Smith is also the chairman and chief executive officer, a director and
controlling shareholder, either directly or through Sonic Financial, of Speedway
Motorsports, Inc. ("SMI"). SMI is a public company traded on the NYSE. Among
other things, it owns and operates the following NASCAR racetracks: Atlanta
Motor Speedway, Bristol Motor Speedway, Charlotte Motor Speedway, Sears Point
Raceway and Texas Motor Speedway. He is also the executive officer and a
director of each of SMI's operating subsidiaries. Under his employment agreement
with the Company, Mr. Smith is required to devote approximately 50% of his
business time to the Company's business.
BRYAN SCOTT SMITH has been the President, Chief Operating Officer and a
director of the Company since its organization in 1997. Mr. Smith, who is the
son of Bruton Smith, has been the Vice President since 1993 and, prior to the
Reorganization, the minority owner of Town & Country Ford. Mr. Smith joined the
Company's predecessor in January 1991 on a full-time basis as an assistant used
car manager. In August of 1991, Mr. Smith became the used car manager at Town &
Country Ford. Mr. Smith was promoted to General Manager of Town & Country Ford
in November 1992 where he remained until his appointment to President and Chief
Operating Officer of the Company in March of 1997. Mr. Smith's initial term as a
director of the Company will expire at the annual meeting of stockholders of the
Company to be held in 1998.
NELSON E. BOWERS, II will be appointed the Executive Vice President and a
director of the Company upon consummation of the Bowers Acquisition. Mr. Bowers
owns a controlling interest in the dealerships that are the subject of the
Bowers Acquisition and has worked in the retail automobile industry since 1974.
Mr. Bowers has served on national dealer councils for BMW and Volvo and has
owned and operated dealerships since 1979. Mr. Bowers' initial term as a
director of the Company will expire at the annual meeting of stockholders to be
held in 1999.
THEODORE M. WRIGHT has been the Chief Financial Officer, Vice
President-Finance, Secretary and a director of the Company since April 1997.
Before joining the Company, Mr. Wright was a Senior Manager and in charge of the
Columbia, South Carolina office of Deloitte & Touche LLP. Prior to joining the
Columbia office, Mr. Wright was a Senior Manager in Deloitte & Touche LLP's
National Office Accounting Research and SEC Services Departments from 1994 to
1995. From 1992 to 1994 Mr. Wright was an audit manager with Deloitte & Touche
LLP. Mr. Wright's initial term as a director of the Company will expire at the
annual meeting of stockholders to be held in 1999.
WILLIAM R. BROOKS has been a director of the Company since its formation.
Mr. Brooks also served as the Company's Chief Financial Officer, Vice
President-Finance 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,
57
Chief Financial Officer and a director of SMI. Mr. Brooks also serves as an
executive officer and a director for various operating subsidiaries of SMI.
Before the formation of SMI in December 1994, Mr. Brooks was the Vice President
of the Charlotte Motor Speedway and a Vice President and a director of Atlanta
Motor Speedway. Mr. Brooks joined Sonic Financial from Price Waterhouse in 1983.
At Sonic Financial, he was promoted from Manager to Controller in 1985 and again
to Chief Financial Officer in 1989. Mr. Brooks' initial term as a director of
the Company will expire at the annual meeting of stockholders to be held in
2000.
JEFFREY C. RACHOR will be appointed Regional Vice President upon
consummation of the Bowers Acquisition. Mr. Rachor has over 13 years experience
in automobile retailing and has been the chief operating officer at the Bowers
Dealerships since 1989. During this period, Mr. Rachor has also served at
various times as the general manager of Toyota, Saturn and
Chrysler-Plymouth-Jeep-Eagle dealerships. Prior to joining the Bowers
organization, Mr. Rachor was an assistant regional manager with American Suzuki
Motor Corporation from 1987 to 1989 and a Metro Sales Manager and a District
Sales Manager with GM's Buick Motor Division from 1983 to 1987.
O. KEN MARKS, JR. owns a controlling interest in Ken Marks Ford and has
operated that dealership as its chief executive since 1992. Mr. Marks is a
Chairman's award winner from Ford and has over 13 years experience in auto
retailing. Mr. Marks will be appointed a Regional Vice President upon
consummation of the Offering.
IVAN A. TUFTY has been Executive Manager of Lone Star Ford since 1990 and
will be appointed a Regional Vice President upon consummation of the Offering.
Mr. Tufty has over 40 years of experience in auto retailing and was a dealer
principal and equity owner for 12 years.
WILLIAM M. SULLIVAN has been Vice-President of Town & Country Ford since
prior to 1992 and will be appointed a Regional Vice President upon consummation
of the Offering. Mr. Sullivan has over 25 years experience in auto retailing as
an Executive Manager, head of F&I and in other roles.
As soon as practicable after the Offering, the Company intends to name two
or three individuals not employed by or affiliated with the Company to the
Company's Board of Directors.
The Board of Directors of the Company is divided into three classes, each
of which, after a transitional period, will serve for three years, with one
class being elected each year. The executive officers are elected annually by,
and serve at the discretion of, the Company's Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since the Company's organization in February 1997, all matters concerning
executive officer compensation have been addressed by the entire Board of
Directors. Bruton Smith, Scott Smith and Theodore Wright were executive officers
of the Company and, together with William R. Brooks, will constitute the entire
Board until the consummation of the Offering when Nelson Bowers, an executive
officer of the Company, is to be appointed. Bruton Smith serves as Chairman of
the Board of SMI. William R. Brooks, an executive officer of SMI, serves on the
Board of the Company. As soon as practicable after the Offering, the Company
intends to name at least two independent directors who will comprise the
Company's compensation committee. See "Management."
LIMITATIONS OF DIRECTORS LIABILITY
The Certificate includes a provision that effectively eliminates the
liability of directors to the Company or to the Company's stockholders for
monetary damages for breach of the fiduciary duties of a director, except for
breaches of the duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, certain actions
with respect to unlawful dividends, stock repurchases or redemptions and any
transaction from which the director derived an improper personal benefit. This
provision does not prevent stockholders from seeking nonmonetary remedies
covering any such action, nor does it affect liabilities under the federal
securities laws. The Company's Bylaws further provide that the Company shall
indemnify each of its directors and officers, to the fullest extent authorized
by Delaware Law, with respect to any threatened, pending or completed action,
suit or proceeding to which such person may be a party by reason of serving as a
director or officer. Delaware Law currently authorized a corporation to
indemnify its directors and officers against expenses (including attorney's
fees), judgments, fines and amount paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by a
third party if such officers or directors acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. Indemnification is
58
permitted in more limited circumstances with respect to derivative actions. The
Company believes that these provisions of the Certificate and the Bylaws are
necessary to attract and retain qualified persons to serve as directors and
officers.
COMMITTEES OF THE BOARD
The Board of Directors will establish a Compensation Committee and an Audit
Committee consisting of independent directors upon the election of at least two
independent directors. The Compensation Committee will review and approve
compensation for the executive officers, and administer, and determine awards
under, the Stock Option Plan and any other incentive compensation plans for
employees of the Company. See " -- Stock Option Plan" and " -- Employee Stock
Purchase Plan." The Audit Committee will recommend the selection of auditors for
the Company and will review the results of the audit and other reports and
services provided by the Company's independent auditors. The Company has not
previously had any of these committees.
DIRECTOR COMPENSATION
Members of the Board of Directors who are not employees of the Company will
be compensated for their services in amounts to be determined. The Company will
also reimburse all directors for their expenses incurred in connection with
their activities as directors of the Company. Directors who are also employees
of the Company receive no compensation for serving on the Board of Directors.
EXECUTIVE COMPENSATION
Sonic was incorporated on January 31, 1997 and did not conduct any
operations prior to that time. The Company anticipates that during 1997 its most
highly compensated executive officers with annual salaries exceeding $100,000,
and their annual base salaries for 1997, will be: Bruton Smith -- $350,000,
Scott Smith -- $300,000, Nelson Bowers, -- $400,000, and Theodore
Wright -- $180,000.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Bruton
Smith, Scott Smith, Bowers, Wright, Marks and Rachor (the "Employment
Agreements"), effective upon consummation of the Offering, which provide for an
annual base salary and certain other benefits. Pursuant to the Employment
Agreements, the 1997 base salaries of Messrs. Bruton Smith, Scott Smith, Bowers,
Wright, Marks and Rachor will be $350,000, $300,000, $400,000, $180,000,
$48,000, and $150,000, respectively. The executives will also receive such
additional increases as may be determined by the Compensation Committee. The
Employment Agreements, except those of Messrs. Rachor and Marks, provide for the
payment of annual performance-based bonuses equal to a percentage of the
executive's base salary, upon achievement by the Company (or relevant region) of
certain performance objectives, based on the Company's pre-tax income, to be
established by the Compensation Committee. The Employment Agreements of Messrs.
Rachor and Marks provide for the payment of annual performance-based bonuses,
paid in equal installments on a monthly basis, equal to a percentage of the
pre-tax earnings, of subsidiaries of the Company located within his regions of
responsibility, in the case of Mr. Rachor, and of Ken Marks Ford in the case of
Mr. Marks. See " -- Incentive Compensation Plan." Under the terms of the
Employment Agreements, the Company will employ Mr. Bruton Smith through
September 2000. Under the terms of their respective Employment Agreements, the
Company will employ Messrs. Scott, Smith, Bowers, Wright, Marks and Rachor for
five years or until their respective Employment Agreements are terminated by the
Company or the executive. Messrs. Scott Smith, Bowers, Wright, Marks and Rachor
also receive under their Employment Agreements, options pursuant to the
Company's Stock Option Plan, for shares, shares, shares, shares
and shares, of the Class A Common Stock, respectively, exercisable at the
initial public offering price, vesting in three equal annual installments
beginning October 1998 and expiring in October 2007.
Each of the Employment Agreements contain similar noncompetition
provisions. These provisions (i) prohibit the disclosure or use of confidential
Company information, and (ii) for a period of two years following the expiration
or termination of an Employment Agreement, prohibit competition with the Company
for the Company's employees and its customers, interference with the Company's
relationships with its vendors, and employment with any competitor of the
Company in specified territories. With respect to Messrs. Bruton Smith, Scott
Smith and Wright, the geographic restrictions apply in any Standard Metropolitan
Statistical Area ("SMSA") or county in which the Company has a place of business
at the time their employment ends. With respect to Messrs. Bowers and Rachor,
the restrictions apply only in the SMSA's for Houston, Charlotte, Chattanooga,
and Nashville. With respect to Mr. Marks, the territorial restrictions apply
only in the SMSA's or counties in which the Company has a place of business and
about which Marks had access to confidential information or for which he had
operational or managerial involvement.
59
Set forth below is information for the years ended December 31, 1996, 1995
and 1994 with respect to compensation for services to the Company's predecessors
of the Company's executive officers.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
OTHER NUMBER OF SHARES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY (1) BONUS (2) COMPENSATION OPTIONS (4) COMPENSATION (5)
O. Bruton Smith 1996 $ 164,750 $ 33,350(3) -- --
Chairman, Chief Executive Officer 1995 142,200 41,350(3) -- --
and Director 1994 142,200 41,000(3) -- --
Bryan Scott Smith 1996 $ 48,000 $ 230,714 (5) -- --
President, Chief 1995 48,000 168,670 (5) -- --
Operating Officer 1994 48,000 134,537 (5) -- --
and Director
(1) Does not include the dollar value of perquisites and other personal
benefits.
(2) The amounts shown are cash bonuses earned in the specified year and paid in
the first quarter of the following year.
(3) The Company provides Mr. Smith with the use of automobiles for personal use,
the annual cost of which is reflected as Other Annual Compensation.
(4) The Company's Stock Option Plan was adopted in August 1997. Therefore, no
options were granted to any of the Company's executive officers in 1996,
1995 or 1994.
(5) The aggregate amount of perquisites and other personal benefits received did
not exceed the lesser of $50,000 or 10% of the total annual salary and bonus
reported for such executive officer.
The Compensation Committee is expected to deliberate upon matters
concerning executive compensation, including possible changes in the components
and amounts of such compensation.
STOCK OPTION PLAN
In August 1997, the Board of Directors and stockholders of the Company
adopted the Company's 1997 Stock Option Plan (the "Stock Option Plan") in order
to attract and retain key personnel. The following discussion of the material
features of the Stock Option Plan is qualified by reference to the text of such
Plan filed as an exhibit to the Registration Statement of which this Prospectus
is a part.
Under the Stock Option Plan, options to purchase up to an aggregate of
shares of Class A Common Stock may be granted to key employees of the
Company and its subsidiaries and to officers, directors, consultants and other
individuals providing services to the Company. Members of the Board of Directors
who serve on the Compensation Committee must qualify as "non-employee
directors," as that term is defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and may not
participate in the Stock Option Plan.
The Compensation Committee of the Board of Directors of the Company will
administer the Stock Option Plan and will determine, among other things, the
persons who are to receive options, the number of shares to be subject to each
option and, the vesting schedule of options. The Board of Directors of the
Company will determine the terms and conditions upon which the Company may make
loans to enable an optionee to pay the exercise price of an option. In selecting
individuals for options and determining the terms thereof, the Compensation
Committee may consider any factors it considers relevant, including present and
potential contributions to the success of the Company. Options granted under the
Stock Option Plan must be exercised within a period fixed by the Compensation
Committee, which period may not exceed ten years from the date of grant of the
option or, in the case of incentive stock options ("ISOs") granted to any holder
on the date of grant of more than ten percent of the total combined voting power
of all classes of stock of the Company, five years from the date of grant of the
option. Options may be made exercisable in whole or in installments, as
determined by the Compensation Committee.
Options may not be transferred other than by will or the laws of descent
and distribution. During the lifetime of an optionee, options may be exercised
only by the optionee. The exercise price of options that are not ISOs will be
determined at the discretion of the Compensation Committee. The exercise price
of ISOs may not be less than the market value of the Class A Common Stock on the
date of grant of the option. In the case of ISOs granted to any holder on the
date of grant of more
60
than ten percent of the total combined voting power of all classes of stock of
the Company and its subsidiaries, the exercise price may not be less than 110%
of the market value per share of the Class A Common Stock on the date of grant.
Unless designated as "incentive stock options" intended to qualify under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), options
granted under the Stock Option Plan are intended to be "nonstatutory stock
options" ("NSOs"). The exercise price may be paid in cash, in shares of Class A
Common Stock owned by the optionee, in NSOs granted under the Stock Option Plan
(except that the exercise price of an ISO may not be paid in NSOs) or in any
combination of cash, shares and NSOs.
Options granted under the Stock Option Plan will include the right to
acquire a "reload" option. In such a case, if a participant pays all or part of
the exercise price of an option with shares of Class A Common Stock held by the
participant for at least six months, then, upon exercise of the option, the
participant is granted a second option to purchase, at the fair market value as
of the date of grant of the second option, the number of shares of Class A
Common Stock transferred to the Company by the participant in payment of the
exercise price of the original option. A reload option is not exercisable until
one year after the grant date of such reload option or the expiration date of
the original option. If the exercise price of a reload option is paid for with
shares of Class A Common Stock that have been held by the optionee for more than
six months, then another reload option will be issued. Shares of Class A Common
Stock covered by a reload option will not reduce the number of shares of Class A
Common Stock available under the Stock Option Plan.
The Stock Option Plan provides that, in the event of changes in the
corporate structure of the Company or certain events affecting the shares of the
Company, adjustments will automatically be made in the number and kind of shares
available for issuance and in the number and kind of shares covered by
outstanding options. It further provides that, in connection with any merger or
consolidation in which the Company is not the surviving corporation and which
results in the holders of the outstanding voting securities of the Company
owning less than a majority of the surviving corporation or any sale or transfer
by the Company of all or substantially all its assets or any tender offer or
exchange offer for or the acquisition, directly or indirectly, by any person or
group of all or a majority of the then-outstanding voting securities of the
Company, all outstanding options under the Stock Option Plan will become
exercisable in full on and after (i) the 15th day prior to the effective date of
such merger, consolidation, sale, transfer or acquisition or (ii) the date of
commencement of such tender offer or exchange offer, as the case may be.
The Board of Directors of the Company, on August , 1997, granted NSOs and
ISOs to purchase an aggregate of shares of Class A Common Stock under the
Stock Option Plan to three executive officers, five regional vice presidents and
one dealer manager of the Company. Messrs. Scott Smith, Bowers, and Wright were
granted NSOs to purchase shares, shares, and shares,
respectively at an exercise equal to the public offering price of the Class A
Common Stock sold in the Offering. Messrs. Scott Smith, Bowers and Wright were
also granted ISOs to purchase shares, shares and shares,
respectively, at an exercise price equal to the public offering price of the
Class A Common Stock sold in the Offering. All these options will become
exerciseable in three equal annual installments beginning in October 1998 with
the last installment vesting in October 2000, and all these options will expire
in October 2007. Consequently, all executive officers as a group were granted
NSOs to purchase an aggregate of shares and ISOs to purchase an aggregate
of shares. Non-executive officer employees were granted NSOs and ISOs to
purchase an aggregate of shares and shares, respectively. See
" -- Employment Agreements."
The issuance of the aforementioned NSO's under the Stock Option Plan is
being treated by the Company as a deferred tax asset, valued at $ as
of . See Note to Combined and Consolidated Financial
Statements.
While the issuance and exercise of ISOs generally have no ordinary income
tax consequences to the holder, upon the exercise of an ISO, the holder will
treat the excess of the fair market value on the date of exercise over the
exercise price as an item of tax adjustment for alternative minimum tax
purposes. The issuance and exercise of ISOs have no federal income tax
consequences to the Company. The disposition of Class A Common Stock acquired
from the exercise of an ISO will ordinarily result in capital gains or loss to
the holder for federal income tax purposes equal to the difference between the
amount realized on disposition of the Class A Common Stock and the option
exercise price. If the holder of Class A Common Stock acquired upon the exercise
of an ISO disposes of such stock before the later of (i) two years following the
grant of the ISO and (ii) one year following the exercise of the ISO (a
"Disqualifying Disposition"), the holder will recognize ordinary income for
federal income tax purposes in an amount equal to the lesser of (i) the excess
of the Class A Common Stock's fair market value on the date of exercise over the
option exercise price, and (ii) the excess of the amount realized on disposition
of the Class A Common Stock over the option exercise price. Any additional gain
upon the disposition will be taxed as capital gains. The Company will be
entitled to a compensation expense deduction for the Company's taxable year in
which the disposition occurs equal to the amount of ordinary income recognized
by the holder.
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The issuance of NSOs has no federal income tax consequences to the Company
or the holder. Upon the exercise of an NSO, the Company generally will be
allowed a federal income tax deduction equal to the amount by which the fair
market value of the underlying shares on the date of exercise exceeds the
exercise price. NSO holders will recognize ordinary income for federal income
tax purposes at the time of option exercise in the same amount. Any gains or
losses upon the disposition of shares acquired by exercise of a NSO will be
taxed to the holder as capital gains or losses.
Registration of the shares underlying the Stock Option Plan is presently
not contemplated. Such shares may be issued upon option exercise in reliance
upon the private offering exemption codified in Section 4(2) of the Securities
Act. Resale of such shares may be permitted subject to the limitations of Rule
144.
EMPLOYEE STOCK PURCHASE PLAN
In August 1997, the Board of Directors and stockholders of the Company
adopted the Sonic Employee Stock Purchase Plan (the "ESPP"). The ESPP is
intended to promote the interests of the Company by providing employees of the
Company the opportunity to acquire a proprietary interest in the Company through
the purchase of Class A Common Stock. The following discussion of the material
features of the ESPP is qualified by reference to the text of such Plan filed in
an exhibit to the Registration Statement of which this Prospectus is a part.
The ESPP is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Code. The ESPP is administered by the Compensation Committee,
which, subject to the terms of the ESPP, has plenary authority in its discretion
to interpret and construe the ESPP. The Compensation Committee will construe the
provisions of the ESPP so as to extend and limit participation in a manner
consistent with the requirements of that Code section. A total of shares
of Class A Common Stock have been reserved for purchase under the ESPP.
On January 1 of each year during the term of the ESPP (the "Grant Date"),
all eligible employees electing to participate in the ESPP ("Participating
Employees") will be granted an option to purchase shares of Class A Common
Stock. Prior to each Grant Date, the Compensation Committee will determine the
number of shares of Class A Common Stock available for purchase under each
option, with the same number of shares to be available under each option granted
on the same Grant Date. No Participating Employee may be granted an option which
would permit such employee to purchase stock under the ESPP and all other
employee stock purchase plans of the Company at a rate which exceeds $25,000 of
the fair market value of such stock (determined at the time such option is
granted) for each calendar year in which such option is outstanding at any time.
A Participating Employee may elect to designate a limited percentage of
such employee's compensation (as defined in the ESPP) to be deferred by payroll
deduction as a contribution to the ESPP. A Participating Employee instead may
elect to make contributions by direct cash payment to the ESPP rather than by
payroll deduction. To the extent a Participating Employee has accumulated enough
funds, his or her contributions to the ESPP will be used to exercise the option
granted under the ESPP through purchases of Class A Common Stock on the last
business day of March, June, September and December on which the principal
trading market for the Class A Common Stock is open for trading and on any other
interim dates during the year which the Compensation Committee designates for
such purpose (the "Exercise Date"). Contributions which are not enough to
purchase a whole share of Class A Common Stock will be carried forward and
applied on the next Exercise Date in that calendar year; provided that
contributions remaining after the last Exercise Date of the calendar year may be
distributed to the Participating Employee at his election.
The purchase price at which Class A Common Stock will be purchased through
the ESPP shall be 85% of the lesser of (i) the fair market value of the Class A
Common Stock on the applicable Grant Date, and (ii) the fair market value of the
Class A Common Stock on the applicable Exercise Date. Any option granted to a
Participating Employee will be exercised automatically on each Exercise Date
during the calendar year of the option's Grant Date in whole or in part such
that the Participating Employee's accumulated contributions as of such Exercise
Date, either through direct cash payment or payroll deduction, will be applied
to the purchase of the maximum number of whole shares of Class A Common Stock
that such contribution will permit at the applicable option price, limited to
the number of shares available for purchase under the option.
Any option granted to a Participating Employee will expire on the last
Exercise Date of the calendar year in which granted. However, if a Participating
Employee withdraws from the ESPP or terminates employment prior to such Exercise
Date, the option may expire earlier.
Upon termination of a Participating Employee's employment for any reason
other than cause, death or leave of absence in excess of ninety days, such
employee may, at his election, request the return of contributions not yet used
to purchase Class A Common Stock or continue participation in the ESPP until the
Exercise Date next following the date of termination
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of employment such that any unexpired option held will be exercised
automatically such Exercise Date. If a Participating Employee dies while
employed by the Company or prior to the Exercise Date next following termination
of employment, such employee's estate will have the right to elect to withdraw
all contributions not yet used to purchase Class A Common Stock or to exercise
the Participating Employee's option for the purchase of Class A Common Stock on
the Exercise Date next following the date of such employee's death.
The Board of Directors of the Company may at any time amend, suspend or
terminate the ESPP; provided, however, that the ESPP may not be amended to (i)
increase the maximum number of shares of Class A Common Stock for which options
may be granted under the ESPP, other than in connection with a change in
capitalization, (ii) materially modify the requirements as to the class of
employees eligible to receive options and purchase Class A Common Stock under
the ESPP, or (iii) materially increase the benefits accruing to Participating
Employees under the ESPP without in any such case obtaining approval of Sonic
stockholders.
The ESPP is intended to meet the requirements of an "employee stock
purchase plan" under Code Section 423. No federal taxable income will be
recognized by Participating Employees upon the grant of an option to purchase
Class A Common Stock under the ESPP. In addition, a Participating Employee will
not recognize federal taxable income on the exercise of an option granted under
the ESPP.
If the Participating Employee holds shares of Class A Common Stock acquired
upon the exercise of an option granted under the ESPP until a date that is more
than two years from the grant date of the relevant option and one year from the
date of option exercise (or dies while owning such shares), the employee must
report as ordinary income in the year of disposition of the shares (or at death)
the lesser of (a) the excess of the fair market value of the shares at the time
of disposition (or death) over the option exercise price and (b) the excess of
the fair market value of the shares on the date the relevant option was granted
over the option exercise price. For this purpose the option exercise price is
85% of the fair market value of the shares on the date the relevant option was
granted (assuming the shares are offered at a 15% discount). Any additional
income is treated as long-term capital gain. If these holding period
requirements are met, the Company is not entitled to any deduction for tax
purposes. If the Participating Employee does not meet the holding period
requirements, the employee recognizes at the time of disposition of the shares
ordinary income equal to the difference between the price paid for the shares
and the fair market value on the date of exercise, irrespective of the price at
which the employee disposes of the shares, and an amount equal to such ordinary
income is generally deductible by the Company. Any gain or loss realized on the
disposition of the shares will be capital gain or loss, and will be long-term
gain or loss if the shares were held for more than one year.
Because the ESPP is based on voluntary participation, benefits thereunder
are not determinable.
Registration of the shares underlying the ESPP is presently not
contemplated. Such shares may be issued upon option exercise in reliance upon
the private offering exemption codified in Section 4(2) of the Securities Act.
Resale of such shares may be permitted subject to the limitations of Rule 144.
CERTAIN TRANSACTIONS
REGISTRATION RIGHTS AGREEMENT
As part of the Reorganization, the Company entered into a Registration
Rights Agreement dated as of June 30, 1997 (the "Registration Rights
Agreements") with Sonic Financial, Bruton Smith, Scott Smith and William S.
Egan. Sonic Financial, Bruton Smith, Scott Smith and Egan Group, LLC, an
assignee of Mr. Egan (the "Egan Group") currently are the owners of record of
, , and shares of Class B Common Stock,
respectively. Upon the registration of any of their shares or as otherwise
provided in the Certificate, such shares will automatically be converted into a
like number of shares of Class A Common Stock. Subject to certain limitations,
the Registration Rights Agreements provide Sonic Financial, Bruton Smith, Scott
Smith and the Egan Group with certain piggyback registration rights that permit
them to have their shares of Common Stock, as selling security holders, included
in any registration statements pertaining to the registration of Class A Common
Stock for issuance by the Company or for resale by other selling security
holders, with the exception of registration statements on Forms S-4 and S-8
relating to exchange offers (and certain other transactions) and employee stock
compensation plans, respectively. These registration rights will be limited or
restricted to the extent an underwriter of an offering, if an underwritten
offering, or the Company's Board of Directors, if not an underwritten offering,
determines that the amount to be registered by Sonic Financial, Bruton Smith,
Scott Smith or the Egan Group would not permit the sale of Class A Common Stock
in the quantity and at the price originally sought by the Company or the
original selling security holders, as the case may be. The Registration Rights
Agreement expires on the tenth anniversary of the closing of the Offering. Sonic
Financial is controlled by the Company's Chairman and Chief Executive Officer,
Bruton Smith.
63
THE SMITH ADVANCE
In connection with the Fort Mill Acquisition, Mr. Smith advanced
approximately $3.5 million to the Company (the "Smith Advance"). The Smith
Advance was used by the Company to pay a portion of the cash consideration for
the Fort Mill Acquisition at closing. The Smith Advance is evidenced by a demand
note bearing interest at the minimum statutory rate of 3.83% per annum. The
Company anticipates seeking additional cash advances or credit support in the
form of guarantees or collateral from Mr. Smith in order to meet cash payment
obligations in the remaining Acquisitions, which close prior to the consummation
of the Offering. The Company intends to repay the principal and interest on the
Smith Advance and any similar future advances from Mr. Smith used to fund the
Acquisitions from the proceeds of this Offering.
CERTAIN DEALERSHIP LEASES
Certain of the properties leased by the Company's dealership subsidiaries
are owned by officers, directors or holders of 5% or more of the Common Stock of
the Company or their affiliates. Town & Country Ford operates at facilities
leased from STC Properties, a North Carolina joint venture ("STC"). Town &
Country Ford maintains a 5% undivided interest in STC and Sonic Financial owns
the remaining 95% of STC. The STC lease on the Town & Country Ford facilities
will expire in October 2000. Annual payments under the STC lease were $510,085
for each of 1994, 1995 and 1996. Current minimum rent payments are $409,000
annually ($34,083 monthly) through 1999, and will be decreased to $340,833 in
2000, such rents being below market. When this lease expires, the Company
anticipates obtaining a long-term lease on the Town & Country Ford facility at
fair market rent.
Lone Star Ford operates, in part, at facilities leased from Viking
Investments Associates, a Texas association ("Viking"), which is controlled by
Mr. Bruton Smith. The Viking lease on the Lone Star Ford property expires in
2005. Annual payments under the Viking lease were $351,420, $302,559 and
$360,000 for 1994, 1995 and 1996, respectively. Minimum annual rents under this
lease are $360,000 ($30,000 monthly), such amount being below market. When this
lease expires, the Company anticipates obtaining a long-term lease on the Lone
Star Ford facility at fair market rent.
The dealership leases discussed below will be executed and effective as of
the consummation of the Acquisitions.
KIA of Chattanooga operates at facilities leased from KIA Land Development,
a company in which Nelson Bowers, the Company's Executive Vice President,
maintains an ownership interest. The Company negotiated this lease in connection
with the Bowers Acquisition. This triple net lease expires in 2007 and monthly
rent is currently under negotiation. The Company may renew this lease at its
option for two additional five year terms. At each renewal, the lessor may
adjust lease rents to reflect fair market rents for the property.
European Motors operates at its Chattanooga facilities under a triple net
lease from Mr. Bowers. The Company negotiated this lease in connection with the
Bowers Acquisition. The European Motors lease expires in 2007 and provides for
monthly rent of $16,846. This lease also provides for renewals on terms
identical to the KIA of Chattanooga lease.
Jaguar of Chattanooga operates at facilities leased from JAG Properties, a
company in which Mr. Bowers maintains an ownership interest. The Company
negotiated this lease in connection with the Bowers Acquisition. This triple net
lease expires in 2017 and provides for monthly rent of $22,010. The Company may
renew this lease on terms identical to the KIA of Chattanooga renewal options.
Cleveland Chrysler-Plymouth-Jeep-Eagle leases its facilities from Cleveland
Properties LLC, a limited liability company in which Mr. Bowers maintains an
ownership interest. The Company negotiated this lease in connection with the
Bowers Acquisition. This triple net lease expires in 2011, provides for monthly
rent of $14,000 and may be renewed on terms identical to the KIA of Chattanooga
lease.
Cleveland Village Imports operates at facilities leased from Nelson Bowers
and another individual. Nelson Bowers, the Company's President and a director,
owns a 75% undivided interest in the land and buildings leased by Cleveland
Village Imports, with the remaining interests owned by an unrelated party. Such
land and buildings are leased under two leases: one is a triple net fixed lease
expiring on October 31, 1997 with rent of $7,591 per month and the other,
pertaining to a used car lot, is a month-to-month lease with rent of $807 per
month. In connection with the Bowers Acquisition, the lessors have agreed to
allow the expiration of these leases in October 1997, and to replace them with a
triple net lease at a negotiated rental rate for a 15-year initial term and two
five-year renewals at the option of the Company.
Saturn of Chattanooga leases its facilities from Mr. Bowers pursuant to a
triple net lease. This lease, negotiated by the Company in connection with the
Bowers Acquisition, expires in 2007 and provides for monthly rent of $27,054.
The lease may be renewed by the Company for two additional five year terms at
the Company's option, with the rent at each renewal being adjusted to fair
market rent.
64
Dyer Volvo operates at facilities leased from D&R Investments, an entity in
which Richard Dyer, the Company's Executive Manager for Dyer Volvo, maintains an
ownership interest. This triple net lease, negotiated by the Company in
connection with the Dyer Acquisition, expires in 2009 and provides for monthly
rent of $50,000. The Dyer Volvo lease also provides the Company with two
optional renewals of five years each with rent at each renewal being adjusted to
fair market rent.
Ken Marks Ford ("KMF") operates at facilities leased from Marks Holding
Company, a corporation that is owned by Ken Marks, the Company's Regional Vice
President-Florida. In connection with the Ken Marks Acquisition, the lessor has
agreed to enter into a triple net lease with the Company as lessee at a
negotiated rental rate of $95,000 per month for an initial term expiring 2007
with two five-year renewals at the option of the Company.
CHARTOWN TRANSACTIONS
Chartown is a general partnership engaged in real estate development and
management. Before the Reorganization, Town & Country Ford maintained a 49%
partnership interest in Chartown (increased to 50% in connection with the Lease)
with the remaining 51% held by SMDA, LLC, a North Carolina limited liability
company ("SMDA"). Mr. Smith owns a 80% direct membership interest in SMDA with
the remaining 20% owned indirectly through Sonic Financial. In addition, Sonic
Financial also held a demand promissory note for $1.2 million issued by Chartown
(the "Chartown Note"), which was uncollectible due to insufficient funds. As
part of the Reorganization, the Chartown Note was canceled and Town & Country
Ford transferred its partnership interest in Chartown to Sonic Financial for
nominal consideration. In connection with that transfer, Sonic Financial agreed
to indemnify Town & Country Ford for any and all obligations and liabilities,
whether known or unknown, relating to Chartown and Town & Country Ford's
ownership thereof.
OTHER TRANSACTIONS
During each of the three years ended December 31, 1996, Town & Country Ford
has paid $48,000 to Sonic Financial as a management fee. Sonic Financial's
services to Town & Country Ford have included performance of the following
functions, among others: maintenance of lender and creditor relationships; tax
planning; preparation of tax returns and representation in tax examinations;
record maintenance; internal audits and special audits; assistance to
independent public accountants; and litigation support to company counsel.
Payments of fees to and receipt of services from Sonic Financial ceased before
the Reorganization. Since that time, the Company has been providing these
services for itself.
Beginning in early 1997, certain of the Sonic Dealerships have entered into
arrangements to sell to their customers credit life insurance policies
underwritten by American Heritage Life Insurance Company, an insurer
unaffiliated with Sonic ("American Heritage"). American Heritage in turn
reinsures all of these policies with Provident American Insurance Company, a
Texas insurance company ("Provident American"). Under these arrangements, the
Sonic Dealerships paid an aggregate of $140,000 to American Heritage in premiums
for these policies since January 1, 1997. The Company anticipates terminating
this arrangement with American Heritage by 1998. Provident American is a
wholly-owned subsidiary of Sonic Financial.
Town & Country Ford and Lone Star Ford have each made several non-interest
bearing advances to Sonic Financial. As of June 30, 1997, Town & Country Ford
had made approximately $2.1 million of such advances. In preparation for the
Reorganization, a demand promissory note by Sonic Financial evidencing certain
of Town & Country Ford's advances was canceled in exchange for the redemption of
certain shares of the capital stock of Town & Country Ford held by Sonic
Financial. As of June 30, 1997, Lone Star Ford had made approximately $0.5
million of advances to Sonic Financial. In preparation for the Reorganization, a
demand promissory note by Sonic Financial evidencing certain of Lone Star Ford's
advances was canceled pursuant to a dividend. At years ended December 31, 1996,
1995 and 1994, the aggregate balances of such advances due from Sonic Financial
were approximately $2.5 million, $2.6 million and $0, respectively.
Certain subsidiaries of Sonic (such subsidiaries together with Sonic and
Sonic Financial being hereinafter referred to as the "Sonic Group") have joined
with Sonic Financial in filing consolidated federal income tax returns for
several years. Such subsidiaries will join with Sonic Financial in filing for
1996 and for the period ending on June 30, 1997. Under applicable federal tax
law, each corporation included in Sonic Financial's consolidated return is
jointly and severally liable for any resultant tax. Under a tax allocation
agreement dated as of June 30, 1997, however, Sonic agreed to pay to Sonic
Financial, 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
Sonic Financial's consolidated group. Also pursuant to such agreement, Sonic
Financial agreed to indemnify Sonic for any additional amount determined to be
due from Sonic Financial's consolidated group in excess of the federal income
tax liability of the Sonic Group for such periods. The tax allocation agreement
establishes procedures with respect to tax adjustments, tax claims, tax refunds,
tax credits and other tax attributes relating to periods ending prior to the
time that the Sonic Group shall leave Sonic Financial's consolidated group.
65
The Company acquired the Sonic Dealerships in the Reorganization pursuant
to four separate stock subscription agreements (the "Subscription Agreements").
The Subscription Agreements provide for the acquisition of 100% of the capital
stock or membership interests, as the case may be, of each of the Sonic
Dealerships from Sonic Financial, Mr. Smith, the Egan Group (an assignee of Mr.
Egan) and Bryan Scott Smith in exchange for certain amounts of the Company's
issued and outstanding Class B Common Stock. See "Principal Stockholders."
For additional information concerning related party transaction of the
businesses being acquired in the Acquisitions, see the notes to the historical
financial statements for each respective business acquired included in this
Prospectus.
66
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 1, 1997 by (i) each
stockholder who is known by the Company to own beneficially more than five
percent of the outstanding Common Stock, (ii) each director of the Company,
(iii) each executive officer of the Company, and (iv) all directors and
executive officers of the Company as a group, and as adjusted to reflect the
sale by the Company of the shares of Class A Common Stock in this Offering.
Prior to this Offering, no shares of Class A Common Stock were issued and
outstanding. However, options to acquire shares of Class A Common Stock
will be issued on or before the closing of the Offering to certain of the
Company's officers and employees. Holders of Class A Common Stock are entitled
to one vote per share on all matters submitted to a vote of the stockholders of
the Company. Holders of Class B Common Stock are entitled to ten votes per share
on all matters submitted to a vote of the stockholders, except that the Class B
Common Stock is entitled to only one vote per share with respect to any
transaction proposed or approved by the Board of Directors of the Company or
proposed by all the holders of the Class B Common Stock or as to which any
member of the Smith Group or any affiliate thereof has a material financial
interest other than as a then existing stockholder of the Company constituting a
(a) "going private" transaction (as defined herein), (b) disposition of
substantially all of the Company's assets, (c) transfer resulting in a change in
the nature of the Company's business and (d) merger or consolidation in which
current holders of Common Stock would own less than 50% of the Common Stock
following such transaction. In the event of any transfer outside of the Smith
Group or the Smith Group holds less than 15% of the total number of shares of
Common Stock outstanding, such transferred shares or all shares, respectively,
of Class B Common Stock will automatically convert into an equal number of
shares of Class A Common Stock. See "Description of Capital Stock."
PERCENTAGE OF ALL
OUTSTANDING
NUMBER OF SHARES NUMBER OF SHARES COMMON STOCK
OF CLASS A COMMON OF CLASS B COMMON BEFORE AFTER
NAME (1) STOCK OWNED STOCK OWNED OFFERING OFFERING(2)
O. Bruton Smith (3)(4) 87.62% %
Sonic Financial Corporation (3) 71.05% %
Bryan Scott Smith (3)(5) 7.65% %
William R. Brooks (3) -- %
Theodore M. Wright (3)(5) -- %
Nelson E. Bowers, II (3)(5) -- %
All directors and executive officers as a group (10 persons) 95.27%
* Less than one percent.
(1) Unless otherwise noted, each person has sole voting and investment power
over the shares listed opposite his name subject to community property laws
where applicable.
(2) The percentages of total voting power would be as follows: Bruton Smith,
%; Sonic Financial, %; Scott Smith, %; William Brooks, less than 1%;
Theodore Wright, less than 1%; Nelson E. Bowers, II, less than 1%; and all
directors and executive officers as a group, %. Assumes the
Underwriters' over-allotment option is not exercised.
(3) The address of such person is care of the Company at 5401 East Independence
Boulevard, Charlotte, North Carolina 28218.
(4) The shares of Common Stock shown as owned by such person or group include
all of the shares owned by Sonic Financial as indicated elsewhere in the
table. Mr. Smith owns the substantial majority of Sonic's outstanding
capital stock.
(5) All shares of Class A Common Stock beneficially owned by such person
underlie options granted (or, in the case of Mr. Bowers, to be granted upon
the closing of the Bowers Acquisition) by the Company at the public
offering price. One-third of such options become exercisable on October ,
1998, one-third on October , 1999 and one-third on October , 2000. See
"Management -- Stock Option Plan."
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of (i) 50,000,000 shares of
Class A Common Stock, $.01 par value, (ii) 15,000,000 shares of Class B Common
Stock, $.01 par value, and (iii) 3,000,000 shares of preferred stock, $.10 par
value. Upon completion of this Offering, the Company will have
outstanding shares of Class A Common Stock and outstanding shares of
Class B Common Stock and no outstanding shares of preferred stock.
67
The following summary description of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
Company's Certificate, which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, and Delaware Law. Reference is
made to such exhibit and Delaware Law for a detailed description of the
provisions thereof summarized below.
COMMON STOCK
The Company's Class A Common Stock and Class B Common Stock are equal in
all respects except for voting rights, conversion rights of the Class B Common
Stock and as required by law, as discussed more fully below.
VOTING RIGHTS; CONVERSION OF CLASS B COMMON STOCK TO CLASS A COMMON STOCK
The voting powers, preferences and relative rights of the Class A Common
Stock and the Class B Common Stock are subject to the following provisions.
Holders of Class A Common Stock have one vote per share on all matters submitted
to a vote of the stockholders of the Company. Holders of Class B Common Stock
are entitled to ten votes per share except as described below. Holders of all
classes of Common Stock entitled to vote will vote together as a single class on
all matters presented to the stockholders for their vote or approval except as
otherwise required by Delaware Law. There is no cumulative voting with respect
to the election of directors. In the event any shares of Class B Common Stock
held by a member of the Smith Group (as defined below) are transferred outside
of the Smith Group, such shares will automatically be converted into shares of
Class A Common Stock. In addition, if the total number of shares of Common Stock
held by members of the Smith Group is less than 15% of the total number of
shares of Common Stock outstanding, all of the outstanding shares of Class B
Common Stock automatically will be reclassified as Class A Common Stock. In any
merger, consolidation or business combination, the consideration to be received
per share by holders of Class A Common Stock must be identical to that received
by holders of Class B Common Stock, except that in any such transaction in which
shares of common stock are distributed, such shares may differ as to voting
rights to the extent that voting rights now differ between the classes of Common
Stock.
Notwithstanding the foregoing, the holders of Class A Common Stock and
Class B Common Stock vote as a single class, with each share of each class
entitled to one vote per share, with respect to any transaction proposed or
approved by the Board of Directors of the Company or proposed by or on behalf of
holders of the Class B Common Stock or as to which any member of the Smith Group
(as defined below) or any affiliate thereof has a material financial interest
other than as a then existing stockholder of the Company constituting a (a)
"going private" transaction, (b) sale or other disposition of all or
substantially all of the Company's assets, (c) sale or transfer which would
cause the nature of the Company's business to be no longer primarily oriented
toward automobile dealership operations and related activities or (d) merger or
consolidation of the Company in which the holders of the Common Stock will own
less than 50% of the Common Stock following such transaction. A "going private"
transaction is defined as any "Rule 13e-3 Transaction," as such term is defined
in Rule 13e-3 promulgated under the Securities Exchange Act of 1934. An
"affiliate" is defined as (i) any individual or entity who or that, directly or
indirectly, controls, is controlled by, or is under common control with any
member of the Smith Group, (ii) any corporation or organization (other than the
Company or a majority-owned subsidiary of the Company) of which any member of
the Smith Group is an officer partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of voting securities, or in which
any member of the Smith Group has a substantial beneficial interest, (iii) a
voting trust or similar arrangement pursuant to which any member of the Smith
Group generally controls the vote of the shares of Common Stock held by or
subject to such trust or arrangement, (iv) any other trust or estate in which
any member of the Smith Group has a substantial beneficial interest or as to
which any member of the Smith Group serves as trustee or in a similar fiduciary
capacity, or (v) any relative or spouse of any member of the Smith Group or any
relative of such spouse, who has the same residence as any member of the Smith
Group.
As used in this Prospectus, the term the "Smith Group" includes the
following persons: (i) Mr. Smith and his guardian, conservator, committee, or
attorney-in-fact; (ii) William S. Egan and his guardian, conservator, committee,
or attorney-in-fact; (iii) each lineal descendant of Messrs. Smith and Egan (a
"Descendant") and their respective guardians, conservators, committees or
attorneys-in-fact; and (iv) each "Family Controlled Entity" (as defined below).
The term "Family Controlled Entity" means (i) any not-for-profit corporation if
at least 80% of its board of directors is composed of Mr. Smith, Mr. Egan and/or
Descendants; (ii) any other corporation if at least 80% of the value of its
outstanding equity is owned by the Smith Group; (iii) any partnership if at
least 80% of the value of the partnership interests are owned by members of the
Smith Group; and (iv) any limited liability or similar company if at least 80%
of the value of the company is owned by members of the Smith Group. For a
discussion of the effects of the disproportionate voting rights of the Common
Stock, see "Risk Factors -- Concentration of Voting Power and Antitakeover
Provisions."
68
Under the Company's Certificate and Delaware Law, the holders of Class A
Common Stock and/or Class B Common Stock are each entitled to vote as a separate
class, as applicable, with respect to any amendment to the Company's Certificate
that would increase or decrease the aggregate number of authorized shares of
such class, increase or decrease the par value of the shares of such class, or
modify or change the powers, preferences or special rights of the shares of such
class so as to affect such class adversely.
DIVIDENDS
Holders of the Class A Common Stock and the Class B Common Stock are
entitled to receive ratably such dividends, if any, as are declared by the
Company's Board of Directors out of funds legally available for that purpose,
provided, that dividends paid in shares of Class A Common Stock or Class B
Common Stock shall be paid only as follows: shares of Class A Common Stock shall
be paid only to holders of Class A Common Stock and shares of Class B Common
Stock shall be paid only to holders of Class B Common Stock. The Company's
Certificate provides that if there is any dividend, subdivision, combination or
reclassification of either class of Common Stock, a proportionate dividend,
subdivision, combination or reclassification of the other class of Common Stock
shall simultaneously be made.
OTHER RIGHTS
Stockholders of the Company have no preemptive or other rights to subscribe
for additional shares. In the event of the liquidation, dissolution or winding
up of the Company, holders of Class A Common Stock and Class B Common Stock are
entitled to share ratably in all assets available for distribution to holders of
Common Stock after payment in full of creditors. No shares of any class of
Common Stock are subject to a redemption or a sinking fund. All outstanding
shares of Common Stock are, and all shares offered by this Prospectus will be,
when sold, validly issued, fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
The Company has appointed First Union National Bank as the transfer agent
and registrar for the Class A Common Stock. The Company has not appointed a
transfer agent for the Class B Common Stock.
PREFERRED STOCK
No shares of preferred stock are outstanding. The Company's Certificate
authorizes the Board of Directors to issue up to 3,000,000 shares of preferred
stock in one or more series and to establish such designations and such relative
voting, dividend, liquidation, conversion and other rights, preferences and
limitations as the Board of Directors may determine without further approval of
the stockholders of the Company. The issuance of preferred stock by the Board of
Directors could, among other things, adversely affect the voting power of the
holders of Class A Common Stock and, under certain circumstances, make it more
difficult for a person or group to gain control of the Company.
The issuance of any series of preferred stock, and the relative
designations, rights, preferences and limitations of such series, if and when
established, will depend upon, among other things, the future capital needs of
the Company, the then-existing market conditions and other factors that, in the
judgment of the Board of Directors, might warrant the issuance of preferred
stock. At the date of this Prospectus, there are no plans, agreements or
understandings for the issuance of any shares of preferred stock.
DELAWARE LAW, CERTAIN CHARTER AND BYLAW PROVISIONS AND CERTAIN FRANCHISE
AGREEMENT PROVISIONS
Certain provisions of Delaware Law and of the Company's Amended Certificate
and Bylaws, summarized in the following paragraphs, may be considered to have an
antitakeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.
DELAWARE ANTITAKEOVER LAW. The Company, a Delaware corporation, is subject
to the provisions of Delaware Law, including Section 203. In general, Section
203 prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which such person became an interested
stockholder unless: (i) prior to such date, the Board of Directors approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder; or (ii) upon becoming an
interested stockholder, the stockholder then owned at least 85% of the voting
stock, as defined in Section 203; or (iii) subsequent to such date, the business
combination is approved by both the Board of Directors and by holders of at
least 66 2/3% of the corporation's outstanding voting stock, excluding shares
owned by the interested stockholder. For these purposes, the term
69
"business combination" includes mergers, asset sales and other similar
transactions with an "interested stockholder." An "interested stockholder" is a
person who, together with affiliates and associates, owns (or, within the prior
three years, did own) 15% or more of the corporation's voting stock. Although
Section 203 permits a corporation to elect not to be governed by its provisions,
the Company to date has not made this election.
CLASSIFIED BOARD OF DIRECTORS. The Company's Bylaws provide for the Board
of Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. Classification of the Board of Directors expands the
time required to change the composition of a majority of directors and may tend
to discourage a takeover bid for the Company. Moreover, under Delaware Law, in
the case of a corporation having a classified board of directors, the
stockholders may remove a director only for cause. This provision, when coupled
with the provision of the Bylaws authorizing only the board of directors to fill
vacant directorships, will preclude stockholders of the Company from removing
incumbent directors without cause, simultaneously gaining control of the Board
of Directors by filing the vacancies with their own nominees.
SPECIAL MEETINGS OF STOCKHOLDERS. The Company's Bylaws provide that special
meetings of stockholders may be called only by the Chairman or by the Secretary
or any Assistant Secretary at the request in writing of a majority of the Board
of Directors of the Company. The Company's Bylaws also provide that no action
required to be taken or that may be taken at any annual or special meeting of
stockholders may be taken without a meeting; the powers of stockholders to
consent in writing, without a meeting, to the taking of any action is
specifically denied. These provisions may make it more difficult for
stockholders to take action opposed by the Board of Directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Company's Bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual or a special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the principal executive office
of the Company, (i) in the case of an annual meeting that is called for a date
that is within 30 days before or after the anniversary date of the immediately
preceding annual meeting of stockholders, not less than 60 days nor more than 90
days prior to such anniversary date, and, (ii) in the case of an annual meeting
that is called for a date that is not within 30 days before or after the
anniversary date of the immediately preceding annual meeting, or in the case of
a special meeting of stockholders called for the purpose of electing directors,
not later than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure of the date of
the meeting was made, whichever occurs first. The Bylaws also specify certain
requirements for a stockholder's notice to be in proper written form. These
provisions may preclude some stockholders from bringing matters before the
stockholders at an annual or special meeting or from making nominations for
directors at an annual or special meeting.
CONFLICT OF INTEREST PROCEDURES. The Company's Certificate contains
provisions providing that transactions between the Company and its affiliates
must be no less favorable to the Company than would be available in transactions
involving arms'-length dealing with unrelated third parties. Moreover, any such
transaction involving aggregate payments in excess of $500,000 must be approved
by a majority of the Company's directors and a majority of the Company's
independent directors. Otherwise, the Company must obtain an opinion as to the
financial fairness of the transactions to be issued by an investment banking or
appraisal firm of national standing.
RESTRICTIONS UNDER FRANCHISE AGREEMENTS. The Company's franchise agreements
impose restrictions on the transfer of the Common Stock. A number of
Manufacturers prohibit transactions which affect changes in management control
of the Company. Such restrictions may prevent or deter prospective acquirers
from obtaining control of the Company. See "Risk Factors -- Stock
Ownership/Issuance Limits" and "Business -- Relationships with Manufacturers."
70
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
shares of Class A Common Stock (assuming no exercise of the Underwriters'
over-allotment option). All of such shares will be freely transferable and may
be resold without further registration under the Securities Act, except for any
shares purchased by an "affiliate" of the Company (as defined below), which
shares will be subject to the resale limitations of Rule 144. The shares
(the "Restricted Shares") of Class B Common Stock outstanding, which are
convertible into Class A Common Stock, are "restricted" securities within the
meaning of Rule 144 irrespective of whether the conversion right is exercised.
The shares of Class A Common Stock, which underlie options granted under
the Company's Stock Option Plan and the Dyer Warrant, may be resold only
pursuant to a registration statement under the Securities Act or an applicable
exemption from registration thereunder such as an exemption provided by Rule
144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year may, under certain circumstances, resell within any
three-month period, such number of shares as does not exceed the greater of one
percent of the then-outstanding shares of Class A Common Stock or the average
weekly trading volume of Class A Common Stock during the four calendar weeks
prior to such resale. Rule 144 also permits, under certain circumstances, the
resale of shares without any quantity limitation by a person who has satisfied a
two-year holding period and who is not, and has not been for the preceding three
months, an affiliate of the Company. In addition, holding periods of successive
non-affiliate owners are aggregated for purposes of determining compliance with
these one- and two-year holding period requirements.
Upon completion of this Offering, none of the shares of Class B
Common Stock outstanding on the date of this Prospectus and not sold in the
Offering will have been held for at least one year. Since all such shares are
restricted securities, none of them may be resold pursuant to Rule 144 upon
completion of this Offering. Any transfer of shares of the Class B Common Stock
to any person other than a member of the Smith Group will result in a conversion
of such shares to Class A Common Stock.
The Restricted Shares will not be eligible for sale under Rule 144 until
the expiration of the one-year holding period from the date such Restricted
Shares were acquired.
The availability of shares for sale or actual sales under Rule 144 and the
perception that such shares may be sold may have a material adverse effect on
the market price of the Class A Common Stock. Sales under Rule 144 also could
impair the Company's ability to market additional equity securities.
Additionally, the Company has entered into the Registration Rights
Agreement with Sonic Financial, Bruton Smith, Scott Smith and William Egan. The
Registration Rights Agreement provides piggyback registration rights with
respect to shares of Common Stock in the aggregate. For further
information regarding the Registration Rights Agreement, see "Certain
Transactions -- Registration Rights Agreements."
The Company, executive officers of the Company and the holders of Class B
Common Stock have agreed, subject to certain exceptions, not, directly or
indirectly, to sell, grant an option or otherwise transfer or dispose of any
Class A Common Stock or securities convertible into or exchangeable or
exercisable for Class A Common Stock, including shares of Class B Common Stock,
or file a registration statement under the Securities Act with respect to the
foregoing or (ii) enter into any swap or other agreement or transaction that
transfers, in whole or part, the economic consequences of ownership of the Class
A Common Stock for 180 days from the date of this Prospectus without the prior
written consent of Merrill Lynch.
71
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Montgomery Securities and
Wheat, First Securities, Inc. are acting as representatives (the
"Representatives"), has severally agreed to purchase from the Company, the
number of shares of Class A Common Stock set forth opposite its name below. In
the Purchase Agreement, the several Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the shares of Class A
Common Stock offered hereby, if any are purchased. In the event of default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated.
NUMBER OF
UNDERWRITERS SHARES
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................................................................
Montgomery Securities.............................................................................................
Wheat, First Securities, Inc......................................................................................
Total................................................................................................
The Underwriters have advised the Company that they propose initially to
offer the shares of Class A Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share of
Class A Common Stock. The Underwriters may allow, and such dealers may reallow,
a discount not in excess of $ per share of Class A Common Stock to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
At the request of the Company, the Underwriters have reserved up to
shares of Class A Common Stock for sale at the initial public offering price to
directors, officers, employees, business associates and related persons of the
Company. The number of shares of Class A Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares which are not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.
The Company, all of the executive officers of the Company and all the
holders of Class B Common Stock have agreed, subject to certain exceptions, not
to, directly or indirectly, (i) sell, grant any option to purchase or otherwise
transfer or dispose of any Class A Common Stock or securities convertible into
or exchangeable or exercisable for Class A Common Stock, including shares of
Class B Common Stock, or file a registration statement under the Securities Act
with respect to the foregoing or (ii) enter into any swap or other agreement or
transaction that transfers, in whole or part, the economic consequence of
ownership of the Class A Common Stock, without the prior written consent of
Merrill Lynch, for a period of 180 days after the date of this Prospectus.
The Company has granted an option to the Underwriters, exercisable within
30 days after the date of this Prospectus, to purchase up to an aggregate of
additional shares of Class A Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. The Underwriters may exercise this option only to cover
over-allotments, if any, made on the sale of the Class A Common Stock offered
hereby. To the extent that the Underwriters exercise this option, each
Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares of Class A Common Stock proportionate to such
Underwriter's initial amount reflected in the foregoing table.
72
Prior to the Offering, there has been no public market for the Class A
Common Stock. The initial public offering price for the Class A Common Stock
will be determined by negotiation between the Company and the Representatives.
The factors considered in determining the initial public offering price, in
addition to prevailing market conditions, are price-earnings ratios of publicly
traded companies that the Representatives believe to be comparable to the
Company, certain financial information of the Company, the history of, and the
prospects for, the Company and the industry in which it competes, and an
assessment of the Company's management, its past and present operations, the
prospects for and the timing of future revenues of the Company, the present
state of the Company's development, and the above factors in relation to market
values and various valuation measures of other companies engaged in activities
similar to the Company. There can be no assurance that an active trading market
will develop for the Class A Common Stock or that the Class A Common Stock will
trade in the public market subsequent to the Offering made hereby at or above
the initial public offering price.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriters may be required to make
in respect thereof.
The Company intends to apply for listing of the Class A Common Stock on the
NYSE under the symbol "DLR." In order to meet the requirements for listing of
the Class A Common Stock on that exchange, the Underwriters have undertaken to
sell lots of 100 or more shares to a minimum of 2,000 beneficial holders.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of Class A Common Stock offered hereby to any accounts
over which they exercise discretionary authority.
Until the distribution of the Class A Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Class A Common
Stock. As an exception to these rules, the Representatives are permitted to
engage in certain transactions that stabilize the price of Class A Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Class A Common Stock.
If the Underwriters create a short position in the Class A Common Stock in
connection with the Offering, I.E., if they sell more shares of Class A Common
Stock than are set forth on the cover page of this Prospectus, the
Representatives may reduce that short position by purchasing Class A Common
Stock in the open market. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Class A Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Class A Common Stock, they may
reclaim the amount of the selling concession from the Underwriters and selling
group members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A Common Stock. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
LEGAL MATTERS
Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina, counsel
to the Company, will render an opinion that the shares of Class A Common Stock
offered hereby, when issued and paid for in accordance with the terms of the
Underwriting Agreement, will be duly authorized, validly issued, fully paid and
nonassessable. Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), New York, New York, has served as counsel to the
Underwriters in connection with this Offering.
EXPERTS
The combined and consolidated financial statements of Sonic Automotive,
Inc. and Affiliated Companies as of and for the year ended December 31, 1996,
the balance sheet of Sonic Automotive, Inc. as of May 31, 1997, the financial
statements
73
of Dyer & Dyer, Inc., the combined and consolidated financial statements of
Bowers Automotive Group, and the combined and consolidated financial statements
of Lake Norman Dodge, Inc. and Affiliated Companies included in this Prospectus
and the related financial statement schedule of Sonic Automotive, Inc. have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The combined and consolidated financial statements of Sonic Automotive,
Inc. and Affiliated Companies as of December 31, 1995 and for the years ended
December 31, 1994 and 1995 have been audited by Dixon, Odom & Co., L.L.P.,
independent auditors, as stated in their report appearing herein, and is
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 under the Securities Act with
respect to the shares of Class A Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the shares of Class A Common Stock offered hereby, reference is
made to the Registration Statement, including the exhibits and schedules filed
as part thereof. Statements contained in this Prospectus as to the contents of
any contract or any other documents are not necessarily complete, and, in each
such instance, reference is made to the copy of the contract or document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference thereto. The Registration Statement, together
with its exhibits and schedules, may be inspected at the Public Reference
Section of the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048 and at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part
of such materials may be obtained from any such office upon payment of the fees
prescribed by the SEC. Such information may also be inspected and copied at the
office of the NYSE at 20 Broad Street, New York, New York 10005. The Commission
also maintains a Website (http://www.sec.gov.) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
74
INDEX TO FINANCIAL STATEMENTS
PAGE
SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES:
INDEPENDENT AUDITORS' REPORTS....................................................................................... F-2-3
COMBINED FINANCIAL STATEMENTS:
Combined and Consolidated Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997............ F-4
Combined and Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996 and unaudited
for the six months ended June 30, 1996 and 1997................................................................. F-5
Combined and Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996 and unaudited for the six months ended June 30, 1997.......................... F-6
Combined and Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and
unaudited for the six months ended June 30, 1996 and 1997....................................................... F-7
Notes to Combined and Consolidated Financial Statements.......................................................... F-8
DYER & DYER, INC.:
INDEPENDENT AUDITORS' REPORT........................................................................................ F-16
FINANCIAL STATEMENTS:
Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997...................................... F-17
Statements of Income and Retained Earnings for the years ended December 31, 1994, 1995 and 1996 and unaudited for
the six months ended June 30, 1996 and 1997..................................................................... F-18
Statements of Stockholder's Equity for the years ended December 31, 1994, 1995 and 1996 and unaudited for the six
months ended June 30, 1997...................................................................................... F-19
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and unaudited for the six months
ended June 30, 1996 and 1997.................................................................................... F-20
Notes to Financial Statements.................................................................................... F-21
BOWERS DEALERSHIPS AND AFFILIATED COMPANIES:
INDEPENDENT AUDITORS' REPORT........................................................................................ F-25
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997............................. F-26
Combined Statements of Income for the years ended December 31, 1995 and 1996 and unaudited for the six months
ended June 30, 1996 and 1997.................................................................................... F-27
Combined Statements of Stockholders' Equity for the years ended
December 31, 1995 and 1996 and unaudited for the six months ended June 30, 1997................................ F-28
Combined Statements of Cash Flows for the years ended December 31, 1995 and 1996 and unaudited for the six months
ended June 30, 1996 and 1997.................................................................................... F-29
Notes to Combined Financial Statements........................................................................... F-30
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES:
INDEPENDENT AUDITORS' REPORT........................................................................................ F-37
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheet at December 31, 1996 and unaudited at June 30, 1997....................................... F-38
Combined Statement of Income for the year ended December 31, 1996 and unaudited for the six months ended June 30,
1996 and 1997................................................................................................... F-39
Combined Statement of Stockholders' Equity for the year ended December 31, 1996 and unaudited for the six months
ended June 30, 1997............................................................................................. F-40
Combined Statement of Cash Flows for the year ended December 31, 1996 and unaudited for the six months ended June
30, 1996 and 1997............................................................................................... F-41
Notes to Combined Financial Statements........................................................................... F-42
KEN MARKS FORD, INC.:
FINANCIAL STATEMENTS (Unaudited -- not covered by report of independent auditors):
Balance Sheet at April 30, 1997.................................................................................. F-47
Statement of Income and Retained Earnings for the year endedApril 30, 1997....................................... F-48
Statement of Cash Flows for the year ended April 30, 1997........................................................
Notes to Unaudited Financial Statements.......................................................................... F-50
F-1
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
SONIC AUTOMOTIVE, INC.
Charlotte, North Carolina
We have audited the accompanying combined balance sheet of Sonic Automotive,
Inc. and Affiliated Companies (the "Company"), which are under common ownership
and management, as of December 31, 1996, and the related combined statements of
income, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Sonic Automotive, Inc.
and Affiliated Companies as of December 31, 1996, and the combined results of
their operations and their combined cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
August 7, 1997
F-2
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
SONIC AUTOMOTIVE, INC.
Charlotte, North Carolina
We have audited the accompanying combined balance sheets of Sonic Automotive,
Inc. and Affiliated Companies (the "Company") as of December 31, 1995, and the
related combined statements of income, stockholders' equity, and cash flows for
the years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Sonic Automotive, Inc.
and Affiliated Companies as of December 31, 1995, and the combined results of
their operations and their combined cash flows for the years ended December 31,
1994 and 1995 in conformity with generally accepted accounting principles.
DIXON, ODOM & CO., L.L.P.
Winston-Salem, North Carolina
April 30, 1997
F-3
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
COMBINED AND CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 8,993,887 $ 6,679,490 $ 9,237,585
Marketable equity securities................................................. 706,126 638,500 769,123
Receivables (Note 5) (net of allowance for doubtful accounts of $160,031 and
$224,789 at December 31, 1995 and 1996,
respectively)............................................................. 9,085,376 11,907,786 12,897,264
Inventories (Notes 3 and 5).................................................. 39,128,041 57,970,020 59,884,909
Deferred income taxes (Note 6)............................................... 117,500 279,896 256,032
Other current assets......................................................... 311,019 332,561 818,171
Total current assets...................................................... 58,341,949 77,808,253 83,863,084
PROPERTY AND EQUIPMENT, NET (Notes 4 and 5).................................... 8,527,338 12,466,713 13,269,789
GOODWILL, NET (Note 1)......................................................... -- 4,266,084 9,463,179
OTHER ASSETS................................................................... 372,610 389,277 263,374
TOTAL ASSETS................................................................... $67,241,897 $94,930,327 $106,859,426
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 3)......................................... $45,151,111 $63,893,356 $ 67,855,408
Trade accounts payable....................................................... 3,043,180 3,642,572 3,847,922
Accrued interest............................................................. 503,391 521,190 491,341
Other accrued liabilities.................................................... 1,554,713 3,031,473 3,394,178
Payable to affiliated companies (Note 7)..................................... 2,000,000 -- --
Payable to Company's Chairman (Note 2)....................................... -- -- 3,500,000
Current maturities of long-term debt......................................... 169,932 518,979 487,242
Total current liabilities................................................. 52,422,327 71,607,570 79,576,091
LONG-TERM DEBT (Note 5)........................................................ 3,560,766 5,285,862 5,137,210
PAYABLE TO AFFILIATED COMPANIES (Note 7)....................................... 1,219,204 914,339 854,984
DEFERRED INCOME TAXES (Note 6)................................................. 777,600 1,059,380 930,923
MINORITY INTEREST (Note 1)..................................................... 199,522 313,912 --
COMMITMENTS AND CONTINGENCIES (Notes 7 and 10)
STOCKHOLDERS' EQUITY (Notes 8 and 9):
Preferred stock $.10 par 3,000,000 shares authorized and unissued............ -- -- --
Class A Common Stock, $.01 par, 50,000,000 shares authorized and unissued.... -- -- --
Class B Common Stock, $.01 par, 50,000,000 shares authorized,
10,000 shares issued and outstanding...................................... 100 100 100
Paid-in capital.............................................................. 6,331,446 13,395,560 16,604,070
Retained earnings............................................................ 2,766,420 4,913,095 6,486,412
Unrealized loss on marketable equity securities.............................. (35,488) (93,562) (97,433)
Due from affiliates (Note 7)................................................. -- (2,465,929) (2,632,931)
Total stockholders' equity................................................ 9,062,478 15,749,264 20,360,218
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $67,241,897 $94,930,327 $106,859,426
See notes to combined and consolidated financial statements.
F-4
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1994 1995 1996 1996 1997
(UNAUDITED)
REVENUES:
Vehicle sales............................ $227,959,827 $267,307,949 $326,841,772 $164,332,724 $185,077,493
Parts, service and collision repair...... 33,984,096 35,859,960 42,643,812 21,005,202 22,906,377
Finance and insurance.................... 5,180,998 7,813,408 7,118,217 4,277,094 4,763,248
Total revenues........................ 267,124,921 310,981,317 376,603,801 189,615,020 212,747,118
COST OF SALES.............................. 234,461,089 272,178,737 332,406,803 167,191,296 188,367,591
GROSS PROFIT............................... 32,663,832 38,802,580 44,196,998 22,423,724 24,379,527
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 24,631,532 29,343,430 33,677,530 16,590,480 18,413,226
DEPRECIATION AND AMORTIZATION.............. 838,011 832,261 1,075,617 359,628 395,573
OPERATING INCOME........................... 7,194,289 8,626,889 9,443,851 5,473,616 5,570,728
OTHER INCOME AND EXPENSE:
Interest expense, floor plan............. 3,000,622 4,504,526 5,968,430 2,800,778 3,017,903
Interest expense, other.................. 443,409 436,435 433,250 183,898 269,145
Gain on sale of marketable equity
securities............................ -- 107,007 354,922 -- --
Other income............................. 609,088 342,047 263,676 369,412 273,842
Total other expense................... 2,834,943 4,491,907 5,783,082 2,615,264 3,013,206
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST........................ 4,359,346 4,134,982 3,660,769 2,858,352 2,557,522
PROVISION FOR INCOME TAXES
(Note 6)................................. 1,559,750 1,674,900 1,399,704 1,093,034 937,212
INCOME BEFORE MINORITY
INTEREST................................. 2,799,596 2,460,082 2,261,065 1,765,318 1,620,310
MINORITY INTEREST IN EARNINGS
OF SUBSIDIARY............................ 15,564 22,167 114,390 40,612 46,993
NET INCOME................................. $ 2,784,032 $ 2,437,915 $ 2,146,675 $ 1,724,706 $ 1,573,317
PRO FORMA NET INCOME PER SHARE
(Note 1) (unaudited)..................... $ 215 $ 157
PRO FORMA NUMBER OF SHARES
USED TO COMPUTE PER SHARE
DATA (Note 1) (unaudited)................ 10,000 10,000
See notes to combined and consolidated financial statements.
F-5
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
COMBINED AND CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997
UNREALIZED LOSS
CLASS B RETAINED ON MARKETABLE DUE
COMMON STOCK PAID-IN EARNINGS EQUITY FROM
SHARES AMOUNT CAPITAL (DEFICIT) SECURITIES AFFILIATES
BALANCE AT DECEMBER 31, 1993........... 10,000 $ 100 $ 4,837,100 $ (2,455,527) $ -- $ --
Net income........................... -- -- -- 2,784,032 -- --
BALANCE AT DECEMBER 31, 1994........... 10,000 $ 100 4,837,100 328,505 -- --
Capital contribution................. -- -- 1,494,346 -- -- --
Change in net unrealized loss on
marketable equity
securities......................... -- -- -- -- (35,488) --
Net income........................... -- -- -- 2,437,915 -- --
BALANCE AT DECEMBER 31, 1995........... 10,000 100 6,331,446 2,766,420 (35,488) --
Capital contribution -- -- 7,064,114 -- --
Advance to affiliates................ -- -- -- -- -- (2,465,929)
Change in net unrealized loss on
marketable equity
securities......................... -- -- -- -- (58,074) --
Net income........................... -- -- -- 2,146,675 --
BALANCE AT DECEMBER 31, 1996........... 10,000 100 13,395,560 4,913,095 (93,562) (2,465,929)
Capital contribution (unaudited)..... -- -- 3,208,510 -- -- --
Advance to affiliates................ (167,002)
Change in net unrealized loss on
marketable equity securities....... -- -- -- -- (3,871) --
Net income (unaudited)............... -- -- -- 1,573,317 --
BALANCE AT JUNE 30, 1997 (UNAUDITED)... 10,000 $ 100 $ 16,604,070 $ 6,486,412 $ (97,433) $(2,632,931)
TOTAL
STOCKHOLDERS'
EQUITY
BALANCE AT DECEMBER 31, 1993........... $ 2,381,673
Net income........................... 2,784,032
BALANCE AT DECEMBER 31, 1994........... 5,165,705
Capital contribution................. 1,494,346
Change in net unrealized loss on
marketable equity
securities......................... (35,488)
Net income........................... 2,437,915
BALANCE AT DECEMBER 31, 1995........... 9,062,478
Capital contribution 7,064,114
Advance to affiliates................ (2,465,929)
Change in net unrealized loss on
marketable equity
securities......................... (58,074)
Net income........................... 2,146,675
BALANCE AT DECEMBER 31, 1996........... 15,749,264
Capital contribution (unaudited)..... 3,208,510
Advance to affiliates................ (167,002)
Change in net unrealized loss on
marketable equity securities....... (3,871)
Net income (unaudited)............... 1,573,317
BALANCE AT JUNE 30, 1997 (UNAUDITED)... $ 20,360,218
See notes to combined and consolidated financial statements.
F-6
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1994 1995 1996 1996 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 2,784,032 $ 2,437,915 $ 2,146,675 $ 1,724,706 $ 1,573,317
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 838,011 832,261 1,075,618 359,630 395,573
Minority interest................................... 15,564 22,167 114,390 40,612 46,993
Loss (gain) on disposal of property and equipment -- (38,721) 79,660
Gain on sale of marketable equity securities........ -- (107,007) (354,922) (278,917) (134,496)
Deferred income taxes............................... 258,400 450,400 (240,548) (62,002) 23,864
Changes in assets and liabilities that relate to
operations:
(Increase) decrease in receivables................ (2,091,063) (228,084) (2,420,651) 287,459 (989,478)
(Increase) decrease in inventories................ (8,942,669) (3,724,725) (12,653,222) (3,511,263) 2,745,061
(Increase) decrease in other current assets....... (66,945) 21,173 (10,455) (189,391) (483,564)
Increase (decrease) in other non-current assets... (679) (14,104) (69,883) 2,851 113,403
Increase in notes payable-floor plan.............. 9,489,146 3,431,241 12,984,772 4,117,088 290,190
Increase (decrease) in accounts payable and
accrued expenses............................... 676,526 (42,224) 1,439,486 1,285,875 396,972
Total adjustments.............................. 176,291 602,377 (55,755) 2,051,942 2,404,579
Net cash provided by operating activities...... 2,960,323 3,040,292 2,090,920 3,776,648 3,977,835
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash received............ -- -- (5,126,595) (1,307,402) (3,627,347)
Purchases of property and equipment................... (1,386,877) (1,508,848) (1,906,739) -- (886,149)
Proceeds from sale of property and equipment.......... 32,162 556,789 4,036 -- --
Purchase of marketable equity securities.............. (82,801) (1,622,845) (207,400) -- --
Proceeds from sales of marketable equity securities... -- 1,073,539 514,700 88,900 --
Net (advances to) receipts from affiliate companies... (295,578) 1,772,022 (4,770,794) (3,251,199) 3,273,643
Net cash provided by (used in) investing
activities................................... (1,733,094) 270,657 (11,492,792) (4,469,701) (1,239,853)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions................................. -- 1,494,346 7,064,114 1,000,000 500
Proceeds from long-term debt.......................... 107,284 2,899 599,206 -- (180,387)
Payments of long-term debt............................ (441,500) (269,254) (575,845) (468,970) --
Net cash provided by (used in) financing
activities................................... (334,216) 1,227,991 7,087,475 531,030 (179,887)
NET INCREASE (DECREASE) IN CASH......................... 893,013 4,538,940 (2,314,397) (162,023) 2,558,095
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD............................................. 3,561,934 4,454,947 8,993,887 9,608,406 6,679,490
CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 4,454,947 $ 8,993,887 $ 6,679,490 $ 9,446,383 $ 9,237,585
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -- Cash paid during the period for:
Interest.............................................. $ 3,324,678 $ 4,776,504 $ 6,488,657 $ 2,839,031 $ 3,320,996
Income taxes.......................................... $ 998,850 $ 1,522,100 $ 2,042,268 $ 834,000 $ 930,000
See notes to combined and consolidated financial statements.
F-7
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Sonic Automotive, Inc ("Sonic") was
incorporated in the State of Delaware in February, 1997 in order to effect a
reorganization of certain affiliated companies (the "Reorganization") and to
undertake an initial public offering of Sonic's common stock (the "Offering").
Sonic and affiliated companies (collectively, the "Company") operate automobile
dealerships in the Houston, Texas and Charlotte, North Carolina metropolitan
areas. The Company sells new and used cars and light trucks, sells replacement
parts, provides vehicle maintenance, warranty, paint and repair services and
arranges related financing and insurance. The financial statements for the
periods through June 30, 1997 represent the combined data for the entities under
common interest and control which became subsidiaries of Sonic pursuant to the
Reorganization on June 30, 1997, including the following entities:
Town and Country Ford, Inc.................................................... Charlotte
Lone Star Ford, Inc........................................................... Houston
FMF Management, Inc. (d/b/a Fort Mill Ford)................................... Charlotte
Town and Country Toyota, Inc.................................................. Charlotte
Frontier Oldsmobile-Cadillac, Inc............................................. Charlotte
All material intercompany transactions have been eliminated in the combined
financial statements. Effective June 30, 1997, these five entities became
wholly-owned subsidiaries of Sonic through the exchange of their common stock or
membership interests for 10,000 shares of Sonic's Class B common stock having a
$.01 par value per share. On June 2, 1997 Sonic, through its wholly-owned
subsidiary, Fort Mill Chrysler-Plymouth-Dodge, acquired certain dealership
assets and liabilities of Jeff Boyd Chrysler-Plymouth-Dodge, Inc. (a previously
unrelated entity) for a total purchase price of approximately $3.7 million. The
unaudited consolidated financial statements as of and for the six months ended
June 30, 1997, which give effect to the Reorganization, include the accounts of
the above five entities and also include the accounts and results of operations
of Fort Mill Chrysler-Plymouth-Dodge from the date of its acquisition.
The Reorganization was accounted for at historical cost in a manner similar
to a pooling-of-interests as the entities were under the common management and
control of Mr. O. Bruton Smith. The acquisition of Jeff Boyd
Chrysler-Plymouth-Dodge was accounted for as a purchase.
Prior to the Reorganization, Town and Country Toyota, Inc. was 69% owned by
Mr. O. Bruton Smith, the Company's Chairman and Chief Executive Officer, Lone
Star Ford, Inc. and Frontier Oldsmobile -- Cadillac, Inc. were 100% owned by
Sonic Financial Corporation ("SFC"), which in turn is 100% owned by Mr. Smith
and related family trusts. Town and Country Ford, Inc. was owned 80% by SFC and
20% by Mr. Scott Smith (O. Bruton Smith's son). FMF Management, Inc. was owned
50% by SFC and 50% by Mr. O. Bruton Smith.
In connection with the Reorganization, the Company purchased the 31%
minority interest in Town and Country Toyota, Inc. for $3.2 million in a
transaction accounted for using purchase accounting.
In connection with the anticipated Offering, Sonic expects to issue shares
of its Class A common stock. The Class B common stock entitles the holder to ten
votes per share, except in certain circumstances, while the Class A common stock
entitles its holder to one vote per share.
PRO FORMA NET INCOME PER SHARE -- Pro forma net income per share in the
accompanying financial statements has been prepared based upon the shares
outstanding after the Reorganization and without giving effect to the issuance
of common stock related to the Offering.
REVENUE RECOGNITION -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
DEALER AGREEMENTS -- The Company purchases substantially all of its new
vehicles from manufacturers at the prevailing prices charged by the manufacturer
to its franchised dealers. The Company's sales could be unfavorably impacted by
the manufacturer's unwillingness or inability to supply the dealership with an
adequate supply of new car inventory.
F-8
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
Each dealership operates under a dealer agreement with the manufacturer
which generally restricts the location, management and ownership of the
respective dealership. The ability of the Company to acquire additional
franchises from a particular manufacturer may be limited due to certain
restrictions imposed by manufacturers. Additionally, the Company's ability to
enter into other significant acquisitions may be restricted and the acquisition
of the Company's stock by third parties may be limited by the terms of the
franchise agreement.
CASH AND CASH EQUIVALENTS -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to vehicle purchases, and was
$2,644,804 and $5,222,589 at December 31, 1995 and 1996, respectively.
INVENTORIES -- Inventories of new vehicles, including demonstrators, are
valued at the lower of last-in, first-out ("LIFO") cost or market. Inventories
of used vehicles are stated at the lower of specific cost or market, and parts
and accessories are stated at the lower first-in, first-out ("FIFO") cost or
market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of the assets. The range of estimated useful lives is as
follows:
USEFUL LIVES
Building..................................................................... 40
Office equipment and fixtures................................................ 5-7
Parts and service equipment.................................................. 5
Company vehicles............................................................. 5
Leasehold improvements are amortized over the lesser of the terms of their
respective leases or the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
GOODWILL -- Goodwill represents the excess of purchase price over the
estimated fair value of the net assets acquired and is being amortized over a 40
year period. The cumulative amount of goodwill amortization at December 31, 1996
was approximately $98,000.
The Company periodically reviews goodwill to assess recoverability. The
Company's policy is to compare the carrying value of goodwill with the expected
undiscounted cash flows from operations of the acquired business.
MARKETABLE EQUITY SECURITIES -- The Company's marketable equity securities
are classified as "available for sale" and are not bought and held principally
for the purpose of selling them in the near term. As such, these securities are
reported at fair value, with unrealized gains and losses, net of tax, excluded
from earnings and reported as a separate component of stockholders' equity.
Realized gains and losses on sales of marketable equity securities are
determined using the specific identification method.
INCOME TAXES -- Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to the capitalization of additional
inventory costs for income tax purposes, the recording of chargebacks and
repossession losses on the direct write-off method for income tax purposes, the
direct write-off of uncollectible accounts for income tax purposes, and the
accelerated depreciation method used for income tax purposes. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. In addition, deferred tax assets are
recognized for state operating losses that are available to offset future
taxable income.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
on deposit with financial institutions. At times, amounts invested with
financial institutions may exceed FDIC insurance limits.
F-9
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
Concentrations of credit risk with respect to receivables are limited
primarily to automobile manufacturers and financial institutions. Credit risk
arising from trade receivables from commercial customers is reduced by the large
number of customers comprising the trade receivables balances. Trade receivables
are concentrated in the Company's two market areas of Houston, Texas and
Charlotte, North Carolina metropolitan areas.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- As of December 31, 1995 and 1996 the
fair values of the Company's financial instruments including: receivables, due
from affiliates, notes payable-floor plan, trade accounts payable, payables to
affiliated companies and Company Chairman and long-term debt approximate their
carrying values.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ADVERTISING -- The Company expenses advertising costs in the period
incurred. Advertising expense amounted to $3,765,363, $4,525,670 and $4,989,283
for 1994, 1995 and 1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS -- Effective January 1, 1996, the Company
adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Adoption of SFAS No. 121 did not have a material impact on the
Company's results of operations, financial position, and cash flows.
NEW ACCOUNTING STANDARDS -- In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." This Statement specifies the computation, presentation and
disclosure requirements for earnings per share. The Company believes that the
adoption of such statement would not result in earnings per share materially
different than pro forma earnings per share presented in the accompanying
statements of income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
standard establishes standards of reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. This
Statement will be effective for the Company's fiscal year ending December 31,
1998, and the Company does not intend to adopt this statement prior to the
effective date. Had the Company early adopted this Statement, it would have
reported comprehensive income of $2,784,032, $2,402,427 and $2,088,601 for the
years ended December 31, 1994, 1995 and 1996, respectively.
INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial
information for the six months ended June 30, 1996 and 1997 has been prepared on
substantially the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein. The results
for interim periods are not necessarily indicative of the results to be expected
for the entire fiscal year.
F-10
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. BUSINESS ACQUISITIONS
In June 1997, the Company through its wholly-owned subsidiary, Fort Mill
Chrysler-Plymouth-Dodge, acquired certain dealership assets and liabilities of
Jeff Boyd Chrysler-Plymouth-Dodge for a total purchase price of $3.7 million. Of
the total purchase price of $3.7 million, $3.5 million was advanced to the
Company by Mr. O. Bruton Smith, with interest charged at 3.83%. It is
anticipated that this advance will be repaid in full with proceeds from the
Offering. This transaction was accounted for using purchase accounting and the
results of the operations of this dealership have been included from the date of
acquisition through June 30, 1997 in the accompanying Unaudited Combined and
Consolidated Statement of Income. The purchase price has been allocated to the
assets and liabilities acquired at their estimated fair market value at the
acquisition date as follows:
Working capital............................................................. $ 977,000
Property and equipment...................................................... 250,000
Goodwill.................................................................... 2,473,000
Totals...................................................................... $3,700,000
In June, July and August the Company entered into definitive agreements to
purchase six additional dealership groups for an aggregate purchase price of
$100.7 million as follows:
Bowers Dealerships................................ Chattanooga, Tennessee
Lake Norman Dodge and Affiliates.................. Cornelius, North Carolina
Ken Marks Ford.................................... Clearwater, Florida
Dyer Volvo........................................ Atlanta, Georgia
Jeff Boyd Chrysler-Plymouth-Dodge................. Fort Mill, South Carolina
Williams Motors, Inc.............................. Rock Hill, South Carolina
The Jeff Boyd Chrysler-Plymouth-Dodge acquisition has been consummated. The
completion of the remaining acquisitions may be dependent upon the successful
completion of the Offering.
On February 1, 1996, the Company acquired Fort Mill Ford for a total
purchase price of $5,741,114. The acquisition has been accounted for as a
purchase and the results of operations of Fort Mill Ford have been included in
the accompanying combined financial statements from the date of acquisition. The
purchase price has been allocated to the assets and liabilities acquired at
their estimated fair market value at the acquisition date as follows:
Working capital............................................................. $7,234,000
Property and equipment...................................................... 3,022,000
Goodwill.................................................................... 4,294,000
Non-current liabilities assumed............................................. (8,809,000)
Total....................................................................... $5,741,000
The following unaudited pro forma financial data is presented as if Fort
Mill Ford had been acquired at January 1, 1994. Fort Mill Ford results of
operations for 1994 and 1995 are based on application of the first-in, first-out
method of accounting for inventories for all classes of inventory. Pro forma
results of operations for 1996 are not presented because the acquisition
occurred in February 1996, and the pro forma results would not be materially
different from the historical results presented.
1994 1995
Revenues..................................................................................... $300,558,662 $345,198,523
Net income................................................................................... $ 2,939,561 $ 2,874,909
Earnings per share........................................................................... $ 294 $ 287
The pro forma information presented above is not necessarily indicative of
the operating results that would have occurred had Fort Mill Ford been acquired
on January 1, 1994. These results are also not necessarily indicative of the
results of future operations.
F-11
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories at December 31, 1995 and 1996 and June 30, 1997 consist of the
following:
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
New vehicles.................................................................... $25,675,122 $38,218,187 $42,601,014
Used vehicles................................................................... 8,913,145 14,372,285 11,826,874
Parts and accessories........................................................... 4,185,547 4,939,724 4,997,869
Other........................................................................... 354,227 439,824 459,152
Total........................................................................... $39,128,041 $57,970,020 $59,884,909
At December 31, 1995 and 1996 and at June 30, 1997, the excess of current
replacement cost over the stated LIFO valuation of new vehicles amounted to
$12,219,953, $13,579,696 and $13,525,047 (unaudited), respectively.
Had the Company used the FIFO method of valuing new vehicle inventory,
pretax earnings would have been $5,809,357, $5,435,709 and $5,020,512 in 1994,
1995 and 1996, respectively.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $45,151,111 and
$63,893,356 at December 31, 1996. The floor plan notes bear interest, payable
monthly on the outstanding balance, at the prime rate plus 1% (9 1/4% at
December 31, 1995 and 1996). Total floor plan interest expense amounted to
$3,000,622, $4,504,526 and $5,968,430 in 1994, 1995 and 1996, respectively. The
notes payable are due when the related vehicle is sold. As such, these floor
plan notes payable are shown as a current liability in the accompanying combined
and consolidated balance sheets.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996 and June 30, 1997 is
comprised of the following:
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
Land............................................................................ $ 1,477,795 $ 2,677,795 $ 2,677,795
Buildings and improvements...................................................... 7,085,878 10,080,659 10,381,145
Office equipment and fixtures................................................... 2,442,965 2,036,980 2,360,424
Parts and service equipment..................................................... 2,955,729 2,866,291 2,941,456
Company vehicles................................................................ 373,683 437,261 512,113
Construction in progress........................................................ 265,677 -- --
Total, at cost.................................................................. 14,601,727 18,098,986 18,872,933
Less accumulated depreciation................................................... (6,074,389) (5,632,273) (5,603,144)
Property and equipment, net..................................................... $ 8,527,338 $12,466,713 $13,269,789
F-12
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996 and June 30, 1997 consists of
the following:
DECEMBER 31,
1995 1996
Note payable in monthly installments of $8,333 plus interest at the prime rate plus 1 1/2%,
through July 2001, collateralized by accounts receivable, inventory and equipment............... $ -- $ 458,335
Mortgage payable in monthly installments of $12,222 plus interest at prime plus 3/4%, through May
2004, collateralized by building................................................................ -- 1,087,778
Unsecured note payable in monthly installments of $9,100, including interest at 8%, through March
2004............................................................................................ -- 599,238
Mortgage note payable in monthly installments of $4,203, including interest at 7%, through
November 2008, collateralized by land and building.............................................. 425,751 405,700
Mortgage note payable in monthly installments of $27,415 including interest at prime plus 1/2%,
through April 2001, at which time remaining outstanding principal balance is due, collateralized
by building..................................................................................... 3,135,379 3,062,926
Other notes payable............................................................................... 169,568 190,864
3,730,698 5,804,841
Less current maturities........................................................................... (169,932) (518,979)
Long-term debt.................................................................................... $3,560,766 $5,285,862
Future maturities of debt at December 31, 1996 are as follows:
Year ending December 31:
1997........................................................................ $ 518,979
1998........................................................................ 455,505
1999........................................................................ 434,609
2000........................................................................ 446,374
2001........................................................................ 3,096,525
Thereafter.................................................................. 852,849
Total....................................................................... $5,804,841
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following
components:
1994 1995 1996
Current:
Federal........................................................................... $1,301,350 $1,147,700 $1,374,280
State............................................................................. -- 76,800 265,972
1,301,350 1,224,500 1,640,252
Deferred............................................................................ 244,900 427,200 (189,179)
Change in valuation allowance....................................................... 13,500 23,200 (51,369)
258,400 450,400 (240,548)
Total............................................................................. $1,559,750 $1,674,900 $1,399,704
F-13
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. INCOME TAXES -- Continued
The reconciliation of the statutory federal income tax rate with the
Company's federal and state overall effective income tax rate is as follows:
1994 1995 1996
Statutory federal rate............................................................................... 34.00% 34.00% 34.00%
State income taxes................................................................................... -- 3.84 3.60
Miscellaneous........................................................................................ 1.78 2.67 .64
Effective tax rates.................................................................................. 35.78% 40.51% 38.24%
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31 are as
follows:
1995 1996
Deferred tax assets:
Allowance for bad debts......................................................................... $ 62,300 $ 85,992
Inventory reserves.............................................................................. 126,400 160,820
Net operating loss carryforwards................................................................ 183,800 74,931
Other........................................................................................... 1,300 75,656
Total deferred tax assets....................................................................... 373,800 397,399
Valuation allowance............................................................................. (126,300) (75,000)
Deferred tax assets, net........................................................................ 247,500 322,399
Deferred tax liabilities:
Basis difference in fixed assets................................................................ (155,200) (556,384)
Basis difference in equity investment........................................................... (644,400) (478,876)
Other........................................................................................... (108,000) (66,623)
Total deferred tax liability...................................................................... (907,600) (1,101,883)
Net deferred tax liability........................................................................ $(660,100) $ (779,484)
The net changes in the valuation allowance against deferred tax assets were
an increase of $23,200 for the year ended December 31, 1995 and a decrease of
($51,300) for the year ended December 31, 1996. The increase (decrease) was
related primarily to the generation (expiration) of state net operating loss
carryforwards. At December 31, 1996, the Company had state net operating loss
carryforwards of $1,259,000 which will expire between 1998 and 2002.
The Company expects to convert its method of valuing inventories from the
LIFO method to the FIFO method in 1997 for financial reporting and income tax
reporting purposes. The Company estimates that it will incur a tax liability of
approximately $5.5 million in connection with this conversion.
7. RELATED PARTIES
Due from affiliates represents non-interest bearing advances to SFC. Since
there are no specified repayment terms, the entire amount has been reflected as
a reduction in stockholders' equity at December 31, 1996 and June 30, 1997.
The Company had amounts payable to affiliated companies of $3,219,204 and
$914,339, at December 31, 1995 and 1996, respectively. The balance, consisting
of non-interest bearing loans from affiliates, is classified as noncurrent based
upon its expected repayment date.
The Company operates certain dealerships at facilities leased from
affiliated companies. As of December 31, 1996, future commitments under these
operating leases are $769,200 annually through 1999, $701,000 in 2000, and
$360,000 from 2001 through 2005. Rent expense in 1994, 1995 and 1996 for these
leases amounted to $756,668, $737,076 and $767,200, respectively.
F-14
SONIC AUTOMOTIVE, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. PREFERRED STOCK
In 1997, the Company authorized 3,000,000 shares of "blank check" preferred
stock with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. No preferred shares were issued and
outstanding at June 30, 1997
9. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of the company are eligible to
participate in a 401(k) plan maintained by SFC. Contributions by the Company to
the plan were not significant in any period presented.
In August 1997, the Company intends to adopt the 1997 Stock Option Plan
(the "Plan"). Under the provisions of the Plan, options to purchase shares of
Class A Common Stock may be granted to key employees of the Company and its
subsidiaries and to officers, directors, consultants and other individuals
providing services to the Company. The exercise price of the options may not be
less than the market value of the Class A Common Stock on the date of grant.
Vesting periods will range from 5 to 10 years.
In August 1997 the Company intends to adopt the Sonic Employee Stock
Purchase Plan (the "ESPP"). The ESPP provides employees of the Company the
opportunity to purchase Class A Common Stock after completion of the Offering.
Under the terms of the ESPP, on January 1 of each year all eligible employees
electing to participate will be granted an option to purchase shares of Class A
Common Stock. The Company's Compensation Committee will annually determine the
number of shares of Class A Common Stock available for purchase under each
option. The purchase price at which Class A Common Stock will be purchased
through the ESPP will be 90% of the lesser of (i) the fair market value of the
Class A Common Stock on the applicable Grant Date and (ii) the fair market value
of the Class A Common Stock on the applicable Exercise Date. Options will expire
on the last exercise date of the calendar year in which granted.
10. CONTINGENCIES
The Company is contingently liable for customer contracts placed with
financial institutions of approximately $741,000 at December 31, 1996. However,
the Company's potential loss is limited to the difference between the present
value of the installment contract at the date of the repossession and the market
value of the vehicle at the date of sale. Other accrued liabilities include a
provision for repossession losses. The Company provides a reserve for
repossession losses based on the ratio that historical loss experience bears to
the amount of outstanding customer contracts.
The Company has available $1,500,000 under draft-clearing credit lines with
a bank in order to immediately fund the Company's checking account for sold
vehicle contracts from other financial institutions. The Company is contingently
liable to the bank until the contracts are approved by the financial
institutions. At December 31, 1996, $151,227 was outstanding under these lines.
In the event that the Company fails to close the acquisitions of Lake
Norman Dodge and Affiliates, Dyer Volvo, Ken Marks Ford, and the Bowers
Dealerships by certain dates, the Company will be required to pay termination
fees which total approximately $5.5 million.
The Company is involved in various legal proceedings. Management believes
that the outcome of such proceedings will not have a materially adverse effect
on the Company's financial position or future results of operations and cash
flows.
F-15
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
DYER & DYER, INC.
Atlanta, Georgia
We have audited the accompanying balance sheets of Dyer & Dyer, Inc. (the
"Company") as of December 31, 1995 and 1996, and the related statements of
income, stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dyer & Dyer, Inc. as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
August 7, 1997
F-16
DYER & DYER, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 1,522,546 $ 941,280 $ 172,937
Receivables................................................................... 432,779 1,213,846 2,535,230
Inventories (Notes 1 and 2)................................................... 9,043,156 15,071,313 11,128,333
Prepaid expenses.............................................................. 274,998 103,958 32,267
Total current assets..................................................... 11,273,479 17,330,397 13,868,767
PROPERTY AND EQUIPMENT, NET (Notes 1 and 3)..................................... 774,909 1,279,774 1,156,207
OTHER ASSETS.................................................................... 287,628 292,250 297,424
TOTAL ASSETS.................................................................... $12,336,016 $18,902,421 $15,322,398
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, floor plan (Note 2)............................................ $ 2,610,935 $ 7,146,245 $ 5,533,925
Trade accounts payable........................................................ 511,292 1,131,472 --
Income taxes payable (Notes 1 and 5).......................................... -- 238,712 238,712
Accrued payroll and bonuses................................................... 82,183 229,297 277,377
Other accrued liabilities..................................................... 196,537 261,932 235,360
Total current liabilities................................................ 3,400,947 9,007,658 6,285,374
INCOME TAXES PAYABLE (Note 5)................................................... 21,012 477,423 238,711
COMMITMENTS (Note 4)
STOCKHOLDER'S EQUITY:
Common stock, $100 par value -- 3,000 shares authorized; 1,531 shares issued;
781 shares outstanding..................................................... 153,100 153,100 153,100
Paid-in capital............................................................... 27,623 27,623 27,623
Retained earnings............................................................. 13,709,477 14,212,760 13,593,733
Total.................................................................... 13,890,200 14,393,483 13,774,456
Less treasury stock (750 shares at cost)...................................... (4,976,143) (4,976,143) (4,976,143)
Total stockholder's equity............................................... 8,914,057 9,417,340 8,798,313
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY...................................... $12,336,016 $18,902,421 $15,322,398
See notes to financial statements.
F-17
DYER & DYER, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1994 1995 1996 1996 1997
(UNAUDITED)
REVENUES:
Vehicle sales.................................. $52,245,947 $52,613,480 $60,870,919 $30,767,026 $31,373,513
Parts, service and collision repair............ 8,680,440 9,097,763 11,163,230 5,481,708 5,960,212
Finance and insurance.......................... 203,198 404,505 542,474 213,711 128,911
Total..................................... 61,129,585 62,115,748 72,576,623 36,462,445 37,462,636
COST OF SALES.................................... 54,121,066 55,776,668 62,547,497 31,969,022 32,377,247
GROSS PROFIT..................................... 7,008,519 6,339,080 10,029,126 4,493,423 5,085,389
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 6,160,564 5,621,343 6,921,428 3,353,559 3,498,432
DEPRECIATION AND AMORTIZATION.................... 123,228 90,538 202,214 45,451 150,621
OPERATING INCOME................................. 724,727 627,199 2,905,484 1,094,413 1,436,336
OTHER INCOME AND EXPENSE:
Interest expense, floor plan................... 56,944 171,690 372,590 178,970 276,393
Other income................................... 609,684 314,788 452,063 234,834 247,213
Total other income (expense).............. 552,740 143,098 79,473 55,864 (29,180)
INCOME BEFORE INCOME TAXES....................... 1,277,467 770,297 2,984,957 1,150,277 1,407,156
PROVISION FOR INCOME TAXES (Notes 1
and 5)......................................... 491,365 295,850 954,846 954,846 --
NET INCOME....................................... $ 786,102 $ 474,447 $ 2,030,111 $ 195,431 $ 1,407,156
See notes to financial statements
F-18
DYER & DYER, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997
TOTAL
COMMON PAID-IN TREASURY RETAINED STOCKHOLDER'S
STOCK CAPITAL STOCK EARNINGS EQUITY
BALANCE
DECEMBER 31, 1993...................................... $153,100 $27,623 $(4,976,143) $12,448,928 $ 7,653,508
Net income............................................. -- -- -- 786,102 786,102
BALANCE
DECEMBER 31, 1994...................................... 153,100 27,623 (4,976,143) 13,235,030 8,439,610
Net income............................................. -- -- -- 474,447 474,447
BALANCE
DECEMBER 31, 1995...................................... 153,100 27,623 (4,976,143) 13,709,477 8,914,057
Dividends.............................................. -- -- -- (1,526,828) (1,526,828)
Net income............................................. -- -- -- 2,030,111 2,030,111
BALANCE
DECEMBER 31, 1996...................................... 153,100 27,623 (4,976,143) 14,212,760 9,417,340
Dividends (unaudited).................................. -- -- -- (2,026,183) (2,026,183)
Net income (unaudited)................................. -- -- -- 1,407,156 1,407,156
BALANCE
JUNE 30, 1997 (unaudited).............................. $153,100 $27,623 $(4,976,143) $13,593,733 $ 8,798,313
See notes to financial statements.
F-19
DYER & DYER, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
1994 1995 1996 1996 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 786,102 $ 474,447 $2,030,111 $ 195,431 $1,407,156
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) Loss on disposal of fixed assets........... 8,011 11,757 10,890 -- (116)
Depreciation and amortization..................... 123,228 90,538 202,214 45,451 150,621
Changes in assets and liabilities that relate to
operations:
(Increase) decrease in accounts receivable........ (390,834) 191,714 (768,730) (39,751) (1,355,959)
(Increase) decrease in inventories................ 11,184 (4,213,189) (6,028,157) (1,566,226) 3,942,980
(Increase) decrease in prepaid expenses........... 79,966 (177,992) 171,040 218,576 71,691
Increase (decrease) in notes payable,
floor plan...................................... (127,470) 2,581,585 4,535,310 290,990 (1,612,320)
Increase (decrease) in accounts payable........... 7,048 498,092 620,180 (376,134) (1,131,472)
Increase (decrease) in other accrued
liabilities..................................... 105,201 (187,726) 147,106 170,944 25,008
Increase (decrease) in income taxes payable....... (20,682) 8,484 760,526 760,526 (242,212)
Total adjustments............................... (204,348) (1,196,737) (349,621) (495,624) (151,779)
Net cash provided by (used) in operating
activities................................... 581,754 (722,290) 1,680,490 (300,193) 1,255,377
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... (18,485) (181,259) (717,969) (14,013) (26,938)
Increase in cash value of life insurance............. (15,398) (26,316) (4,622) (2,311) (5,174)
Deposits held by financial institutions.............. 13,001 10,849 (12,337) 22,238 34,575
Net cash provided by (used) in investing
activities................................... (20,882) (196,726) (734,928) 5,914 2,463
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid....................................... -- -- (1,526,828) (759,810) (2,026,183)
INCREASE (DECREASE) IN CASH............................ 560,872 (919,016) (581,266) (1,054,089) (768,343)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 1,880,690 2,441,562 1,522,546 1,522,546 941,280
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $2,441,562 $1,522,546 $ 941,280 $ 468,457 $ 172,937
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.......................................... $ 57,766 $ 176,464 $ 509,621 $ 247,970 $ 279,460
Income taxes...................................... $ 399,605 $ 438,810 $ 31,826 $ 31,826 $ 242,237
See notes to financial statements.
F-20
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Dyer & Dyer, Inc. (the "Company") was
incorporated in South Carolina in 1978, and operates a Volvo automobile
dealership in Atlanta, Georgia. The Company sells new and used cars, sells
replacement parts, provides vehicle maintenance, warranty, paint and repair
services and arranges related financing and insurance.
In August 1997, the Company signed a definitive purchase agreement whereby
its net assets would be acquired by Sonic Automotive, Inc. for $18 million. This
acquisition is to be effective prior to the completion of an anticipated public
offering of common stock by Sonic Automotive in 1997.
REVENUE RECOGNITION -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
DEALER AGREEMENTS -- The Company purchases substantially all of its new
vehicles from the manufacturer at the prevailing prices charged by the
manufacturer to its franchised dealers. The Company's sales could be unfavorably
impacted by the manufacturer's unwillingness or inability to supply the
dealership with an adequate supply of new car inventory.
The dealership operates under a dealer agreement with the manufacturer
which generally restricts the location, management and ownership of the
dealership. The ability of the Company to acquire additional franchises may be
limited due to certain restrictions imposed by the manufacturer. Additionally,
the Company's ability to enter into significant acquisitions may be restricted
and the acquisition of the Company's stock by third parties may be limited by
the terms of the franchise agreement.
The manufacturer has implemented various incentive programs for its dealers
that provide for specified payments to the dealers based on the results of
customer satisfaction surveys and the implementation of certain standardized
policies and procedures. These programs are for a limited duration and remain
subject to cancellation by the manufacturer at any time. Incentive payments
credited to cost of sales amounted to approximately $210,000, $267,000 and
$1,326,000 during 1994, 1995 and 1996, respectively, and $290,000 and $912,000
for the six months ended June 30, 1996 and 1997, respectively.
CASH AND CASH EQUIVALENTS -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to vehicle purchases, and was
approximately $1,522,000 and $934,000 at December 31, 1995 and 1996,
respectively, and $167,000 at June 30, 1997.
INVENTORIES -- Inventories of new vehicles, including demonstators, are
valued at the lower of last-in, first-out ("LIFO") cost or market. Inventories
of used vehicles are stated at the lower of first-in, first-out ("FIFO") cost or
market, and parts and accessories are stated at the lower of specific cost or
market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of the assets. The range of estimated useful lives are as
follows:
USEFUL LIVES
Office equipment and fixtures............................................................ 5-7
Parts and service equipment.............................................................. 5
Company vehicles......................................................................... 5
Leasehold improvements are amortized over the lesser of the terms of their
respective leases or the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are expensed as incurred. Significant
betterments are capitalized.
INCOME TAXES -- For the years ended December 31, 1994 and 1995, the Company
was a C Corporation and, therefore, provided for income taxes using the balance
sheet method. There were no significant deferred tax assets and liabilities as
of December 31, 1995. Effective January 1, 1996, the Company elected to be
treated as an S Corporation for federal and state income tax purposes. As such
the Company's taxable income is included in the stockholder's annual income tax
return. Accordingly, no provision for federal or state income taxes has been
included in the Company's statements of income for the periods beginning after
December 31, 1995.
F-21
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
on deposit with financial institutions. At times, amounts invested with
financial institutions may exceed FDIC insurance limits.
Concentrations of credit risk with respect to receivables are limited
primarily to automobile manufacturers and financial institutions. Credit risk
arising from trade receivables from commercial customers is reduced by the large
number of customers comprising the trade receivables balances. Trade receivables
are concentrated in the Atlanta, Georgia area.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ADVERTISING -- The Company expenses advertising costs in the period
incurred. Advertising expense approximated $709,000, $525,000 and $765,000
during 1994, 1995 and 1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS -- Effective January 1, 1996, the Company
adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Adoption of SFAS No. 121 did not have a material impact on the
Company's results of operations or financial position.
INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial
information for the six months ended June 30, 1996 and 1997 has been prepared on
substantially the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein. The results
of interim periods are not necessarily indicative of results to be expected for
the entire fiscal year.
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
New vehicles.................................................................... $ 5,692,043 $ 7,980,256 $ 5,017,765
Used vehicles................................................................... 2,768,230 6,362,410 5,542,979
Parts and accessories........................................................... 503,490 586,129 420,959
Other........................................................................... 79,393 142,518 146,630
Total........................................................................... $ 9,043,156 $15,071,313 $11,128,333
At December 31, 1995 and 1996 and at June 30, 1997, the excess of current
replacement cost over the stated LIFO valuation of new vehicles, parts and
accessories amount to $2,387,114, $2,503,330 and $2,503,330 (unaudited),
respectively.
Had the Company used the FIFO method of valuing new vehicle, parts and
accessories inventory, pretax earnings would have been $1,335,380, $1,200,776
and $3,101,173 in 1994, 1995 and 1996, respectively.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $2,610,935 and
$7,146,245 at December 31, 1995 and 1996, respectively. The floor plan notes
bear interest, payable monthly on the outstanding balance, at the prime rate
plus 1/2% to 1 1/2% (prime rate was 8.25% at December 31, 1996). Total floor
plan interest expense amounted to $56,944, $171,690 and $372,590 in 1994, 1995
and 1996, respectively. The notes payable are due when the related vehicle is
sold. As such, these floor plan notes payable are shown as a current liability
in the accompanying balance sheets.
F-22
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
Leasehold improvements.............................................................. $1,479,385 $1,885,415 $1,885,415
Furniture and fixtures.............................................................. 1,372,801 1,546,987 1,550,022
Other equipment..................................................................... 565,398 571,778 571,778
Computer equipment.................................................................. 188,851 195,598 198,428
Service vehicles.................................................................... 117,535 122,916 143,989
3,723,970 4,322,694 4,349,632
Less accumulated depreciation and amortization...................................... (2,949,061) (3,042,920) (3,193,425)
Property and equipment, net......................................................... $ 774,909 $1,279,774 $1,156,207
4. LEASES
The Company leases its business premises under noncancelable operating
leases for five to twenty-five year terms from a partnership partially owned by
the sole stockholder of the Company. Future minimum rental payments required
under noncancelable leases at December 31, 1996 are as follows:
YEAR ENDING:
1997.................................................................................... $ 754,162
1998.................................................................................... 756,956
1999.................................................................................... 759,832
2000.................................................................................... 762,800
2001.................................................................................... 765,856
Thereafter.............................................................................. 5,551,504
Total................................................................................... $9,351,110
Rent expense approximated $711,000, $708,000 and $715,000 during 1994, 1995
and 1996, respectively.
5. INCOME TAXES
The provision for income taxes consists of the following:
DECEMBER 31,
1994 1995 1996
Current:
Federal................................................................................ $439,714 $231,720 $811,620
State.................................................................................. 47,463 40,864 143,226
487,177 272,584 954,846
Deferred................................................................................. 4,188 23,266 --
Total.................................................................................... $491,365 $295,850 $954,846
Effective with the Company's S Corporation election, it was required to
recapture its December 31, 1995 LIFO reserve of approximately $2,400,000 and pay
tax on that amount for both Federal and State income tax purposes. The taxes are
payable in four equal annual installments beginning March 15, 1996. This
conversion to S Corporation status resulted in the recognition of approximately
$955,000 in income tax expense.
As a result of the Company's change to S Corporation status on January 1,
1996 (see Note 1), it is exposed to potential future taxes on built-in gains
which were present on the date of the conversion. If the planned acquisition of
the net assets of
F-23
DYER & DYER, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. INCOME TAXES -- Continued
the Company described in Note 1 is consummated, the disposal of tangible and
intangible property which appreciated prior to the election of S Corporation
status will result in the assessment of the built-in gains tax.
6. RETIREMENT PLAN
The Company has a contributory 401(k) plan covering substantially all
employees. Company contributions to the Plan are equal to 25% of the first 4% of
participant contributions. Company contributions amounted to $1,000, $18,000 and
$18,000 in 1994, 1995 and 1996, respectively.
F-24
INDEPENDENT AUDITORS' REPORT
TO THE BOARDS OF DIRECTORS AND STOCKHOLDERS OF
BOWERS DEALERSHIPS AND AFFILIATED COMPANIES
Chattanooga, Tennessee
We have audited the accompanying combined balance sheets of Bowers
Dealerships and Affiliated Companies (the "Company"), which are under common
ownership and management, as of December 31, 1995 and 1996, and the related
combined statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Bowers Dealerships
and Affiliated Companies as of December 31, 1995 and 1996, and the combined
results of their operations and their combined cash flows for the years then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
August 7, 1997
F-25
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 2,331,136 $ 3,422,140 $ 5,797,307
Receivables................................................................... 2,972,607 3,840,311 3,398,335
Inventories (Note 3).......................................................... 13,003,266 23,147,852 34,070,935
Other current assets (Note 6)................................................. 1,182,860 2,119,974 2,452,831
Total current assets..................................................... 19,489,869 32,530,277 45,719,408
PROPERTY AND EQUIPMENT, NET (Note 4)............................................ 2,889,753 7,254,793 8,744,225
GOODWILL, NET (Note 1).......................................................... 978,735 4,374,573 8,285,460
OTHER ASSETS.................................................................... 183,822 161,845 257,464
TOTAL ASSETS.................................................................... $23,542,179 $44,321,488 $63,006,557
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 3).......................................... $11,620,942 $19,731,323 $29,070,838
Notes payable -- other (Note 6)............................................... 2,015,025 3,792,610 4,589,869
Trade accounts payable........................................................ 278,001 1,196,660 1,424,997
Accrued interest.............................................................. 69,164 105,505 178,143
Other accrued liabilities..................................................... 897,893 1,742,119 1,738,928
Current maturities of long-term debt (including amounts due to related parties
of $104,189, $104,189 and $172,072 at December 31, 1995 and 1996 and June
30, 1997, respectively).................................................... 468,040 389,658 558,332
Total current liabilities................................................ 15,349,065 26,957,875 37,561,107
LONG-TERM DEBT (Note 6) (including amounts due to related parties of $2,109,815,
$2,005,626 and $1,953,531 at December 31, 1995 and 1996
and June 30, 1997, respectively).............................................. 2,110,016 3,562,249 4,364,746
COMMITMENTS AND CONTINGENCIES (Notes 5 and 10)
EQUITY
Common stock of combined companies (Note 8):.................................. 1,000,000 1,000,000 1,000,000
Retained earnings and members' and partners' equity........................... 5,543,728 13,661,994 20,941,334
Due from affiliates (Note 7).................................................. (460,630) (860,630) (860,630)
Total equity............................................................. 6,083,098 13,801,364 21,080,704
TOTAL LIABILITIES AND EQUITY.................................................... $23,542,179 $44,321,488 $63,006,557
See notes to combined financial statements
F-26
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1995 1996 1996 1997
(UNAUDITED)
REVENUES:
Vehicle sales............................... $ 91,774,886 $113,362,495 $48,251,281 $72,605,727
Parts, service and collision repair......... 5,813,582 10,405,031 4,472,267 11,596,873
Finance and insurance....................... 2,768,358 3,348,273 1,639,878 1,867,781
Total revenues......................... 100,356,826 127,115,799 54,363,426 86,070,381
COST OF SALES................................. 86,772,544 109,372,977 46,129,292 73,095,919
GROSS PROFIT.................................. 13,584,282 17,742,822 8,234,134 12,974,462
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................... 10,748,891 14,886,611 6,486,017 9,908,039
DEPRECIATION AND AMORTIZATION................. 321,170 514,915 193,486 415,899
OPERATING INCOME.............................. 2,514,221 2,341,296 1,554,631 2,650,524
OTHER INCOME AND EXPENSE:
Interest expense, floor plan................ 1,098,757 1,288,021 610,784 965,350
Interest expense, other..................... 270,771 380,060 157,388 211,250
Other income................................ 19,174 157,443 63,539 451,796
Total other expense.................... 1,350,354 1,510,638 704,633 724,804
INCOME BEFORE INCOME TAXES (Note 1)........... 1,163,867 830,658 849,998 1,925,720
PROVISION FOR INCOME TAXES.................... 41,879 60,850 60,215 30,927
NET INCOME.................................... $ 1,121,988 $ 769,808 $ 789,783 $ 1,894,793
See notes to combined financial statements
F-27
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997
RETAINED
EARNINGS
AND
COMMON MEMBERS'
STOCK OF AND
COMBINED PARTNERS' DUE FROM TOTAL
COMPANIES EQUITY AFFILIATE EQUITY
BALANCE AT DECEMBER 31, 1994...................................... $1,000,000 $ 3,089,208 $ -- $ 4,089,208
Capital contribution............................................ -- 1,753,736 -- 1,753,736
Distributions................................................... -- (421,204) -- (421,204)
Net income...................................................... -- 1,121,988 -- 1,121,988
Advances to affiliates.......................................... -- -- (460,630) (460,630)
BALANCE AT DECEMBER 31, 1995...................................... 1,000,000 5,543,728 (460,630) 6,083,098
Capital contribution............................................ -- 7,700,000 -- 7,700,000
Distributions................................................... -- (351,542) -- (351,542)
Net income...................................................... -- 769,808 -- 769,808
Advances to affiliates.......................................... -- -- (400,000) (400,000)
BALANCE AT DECEMBER 31, 1996...................................... 1,000,000 13,661,994 (860,630) 13,801,364
Capital contribution (unaudited)................................ -- 5,500,000 -- 5,500,000
Distributions (unaudited)....................................... -- (115,453) -- (115,453)
Net income (unaudited).......................................... -- 1,894,793 -- 1,894,793
BALANCE AT JUNE 30, 1997 (unaudited).............................. $1,000,000 $20,941,334 $ (860,630) $21,080,704
See notes to combined financial statements.
F-28
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
1995 1996 1996 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $1,121,988 $ 769,808 $ 789,783 $1,894,793
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 321,170 514,915 193,486 415,899
Changes in assets and liabilities that relate to operations:
(Increase) decrease in receivables........................... 909,934 (867,704) 639,758 441,976
Increase in inventories...................................... (602,704) (4,300,530) (258,272) (8,205,796)
Increase in other current assets............................. (324,499) (937,114) (966,156) (332,857)
(Increase) decrease in other non-current assets.............. (67,652) 37,947 (110,984) (94,441)
Increase in notes payable -- floor plan...................... 274,484 8,110,381 2,140,955 9,339,515
Increase (decrease) in accounts payable and accrued
expenses.................................................. (1,427,260) 1,799,226 1,146,612 297,784
Total adjustments......................................... (916,527) 4,357,121 2,785,399 1,862,080
Net cash provided by operating activities................. 205,461 5,126,929 3,575,182 3,756,873
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash received........................ -- (9,840,438) (4,790,970) (6,718,465)
Additions to property and equipment............................... (333,741) (4,295,381) (2,570,979) (1,816,218)
Net cash used in investing activities........................ (333,741) (14,135,819) (7,361,949) (8,534,683)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions............................................. 1,378,208 7,700,000 2,700,000 5,500,000
Due from affiliate................................................ (460,630) (400,000) -- --
Distributions to stockholders..................................... (421,204) (351,542) (351,542) (115,453)
Proceeds from long-term debt...................................... 272,084 1,872,169 1,872,169 1,280,000
Payments of long-term debt........................................ (764,933) (498,318) (192,370) (308,829)
Proceeds from notes payable -- other.............................. 1,410,025 1,981,197 1,600,994 1,059,797
Payments of notes payable -- other................................ (220,000) (203,612) (260,000) (262,538)
Net cash provided by financing activities.................... 1,193,550 10,099,894 5,369,251 7,152,977
NET INCREASE IN CASH................................................ 1,065,270 1,091,004 1,582,484 2,375,167
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................... 1,265,866 2,331,136 2,331,136 3,422,140
CASH AND CASH EQUIVALENTS, END OF PERIOD............................ $2,331,136 $ 3,422,140 $3,913,620 $5,797,307
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the period for:
Interest.......................................................... $1,366,071 $ 1,631,740 $ 737,955 $ 877,730
Income taxes...................................................... $ 96,391 $ 76,081 $ 35,636 $ 27,620
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Net liabilities recorded from combining affiliated companies...... $ 372,533 $ -- $ -- $ --
See notes to combined financial statements.
F-29
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Bowers Dealerships and Affiliated Companies
(the "Company") operates automobile dealerships in the Chattanooga and
Nashville, Tennessee areas. The Company sells new and used cars and light
trucks, sells replacement parts, provides vehicle maintenance, warranty, paint
and repair services and arranges financing and insurance. As of December 31,
1996, the Company had nine dealership locations selling new vehicles
manufactured by BMW, Chrysler, Ford, Honda, Infiniti, Jaguar, Saturn and
Volkswagen. Subsequent to December 31, 1996 the Company acquired a Dodge
dealership. (see Note 2).
The accompanying combined financial statements include the accounts of the
following entities:
NAME LOCATION STRUCTURE
Cleveland Village Imports, Inc.......................... Chattanooga C Corporation
Saturn of Chattanooga, Inc.............................. Chattanooga S Corporation
Nelson Bowers Ford, L.P................................. Chattanooga Limited Partnership
Infiniti of Chattanooga, Inc............................ Chattanooga C Corporation
Cleveland Chrysler Plymouth Jeep Eagle, LLC............. Chattanooga Limited Liability Company
Jaguar of Chattanooga, LLC.............................. Chattanooga Limited Liability Company
KIA of Chattanooga...................................... Chattanooga Limited Liability Company
European Motors of Nashville LLC........................ Nashville Limited Liability Company
European Motors LLC..................................... Chattanooga Limited Liability Company
The combined financial statements have been prepared in connection with a
planned acquisition of the net assets of these entities and the aforementioned
Dodge dealership by Sonic Automotive ("Sonic"). In June 1997, the Company signed
a definitive purchase agreement whereby substantially all of its net assets
would be acquired by Sonic for $33,500,000, including $28,500,000 in cash and a
$5,000,000 note payable. Net assets not being acquired are primarily land,
building and the net assets related to a body shop operation. This acquisition
is to be effective prior to the completion of an anticipated public offering of
common stock by Sonic in 1997. The accompanying combined financial statements
reflect the financial position, results of operations, and cash flows of each of
the above listed dealerships. The combination of these entities has been
accounted for at historical cost in a manner similar to a pooling-of-interest
because the entities are under common management and control. All material
intercompany transactions have been eliminated.
REVENUE RECOGNITION -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
DEALER AGREEMENTS -- The Company purchases substantially all of its new
vehicles from manufacturers at the prevailing prices charged by the manufacturer
to its franchised dealers. The Company's sales could be unfavorably impacted by
the manufacturer's unwillingness or inability to supply the dealership with an
adequate supply of new car inventory.
Each dealership operates under a dealer agreement with the manufacturer
except Volkswagen of Nashville which operates under a management agreement which
generally restricts the location, management and ownership of the respective
dealership. The ability of the Company to acquire additional franchises from a
particular manufacturer may be limited due to certain restrictions imposed by
manufacturers. Additionally, the Company's ability to enter into significant
acquisitions may be restricted and the acquisition of the Company's stock by
third parties may be limited by the terms of the franchise agreement.
CASH AND CASH EQUIVALENTS -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to a vehicle purchase, and was
$1,019,950 and $2,029,314 at December 31, 1995 and 1996, respectively.
F-30
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
INVENTORIES -- Inventories of new and used vehicles, including
demonstrators, are valued at the lower of first-in, first-out ("FIFO") cost or
market, and parts and accessories are stated at the lower of specific cost or
market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of the assets. The range of estimated useful lives is as
follows:
USEFUL LIVES
Building..................................................................... 31.5-39
Office equipment and fixtures................................................ 5-7
Parts, service equipment and vehicles........................................ 7
Leasehold improvements are amortized over the lesser of the terms of their
respective leases or the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
GOODWILL -- Goodwill represents the excess of purchase price over the
estimated fair value of the net assets acquired and is being amortized over a 40
year period. The cumulative amount of goodwill amortization at December 31, 1995
and 1996 was $33,561 and $87,723, respectively.
The Company periodically reviews goodwill for impairment by comparing the
carrying amount of goodwill with the estimated undiscounted future cash flows
from operations of the acquired business.
INCOME TAXES -- With the exception of Infiniti of Chattanooga, Inc. and
Cleveland Village Imports, Inc., all entities included in the accompanying
combined financial statements are either S Corporations, Limited Partnerships or
Limited Liability Companies (LLC). As such, these entities do not pay Federal
corporate income taxes on their taxable income. In addition, the Limited
Partnerships and LLC's are not subject to state income taxes. The stockholders
or partners are liable for individual income taxes on their respective shares of
the Company's taxable income.
Because Infiniti of Chattanooga, Inc. and Cleveland Village Imports, Inc.
is a C Corporation, federal and state income taxes are provided for in the
financial statements and consist of taxes currently due plus deferred taxes. In
addition, the S Corporations are subject to Tennessee income taxes which are
provided for in the financial statements. Income taxes are provided for income
taxes using the balance sheet method. Deferred taxes result primarily from
warranty accruals and the accelerated depreciation method used for income tax
purposes. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled. In
addition, deferred tax assets are recognized for state operating losses that are
available to offset future taxable income.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
deposits. At times, amounts invested with financial institutions may exceed FDIC
insurance limits.
Concentrations of credit risk with respect to receivables are limited
primarily to automobile manufacturers and financial institutions. Credit risk
arising from trade receivables from commercial customers is reduced by the large
number of customers comprising the trade receivables balances. Trade receivables
are concentrated in the Company's two market areas of Chattanooga and Nashville,
Tennessee.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ADVERTISING -- The Company expenses advertising costs in the period
incurred. Advertising expense amounted to $992,839 and $1,372,775 for 1995 and
1996, respectively.
F-31
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
IMPAIRMENT OF LONG-LIVED ASSETS -- Effective January 1, 1996, the Company
adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may be
impaired. Adoption of SFAS No. 121 did not have a material impact on the
Company's results of operations or financial position.
INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial
information for the six months ended June 30, 1997 has been prepared on
substantially the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein. The results
of interim periods are not necessarily indicative of results to be expected for
the entire fiscal year.
2. BUSINESS ACQUISITIONS
EUROPEAN MOTORS OF NASHVILLE, INC. AND EUROPEAN MOTORS LLC -- In October
1996, the Company acquired European Motors of Nashville, Inc. and European
Motors LLC. The total purchase price was $9,840,438. These acquisitions have
been accounted for using purchase accounting and the results of operations of
these dealerships have been included in the accompanying combined financial
statements from the date of acquisition. The total purchase price has been
allocated to the assets and liabilities acquired at their estimated fair market
value at acquisition date as follows:
Inventory................................................................... $5,862,555
Property and equipment...................................................... 527,883
Goodwill.................................................................... 3,450,000
Total....................................................................... $9,840,438
DODGE OF CHATTANOOGA -- On March 1, 1997, the Company acquired Dodge of
Chattanooga for a total purchase price of $6,718,465. The acquisition has been
accounted for as a purchase and the results of operations of Dodge of
Chattanooga have been included in the accompanying unaudited combined financial
statements from the date of acquisition through June 30, 1997. The purchase
price has been allocated to the assets and liabilities acquired at their
estimated fair market value at acquisition date as follows:
Inventory................................................................... $2,718,465
Goodwill.................................................................... 4,000,000
Total....................................................................... $6,718,465
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories at December 31, 1995 and 1996 and June 30, 1997 consist of the
following:
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
New vehicles.................................................................... $ 9,929,971 $16,319,295 $21,837,310
Used vehicles................................................................... 2,369,023 4,821,689 9,870,280
Parts and accessories........................................................... 685,012 1,900,962 2,040,757
Other........................................................................... 19,260 105,906 322,588
Total........................................................................... $13,003,266 $23,147,852 $34,070,935
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $11,620,942 and
$19,731,323 at December 31, 1995 and 1996, respectively. The floor plan notes
bear interest, that fluctuates with prime and are payable monthly on the
outstanding balance, ranging from 6.25% to 9.75% at December 31,
F-32
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN -- Continued
1996. Total floor plan interest expense amounted to $1,098,757 and $1,288,021 in
1995 and 1996, respectively. The notes payable are due when the related vehicle
is sold. As such, these floor plan notes payable are shown as a current
liability in the accompanying combined balance sheets.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996 and June 30, 1997 is
comprised of the following:
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
Land............................................................................ $ 846,265 $ 1,455,297 $ 1,831,514
Buildings and improvements...................................................... 1,114,984 3,962,427 4,868,637
Office equipment and fixtures................................................... 1,228,579 1,697,617 1,938,612
Parts and service equipment..................................................... 900,005 1,775,271 2,102,199
Leasehold improvements.......................................................... 254,694 262,261 262,261
Total, at cost.................................................................. 4,344,527 9,152,873 11,003,223
Less accumulated depreciation................................................... (1,454,774) (1,898,080) (2,258,998)
Property and equipment, net..................................................... $ 2,889,753 $ 7,254,793 $ 8,744,225
5. OPERATING LEASES
The Company leases its business premises under nonconcealable operating
leases for one to twenty-six year terms. Future minimum rental payments required
under nonconcealable leases at December 31, 1996 are as follows:
Year ending
1997........................................................................ $ 656,237
1998........................................................................ 413,903
1999........................................................................ 387,120
2000........................................................................ 387,120
2001........................................................................ 387,120
Thereafter.................................................................. 4,994,184
Total....................................................................... $7,225,684
Rent expense amounted to $458,999 and $762,725 during 1995 and 1996,
respectively.
F-33
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. FINANCING ARRANGEMENTS
Notes payable-other consists of a demand note to a bank and advances
principally from a stockholder. The stockholder advances are restricted to
investment in a cash management fund sponsored by finance companies. Other
current assets at December 31, 1995 and 1996 include $797,000 and $1,326,000,
respectively, of restricted cash in the cash management fund.
Notes payable-other consist of the following:
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
Unsecured demand note payable to bank, interest at
at December 31, 1996................................................ $ -- $ 251,203 $ 600,000
Unsecured stockholder advances restricted for investment -- due on
demand.............................................................. 797,000 1,326,000 1,885,000
Other unsecured stockholder advances due to demand.................... 1,218,025 2,215,407 2,104,869
Notes payable -- other................................................ $2,015,025 $3,792,610 $ 4,589,869
Long-term debt at December 31, 1995 and 1996 and June 30, 1997 consists of
the following:
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
Mortgage note payable on land and building with a carrying value of
$2,302,487, interest payable at 8.9%, due June 1, 2001.............. $ -- $1,799,152 $ 1,767,753
Mortgage note payable to stockholder on land and building with a
carrying value of $1,535,585, interest payable at 12%, due December
1, 2010............................................................. 1,545,815 1,441,626 1,389,531
Note payable due to stockholder, interest payable at 9.5%, due
December 31, 2001................................................... 564,000 564,000 564,000
Note payable related to purchase of dealership, due February 28,
1999................................................................ -- -- 333,333
Note payable on land and building with a carrying value of $1,813,502,
interest payable at 8.9%, due March 31, 2002........................ -- -- 773,714
Notes payable for equipment with a carrying value of $76,608, interest
payable ranging from 9.6% to 11.18%, payable in full November 15,
1997................................................................ 109,380 76,199 45,332
Note payable on company owned vehicles, with a carrying value of
approximately $20,253, bearing interest at 9.5%..................... 298,861 20,253 --
Note payable to an unrelated car dealership, due December 3, 1999..... 60,000 45,000 45,000
Note payable -- other................................................. -- 5,677 4,415
2,578,056 3,951,907 4,923,078
Less current maturities............................................... (468,040) (389,658) (558,332)
Long-term debt........................................................ $2,110,016 $3,562,249 $ 4,364,476
F-34
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. FINANCING ARRANGEMENTS -- Continued
Future maturities of the above debt at December 31, 1996 are as follows:
Year ending December 31:
1997........................................................................ $ 389,658
1998........................................................................ 363,839
1999........................................................................ 477,119
2000........................................................................ 194,018
2001........................................................................ 1,606,592
Thereafter.................................................................. 920,681
Total....................................................................... $3,951,907
7. RELATED PARTIES
The Company operates certain dealerships at facilities leased from
affiliated companies. The leases are classified as operating leases. Future
minimum rent payments are $387,120 annually through 2001. Rent expense in 1995
and 1996 for these leases amounted to $315,120 and $441,120, respectively.
The Company has accounts receivable from stockholders arising from various
costs paid by the Company for the stockholders totaling $460,630, $860,630 and
$860,630 as of December 31, 1995 and 1996 and June 30, 1997, respectively.
The Company's related party transactions are summarized as follows:
YEAR ENDED
DECEMBER 31
1995 1996
Extended warranty premiums............................................................................ $477,327 $602,270
Advertising........................................................................................... 600,161 530,057
Auction Fees.......................................................................................... -- 39,000
Auto etching.......................................................................................... 28,200 32,861
Automobile packs...................................................................................... 91,830 107,246
8. EQUITY
During 1997, an affiliated company began paying the salaries of certain
executive officers and other selling, general and administrative expenses. The
affiliated company charged the Company management fees during the six months
ended June 30, 1997 totaling $864,000 for the services performed by the
executive officers.
The capital structure of the entities included in the combined financial
statements of the Company at December 31, 1995 is as follows:
COMMON STOCK
SHARES RETAINED EARNINGS
PAR SHARES ISSUED AND AND MEMBERS' AND
VALUE AUTHORIZED OUTSTANDING AMOUNT PARTNERS' EQUITY
Cleveland Village Imports, Inc.......................... No par 2,000 2,000 $ 300,000 $ 552,817
Saturn of Chattanooga, Inc.............................. $ 700 2,000 1,000 700,000 2,470,654
Nelson Bowers Ford, L.P................................. 759,039
Cleveland Chrysler Plymouth Jeep Eagle, LLC............. 596,434
Jaguar of Chattanooga, LLC.............................. 1,164,784
$1,000,000 $ 5,543,728
F-35
BOWERS DEALERSHIPS
AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. EQUITY -- Continued
The capital structure of the entities included in the combined financial
statements of the Company at December 31, 1996 is as follows:
RETAINED EARNINGS
COMMON STOCK AND
SHARES PARTNERS'
PAR SHARES ISSUED AND AND MEMBERS'
VALUE AUTHORIZED OUTSTANDING AMOUNT EQUITY
Cleveland Village Imports, Inc.......................... No par 2,000 2,000 $ 300,000 $ 563,672
Saturn of Chattanooga, Inc.............................. $ 700 2,000 1,000 700,000 2,675,993
Nelson Bowers Ford, L.P................................. -- 699,958
Cleveland Chrysler Plymouth Jeep Eagle, LLC............. -- 417,300
Jaguar of Chattanooga, LLC.............................. -- 1,141,782
European Motors of Nashville, LLC....................... -- 5,014,936
European Motors LLC..................................... -- 3,148,353
$1,000,000 $13,661,994
9. EMPLOYEE BENEFIT PLANS
In April 1997, the Company established a 401(k) plan, whereby substantially
all of the employees of the company meeting certain service requirements are
eligible to participate. Contributions by the Company to the plan were not
significant in any period presented.
10. CONTINGENCIES
The Company is involved in various legal proceedings. Management believes
that the outcome of such proceedings will not have a materially adverse effect
on the Company's financial position or future results of operations and cash
flows.
F-36
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
LAKE NORMAN DODGE, INC.
Cornelius, North Carolina
We have audited the accompanying combined balance sheet of Lake Norman
Dodge, Inc. and Affiliated Companies (the "Company"), which are under common
ownership and management, as of December 31, 1996, and the related combined
statements of income, stockholders' equity, and cash flows for the year then
ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Lake Norman Dodge,
Inc. and Affiliated Companies as of December 31, 1996, and the combined results
of their operations and their combined cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
August 7, 1997
F-37
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1997
DECEMBER
31, JUNE 30,
1996 1997
(UNAUDITED)
ASSETS (NOTE 4)
CURRENT ASSETS:
Cash and cash equivalents.................................................................... $ 3,491,358 $ 3,466,789
Receivables.................................................................................. 1,998,315 2,535,247
Inventories (Note 2)......................................................................... 23,603,843 22,778,488
Prepaid expenses............................................................................. -- 243,870
Total current assets...................................................................... 29,093,516 29,024,394
PROPERTY AND EQUIPMENT, NET (Note 3)........................................................... 485,880 566,875
OTHER ASSETS (NOTE 6):
Due from employees........................................................................... 281,497 302,628
Due from related partnership................................................................. 159,554 159,554
Total other assets........................................................................ 441,051 462,182
TOTAL ASSETS................................................................................... $30,020,447 $30,053,451
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable-floor plan (Note 2)............................................................ $25,957,314 $25,865,010
Trade accounts payable....................................................................... 1,364,121 1,351,664
Note payable to bank (Note 4)................................................................ 68,168 27,644
Other accrued liabilities.................................................................... 765,620 472,485
Current maturities of long-term debt......................................................... 142,857 71,429
Total current liabilities................................................................. 28,298,080 27,788,232
LONG-TERM DEBT (Note 4)........................................................................ 785,715 785,714
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
Common stock of combined companies........................................................... 75,000 75,000
Paid-in capital.............................................................................. 600,009 600,009
Retained earnings............................................................................ 261,643 804,496
Total stockholders' equity................................................................ 936,652 1,479,505
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................................... $30,020,447 $30,053,451
See notes to combined financial statements.
F-38
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1996 AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
YEAR ENDED
DECEMBER 31, JUNE 30,
1996 1996 1997
(UNAUDITED)
REVENUES:
Vehicle sales................................................................ $124,538,878 $55,071,168 $69,798,274
Finance and insurance........................................................ 3,617,296 1,773,355 1,949,987
Parts and service............................................................ 9,543,187 4,371,529 5,321,329
Total revenues............................................................ 137,699,361 61,216,052 77,069,590
COST OF SALES.................................................................. 121,806,212 53,845,015 68,272,355
GROSS PROFIT................................................................... 15,893,149 7,371,037 8,797,235
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................... 14,215,002 6,736,729 6,937,071
DEPRECIATION AND AMORTIZATION.................................................. 88,987 37,414 46,900
OPERATING INCOME............................................................... 1,589,160 596,894 1,813,264
OTHER INCOME AND EXPENSE:
Interest expense, floor plan................................................. 1,552,250 588,951 1,185,518
Interest expense, other...................................................... 49,540 2,880 67,647
Other income................................................................. 257,747 113,277 176,322
Total other expense....................................................... 1,344,043 478,554 1,076,843
NET INCOME..................................................................... $ 245,117 $ 118,340 $ 736,421
See notes to combined financial statements.
F-39
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996 AND SIX MONTHS ENDED JUNE 30, 1997
TOTAL
COMMON STOCK PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
BALANCE AT DECEMBER 31, 1995.................................. 75 $75,000 $475,009 $728,963 $1,278,972
Capital contribution........................................ -- -- 125,000 -- 125,000
Net income.................................................. -- -- -- 245,117 245,117
Distributions to owners..................................... -- -- -- (712,437) (712,437)
BALANCE AT DECEMBER 31, 1996.................................. 75 75,000 600,009 261,643 936,652
Net income (unaudited)...................................... -- -- -- 736,421 736,421
Distributions to owners (unaudited)......................... -- -- -- (193,568) (193,568)
BALANCE AT JUNE 30, 1997 (unaudited).......................... 75 $75,000 $600,009 $804,496 $1,479,505
See notes to combined financial statements.
F-40
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, 1996 1996 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 245,117 $ 118,340 $ 736,421
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Bad debts and repossessions........................................... 44,523 -- 9,910
Depreciation and amortization expense................................. 88,987 37,414 46,900
Increase in LIFO reserve.............................................. 169,316 177,898 324,486
Changes in assets and liabilities that relate to operations:
Increase in receivable.............................................. (533,128) (417,366) (546,842)
Increase (decrease) in inventories.................................. (10,887,995) 1,039,475 500,867
Increase (decrease) in prepaid expenses............................. 15,895 (271,689) (243,870)
(Increase) decrease in accounts payable............................. 109,802 (240,517) (12,456)
(Increase) decrease in notes payable floor plan..................... 13,226,616 547,291 (92,304)
(Increase) decrease in other accrued liabilities.................... 488,012 1,281,747 (293,135)
Total adjustments................................................ 2,722,028 2,154,253 (306,444)
Net cash provided by (used in) operating activities.............. 2,967,145 2,272,593 429,977
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................................... (282,711) (141,084) (127,895)
Advances to employees -- net............................................. (86,179) (87,558) (21,131)
Advances to related partnership -- net................................... (159,553) -- --
Net cash used in investing activities............................ (528,443) (228,642) (149,026)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank note.................................................. 100,000 100,000 --
Payments on bank note.................................................... (69,331) (30,214) (40,524)
Proceeds from long-term debt............................................. 1,000,000 1,000,000 --
Payments on long-term debt............................................... (71,429) -- (71,428)
Capital contribution..................................................... 125,000 -- --
Distributions to owners.................................................. (712,437) (540,205) (193,568)
Net cash provided by financing activities........................ 371,803 529,581 (305,520)
NET INCREASE (DECREASE) IN CASH............................................ 2,810,505 2,573,532 (24,569)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 680,853 680,853 3,491,358
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 3,491,358 $ 3,254,385 $ 3,466,789
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Cash paid during the period for interest................................. $ 1,601,790 $ 591,831 $ 1,253,165
See notes to combined financial statements.
F-41
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Lake Norman Dodge, Inc. and Affiliated
Companies' (the "Company") operates two automobile dealerships in the Charlotte,
North Carolina area. The Company sells new and used cars and light trucks, sells
replacement parts, provides vehicle maintenance, warranty, paint and repair
services and arranges related financing and insurance.
The combined financial statements include the accounts of Lake Norman
Dodge, Inc. ("LND") and its subsidiary, Lake Norman
Chrysler-Plymouth-Jeep-Eagle, LLC ("LNCPJE") and certain proprietorships of Phil
Gandy and Quinton Gandy. LND is 100% owned by Phil Gandy and Quinton Gandy. All
significant intercompany balances and planned transactions have been eliminated
in combination.
The combined financial statements have been prepared in connection with a
planned acquisition of the net assets of these entities by Sonic Automotive,
Inc. ("Sonic"). In May 1997, the Company signed a definitive purchase agreement
whereby its outstanding capital stock would be acquired by Sonic for
$18,200,000. This acquisition is to be effective prior to the completion of an
anticipated public offering of common stock by Sonic in 1997.
The accompanying combined financial statements reflect the financial
position, results of operations, and cash flows of each of the above listed
entities. The combination of these entities has been accounted for at historical
cost in a manner similar to a pooling-of-interest because the entities are under
common management and control. All material intercompany transactions have been
eliminated.
LNCPJE was organized on March 18, 1996, as a North Carolina limited
liability company and commenced operations on July 1, 1996. The certain
proprietorships of Phil Gandy and Quinton Gandy include commissions earned
related to sales of extended warranty contracts through LND and LNCPJE, which
were paid directly to Phil Gandy and Quinton Gandy at the option of LND and
LNCPJE. Earned commissions relating to the sales of these contracts reflect a
recurring transaction relating to the dealerships and therefore these
proprietorships have been included in the accompanying combined financial
statements.
REVENUE RECOGNITION -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institutions.
DEALER AGREEMENTS -- The Company purchases substantially all of its new
vehicles from manufacturers at the prevailing prices charged by the manufacturer
to its franchised dealers. The Company's sales could be unfavorably impacted by
the manufacturers' unwillingness or inability to supply the dealership with an
adequate supply of new car inventory.
Each dealership operates under a dealer agreement with the manufacturer
which generally restricts the location, management and ownership of the
respective dealership. The ability of the Company to acquire additional
franchises from a particular manufacturer may be limited due to certain
restrictions imposed by manufacturers. Additionally, the Company's ability to
enter into significant acquisitions may be restricted and the acquisition of the
Company's stock by third parties may be limited by the terms of the franchise
agreement.
CASH AND CASH EQUIVALENTS -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to vehicle purchases, and was
$2,110,467 at December 31, 1996.
INVENTORIES -- Inventories of new vehicles, including demonstrators, are
valued at the lower of last-in, first-out ("LIFO") cost or market. Inventories
of used vehicles are stated at the lower of first-in, first-out ("FIFO") cost or
market, and parts and accessories are stated at the lower of specific cost or
market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed over the estimated useful lives of the assets using
primarily accelerated methods. The range of estimated useful lives is as
follows:
USEFUL LIVES
Parts and service equipment................................................... 5 years
Office equipment and fixtures................................................. 5-7 years
Company vehicles.............................................................. 5 years
F-42
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
Leasehold improvements are amortized over the lesser of the terms of their
respective leases or the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are expensed as incurred.
Significant betterments are capitalized.
INCOME TAXES -- LND has elected to be treated as an S Corporation for
federal and state income tax purposes, and LNCPJE is a limited liability company
(LLC). As such the stockholders and members, respectively, include their pro
rata share of the Company's taxable income for the year in their individual
income tax returns. The proprietorship income of Phil and Quinton Gandy combined
herein is also included in their personal income tax returns. Accordingly, no
provision for federal or state income taxes has been included in the
accompanying combined statement of income.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
deposits. At times, amounts invested with financial institutions may exceed FDIC
insurance limits.
Concentrations of credit risk with respect to receivables are limited
primarily to automobile manufacturers and financial institutions. Credit risk
arising from trade receivables from commercial customers is reduced by the large
number of customers comprising the trade receivables balances. Trade receivables
are concentrated in the Charlotte, North Carolina metropolitan area.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ADVERTISING COSTS -- The Company expenses all costs of advertising when
incurred. Advertising costs of $1,828,534 are included in operating expenses for
1996.
INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial
information for the six months ended June 30, 1997 has been prepared on
substantially the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein. The results
for interim periods are not necessarily indicative of the results to be expected
for the entire fiscal year.
The combined statement of income for the year ended December 31, 1996
includes expenses approximating $1,200,000 for discretionary bonuses to
stockholders determined at year end. Of this amount approximately $565,000 was
incurred through June 30, 1996. Given the planned acquisition by Sonic, it is
uncertain if a similar discretionary bonus will be awarded in 1997. As such, no
bonus has been accrued through June 30, 1997.
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOORPLAN
Inventories at December 31, 1996 and June 30, 1997 consist of the
following:
DECEMBER 31, JUNE 30,
1996 1997
(UNAUDITED)
New vehicles................................................................................... $ 16,617,268 $18,626,219
Used vehicles.................................................................................. 6,437,598 3,720,437
Parts and accessories.......................................................................... 548,977 431,832
Total.......................................................................................... $ 23,603,843 $22,778,488
Had the Company used the FIFO method of valuing new vehicle inventory,
inventories would have been $1,564,142 higher and pre-tax income would have been
$414,432 as of and for the year ended December 31, 1996.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $25,957,314 at December
31, 1996. The floor plan notes bear interest, payable monthly on the outstanding
balance, at the prime rate plus 0.5% (8.75% at December 31, 1996). Total floor
plan interest expense amounted to $1,552,250 in
F-43
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOORPLAN -- Continued
1996. The notes payable are due when the related vehicle is sold. As such, these
floor plan notes payable are shown as a current liability in the accompanying
balance sheet.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and June 30, 1997 is comprised
of the following:
DECEMBER 31, JUNE 30,
1996 1997
(UNAUDITED)
Service equipment........................................................ $ 309,944 $ 373,652
Parts and accessory equipment............................................ 35,480 38,876
Vehicles................................................................. 11,809 53,898
Furniture and fixtures................................................... 212,155 278,479
Leasehold improvements................................................... 460,097 497,345
Total at cost............................................................ 1,029,485 1,242,250
Less accumulated depreciation............................................ (543,605) (675,375)
Property and equipment, net.............................................. $ 485,880 $ 566,875
4. NOTE PAYABLE TO BANK AND LONG-TERM DEBT
The note payable with a balance of $68,168 at December 31, 1996 is due in
monthly installments of $7,172, including interest at 8.25%, through October,
1997. The note is collateralized by modular buildings used in Company
operations.
In July, 1996, the Company borrowed $1,000,000 from Chrysler Financial
Corporation. Payments of $11,905 plus interest at prime plus .5% (8.75% at
December 31, 1996) are due monthly, through July, 2003. The loan is
collateralized by a security interest in all assets of LNCPJE. Principal is due
as follows:
1998.......................................................................... $142,857
1999.......................................................................... 142,857
2000.......................................................................... 142,857
2001.......................................................................... 142,857
2002.......................................................................... 142,857
Thereafter.................................................................... 71,430
Total......................................................................... 785,715
Current maturities............................................................ 142,857
Long-term debt................................................................ $928,572
5. OPERATING LEASES
The Company leases its operating facilities from its shareholders under
three separate leases expiring March, 2000 and June, 2001. Monthly payments
under these leases at December 31, 1996, total $83,000. One of these leases has
an option for renewal for two additional five year terms. The Company pays all
operating costs such as utilities, repairs, maintenance and insurance relating
to these facilities. Total payments made to related parties under these leases
in 1996 were $786,000 exclusive of operating costs.
F-44
LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
5. OPERATING LEASES -- Continued
At December 31, 1996 future minimum rental payments under these operating
leases are as follows:
YEAR
1997........................................................................ $ 996,000
1998........................................................................ 996,000
1999........................................................................ 996,000
2000........................................................................ 564,000
2001........................................................................ 210,000
Total................................................................ $3,762,000
The Company leases automobiles through Chrysler Finance under twenty-four
and thirty-six month agreements expiring at various dates. The Company pays
monthly rental of varying amounts. In addition, the Company pays all operating
costs, including insurance, repairs, and maintenance. Payments under automobile
leases were $170,800 in 1996.
At December 31, 1996, minimum future lease payments under these leases are
as follows:
1997.......................................................................... $216,000
1998.......................................................................... 81,000
Total.................................................................. $297,000
6. RELATED PARTIES
DUE FROM RELATED PARTIES -- Due from employees includes $219,878 due from
shareholders. These amounts bear interest at the prevailing U. S. Treasury rates
for short-term debt, are noncollateralized and have no specific repayment terms.
Amounts due from related partnership are noninterest bearing,
noncollateralized and have no specific repayment terms.
7. EMPLOYEE SAVINGS PLAN
The Company operates a savings plan under Section 401(k) of the Internal
Revenue Code. This plan allows employees to defer a portion of their income on a
pre-tax basis through plan contributions. The Company makes matching
contributions up to 2% of employee salary. Company contributions to the plan in
1996 totaled $56,800. The Company also paid plan expenses of $1,312.
F-45
KEN MARKS FORD, INC.
UNAUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
APRIL 30, 1997
(NOT COVERED BY REPORT OF INDEPENDENT AUDITORS)
F-46
KEN MARKS FORD, INC.
BALANCE SHEET
APRIL 30, 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................................................... $ 3,898,793
Receivables.................................................................................................. 1,056,650
Inventories (Note 2)......................................................................................... 11,216,499
Prepaid expenses............................................................................................. 259,633
Deferred income taxes (Note 5)............................................................................... 96,500
TOTAL CURRENT ASSETS...................................................................................... 16,528,075
PROPERTY AND EQUIPMENT (Note 3)................................................................................ 470,738
OTHER ASSETS................................................................................................... 14,000
TOTAL ASSETS................................................................................................... $17,012,813
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 2)......................................................................... $12,557,574
Trade accounts payable....................................................................................... 542,092
Other accrued liabilities (Note 7)........................................................................... 1,556,830
Allowance for insurance, service contract and finance income chargebacks..................................... 224,544
Income tax payable (Note 5).................................................................................. 23,948
TOTAL CURRENT LIABILITIES................................................................................. 14,904,988
DEFERRED INCOME TAXES (Note 5)................................................................................. 18,500
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value, 500 shares authorized and issued.............................................. 500
Paid-in capital.............................................................................................. 423,800
Retained earnings............................................................................................ 1,665,025
Total stockholders' equity................................................................................ 2,089,325
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................................................... $17,012,813
See notes to unaudited financial statements.
F-47
KEN MARKS FORD, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED APRIL 30, 1997
(UNAUDITED)
REVENUES:
Vehicle sales............................................................................................... $129,162,872
Parts, service and collision repairs........................................................................ 13,116,124
Finance and insurance....................................................................................... 2,188,071
Total revenues........................................................................................... 144,467,067
COST OF SALES................................................................................................. 126,870,910
GROSS PROFIT.................................................................................................. 17,596,157
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 7)......................................................... 15,743,940
DEPRECIATION AND AMORTIZATION................................................................................. 100,771
OPERATING INCOME.............................................................................................. 1,751,446
OTHER INCOME AND EXPENSE:
Interest expense, floor plan................................................................................ 2,008,408
Other income................................................................................................ 1,023,289
Total other income and expense........................................................................... 985,119
INCOME BEFORE INCOME TAXES.................................................................................... 766,327
PROVISION FOR INCOME TAXES (Note 5)........................................................................... 300,730
NET INCOME.................................................................................................... 465,597
RETAINED EARNINGS, April 30, 1996............................................................................. 1,219,428
DIVIDENDS PAID TO STOCKHOLDERS ($40 per share)................................................................ (20,000)
RETAINED EARNINGS, April 30, 1997............................................................................. $ 1,665,025
See notes to unaudited financial statements.
F-48
KEN MARKS FORD, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED APRIL 30, 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................................... $ 465,597
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................................. 100,771
Deferred income taxes..................................................................................... 16,400
Loss on disposal of property and equipment................................................................ 45,192
Change in operating assets and liabilities:
Increase in accounts receivable......................................................................... (153,935)
Decrease in inventories................................................................................. 5,197,289
Decrease in prepaid expenses............................................................................ 29,467
Decrease in due from related parties.................................................................... 134,141
Decrease in notes payable, floor plan................................................................... (3,401,972)
Increase in trade accounts payable...................................................................... 186,159
Decrease in accrued expenses and other payables......................................................... (1,022,066)
Decrease in allowance for insurance, service contract and finance income chargebacks.................... (85,104)
Decrease in income tax payable.......................................................................... (37,794)
Total adjustments.................................................................................... 1,008,548
Net cash provided by operating activities................................................................. 1,474,145
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................................................................... (183,674)
Net cash used in investing activities..................................................................... (183,674)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to stockholders............................................................................... (20,000)
Net cash used in financing activities..................................................................... (20,000)
NET INCREASE IN CASH........................................................................................... 1,270,471
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................................................................... 2,628,322
CASH AND CASH EQUIVALENTS, END OF YEAR......................................................................... $ 3,898,793
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest..................................................................................................... $ 2,008,408
Income taxes................................................................................................. $ 322,064
See notes to unaudited financial statements.
F-49
KEN MARKS FORD, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
YEAR ENDED APRIL 30, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Ken Marks Ford, Inc. (the Company) operates an
automobile dealership in the Tampa-Clearwater areas in Florida. The Company's
products and services include retail sales of new and used automobiles and light
trucks, wholesale sales of used automobiles and trucks, vehicle financing and
insurance and replacement parts and service.
In July 1997, the Company signed a definitive purchase agreement whereby
its outstanding capital stock would be acquired by Sonic Automotive, Inc. for
$24,982,500. This acquisition is to be effective prior to the completion of an
anticipated public offering of common stock by Sonic Automotive, Inc. in 1997.
REVENUE RECOGNITION -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
DEALER AGREEMENTS -- The Company purchases substantially all of its new
vehicles from manufacturers at the prevailing prices charged by the manufacturer
to its franchised dealers. The Company's sales could be unfavorably impacted by
the manufacturer's unwillingness or inability to supply the dealership with an
adequate supply of new car inventory. Each dealership operates under a dealer
agreement with the manufacturer. These agreements generally restrict the
location, management and ownership of the respective dealership.
CASH AND CASH EQUIVALENTS -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to vehicle purchases, and was
$1,752,720 at April 30, 1997.
INVENTORIES -- New vehicle inventory is stated at the lower of cost or
market determined on a last-in, first-out basis (LIFO). The parts inventory is
determined using Ford's replacement cost and then adjusted on a LIFO basis using
the current year parts price index. Used vehicle inventory is valued on a
specific identification basis.
PROPERTY AND EQUIPMENT -- These assets are carried at cost. Major additions
are capitalized while maintenance and repairs which do not improve or extend the
useful life of the respective assets are expensed currently. When property is
retired or otherwise disposed of, the cost of the property is eliminated from
the asset account, accumulated depreciation is charged with an amount equal to
the depreciation provided and the difference, if any, is charged or credited to
income.
Depreciation is provided on both the straight-line and declining balance
methods over the estimated useful lives as follows:
Leasehold improvements.................................................................. 18-31 years
Machinery and equipment................................................................. 5-7 years
Furniture and fixtures.................................................................. 5-7 years
INCOME TAXES -- Deferred income tax assets and liabilities are determined
based on the difference between financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
deposits. At times, amounts invested with financial institutions may exceed FDIC
insurance limits.
Concentrations of credit risk with respect to receivables are limited
primarily to automobile manufacturers and financial institutions. Credit risk
arising from trade receivables from commercial customers is reduced by the large
number of customers comprising the trade receivables balance. Trade receivables
are concentrated in the Tampa metropolitan area.
F-50
KEN MARKS FORD, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Advertising -- Advertising costs are charged to operations in the year
incurred and totaled approximately $487,000 for the year ended April 30, 1997.
2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories at April 30, 1997 consisted of the following:
New vehicles........................................................................... $ 8,431,786
Used vehicles.......................................................................... 2,341,929
Parts and accessories.................................................................. 442,784
Total.................................................................................. $11,216,499
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $12,557,574 at April
30, 1997. The floor plan notes bear interest, payable monthly on the outstanding
balance, at the prime rate plus 1% (9.5% at April 30, 1997). Total floor plan
interest expense amounted to $2,008,408 during the year ended April 30, 1997.
The notes payable become due when the related vehicle is sold. As such, these
floor plan notes payable are shown as a current liability in the accompanying
balance sheet.
Certain inventory items collateralize the demand notes payable described in
Note 4. All new vehicles and demonstrators and substantially all parts and
accessories are purchased from Ford Motor Company.
3. PROPERTY AND EQUIPMENT
Property and equipment as of April 30, 1997 consisted of the following:
Parts and service equipment............................................................ $ 333,063
Furniture and fixtures................................................................. 400,152
Leasehold improvements................................................................. 481,815
1,215,030
Less accumulated depreciation.......................................................... (744,292)
Property and equipment, net............................................................ $ 470,738
4. DEMAND NOTES PAYABLE
The Company has a revolving line of credit with Ford Motor Credit
Corporation in the amount of $2,500,000. At April 30, 1997, no amount was
outstanding relating to this line of credit. The line of credit is
collateralized by a blanket lien on inventory and all assets of the Company.
5. INCOME TAXES
The provision for income taxes consists of the following:
Current taxes.......................................................................... $ 290,930
Deferred taxes......................................................................... 9,800
Provision for income taxes............................................................. $ 300,730
F-51
KEN MARKS FORD, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- CONTINUED
5. INCOME TAXES -- Continued
Amounts for deferred income tax assets and liabilities as of April 30, 1997
are as follows:
Deferred tax asset -- current, primarily from differences relating to finance and
insurance reserves and allowance for bad debts....................................... $ 96,500
Deferred tax liability -- long-term, primarily from differences relating to
depreciation......................................................................... (18,500)
Net deferred tax asset................................................................. $ 78,000
The effective tax rate of the Company for federal and state tax purposes
does not materially vary from the federal and state statutory rates of 34% and
5.5%, respectively.
6. CONTINGENCIES
The Company has an agreement with certain financial institutions whereby
the Company receives a portion of the finance income on contracts financed with
those institutions. Should the financial institution suffer a loss on the
contract through early pay-off, repossession or other related circumstances, the
Company would be contingently liable for a percentage of finance income
previously received. The accompanying financial statements include a liability
for estimated finance income chargebacks of $160,447 at April 30, 1997 for this
contingency.
Ford Motor Company (FMC) owns vehicles which are used as short-term rentals
for which the Company pays FMC monthly fees. A portion of the fees are applied
against the purchase price the Company must pay for the vehicles when they are
no longer used for rental. The contingent liability to FMC to purchase the
vehicles under this program was $1,771,151 at April 30, 1997.
7. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases its operating facility from a corporation which is owned
by the Company's stockholders. The lease is currently on a month-to-month basis.
Rent charged to expense under this lease was $359,630 for the year ended April
30, 1997. In addition, management fees of $675,000 for the year ended April 30,
1997 were paid by the Company to the above corporation and are included in
selling, general and administrative expenses. In addition, related party
payables of $270,000 were included in other accrued liabilities at April 30,
1997.
F-52
NO DEALER, SALESPERSON, OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE CLASS A
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
Prospectus Summary................................... 3
The Offering......................................... 6
Summary Historical and Pro Forma Combined and
Consolidated Financial Data........................ 8
Risk Factors......................................... 10
The Reorganization................................... 18
The Acquisitions..................................... 18
Use of Proceeds...................................... 21
Dividend Policy...................................... 21
Capitalization....................................... 22
Dilution............................................. 23
Selected Combined And Consolidated Financial Data.... 24
Pro Forma Combined and Consolidated Financial Data... 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 34
Business............................................. 40
Management........................................... 56
Certain Transactions................................. 62
Principal Stockholders............................... 66
Description of Capital Stock......................... 67
Shares Eligible for Future Sale...................... 70
Underwriting......................................... 71
Legal Matters........................................ 72
Experts.............................................. 72
Additional Information............................... 73
Index to Financial Statements........................ F-1
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
SHARES
SONIC AUTOMOTIVE, INC.
CLASS A COMMON STOCK
PROSPECTUS
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
WHEAT FIRST BUTCHER SINGER
, 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be borne by the Registrant
in connection with the issuance and distribution of the securities being
registered hereby other than underwriting discounts and commissions. All the
amounts shown are estimates, except for the registration fee with the Securities
and Exchange Commission, the NASD filing fee and the NYSE fees.
SEC Registration fee...................................................................... $ 31,516
NASD filing fee........................................................................... 10,900
NYSE fees.................................................................................
Transfer agent and registrar fees.........................................................
Accounting fees and expenses..............................................................
Legal fees and expenses...................................................................
"Blue Sky" fees and expenses (including legal fees).......................................
Costs of printing and engraving...........................................................
Miscellaneous.............................................................................
Total..................................................................................... $
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Bylaws effectively provide that the Registrant shall, to
the full extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as amended from time to time ("Section 145"), indemnify all
persons whom it may indemnify pursuant thereto. In addition, the Registrant's
Amended and Restated Certificate of Incorporation eliminates personal liability
of its directors to the full extent permitted by Section 102(b)(7) of the
General Corporation Law of the State of Delaware, as amended from time to time
("Section 102(b)(7)").
Section 145 permits a corporation to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to matter
as to which they shall have acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interest of the corporation, except
that no indemnification shall be made if such person shall have been adjudged
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine upon application that the
defendant officers or directors are reasonably entitled to indemnify for such
expenses despite such adjudication of liability.
Section 102(b)(7) provides that a corporation may eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for reach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for willful or negligent conduct
in paying dividends or repurchasing stock out of other than lawfully available
funds or (iv) for any transaction from which the director derived an improper
personal benefit. No such provisions shall eliminate or limit the liability of a
director for any act or omission occurring prior to the date when such provision
becomes effective.
The Company intends to obtain, prior to the effective date of the
Registration Statement, insurance against liabilities under the Securities Act
of 1933 for the benefit of its officers and directors.
Section 7 of the Underwriting Agreement (to be filed as Exhibit 1.1 to this
Registration Statement) provides that the Underwriters severally and not jointly
will indemnify and hold harmless the Registrant and each director, officer or
controlling person of the Registrant from and against any liability caused by
any statement or omission in the Registration Statement or Prospectus based upon
information furnished to the Registrant by the Underwriters for use therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Except as hereinafter set forth, there have been no sales of unregistered
securities by the Registrant within the past there years.
As of January 30, 1997, as part of the original organization of the
Company, the Registrant issued to Sonic Financial Corporation 100 shares of
Common Stock of the Company (the "Original Shares") in exchange for $500 in
cash.
II-1
As of June 30, 1997, as part of the Reorganization, the Registrant issued
to (i) its Chief Executive Officer, Bruton Smith, 1,657 shares of the
Registrant's Class B Common Stock in exchange for all his interests in Town &
Country Toyota and Fort Mill Ford, (ii) Sonic Financial Corporation 7,105 shares
of its Class B Common Stock in exchange for all its interests in the Original
Shares, Town & Country Ford, Fort Mill Ford, Lone Star Ford and Frontier
Plymouth-Oldsmobile-Cadillac, (iii) William S. Egan 473 shares of its Class B
Common Stock in exchange for all his interest in Town & Country Toyota, and (iv)
Bryan Scott Smith 765 shares of its Class B Common Stock in exchange for all his
interests in Town & Country Ford and Fort Mill Ford. In each such transaction,
the securities were not registered under the Securities Act, in reliance upon
the exemption from registration provided by Section 4(2) of said Act in view of
the sophistication of the foregoing purchasers, their access to material
information, the disclosures actually made to them by the Registrant and the
absence of any general solicitation or advertising.
On August , 1997, the Registrant issued to nine of its officers and
employees, pursuant to the Registrant's Stock Option Plan, options to purchase
shares of Class A Common Stock in the aggregate. Such securities were not
registered under the Securities Act because such grants were made without
consideration to the Registrant and, consequently, do not constitute offers or
sales within the meaning of Section 5 of the Securities Act.
ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2 Bylaws of the Company
4.1* Form of Class A Common Stock Certificate
4.2 Registration Rights Agreement dated as of June 30, 1997 among the Company, O. Bruton Smith, Bryan Scott
Smith, William S. Egan and Sonic Financial Corporation
5.1* Opinion letter of Parker, Poe, Adams & Bernstein, L.L.P. regarding the legality of the securities to be
registered
10.1 Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Nelson E. Bowers,
II or his affiliates
10.2* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Marks Holding
Company, Inc.
10.3* Lease Agreement dated as of January 1, 1995 between Lone Star Ford, Inc. and Viking Investment Associates
10.4* Lease Agreement dated as of October 23, 1979 between O. Bruton Smith, Bonnie Smith and Town and Country
Ford, Inc.
10.5* North Carolina Warranty Deed dated as of April 24, 1987 between O. Bruton Smith and Bonnie Smith, as
Grantors and STC Properties, as Grantee
10.6* Lease dated January 13, 1995 between JAG Properties LLC and Jaguar of Chattanooga LLC
10.7* Lease dated October 18, 1991 by and between Nelson E. Bowers II, Thomas M. Green, Jr., and Infiniti of
Chattanooga, Inc.
10.8* Amendment to Lease Agreement dated as of January 13, 1995 among Nelson E. Bowers II, Thomas M. Green, Jr.,
JAG Properties LLC and Infiniti of Chattanooga, Inc.
10.9* Lease dated March 15, 1996 between Cleveland Properties LLC and Cleveland Chrysler-Plymouth-Jeep-Eagle LLC
10.10* Lease Agreement dated January 2, 1993 among Nelson E. Bowers II, Thomas M. Green, Jr. and Cleveland
Village Imports, Inc.
10.11* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing dated August 10,
1972 by Lone Star Ford, Inc.
10.12* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing and Security
Agreement dated August 22, 1984 by Town and Country Ford, Inc.
10.13* Long Term Debt Agreement dated October 5, 1990 between Marcus David Corporation and World Omni Financial
Corp.
10.14* Demand Promissory Note dated October 5, 1990 of Marcus David Corporation in favor of World Omni Financial
Corp.
10.15* Security Agreement & Master Credit Agreement dated April 24, 1995 between Cleveland Chrysler-
Plymouth-Jeep-Eagle LLC and Chrysler Credit Corporation
10.16* Security Agreement & Master Credit Agreement dated April 24, 1995 between Saturn of Chattanooga and
Chrysler Credit Corporation
II-2
EXHIBIT NO. DESCRIPTION
10.17* Security Agreement & Master Credit Agreement dated April 24, 1995 between Nelson Bowers Ford, L.P. and
Chrysler Credit Corporation
10.18* Floor Plan Agreement dated May 6, 1996 between European Motors, LLC and NationsBank, N.A.
10.19* Floor Plan Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A.
10.20* Floor Plan Agreement dated October 17, 1996 between European Motors of Nashville, LLC and NationsBank,
N.A.
10.21* Floor Plan Agreement dated March 5, 1997 between Nelson Bowers Dodge, LLC and NationsBank, N.A.
10.22* Dealer Agreement dated August 22, 1996 between Lake Norman Chrysler-Plymouth-Jeep-Eagle, LLC and Barnett
Bank
10.23* Security Agreement & Capital Loan Agreement dated May 15, 1996 between Lake Norman Dodge, Inc and Chrysler
Financial Corp.
10.24* Security Agreement-Guaranty dated May 15, 1996 between Lake Norman Chrysler-Plymouth-Jeep-Eagle, LLC and
Chrysler Financial Corp.
10.25* Floor Plan Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc.
10.26* Security Agreement and Master Credit Agreement dated April 21, 1995 between Cleveland Village Imports,
Inc. and Chrysler Credit Corporation
10.27* Jaguar Credit Corporation Automotive Wholesale Plan Application for Wholesale Financing and Security
Agreement dated March 14, 1995 by Jaguar of Chattanooga LLC
10.28* Assignment of Joint Venture Interest in Chartown dated as of June 30, 1997 among Town and Country Ford,
Inc. SMDA LLC and Sonic Financial Corporation
10.29* Form of Employment Agreement between the Company and O. Bruton Smith
10.30 Form of Employment Agreement between the Company and Bryan Scott Smith
10.31 Form of Employment Agreement between the Company and Theodore M. Wright
10.32 Form of Employment Agreement between the Company and Nelson E. Bowers, II
10.33 Tax Allocation Agreement dated as of June 30, 1997 between the Company and Sonic Financial Corporation
10.34 Form of Sonic Automotive, Inc. Stock Option Plan
10.35 Form of Sonic Automotive, Inc. Employee Stock Purchase Plan
10.36 Subscription Agreement dated as of June 30, 1997 between O. Bruton Smith and the Company
10.37 Subscription Agreement dated as of June 30, 1997 between Sonic Financial Corporation and the Company
10.38 Subscription Agreement dated as of June 30, 1997 between Bryant Scott Smith and the Company
10.39 Subscription Agreement dated as of June 30, 1997 between William S. Egan and the Company
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Dixon Odom & Co.
23.3 Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration Statement)
24 Power of Attorney (included on the signature page to this Registration Statement)
27 Financial Data Schedule
99.1 Consent of Nelson E. Bowers, II
* To be furnished by Amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing or closings specified in the Underwriting
Agreement, certificates in such denominations and registered in such names as
may be required by the Underwriters in order to permit prompt delivery to each
purchaser.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed part of this Registration Statement as
of the time it was declared effective.
II-3
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Charlotte, North Carolina on August
8, 1997.
SONIC AUTOMOTIVE, INC.
By:
O. BRUTON SMITH
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
We, the undersigned directors and officers of Sonic Automotive, Inc., do
hereby constitute and appoint each of Messrs. O. Bruton Smith, Bryan Scott
Smith, and Theodore M. Wright, each with full power of substitution, our true
and lawful attorney-in-fact and agent to do any and all acts and things in our
names and in our behalf in our capacities stated below, which acts and things
either of them may deem necessary or advisable to enable Sonic Automotive, Inc.
to comply with the Securities Act of 1933, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission, in
connection with this Registration Statement, including specifically, but not
limited to, power and authority to sign for any or all of us in our names, in
the capacities stated below, any and all amendments (including post-effective
amendments) hereto and any subsequent registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission; and we do hereby ratify and confirm all that
they shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
SIGNATURE TITLE DATE
/s/ Chairman and Chief Executive Officer August 8, 1997
O. BRUTON SMITH (principal executive officer)
/s/ President, Chief Operating Officer August 8, 1997
BRYAN SCOTT SMITH and Director
/s/ Vice President, Treasurer, August 8, 1997
THEODORE M. WRIGHT Chief Financial Officer
(principal financial and
accounting officer) and
Director
/s/ Director August 8, 1997
WILLIAM R. BROOKS
II-5
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2 Bylaws of the Company
4.1* Form of Class A Common Stock Certificate
4.2 Registration Rights Agreement dated as of June 30, 1997 among the Company, O. Bruton Smith,
Bryan Scott Smith, William S. Egan and Sonic Financial Corporation
5.1* Opinion letter of Parker, Poe, Adams & Bernstein, L.L.P. regarding the legality of the
securities to be registered
10.1 Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and
Nelson E. Bowers, II or his affiliates
10.2* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Marks
Holding Company, Inc.
10.3* Lease Agreement dated as of January 1, 1995 between Lone Star Ford, Inc. and Viking Investment
Associates
10.4* Lease Agreement dated as of October 23, 1979 between O. Bruton Smith, Bonnie Smith and Town
and Country Ford, Inc.
10.5* North Carolina Warranty Deed dated as of April 24, 1987 between O. Bruton Smith and Bonnie
Smith, as Grantors and STC Properties, as Grantee
10.6* Lease dated January 13, 1995 between JAG Properties LLC and Jaguar of Chattanooga LLC
10.7* Lease dated October 18, 1991 by and between Nelson E. Bowers II, Thomas M. Green, Jr., and
Infiniti of Chattanooga, Inc.
10.8* Amendment to Lease Agreement dated as of January 13, 1995 among Nelson E. Bowers II, Thomas M.
Green, Jr., JAG Properties LLC and Infiniti of Chattanooga, Inc.
10.9* Lease dated March 15, 1996 between Cleveland Properties LLC and Cleveland Chrysler-
Plymouth-Jeep-Eagle LLC
10.10* Lease Agreement dated January 2, 1993 among Nelson E. Bowers II, Thomas M. Green, Jr. and
Cleveland Village Imports, Inc.
10.11* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing dated
August 10, 1972 by Lone Star Ford, Inc.
10.12* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing and
Security Agreement dated August 22, 1984 by Town and Country Ford, Inc.
10.13* Long Term Debt Agreement dated October 5, 1990 between Marcus David Corporation and World Omni
Financial Corp.
10.14* Demand Promissory Note dated October 5, 1990 of Marcus David Corporation in favor of World
Omni Financial Corp.
10.15* Security Agreement & Master Credit Agreement dated April 24, 1995 between Cleveland
Chrysler-Plymouth-Jeep-Eagle LLC and Chrysler Credit Corporation
10.16* Security Agreement & Master Credit Agreement dated April 24, 1995 between Saturn of
Chattanooga and Chrysler Credit Corporation
10.17* Security Agreement & Master Credit Agreement dated April 24, 1995 between Nelson Bowers Ford,
L.P. and Chrysler Credit Corporation
10.18* Floor Plan Agreement dated May 6, 1996 between European Motors, LLC and NationsBank, N.A.
10.19* Floor Plan Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank,
N.A.
10.20* Floor Plan Agreement dated October 17, 1996 between European Motors of Nashville, LLC and
NationsBank, N.A.
10.21* Floor Plan Agreement dated March 5, 1997 between Nelson Bowers Dodge, LLC and NationsBank,
N.A.
10.22* Dealer Agreement dated August 22, 1996 between Lake Norman Chrysler-Plymouth-Jeep-Eagle, LLC
and Barnett Bank
10.23* Security Agreement & Capital Loan Agreement dated May 15, 1996 between Lake Norman Dodge, Inc
and Chrysler Financial Corp.
10.24* Security Agreement-Guaranty dated May 15, 1996 between Lake Norman Chrysler-
Plymouth-Jeep-Eagle, LLC and Chrysler Financial Corp.
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
10.25* Floor Plan Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc.
10.26* Security Agreement and Master Credit Agreement dated April 21, 1995 between Cleveland Village
Imports, Inc. and Chrysler Credit Corporation
10.27* Jaguar Credit Corporation Automotive Wholesale Plan Application for Wholesale Financing and
Security Agreement dated March 14, 1995 by Jaguar of Chattanooga LLC
10.28* Assignment of Joint Venture Interest in Chartown dated as of June 30, 1997 among Town and
Country Ford, Inc. SMDA LLC and Sonic Financial Corporation
10.29* Form of Employment Agreement between the Company and O. Bruton Smith
10.30 Form of Employment Agreement between the Company and Bryan Scott Smith
10.31 Form of Employment Agreement between the Company and Theodore M. Wright
10.32 Form of Employment Agreement between the Company and Nelson E. Bowers, II
10.33 Tax Allocation Agreement dated as of June 30, 1997 between the Company and Sonic Financial
Corporation
10.34 Form of Sonic Automotive, Inc. Stock Option Plan
10.35 Form of Sonic Automotive, Inc. Employee Stock Purchase Plan
10.36 Subscription Agreement dated as of June 30, 1997 between O. Bruton Smith and the Company
10.37 Subscription Agreement dated as of June 30, 1997 between Sonic Financial Corporation and the
Company
10.38 Subscription Agreement dated as of June 30, 1997 between Bryant Scott Smith and the Company
10.39 Subscription Agreement dated as of June 30, 1997 between William S. Egan and the Company
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Dixon Odom & Co.
23.3 Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration
Statement)
24 Power of Attorney (included on the signature page to this Registration Statement)
27 Financial Data Schedule
99.1 Consent of Nelson E. Bowers, II
* To be furnished by Amendment.
EX-3
2
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
SONIC AUTO WORLD, INC.
Sonic Auto World, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Sonic Auto World, Inc. The date of
filing of its original Certificate of Incorporation with the Secretary of State
was January 30, 1997.
2. This Amended and Restated Certificate of Incorporation amends and
restates the Certificate of Incorporation of this corporation in its entirety as
follows:
ARTICLE I
NAME
The name of the corporation is Sonic Automotive, Inc. (the
"Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is The
Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE IV
CAPITAL STOCK
SECTION 4.01. AUTHORIZED CAPITAL STOCK. The aggregate number of shares
of capital stock which the Corporation shall have authority to issue is
sixty-eight million (68,000,000) shares divided into the following classes:
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(a) Fifty million (50,000,000) shares of Class A Common Stock
with a par value of one cent ($0.01) per share (the "Class A Common Stock");
(b) Fifteen million (15,000,000) shares of Class B Common
Stock with a par value of one cent ($0.01) 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 ($0.10) 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.
SECTION 4.02. VOTING.
(a) Each holder of Class A Common Stock shall have one (1)
vote for each share of Class A Common Stock standing in such holder's name on
the stock transfer records of the Corporation with respect to each matter
submitted to a vote of the stockholders. Except as otherwise provided in
subparagraph (b) below, each holder of Class B Common Stock shall have ten (10)
votes for each share of Class B Common Stock standing in such holder's name on
the stock transfer records of the Corporation with respect to each matter
submitted to a vote of the stockholders. Except as otherwise required by law,
the holders of the Class A Common Stock and the holders of the Class B Common
Stock shall in all matters vote together as a single class; provided, however,
that the affirmative vote of the holders of a majority of the shares of the
Class A Common Stock and/or the holders of a majority of the shares of the Class
B Common Stock, each voting separately as a class, as applicable, is required in
order to increase or decrease the aggregate number of authorized shares of such
class, increase or decrease the par value of the shares of such class, or modify
or change the powers, preferences or special rights of the shares of such class
so as to affect such class adversely.
(b) Each holder of Class A Common Stock and Class B Common
Stock shall have one (1) vote for each share of Class A Common Stock or Class B
Common Stock, as the case may be, standing in such holder's name on the stock
transfer records of the Corporation on the following matters proposed or
approved by the Board of Directors of the Corporation or proposed by or on
behalf of the holders of Class B Common Stock or as to which any member of the
Smith Group (as hereinafter defined) or any affiliate thereof has a material
financial interest other than as a then-existing stockholder of the Corporation:
(i) Any vote by the stockholders of the Corporation
on any Rule 13e-3 transaction as such term is defined in Rule 13e-3 promulgated
under the Securities Exchange Act of 1934;
(ii) Any vote by the stockholders of the Corporation
on any sale or other disposition of all or substantially all of the assets of
the Corporation to any other Person;
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(iii) Any vote by the stockholders of the Corporation
on any sale or transfer of assets which would cause the Corporation's business
to no longer be primarily oriented toward automobile dealership operations and
related activities; and
(iv) Any vote by the stockholders of the Corporation
on any merger or consolidation of the Corporation in which the holders of the
Corporation's Common Stock will own less than 50% of the Common Stock following
such transaction.
An "affiliate" is defined as (1) any individual or entity who
or that, directly or indirectly, controls, is controlled by, or is under common
control with any member of the Smith Group, (2) any corporation or organization
(other than the Corporation or a majority-owned subsidiary of the Corporation)
of which any member of the Smith Group is an officer, partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of voting
securities, or in which any member of the Smith Group has a substantial
beneficial interest, (3) a voting trust or similar arrangement pursuant to which
any member of the Smith Group generally controls the vote of the shares of
Common Stock held by or subject to such trust or arrangement, (4) any other
trust or estate in which any member of the Smith Group has a substantial
beneficial interest or as to which any member of the Smith Group serves as
trustee or a similar fiduciary capacity, or (5) any relative or spouse of any
member of the Smith Group or any relative of such spouse, who has the same
residence as any member of the Smith Group.
SECTION 4.03. CONVERSION OF CLASS B COMMON STOCK. Each share of Class B
Common Stock shall be convertible, at the option of the holder thereof, into one
fully paid and nonassessable share of Class A Common Stock. Any such conversion
may be effected by any holder of Class B Common Stock at any time, and from time
to time, by surrendering such holder's certificate or certificates representing
the Class B Common Stock to be converted, duly endorsed, at the office of the
Corporation or any duly appointed and acting transfer agent for the Class B
Common Stock, as applicable, together with a written notice to the Corporation
at such office that such holder elects to convert all or a specified number of
shares of Class B Common Stock represented by such certificate and stating the
name or names in which such holder desires the certificate or certificates
representing the Class A Common Stock to be issued. Any certificate for shares
surrendered for conversion shall be accompanied by instruments of transfer, in
form satisfactory to the Corporation, duly executed by the holder of such shares
or the duly authorized representative of such holder. Promptly thereafter, the
Corporation shall issue and deliver to such holder or such holder's nominee or
nominees a certificate or certificates for the number of shares of Class A
Common Stock to which such holder shall be entitled as herein provided. Such
conversion shall be deemed to have been made immediately and automatically at
the closing of business on the date of receipt by the Corporation or any such
transfer agent, and the person or persons entitled to receive the Class A Common
Stock issuable on such conversion shall be treated for all purposes as the
record holder or holders of such Class A Common Stock at the close of business
on that date. A number of shares of Class A Common Stock equal to the number of
shares of Class B Common Stock outstanding from time to time shall be set aside
and reserved for issuance upon conversion of shares of Class B Common Stock.
Class A Common Stock shall have no conversion rights.
3
SECTION 4.04. LIMITATIONS ON TRANSFERABILITY OF CLASS B COMMON STOCK;
DEEMED CONVERSIONS.
(a) A member of the Smith Group who owns shares of Class B
Common Stock (a "Class B Stockholder") may transfer, directly or indirectly,
shares of Class B Common Stock, whether by sale, assignment, gift or otherwise,
only to another member of the Smith Group, and no Class B Stockholder may
otherwise transfer beneficial ownership of any shares of Class B Common Stock.
In the event of any attempted transfer of the beneficial ownership of any shares
of Class B Common Stock in violation of the limitation provided in the preceding
sentence, the shares of Class B Common Stock with respect to which the transfer
of such beneficial ownership has been attempted shall be deemed to have been
converted automatically, without further deed or action by or on behalf of any
person, into shares of Class A Common Stock. Notwithstanding the foregoing, in
the event of a deemed conversion of Class B Common Stock to Class A Common Stock
pursuant to the provisions of this Section 4.04(a), the transfer resulting in
such deemed conversion shall be effective with respect to the Class A Common
Stock issued pursuant thereto.
(b) If the total number of shares of Common Stock held by
members of the Smith Group is less than 15% of the total number of shares of
Common Stock outstanding, all of the outstanding shares of Class B Common Stock
shall automatically be deemed converted to Class A Common Stock.
A member of the Smith Group consists of the following persons:
(i) Mr. O. Bruton Smith and his guardian,
conservator, committee, or attorney in fact;
(ii) Mr. William S. Egan and his guardian,
conservator, committee, or attorney in fact;
(iii) each lineal descendant of Messrs. Smith and
Egan (each, a "Descendant") and their respective guardians, conservators,
committees, or attorneys in fact;
(iv) each Family Controlled Entity (as hereinafter
defined).
The term "Family Controlled Entity" means:
(i) any not for profit corporation if at least 80% of
its Board of Directors is composed of Mr. Smith, Mr. Egan and/or Descendants;
(ii) any other corporation if at least 80% of the
value of its outstanding equity is owned by members of the Smith Group;
(iii) any partnership if at least 80% of the value of
the partnership interests are owned by members of the Smith Group; and
4
(iv) any limited liability or similar company if at
least 80% of the value of the company is owned by members of the Smith Group.
Notwithstanding anything to the contrary set forth herein, any
holder of Class B Common Stock may pledge such shares to a pledgee pursuant to a
bona fide pledge of such shares as collateral security for indebtedness due to
the pledgee; provided, however, that such shares may not be transferred to or
registered in the name of the pledgee unless such pledgee is a member of the
Smith Group. In the event of foreclosure or other similar action by the pledgee,
such pledged shares shall automatically, without any act or deed on the part of
the Corporation or any other person, be deemed converted into shares of Class A
Common Stock unless within five (5) business days after such foreclosure or
similar event such pledged shares are returned to the pledgor or transferred to
a member of the Smith Group. The foregoing provisions of this paragraph shall
not be deemed to restrict or prevent any transfer of such shares by operation of
law upon incompetence, death, dissolution or bankruptcy of any Class B
Stockholder or any provision of law providing for, or judicial order of,
forfeiture, seizure or impoundment.
(c) Any transferee of shares of Class B Common Stock pursuant
to a transfer made in violation of this Section 4.04 or pursuant to the last
sentence of Section 4.04(b) other than to a member of the Smith Group shall have
no rights as a holder of Class B Common Stock and no other rights against or
with respect to the Corporation except the right to receive, in accordance with
this Section 4.04, shares of Class A Common Stock upon the conversion of such
transferred shares.
(d) Shares of Class B Common Stock shall not be issuable to
any person other than a member of the Smith Group. Notwithstanding any other
provision of this Amended and Restated Certificate of Incorporation, the
Corporation shall, to the fullest extent permitted by law, be entitled to issue
shares of Class B Common Stock to any member of the Smith Group from time to
time.
(e) The Corporation and any transfer agent of Class B Common
Stock may, as a condition to the transfer or the registration of any transfer of
shares of Class B Common Stock permitted by this Section 4.04 require the
furnishing of such affidavits or other proof as they deem necessary to establish
that such transferee is a member of the Smith Group.
(f) For purposes of this Section 4.04, the term "beneficial
ownership" in respect of shares of Class B Common Stock shall mean possession of
the power of authority, either singly or jointly with another, to vote or
dispose of, or to direct the voting or disposition of, such shares and the term
"beneficial owner" in respect of shares of Class B Common Stock shall mean the
person or persons who possess such power and authority.
SECTION 4.05. DIVIDENDS AND DISTRIBUTIONS ON COMMON STOCK.
(a) Subject to the preferential rights, if any, of the holders
of Preferred Stock, holders of Class A Common Stock and Class B Common Stock
shall be entitled to share ratably as a single class in all dividends and other
distributions of cash, shares of capital stock of the Corporation, other
securities of the Corporation or any other company, or any other right or
property
5
as may be declared thereon by the Board of Directors from time to time out of
assets or funds of the Corporation legally available therefor.
(b) Dividends may be paid in shares of Class A Common Stock or
Class B Common Stock, but shares of Class A Common Stock may be paid only to
holders of Class A Common Stock and shares of Class B Common Stock may be paid
only to holders of Class B Common Stock and the same number of shares shall be
paid in respect of each outstanding share of Class A Common Stock and Class B
Common Stock.
(c) In the event the Corporation shall be liquidated (either
partially or completely), dissolved or wound up, whether voluntarily or
involuntarily, each share of Class A Common Stock and Class B Common Stock shall
be entitled to an equal distribution of net assets.
(d) Whenever the Corporation shall (i) declare a dividend on
shares of any class of Common Stock in shares of such class of Common Stock or
in securities convertible into or exchangeable for shares of such class of
Common Stock, (ii) subdivide the outstanding shares of any class of Common
Stock, (iii) combine the outstanding shares of any class of Common Stock into a
smaller number of shares, or (iv) issue any shares of any class of Common Stock
upon reclassification of such shares, an identical dividend, subdivision,
combination or other adjustment shall be made with respect to the outstanding
shares of the other class or classes of Common Stock.
(e) In any merger, consolidation, or business combination
involving the Corporation or any subsidiary of the Corporation, the
consideration to be received per share by the holders of Class A Common Stock
and Class B Common Stock must be identical for each class of stock, except that
in any such transaction in which shares of Common Stock are to be distributed,
such shares may differ as to voting rights to the extent that voting rights now
differ among the Class A Common Stock and Class B Common Stock.
SECTION 4.06. PREFERRED STOCK.
The Preferred Stock may be issued from time to time in one or
more series, each series to have distinctive designations. The powers,
preferences and rights of each such series of Preferred Stock and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series of Preferred Stock at any time outstanding.
The Board of Directors is hereby expressly granted the authority to cause the
Preferred Stock to be issued in one or more series and, with respect to each
such series, to fix by resolutions, the following characteristics prior to the
issuance thereof:
(a) The designation of the series, which may be by
distinguishing number, letter or title;
(b) The number of shares of the series, which number the Board
of Directors may (except as otherwise provided in the creation of the series)
increase or decrease (but not below the number of shares thereof then
outstanding);
6
(c) The voting rights of the shares of the series, which
rights may be full or limited, or which shares may be without voting power;
(d) The dividend rights of the shares of the series, if any,
including without limitation the dividend rates, the dividend payment dates,
whether dividends will be cumulative, adding conditions for payment and any
payment preferences in relation to the dividends payable on any other class or
classes or series of stock of the Corporation;
(e) The redemption rights, if any, and the price or prices for
the shares of the series;
(f) Sinking funds requirements, if any, for the purchase or
redemption of shares of the series;
(g) Rights upon liquidation, dissolution, or winding up of the
Corporation or upon the distribution of the assets of the Corporation;
(h) Whether the shares of the series shall be convertible into
shares of any other class or classes or into shares of any other series of the
same or of any other class or classes of stock, and if so, the conversion price,
any adjustments thereof and all other terms and conditions upon which such
conversion may be made; and
(i) Such other powers, preferences, rights, qualifications,
limitations or restrictions as the Board of Directors shall determine;
all as shall be stated in the Resolution or Resolutions of the Board of
Directors providing for the issuance of such series of preferred stock.
The relative powers, preferences and rights of each series of
Preferred Stock in relation to the powers, preferences and rights of each other
series of Preferred Stock shall, in each case, be as fixed from time to time by
the Board of Directors in the resolution or resolutions adopted pursuant to the
authority granted in this Section 4.06, and the consent, by class or series vote
or otherwise, of the holders of Preferred Stock of such of the series of
Preferred Stock as are from time to time outstanding shall not be required for
the issuance by the Corporation, acting at the direction of the Board of
Directors, of any other series of Preferred Stock, regardless of whether the
powers, preferences and rights of such series shall be fixed by the Board of
Directors as senior to, or on a parity with, the powers, preferences and rights
of such outstanding series, or any of them, unless and to the extent that the
Board of Directors may provide in such resolution or resolutions adopted with
respect to any series of Preferred Stock that the consent of the holders of a
majority (or such other proportions as shall be therein fixed) of the
outstanding shares of such series voting thereon shall be required for the
issuance of any or all other series of Preferred Stock.
The shares of any series of Preferred Stock that (i) have been
redeemed by the Corporation in accordance with the express terms thereof, (ii)
are purchased in satisfaction of any sinking fund requirement provided for
shares of such series, or (iii) are converted in accordance with the express
terms thereof, in each case shall be cancelled and not reissued. Any shares of
Preferred
7
Stock otherwise acquired by the Corporation shall resume the status of
authorized and unissued shares of Preferred Stock without series designation.
SECTION 4.07. NO PREEMPTIVE RIGHTS. No holder of shares of any class of
stock of the Corporation shall, as such holder, have any preemptive right to
purchase shares of any class of stock of the Corporation or shares or other
securities convertible into or exchangeable for or carrying rights or options to
purchase shares of any class of stock of the Corporation, whether such class of
stock, shares or other securities are now or hereafter authorized, which at any
time may be proposed to be issued by the Corporation or subjected to rights or
options to purchase granted by the Corporation.
ARTICLE V
STOCKHOLDER ACTION
No action required to be taken or that may be taken at an annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, and the power of stockholders to consent in writing, without a meeting,
to the taking of any action is specifically denied.
ARTICLE VI
CONFLICTS OF INTEREST
Transactions between the Corporation and its affiliates must be no less
favorable to the Corporation than would be available to the Corporation in
arm's-length transactions dealing with an unrelated third party. In addition,
the Corporation may not enter into transactions between the Corporation and its
affiliates involving aggregate payments in excess of $500,000 unless (i) the
transaction has been approved by a majority of the members of the Corporation's
Board of Directors and a majority of the Corporation's independent directors, or
(ii) the Corporation has received an opinion as to the financial fairness of the
transaction from an investment banking or appraisal firm of national standing.
ARTICLE VII
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, amend or
repeal the Bylaws of the Corporation by a majority vote at any regular or
special meeting of the Board of Directors or by written consent, subject to the
power of the stockholders of the Corporation to amend or repeal any Bylaw
whether adopted by the Board of Directors or the stockholders.
8
ARTICLE VIII
LIMITATION OF LIABILITY
No director of the Corporation shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, except that the foregoing provision shall not
eliminate or limit the liability of a director (i) for any breach of such
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which such director derived an
improper personal benefit. If the Delaware General Corporation Law hereafter is
amended to authorize the further elimination or limitation on personal liability
of directors, then the liability of a director of the Corporation, in addition
to the limitation on personal liability provided herein, shall be limited to the
fullest extent permitted by the amended Delaware General Corporation Law.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
Any of the provisions of this Amended and Restated Certificate of
Incorporation may, from time to time, be amended, altered or repealed, and other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted in the manner and at the time prescribed by said laws
and subject to the provisions of Section 4.02 hereof, all rights at any time
conferred upon the stockholders of the Corporation by this Amended and Restated
Certificate of Incorporation are granted subject to the provisions of this
Article IX.
ARTICLE X
ELECTIONS OF DIRECTORS
Elections of directors need not be by written ballot unless and except
to the extent that the Bylaws of the Corporation shall so require.
3. This Restated Certificate of Incorporation has been duly adopted by
unanimous written consent of the stockholders in accordance with the applicable
provisions of Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware.
4. This Restated Certificate of Incorporation shall be effective on
filing with the Secretary of State of the State of Delaware.
9
IN WITNESS WHEREOF, Sonic Auto World, Inc. has caused its
corporate seal to be hereunto affixed and this Amended and Restated Certificate
of Incorporation to be signed by Bryan Scott Smith, its President, and attested
by Theodore M. Wright, its Secretary, this 7th day of August, 1997.
SONIC AUTO WORLD, INC.
By: /s/
Bryan Scott Smith, President
ATTEST:
By /s/
Theodore M. Wright, Secretary
10