THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
IS NOT COMPLETE AND MAY BE CHANGED. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS ARE NOT AN OFFER TO SELL THESE SECURITIES AND ARE NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED MAY 1, 2002
PRELIMINARY PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(b)(2)
(TO PROSPECTUS DATED DECEMBER 11, 2000) Registration No. 333-50430
$130,000,000
[LOGO]
SONIC
AUTOMOTIVE/TM/
% CONVERTIBLE SENIOR SUBORDINATED NOTES DUE 2009
----------------
THE OFFERING
Sonic Automotive, Inc. is offering the notes at an issue price of $1,000
per note. The notes will mature on May , 2009. We will pay interest on the
notes semiannually in arrears on May and November of each year, beginning
November , 2002. The notes will be our unsecured senior subordinated
obligations and will rank equally with all of our senior subordinated
obligations. The notes will be subordinated to all our existing and future
senior indebtedness. The notes will not be guaranteed by any of our
subsidiaries.
CONVERTIBILITY OF THE NOTES
Holders may convert each $1,000 principal amount of their notes into
shares of our Class A common stock, subject to adjustment, only if (1)
the sale price of our Class A common stock reaches, or the trading price of the
notes falls below, specified thresholds, (2) the notes are called for
redemption, or (3) specified corporate transactions have occurred. Upon
conversion, we will have the right to deliver, in lieu of our Class A common
stock, cash or a combination of cash and Class A common stock in an amount
described herein. Our Class A common stock currently trades on the New York
Stock Exchange under the symbol "SAH." On April 30, 2002, the last reported
sale price of our Class A common stock on the NYSE was $38.45 per share.
PURCHASE OF THE NOTES UPON A CHANGE IN CONTROL AT THE OPTION OF THE HOLDER
Upon a change in control of Sonic Automotive, Inc., as defined in the
indenture governing the notes, each holder may require us to repurchase for
cash all or a portion of the holder's notes, at 100% of the principal amount
thereof, plus accrued and unpaid interest to the date of repurchase.
REDEMPTION OF THE NOTES AT OUR OPTION
We may redeem all or a portion of the notes at any time on or after May ,
2005 at the redemption prices set forth in this prospectus supplement.
INVESTING IN THE NOTES INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE S-16 OF THIS PROSPECTUS SUPPLEMENT AND PAGE
6 OF THE PROSPECTUS.
----------------
PER NOTE TOTAL
-------- -----
Public Offering Price (1)........................... % $
Underwriting Discount............................... % $
Proceeds, before expenses, to Sonic Automotive, Inc. % $
--
(1)Plus accrued interest from May , 2002, if settlement occurs after
that date.
The underwriters may also purchase up to an additional $19,500,000
aggregate principal amount of notes within 30 days from the date of this
prospectus supplement to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The notes will be ready for delivery in book-entry form only through the
facilities of The Depository Trust Company on or about May , 2002.
----------------
MERRILL LYNCH & CO. BANC OF AMERICA SECURITIES LLC
(SOLE BOOK-RUNNING MANAGER) (CO-LEAD MANAGER)
WACHOVIA SECURITIES
----------------
The date of this prospectus supplement is May , 2002.
TABLES OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
About This Prospectus Supplement...................... S-2
Cautionary Notice Regarding Forward-Looking Statements S-3
Where You Can Find More Information About Sonic....... S-4
SEC Review............................................ S-5
Prospectus Supplement Summary......................... S-6
Summary Consolidated Financial and Operating Data..... S-14
Risk Factors.......................................... S-16
Ratio of Earnings To Fixed Charges.................... S-35
Use of Proceeds....................................... S-35
Capitalization........................................ S-36
Description of Notes.................................. S-37
Certain United States Tax Considerations.............. S-59
Underwriting.......................................... S-67
Legal Matters......................................... S-69
Experts............................................... S-69
PROSPECTUS
PAGE
----
About This Prospectus................................. 3
Where You Can Find More Information About Sonic....... 3
Cautionary Notice Regarding Forward-Looking Statements 5
The Company........................................... 6
Risk Factors.......................................... 6
Use of Proceeds....................................... 25
Ratios of Earnings to Fixed Charges................... 25
Description of Debt Securities........................ 25
Description of Capital Stock.......................... 35
Description of Warrants............................... 42
Certain Manufacturer Restrictions..................... 43
Selling Stockholders.................................. 45
Plan of Distribution.................................. 46
Legal Matters......................................... 47
Experts............................................... 48
ABOUT THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first is this prospectus supplement,
which describes the specific terms of the offering and the notes. The second
part, the accompanying prospectus, gives more general information, some of
which does not apply to this offering.
If the description of this offering and the notes varies between this
prospectus supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
Unless we state otherwise, all information in this prospectus supplement
assumes that the underwriters do not exercise their over-allotment option.
In various places in this prospectus supplement and the accompanying
prospectus, we refer you to sections of other documents for additional
information by indicating the caption heading of the other sections.
S-2
The page on which each principal caption included in this prospectus supplement
and the accompanying prospectus can be found is listed in the table of contents
above. All cross references in this prospectus supplement are to captions
contained in this prospectus supplement and not in the accompanying prospectus,
unless otherwise indicated.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement contains numerous "forward-looking statements"
within the meaning of the Private Litigation Securities Reform Act of 1995.
These forward looking statements address our future objectives, plans and
goals, as well as our intent, beliefs and current expectations regarding future
operating performance, and can generally be identified by words such as "may,"
"will," "should," "believe," "expect," "anticipate," "intend," "plan,"
"foresee," and other similar words or phrases. Specific events addressed by
these forward-looking statements include, but are not limited to:
. future acquisitions;
. industry trends;
. general economic trends, including employment rates and consumer
confidence levels;
. vehicle sales rates and same store sales growth;
. our financing plans; and
. our business and growth strategies.
You are cautioned that these forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. Among others,
factors that could materially adversely affect actual results and performance
include those risk factors contained herein or incorporated by reference, such
as:
. our ability to generate sufficient cash flows or obtain additional
financing to support acquisitions, capital expenditures, and general
operating activities;
. the reputation and financial condition of vehicle manufacturers whose
brands we represent, and their ability to design, manufacture, deliver
and market their vehicles successfully;
. our relationships with manufacturers which may affect our ability to
complete additional acquisitions;
. changes in laws and regulations governing the operation of automobile
franchises, accounting standards, taxation requirements, and
environmental laws;
. general economic conditions in the markets in which we operate,
including fluctuations in interest rates, employment levels, and the
level of consumer spending;
. high competition in the automotive retailing industry, which not only
creates pricing pressures on the products and services we offer, but on
businesses we seek to acquire; and
. our ability to successfully integrate recent and potential future
acquisitions.
You should rely only on the information contained in this prospectus
supplement or the accompanying prospectus or incorporated by reference in this
prospectus supplement. We have not, and the underwriters have not, authorized
any other person to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. We
are not, and the underwriters are not, making an offer to sell these securities
(1) in any jurisdiction where the offer or sale is not permitted, (2) where the
person making the offer is not qualified to do so or (3) to any person who
cannot legally be offered the securities. You should
S-3
assume that the information appearing in this prospectus supplement, the
accompanying prospectus and the information incorporated by reference herein is
accurate only as of their respective dates. Our business, financial condition,
results of operations and prospects may have changed since those dates.
No automobile manufacturer or distributor has been involved, directly or
indirectly, in the preparation of this prospectus supplement or in the offering
being made hereby. No automobile manufacturer or distributor has been
authorized to make any statements or representations in connection with the
offering, and no automobile manufacturer or distributor has any responsibility
for the accuracy or completeness of this prospectus supplement or for the
offering.
Except as otherwise indicated, all references in this prospectus
supplement to "we," "us," "our," "our company" or "Sonic" means Sonic
Automotive, Inc., excluding, unless otherwise expressly stated or the context
otherwise required, its subsidiaries.
WHERE YOU CAN FIND MORE INFORMATION ABOUT SONIC
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
These reports and information relate to our business, financial condition and
other matters. You may read and copy these reports, proxy statements and other
information at the Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of
the Commission's Public Reference Room in Washington, D.C. by calling the
Commission at l-800-SEC-0330. Copies may be obtained from the Commission by
paying the required fees. The Commission maintains an internet web site that
contains reports, proxy and information statements and other information
regarding us and other registrants that file electronically with the
Commission. The Commission's web site is HTTP://WWW.SEC.GOV. Information that
we file with the Commission may also be read and copied at the offices of the
New York Stock Exchange at 20 Broad Street, New York, New York 10005.
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring to documents we have previously filed with the Commission. The
information incorporated by reference is considered to be part of this
prospectus supplement, and information that we file later with the Commission
will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the
Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")(other than those portions of such
documents described in paragraphs (i), (k) and (l) of Item 402 of Regulation
S-K promulgated by the Commission), until we decide to terminate this offering
earlier:
(1) Our Annual Report on Form 10-K for the fiscal year ended December
31, 2001 (excluding Exhibit 99.1 to such report);
(2) Our Current Report on Form 8-K dated January 15, 2002;
(3) Our Current Report on Form 8-K dated April 15, 2002; and
(4) The description of our Class A common stock contained in our
Registration Statement on Form 8-A, as amended, filed with the Commission
pursuant to Section 12 of the Exchange Act.
We will provide upon request a free copy of any or all of the documents
incorporated by reference in this prospectus supplement (excluding exhibits to
such documents unless such exhibits are specifically incorporated by reference)
to anyone who receives this prospectus. Written or telephone requests should be
directed to Mr. Todd Atenhan, Director of Investor Relations, P.O. Box 18747,
Charlotte, North Carolina 28218, Telephone (888) 766-4218.
S-4
SEC REVIEW
The SEC is currently reviewing a registration statement on Form S-3 we
filed recently to register the issuance of up to an aggregate of $300 million
of our debt and equity securities, as well as guarantees by certain of our
subsidiaries. As a result of the SEC's review of that registration statement,
we may be required to change the description of our business and other
information from that in this prospectus supplement, the accompanying
prospectus and the documents and information we incorporate into this
prospectus supplement by reference. In addition, comments by the SEC on our
financial data incorporated by reference into this prospectus supplement or the
accompanying prospectus may require modification or reformulation of our
financial data. Consequently, the information in this prospectus supplement,
the accompanying prospectus and the documents and information we incorporate
into this prospectus supplement or the accompanying prospectus by reference may
differ from the information included in future public filings.
S-5
PROSPECTUS SUPPLEMENT SUMMARY
SONIC AUTOMOTIVE, INC.
We are the second largest automotive retailer in the United States, as
measured by total revenue. As of April 30, 2002, we operated 185 dealership
franchises at 134 dealership locations, representing 35 different brands of
cars and light trucks, and 44 collision repair centers in 15 states. We have
grown from 10 stores, six collision centers, eight brands in four states since
our initial public offering in November 1997. Through December 31, 2001, our
five-year compound annual growth rates are 86% for revenues, 115% for net
income and 63% for earnings per share. Our dealerships provide comprehensive
services including (1) sales of both new and used cars and light trucks, (2)
sales of replacement parts and performance of vehicle maintenance, warranty,
paint and repair services and (3) arrangement of extended warranty contracts
and financing and insurance ("F&I") for our automotive customers. We were
incorporated in Delaware in 1997.
As compared to automotive manufacturers, we and other automotive
retailers exhibit relatively low earnings volatility. This is primarily due to
a higher ratio of variable costs that allows us to manage the majority of our
expenses, such as advertising, sales commissions and vehicle carrying costs, as
demand patterns change. We also have a greater diversity in our sources of
revenues compared to automobile manufacturers. In addition to new vehicle
sales, our revenues are derived from the sale of used vehicles and parts,
service and collision repair, which carry higher gross margins and are less
sensitive to economic cycles and seasonal influences than are new vehicle
sales. The following charts depict the diversity of our sources of revenue and
gross profit for the year ended December 31, 2001:
[CHART]
Revenue Gross Profit
New Vehicles 60% Parts, service
Used Vehicles 25% and collision repair 37%
Parts, service New Vehicles 31%
and collision repair 12% Finance and Insurance 19%
Finance and Insurance 3% Used Vehicles 13%
RECENT DEVELOPMENTS
MASSEY ACQUISITION
On March 29, 2002, we acquired 15 automobile dealerships owned directly
or indirectly by Donald E. Massey in a series of related transactions. The
acquired dealerships are located in California, Colorado, Florida, North
Carolina, Michigan, Tennessee and Texas, and sell the following brands of new
vehicles: Buick, Cadillac, Chevrolet, GMC, Oldsmobile, Pontiac, Rolls
Royce/Bentley and Saab. As part of the Massey acquisition, we acquired the
inventory, equipment and certain other assets of 10 automobile dealerships for
approximately $95.8 million in cash and assumed approximately $108.8 million in
vehicle floor plan debt. Sonic did not acquire all of the ordinary course of
business assets of these dealerships, such as accounts receivable, and also did
not
S-6
assume any ordinary course of business liabilities, such as accounts payable
and other accrued liabilities. Accordingly, the amount of consideration for
this asset purchase transaction may not reflect normal working capital
investment in dealership operations.
Sonic also acquired all of the outstanding shares of three corporations
that operate 5 Massey dealerships for approximately $14.3 million in cash and
1,470,588 shares of Sonic's Class A common stock. These shares had an aggregate
fair market value of approximately $44.1 million based on the $29.98 closing
price of Sonic's Class A common stock on the New York Stock Exchange on March
28, 2002. For purchase accounting purposes, however, Sonic valued the 1,470,588
shares of Class A common stock issued in these transactions at approximately
$38.0 million. The total number of shares issued in the Massey acquisition is
subject to adjustment based upon indemnification or other obligations of the
sellers that arise within 90 days of the closing date. The shares of Sonic's
Class A common stock issued in the Massey acquisition are subject to certain
contractual limitations on resale for a period of two years following the
closing date of the acquisition.
The total purchase price for the Massey acquisition was based on Sonic's
internally determined valuation of the dealerships and their assets. The cash
portion of the purchase price for the Massey acquisition was provided by cash
generated from Sonic's existing operations and borrowings under Sonic's
revolving credit facility. In addition to the assets acquired above, Sonic also
acquired one parcel of real property located in Houston, Texas for
approximately $4.0 million in cash. This purchase was financed by cash
generated from Sonic's existing operations and by borrowings under Sonic's
construction/mortgage credit facility.
OPERATING RESULTS FOR THE QUARTER ENDED MARCH 31, 2002
NET INCOME. Our net income for the quarter ended March 31, 2002 was $22.1
million, or $0.52 per diluted share, compared to $13.4 million, or $0.33 per
diluted share, for the comparable period of the prior year -- a 57.6% increase.
The results for 2002 reflect the new accounting standards regarding goodwill,
which became effective for Sonic on January 1, 2002. Net income before goodwill
amortization for the quarter ended March 31, 2001 was $16.8 million, or $0.40
per share. On a comparable accounting basis, net income increased 31.7% and
earnings per share increased 30.0% for the quarter.
EBITDA. Our EBITDA for the quarter ended March 31, 2002 was $46.8
million compared to $40.0 million for the first quarter of 2001. See "Summary
Consolidated Financial and Operating Data" for our definition of EBITDA.
DISCONTINUED OPERATIONS. On January 1, 2002, Sonic adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets.'' Under the provisions of
this standard, the results of operations of dealerships we disposed of during
the quarter and any dealerships we have classified as held for sale at the end
of the quarter are now reflected in discontinued operations on our income
statement. Earnings per share from continuing operations for the first quarter
2002 was $0.53 compared to $0.36 for the same quarter last year. We dispose of
dealership operations that do not meet our return criteria for retention.
Although our divestiture activities are largely completed, we expect to dispose
of another four to six dealership operations in the coming quarters. We believe
these disposal activities have had a positive impact on our profitability,
margins, returns on capital and the availability of qualified management for
continuing operations.
SAME STORE SALES TRENDS. On a same store basis, total revenues decreased
3.1% for the quarter. New vehicle same store sales were down 1.3%, compared to
an industry-wide decline in new vehicle unit sales of 4.5% for the quarter.
Excluding our Northern California operations, new vehicle same store sales
increased 3.2% while used vehicle same store sales were down 11.4% for the
quarter. Same store parts, service and collision repair revenues increased 3.2%
for the quarter, while same store parts, service and collision repair gross
profits increased 7.2%. Same store finance and insurance revenues for the
quarter were flat compared to the same
S-7
quarter last year, although per unit finance and insurance gross profits
increased 7.38%. Overall, same store gross profit dollars remained unchanged
compared to the same period last year, despite lower same store vehicle sales.
Same store gross margins increased from 14.9% in last year's first quarter to
15.5% in the first quarter of 2002. Same store contribution to profits after
flooring interest costs increased 7.1% for the quarter compared to the same
quarter last year.
BRAND AND GEOGRAPHIC DIVERSITY. Our top ten brands for the quarter based
on new vehicle revenues were Ford (16.2%), GM (15.4%), Honda (14.2%), Toyota
(12.1%), BMW (10.8%), Chrysler (7.2%), Lexus (5.1%), Nissan (4.7%), Mercedes
(3.6%) and Volvo (3.1%). Our top ten markets for the quarter based on total
revenues were Houston (13.2%), San Francisco (12.3%), Los Angeles (8.4%),
Charlotte (7.8%), Dallas (7.4%), San Jose (5.2%), Tampa (4.4%), Columbus
(4.3%), Tulsa (3.8%) and Atlanta (3.4%). During the first quarter of 2002, we
closed on 22 acquisitions, including the Massey Acquisition. In addition, we
have announced the acquisition or pending acquisition of five dealerships. Each
of these dealerships is in a market where we have existing operations.
BUSINESS STRATEGY
FURTHER DEVELOP STRATEGIC MARKETS AND BRANDS. Our growth strategy has
been focused on metropolitan markets, predominantly in the Southeast,
Southwest, Midwest and California, that on average are experiencing population
growth that exceeds the national average. Where practicable, we also seek to
acquire franchises that we believe have above average sales prospects. We have
a dealership portfolio of 35 American, European and Asian brands. A majority of
our dealerships are either luxury or mid-line import brands. Our dealership
network is organized into regional dealership groups. We operate dealerships in
the following regional areas:
AS OF DECEMBER 31, 2001 AS OF APRIL 30, 2002
------------------------------------ --------------------
NUMBER OF NUMBER OF PERCENT OF 2001 NUMBER OF NUMBER OF
STORES FRANCHISES TOTAL REVENUES STORES FRANCHISES
--------- ---------- --------------- --------- ----------
Northern California....... 18 23 20% 18 23
Houston................... 10 12 12% 12 14
Southern California/Nevada 16 18 10% 23 30
Dallas.................... 4 4 8% 6 6
North Carolina............ 9 14 8% 11 16
West Florida.............. 8 8 7% 8 8
Birmingham/Tennessee...... 10 13 6% 9 12
Ohio...................... 7 12 5% 7 12
Alabama................... 8 16 5% 8 16
Oklahoma.................. 6 6 5% 6 6
Mid-Atlantic.............. 5 6 4% 5 6
South Carolina............ 7 12 4% 6 10
Georgia................... 3 3 3% 3 3
East Florida.............. 4 8 3% 7 13
Detroit................... -- -- -- 3 5
Denver.................... -- -- -- 2 5
--------- ---------- --------------- --------- ----------
Total..................... 115 155 100% 134 185
=== === ==== === ===
We believe that further consolidation in the auto retailing industry is
likely and we intend to seek acquisitions consistent with our operating
strategy. We generally seek to acquire larger, well managed multiple franchise
dealerships or multiple dealership groups located in metropolitan or high
growth suburban markets. We also look to acquire smaller, single franchise
dealerships that will allow us to capitalize upon professional management
practices and provide greater breadth of products and services in our markets.
We believe that
S-8
attractive acquisition opportunities continue to exist for dealership groups
with the capital and experience to identify, acquire and professionally manage
dealerships.
The automotive retailing industry remains highly fragmented. We believe
our "hub and spoke" acquisition strategy will allow us to realize economies of
scale, offer a greater breadth of products and services and increase brand
diversity. We also intend to acquire dealerships that have underperformed the
industry average but represent attractive franchises or have attractive
locations that would immediately benefit from our professional management.
. INCREASE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. We continue to
pursue opportunities to increase our sales of higher-margin products and
services by expanding the following:
RETAIL USED VEHICLES: Retail used vehicle sales typically generate higher
gross margins than new vehicle sales due to limited comparability among
used vehicles and the somewhat subjective nature of their valuation. Our
experience indicates that there are typically opportunities at acquired
dealerships to improve all aspects of used vehicle operations and used
vehicle inventory control. Retail used vehicle unit sales accounted for
approximately 37.0% of our new and used vehicle unit sales for the year
ended December 31, 2001 and 36.2% of our new and used vehicle unit sales
for the year ended December 31, 2000.
FINANCE AND INSURANCE: Each sale of a new or used vehicle provides us the
opportunity to earn financing fees and to sell extended warranty service
contracts. We currently offer a wide range of nonrecourse financing,
leasing and insurance products to our customers. We believe there are
opportunities at acquired dealerships to increase earnings from the sale
of finance, insurance and warranty products. As a result of our size and
scale, we have also negotiated higher commissions on the origination of
customer vehicle financing, insurance policies and extended warranty
contracts. On a per vehicle basis, our F&I revenue for the year ended
December 31, 2001 increased 12.1% to $846 compared to 2000.
PARTS, SERVICE & REPAIR: Each of our dealerships offers a fully
integrated service and parts department. Manufacturers permit warranty
work to be performed only at franchised dealerships. As a result, our
dealerships are uniquely qualified to perform work covered by
manufacturer warranties on increasingly complex vehicles. We believe we
can continue to grow our profitable parts and service business by using
variable rate pricing structures, focusing on customer service and
efficiently managing our parts inventory.
In addition, we operated collision repair centers at 44 locations at
April 30, 2002. We recently added two regional managers to oversee these
operations. We believe we can improve these operations by capitalizing on
the synergies between our franchised dealerships and our collision repair
centers. These synergies include access to customer networks, ready
access to parts and the ability to share employees.
. EMPHASIZE EXPENSE CONTROL. We continually focus on controlling
expenses and expanding margins at the dealerships we acquire and integrate into
our organization. Approximately 63.1% of our selling, general and
administrative expenses for the year ended December 31, 2001 were variable. We
are able to adjust these expenses as the operating or economic environment
impacting our dealerships changes. We manage these variable costs, such as
advertising (7.0% of selling, general and administrative expenses) and
non-salaried compensation (50.1%) expenses, so that they are generally related
to vehicle sales and can be adjusted in response to changes in vehicle sales
volume. Salespersons, sales managers, service managers, parts managers, service
advisors, service technicians and all other non-clerical dealership personnel
are paid either a commission or a modest salary plus commissions. In addition,
management compensation is tied to individual dealership profitability and
stock price appreciation through stock options.
S-9
. EFFECTIVELY MANAGE INVENTORY LEVELS. Maintaining appropriate levels of
both vehicle and parts inventories has a direct impact on profitability. We
believe that vehicle gross margins decline as inventory levels increase and
more pressure is exerted on the sales staff to close deals. In addition, net
profitability is negatively affected by the higher costs (floor plan interest
and insurance) of carrying that inventory. We have implemented financial
reporting systems that give us the ability to analyze our vehicle inventory on
a consolidated basis. Inventory management is also a key component of the
various incentive programs we have implemented at our dealerships. During 2001,
we reduced our new vehicle inventory levels from 68.1 days supply at the
beginning of the year to 45.4 days supply at year end and our used vehicle
inventory levels from 40.1 days supply to 35.1 days supply.
. TRAIN, DEVELOP AND MOTIVATE QUALIFIED MANAGEMENT. We believe that our
well-trained dealership personnel are key to our long-term prospects. We
require all of our employees, from service technicians to regional vice
presidents, to participate in in-house training programs each year. We have
expanded our Sonic Dealer Academy to include modules not only for our dealer
operators but also for general sales managers and fixed operations managers. We
believe that our comprehensive training of all employees and professional,
multi-tiered management structure provide us with a competitive advantage over
other dealership groups. This training and organizational structure provides
high-level supervision over the dealerships, accurate financial reporting and
the ability to maintain effective controls as we expand. In order to motivate
management, we employ an incentive compensation program for each officer, vice
president and dealer operator, a portion of which is provided in the form of
Sonic stock options with additional incentives based on the performance of
individual profit centers. We believe that this organizational structure,
together with the opportunity for promotion within our large organization and
for equity participation, serve as a strong motivation for our employees.
. ACHIEVE HIGH LEVELS OF CUSTOMER SATISFACTION. We focus on maintaining
high levels of customer satisfaction. Our personalized sales process is
designed to satisfy customers by providing high-quality vehicles in a positive,
"consumer friendly" buying environment. Some manufacturers offer specific
performance incentives on a per vehicle basis if certain Customer Satisfaction
Index ("CSI") levels (which vary by manufacturer) are achieved by a dealer. In
addition, all manufacturers consider CSI scores in approving acquisitions. In
order to keep management focused on customer satisfaction, we include CSI
results as a component of our incentive compensation programs. Our success in
this area is evident by the number of manufacturer awards our dealerships have
received. In 2001, a number of our dealerships received their respective
manufacturer's highest award for customer satisfaction, including BMW's Center
of Excellence award, Chrysler's Five Star Certification, the Lexus Elite Award,
Toyota's President's Award, Honda's President's Award and Infiniti's Reward of
Excellence.
. MANAGEMENT INFORMATION SYSTEMS. Our dealerships process their
financial and operating data through their individual dealer management systems
using software provided by ADP, Inc., Reynolds & Reynolds, Co. or UCS, Inc. We
then consolidate the data received from our dealers using an exclusive private
communication network. We aggregate the information at our corporate
headquarters using Hyperion financial systems. This technology allows us to
quickly integrate the information from a new acquisition. Using our private
network, we upload the financial and operational data of a newly acquired
dealership and thereby efficiently integrate the acquired dealership into our
operational strategy.
. CUSTOMER RELATIONSHIP MANAGEMENT. We believe that we can increase
customer loyalty and reduce marketing costs by using Customer Relationship
Management ("CRM") software to more efficiently target our advertising
communications. We expect these systems to allow us to capture a greater
percentage of our targeted customers' automotive spending. We are implementing
a standardized system throughout our dealership network to allow us access to
centralized information. We completed our pilot program and have successfully
deployed our CRM system in approximately 50% of our dealerships.
S-10
THE OFFERING
Issuer.................... Sonic Automotive, Inc.
Notes Offered............. $130,000,000 aggregate principal amount
($149,500,000 aggregate principal amount if the
underwriters exercise their over-allotment option
in full) of % Convertible Senior Subordinated
Notes due 2009.
Offering Price............ 100% of the principal amount of each note plus
accrued interest, if any, from May , 2002.
Maturity.................. May , 2009.
Interest.................. % per year on the principal amount, payable
semi-annually in arrears on May and November
of each year, beginning November , 2002.
Conversion Rights......... For each $1,000 principal amount of notes
surrendered for conversion, if the conditions for
conversion are satisfied, a holder will
receive shares of our Class A common stock
(assuming no adjustments in the conversion rate).
In lieu of delivering shares of our Class A common
stock upon conversion of all or any portion of our
notes, we may elect to pay holders surrendering
notes cash or a combination of cash and shares of
our Class A common stock for the notes surrendered.
The conversion rate may be adjusted for certain
reasons specified in the indenture. Upon
conversion, a holder will not receive any cash
payment representing any accrued and unpaid
interest. Instead, accrued and unpaid interest
will be deemed paid by shares of Class A common
stock received by the holder on conversion. See
"Description of Notes--Conversion Rights."
Holders may surrender notes for conversion into
our shares of Class A common stock in any fiscal
quarter commencing after June 30, 2002, if, as of
the last day of the preceding fiscal quarter, the
closing sale price of our Class A common stock for
at least 20 trading days in a period of 30
consecutive trading days ending on the last
trading day of such preceding fiscal quarter is
more than 110% of the conversion price per share
of Class A common stock on the last day of such
preceding fiscal quarter. If this condition is
satisfied, then the notes will be convertible at
any time at the option of the holder, through
maturity. The conversion price per share as of any
day will equal , subject to any adjustments to
the conversion rate through that day.
On or before May , 2007, a holder also may
convert its notes into shares of our Class A
common stock at any time after a 10 consecutive
trading-day period in which the average of the
trading prices for the notes for that 10
trading-day period was less than 103% of the
average conversion value for the notes during that
period. Conversion value is equal to the product
of the closing sale price for our shares of Class
A common stock on a given day multiplied by the
then current conversion rate, which is the number
of shares of Class A common stock into which each
$1,000 principal amount of notes is then
convertible.
S-11
Notes or portions of notes in integral multiples
of $1,000 principal amount called for redemption
may be surrendered for conversion until the close
of business on the second business day prior to
the redemption date. In addition, if we make
certain distributions to our stockholders with a
per share value of more than 15% of the sale price
of our Class A common stock on the date
immediately preceding the declaration of the
distribution, or if we are a party to certain
consolidations, mergers or binding share
exchanges, notes may be surrendered for
conversion, as provided in "Description of
Notes--Conversion Rights." The ability to
surrender notes for conversion will expire at the
close of business on May , 2009.
Use of Proceeds........... We estimate that the net proceeds from the
offering will be approximately $ million and $
million if the underwriters exercise their
overallotment option in full. We intend to use the
net proceeds of the offering to repay a portion of
the amounts outstanding under our revolving credit
facility, which may be reborrowed.
Ranking................... The notes will be unsecured obligations and will
rank equal in right of payment to all our existing
and future senior subordinated indebtedness. The
notes will be effectively subordinated to our
secured indebtedness to the extent of the
security. The notes will be subordinated to our
revolving credit facility, floor plan facilities,
construction/mortgage facility and other senior
indebtedness. The notes will not be guaranteed by
any of our subsidiaries. As a result, the notes
will be effectively subordinated to the
indebtedness and other liabilities of our
subsidiaries. Because the notes are subordinated,
in the event of bankruptcy, liquidation or
dissolution and acceleration of or payment default
on senior indebtedness, holders of the notes will
not receive any payment until holders of senior
indebtedness have been paid in full. As of March
31, 2002, after giving effect to this offering and
our use of proceeds, we would have had
approximately $299.0 million of debt which would
have been senior or secured (excluding floor plan
debt), $200 million of debt ranking pari passu to
the notes and approximately $5.5 million of
unsecured subordinated debt. All such debt (other
than the subordinated debt) is also guaranteed by
substantially all of our subsidiaries.
Sinking Fund.............. None.
Optional Redemption....... We may redeem the notes in whole or in part at any
time after May , 2005, on at least 30 days', and
no more than 60 days', notice at the redemption
prices set forth in this prospectus supplement,
plus accrued and unpaid interest to, but excluding
the redemption date. See "Description of
Notes--Redemption of Notes at our Option."
Change in Control......... Upon a change in control (as defined in the
indenture governing the notes) of Sonic, each
holder may require us to purchase all or a portion
of the holder's notes for cash at a price equal to
100% of the principal amount of the notes to be
purchased plus accrued and unpaid interest to, but
excluding, the date of purchase. See "Description
of the Notes--Change in Control Permits Purchase
of Notes by Us at the Option of the Holder."
S-12
Trading Although the notes will be registered, we do not
intend to apply for listing of the notes on any
securities exchange or for quotation of the notes
on any automated quotation system. If an active
trading market for the notes does not develop, the
market price and liquidity of the notes may be
adversely affected.
DTC Eligibility........... The notes will be issued in minimum denominations
of $1,000 and integral multiples of $1,000 in
fully registered book-entry form and will be
represented by one or more permanent global
certificates without coupons deposited with a
custodian for and registered in the name of a
nominee of DTC in New York, New York. Beneficial
interests in any such securities will be shown on,
and transfers will be effected only through,
records maintained by DTC and its direct and
indirect participants and any such interest may
not be exchanged for certificated securities,
except in limited circumstances. See "Description
of the Notes--Book-Entry System."
Risk Factors.............. See "Risk Factors" and the other information
included and incorporated by reference in this
prospectus supplement for a discussion of factors
you should carefully consider before deciding to
invest in the notes.
Trading of our Class A
Common Stock............ Our Class A common stock is traded on the New York
Stock Exchange under the symbol "SAH."
S-13
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated income statement data for the years ended
December 31, 1999, 2000 and 2001 and the summary consolidated balance sheet
data as of December 31, 2000 and 2001 are derived from Sonic's audited
financial statements, which are incorporated by reference in this prospectus
supplement. The summary consolidated balance sheet data as of December 31, 1999
is derived from Sonic's audited financial statements, which are not included or
incorporated by reference in this prospectus supplement. This summary
consolidated financial and operating data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Sonic's Consolidated Financial Statements and the related notes
thereto, incorporated by reference in this prospectus supplement.
We have accounted for all of our dealership acquisitions using the
purchase method of accounting and, as a result, we do not include in our
financial statements the results of operations of acquired dealerships prior to
the date they were acquired by us. The Summary Consolidated Financial and
Operating Data of Sonic discussed below reflect the results of operations and
financial position of each of our dealerships acquired prior to December 31,
2001. As a result of the effects of our acquisitions and other potential
factors in the future, the Summary Consolidated Financial Data set forth below
is not necessarily indicative of the results of operations and financial
position of Sonic in the future or the results of operations and financial
position that would have resulted had such acquisitions occurred at the
beginning of the periods presented below.
S-14
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 2000 2001
---------- ---------- ----------
(DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS
INCOME STATEMENT DATA:
Revenues:
New vehicles............................................ $1,962,129 $3,499,546 $3,772,133
Used vehicles........................................... 651,461 1,174,660 1,174,064
Wholesale vehicles...................................... 250,794 430,513 418,006
---------- ---------- ----------
Total vehicle sales..................................... 2,864,384 5,104,719 5,364,203
Parts, service and collision repair..................... 364,184 687,975 783,830
Finance, insurance and other............................ 82,771 162,751 189,325
---------- ---------- ----------
Total revenues.......................................... 3,311,339 5,955,445 6,337,358
Cost of sales........................................... 2,843,800 5,064,505 5,362,623
---------- ---------- ----------
Gross profit............................................ 467,539 890,940 974,735
Selling, general and administrative expenses............ 340,030 659,109 747,656
Depreciation and amortization........................... 11,699 22,714 25,790
---------- ---------- ----------
Operating income........................................ 115,810 209,117 201,289
Other income and expense:
Interest expense, floor plan............................ 22,536 47,108 35,501
Interest expense, other................................. 21,586 42,244 35,869
Other income............................................ 1,286 107 124
---------- ---------- ----------
Total other expense, net................................ 42,836 89,245 71,246
---------- ---------- ----------
Income before income taxes.............................. 72,974 119,872 130,044
Provision for income taxes.............................. 28,325 45,700 50,715
---------- ---------- ----------
Net income.............................................. $ 44,649 $ 74,172 $ 79,329
========== ========== ==========
Diluted income per share................................ $ 1.27 $ 1.69 $ 1.91
========== ========== ==========
Weighted average diluted common shares outstanding...... 35,248 43,826 41,609
Ratio of earnings to fixed charges(a)................... 3.4x 3.0x 3.3x
OTHER FINANCIAL DATA:
EBITDA(b)............................................... $ 106,259 $ 184,830 $ 191,703
Capital expenditures.................................... $ 21,548 $ 73,171 $ 43,600
Ratio of EBITDA to interest expense, other(b)........... 4.9x 4.4x 5.3x
MARGIN DATA:
EBITDA margin(b)........................................ 3.2% 3.1% 3.0%
Gross profit margin..................................... 14.1% 15.0% 15.4%
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents............................... $ 83,111 $ 109,325 $ 127,943
Inventories............................................. 630,857 773,785 664,258
Total current assets.................................... 835,567 1,032,731 956,296
Goodwill, net........................................... 592,670 668,782 738,103
Total assets............................................ 1,501,102 1,784,576 1,805,926
Total current liabilities (including current maturities) 657,910 818,321 737,253
Notes payable--floor plan............................... 517,575 684,718 587,914
Total long-term debt(c)................................. 425,894 493,309 519,963
Stockholders' equity.................................... 402,573 450,922 517,261
- --------
(a)Fixed charges is defined as interest (other than interest expense related to
notes payable-floor plan) and such portion of rent expense determined to be
representative of the interest factor. The ratio of earnings to fixed
charges is calculated by adding fixed charges to income before income taxes
and minority interest and dividing the sum by fixed charges.
(b)EBITDA is defined as earnings before interest (other than interest expense
related to notes payable-floor plan), taxes, depreciation, and amortization.
While EBITDA should not be construed as a substitute for operating income or
as a better measure of liquidity than cash flows from operating activities,
which are determined in accordance with accounting principles generally
accepted in the United States of America, we have included it herein to
provide additional information with respect to our ability to meet future
debt service, capital expenditures and working capital requirements. These
measures may not be comparable to similarly titled measures reported by
other companies.
(c)Long-term debt, including current portion, includes the payable to our
Chairman, which is subordinated to the notes. See Sonic's Consolidated
Financial Statements and the related notes incorporated by reference in this
prospectus supplement.
S-15
RISK FACTORS
THE FOLLOWING IS A BRIEF DESCRIPTION OF CERTAIN RISKS RELATED TO THIS
OFFERING. WE ENCOURAGE YOU TO CAREFULLY CONSIDER AND EVALUATE ALL OF THE
INFORMATION SET FORTH IN THIS PROSPECTUS SUPPLEMENT, INCLUDING THE RISK FACTORS
SET FORTH BELOW, AND THOSE IN OUR MOST RECENT QUARTERLY OR ANNUAL REPORT.
THE NOTES ARE SUBORDINATED TO OUR SENIOR INDEBTEDNESS.
The payment of the principal of, premium, if any, and interest on the
notes will be subordinated to the prior payment in full of all of our existing
and future senior indebtedness. In the event of a liquidation, dissolution,
reorganization or any similar proceeding, our assets will be available to pay
obligations on the notes only after senior indebtedness has been paid in full.
Therefore, there may not be sufficient assets to pay amounts due on all or any
of the notes.
In addition, we may not:
. pay principal of, premium, if any, interest on or any other amounts
owing in respect of the notes; or
. purchase, redeem or otherwise retire the notes, if any senior
indebtedness is not paid when due or any other default on senior
indebtedness occurs and the maturity of such indebtedness is
accelerated in accordance with its terms unless, in either case, the
default has been cured or waived, and the acceleration has been
rescinded or the senior indebtedness has been repaid in full.
Moreover, under certain circumstances, if any non-payment default exists
with respect to senior indebtedness, we may not make any payments on the notes
for a specified time, unless such default is cured or waived, any acceleration
of such indebtedness has been rescinded or such indebtedness has been repaid in
full. See "Description of the Notes--Ranking of Notes."
The notes will be unsecured senior subordinated obligations and, as such,
will be subordinated in right of payment with all of the other existing and
future senior indebtedness incurred by us and PARI PASSU in right of payment to
all of the existing and future senior subordinated indebtedness incurred by us.
As of March 31,2002, after giving effect to the offering and application of the
estimated net proceeds of the offering:
. we would have had approximately $299.0 million of debt which is
senior or secured and guaranteed by our subsidiaries;
. we would have had $200.0 million of debt ranking PARI PASSU to the
notes as to Sonic, but which is guaranteed by our subsidiaries;
. we would have had $5.5 million of unsecured subordinated debt; and
. our subsidiaries would also have had approximately $797.6 million of
secured floor plan indebtedness, which would be effectively senior to
the notes since the notes will not be guaranteed by any of our
subsidiaries.
Our indebtedness is described in the footnotes to our audited financial
statements contained in our annual report on Form 10-K which is incorporated by
reference in this prospectus supplement. The notes will not be secured by any
of our, or our subsidiaries', assets. Our floor plan indebtedness is secured by
vehicle inventory and proceeds from the sale of that inventory. The
indebtedness under our revolving facility is secured by:
. our pledge of all the capital stock, membership interests and
partnership interests of all of our dealership subsidiaries (to the
extent that such a pledge is permitted by the applicable
manufacturer);
S-16
. guarantees by all of our subsidiaries that are, in turn, secured by a
lien on all of the assets of these subsidiaries; and
. a lien on all of our other assets, except for real estate owned by us
or our subsidiaries.
In the event of a default on the notes or our bankruptcy, liquidation or
reorganization, these assets will be available to satisfy the obligations with
respect to the indebtedness secured thereby before any payment therefrom could
be made on the notes. Therefore, there may not be sufficient assets to pay
amounts due on all or any of the notes.
THE NOTES ARE EFFECTIVELY SUBORDINATED TO THE OBLIGATIONS OF OUR SUBSIDIARIES.
Our cash flow and ability to service the notes, will depend, in large
part, upon the cash flow of our subsidiaries and payments of funds by those
subsidiaries to us in the form of repayment of loans, dividends or otherwise.
These subsidiaries are separate and distinct legal entities with no legal
obligation to pay any amounts due on the notes or to make funds available
therefor. Most of our operating subsidiaries are primary obligors under our
floor plan facilities. In addition, although our operating subsidiaries will
not be providing guarantees in connection with the notes, they do guarantee our
indebtedness under our revolving credit facility, other senior debt and our 11%
Senior Subordinated Notes due 2008. In addition, our subsidiaries have and in
the future may become parties to financing arrangements that contain
limitations on the ability of our subsidiaries to pay dividends or to make
loans or advances to us or otherwise make cash flow available to us. Our
indenture does not restrict such provisions or prohibit us or our subsidiaries
from incurring debt or other obligations, including senior indebtedness, under
the indenture. As a result of the factors described herein, the notes are
effectively subordinated to the obligations of our subsidiaries. If we or our
subsidiaries incur additional debt or liabilities, our ability to pay our
obligations on the notes could be adversely affected.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR STOCK PRICE, WHICH MAY
SIGNIFICANTLY AFFECT THE TRADING PRICE OF THE NOTES.
Fluctuations in the trading price of our Class A common stock will affect
the trading price of the notes. The stock market in general has from time to
time experienced extreme price fluctuations. Often, these changes have been
unrelated to the operating performance of the affected companies. Furthermore,
quarter-to-quarter fluctuations in our results of operations caused by changes
in customer demand or other factors may have a significant effect on the market
price of our Class A common stock. In addition, general market conditions and
international political or economic factors unrelated to our performance may
affect our stock price. These and other conditions and factors could cause the
price of our Class A common stock, and therefore the price of the notes, to
fluctuate substantially over short periods.
SHARES ELIGIBLE FOR FUTURE PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY
AFFECT OUR STOCK PRICE.
The 12,029,375 shares of Class B common stock (which is convertible into
Class A common stock) owned beneficially by our stockholders at December 31,
2001, the shares of Class A common stock underlying options granted by us under
our stock option plans and our shares issued privately in acquisitions,
including the Massey acquisition, may be resold in the public market in the
future. No prediction can be made as to the effect that resale of such shares
(or their ability for resale) will have on the market price for the Class A
common stock prevailing from time to time. The resale of substantial amounts of
Class A common stock, or the perception that such resales may occur, could
materially and adversely affect prevailing market prices for the Class A common
stock, and thus the notes. We have agreed not to issue, and all executive
officers and directors have agreed not to resell any equity securities during
the 90 day period beginning with the date of this prospectus supplement,
subject to certain exceptions. See "Underwriting--No Sales of Similar
Securities."
S-17
WE MAY NOT BE ABLE TO PURCHASE YOUR NOTES UPON A CHANGE OF CONTROL.
Upon the occurrence of specified change of control events, we are
required to offer to purchase the notes at a price of 100% of their principal
amount plus accrued interest. We may not have sufficient financial resources to
purchase all of the notes that holders may tender to us upon a change of
control. In certain circumstances, our lenders also have the right to prohibit
any purchases by us of the notes, in which case we would be in default on the
notes.
WE DEPEND UPON THE OPERATIONS OF OUR SUBSIDIARIES.
Our ability to make interest and principal payments when due to holders
of the notes depends upon the receipt of sufficient funds from our
subsidiaries. The notes are our obligations. Substantially all of our
consolidated assets are held by our subsidiaries and substantially all of our
cash flow and net income are generated by our subsidiaries.
WE DO NOT EXPECT A PUBLIC MARKET FOR THE NOTES TO DEVELOP AFTER COMPLETION OF
THE OFFERING.
There currently is no trading market and there can be no assurance as to
the liquidity of any market for the notes that may develop, the ability of
holders of the notes to sell their notes, or the prices at which holders of the
notes would be able to sell their notes. If markets were to exist, the notes
could trade at prices higher or lower than their initial purchase prices
depending on many factors. We do not intend to apply for listing of the notes
on any securities exchange or for quotation on the National Association of
Securities Dealers Automated Quotation System.
OUR SIGNIFICANT INDEBTEDNESS COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL
HEALTH AND PREVENT US FROM FULFILLING OUR FINANCIAL OBLIGATIONS.
As of March 31, 2002, our total outstanding indebtedness was
approximately $1,418.3 million, including the following:
. $405.5 million under a revolving credit agreement (the "Revolving
Facility") with Ford Motor Credit Company ("Ford Motor Credit"),
Chrysler Financial Company, LLC ("Chrysler Financial") and Toyota
Motor Credit Corporation ("Toyota Credit") with a borrowing limit of
$600 million, subject to a borrowing base calculated on the basis of
our receivables, inventory and equipment and a pledge of certain
additional collateral by an affiliate of Sonic;
. $428.9 million under a standardized secured inventory floor plan
facility (the "Ford Floor Plan Facility") with Ford Motor Credit;
. $296.1 million under a standardized secured floor plan facility (the
"Chrysler Floor Plan Facility") with Chrysler Financial;
. $21.4 million under a standardized secured floor plan facility (the
"Toyota Floor Plan Facility") with Toyota Credit;
. $51.2 million under a standardized secured floor plan facility (the
"GMAC Floor Plan Facility" and together with the Ford Floor Plan
Facility, the Toyota Floor Plan Facility and the Chrysler Floor Plan
Facility, the "Floor Plan Facilities") with General Motors Acceptance
Corporation ("GMAC");
. $195.8 million in 11% Senior Subordinated Notes due 2008 representing
$200.0 million in aggregate principal amount less unamortized
discount of approximately $4.2 million; and
S-18
. $19.4 million of other secured debt, including $11.5 million under a
revolving real estate acquisition and new dealership construction
line of credit (the "Construction Loan") and a related mortgage
refinancing facility (the "Permanent Loan" and together with the
Construction Loan, the "Mortgage Facility") with Ford Motor Credit.
As of March 31, 2002, we had approximately $107.7 million available for
additional borrowings under the Revolving Facility, based on a borrowing base
calculated on the basis of our receivables, inventory and equipment and certain
additional collateral pledged by an affiliate of Sonic. We are paying down
revolving debt with the proceeds of this offering, but this revolving debt may
be reborrowed. We also had approximately $88.5 million available for additional
borrowings under the Mortgage Facility for real estate acquisitions and new
dealership construction. We also have significant additional capacity under the
Floor Plan Facilities. In addition, the indentures relating to our senior
subordinated notes and other debt instruments allow us to incur additional
indebtedness, including secured indebtedness.
The degree to which we are leveraged could have important consequences to
the holders of our securities, including the following:
. our ability to obtain additional financing for acquisitions, capital
expenditures, working capital or general corporate purposes may be
impaired in the future;
. a substantial portion of our current cash flow from operations must
be dedicated to the payment of principal and interest on our senior
subordinated notes, borrowings under the Revolving Facility and the
Floor Plan Facilities and other indebtedness, thereby reducing the
funds available to us for our operations and other purposes;
. some of our borrowings are and will continue to be at variable rates
of interest, which exposes us to the risk of increasing interest
rates;
. the indebtedness outstanding under our credit facilities is secured
by a pledge of substantially all the assets of our dealerships; and
. we may be substantially more leveraged than some of our competitors,
which may place us at a relative competitive disadvantage and make us
more vulnerable to changing market conditions and regulations.
In addition, our debt agreements contain numerous covenants that limit
our discretion with respect to business matters, including mergers or
acquisitions, paying dividends, incurring additional debt, making capital
expenditures or disposing of assets.
OUR FUTURE OPERATING RESULTS DEPEND ON OUR ABILITY TO INTEGRATE ACQUISITIONS
INTO OUR OPERATIONS.
Our future operating results depend on our ability to integrate the
operations of our recently acquired dealerships, as well as dealerships we
acquire in the future, with our existing operations. In particular, we need to
integrate our systems, procedures and structures, which can be difficult. Our
growth strategy has focused on the pursuit of strategic acquisitions that
either expand or complement our business. We acquired 72 dealerships in 1999,
11 in 2000, 12 in 2001 and 22 to date in 2002.
We cannot assure you that we will effectively and profitably integrate
the operations of these dealerships without substantial costs, delays or
operational or financial problems, due to:
. the difficulties of managing operations located in geographic areas
where we have not previously operated;
. the management time and attention required to integrate and manage
newly acquired dealerships;
S-19
. the difficulties of assimilating and retaining employees; and
. the challenges of keeping customers.
These factors could have a material adverse effect on our financial
condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS MAY HINDER OUR ABILITY TO INCREASE REVENUES
AND EARNINGS.
The automobile retailing industry is considered a mature industry in
which minimal growth is expected in industry unit sales. Accordingly, our
future growth depends in large part on our ability to acquire additional
dealerships, as well as on our ability to manage expansion, control costs in
our operations and consolidate both past and future dealership acquisitions
into existing operations. In pursuing a strategy of acquiring other
dealerships, we face risks commonly encountered with growth through
acquisitions. These risks include, but are not limited to:
. incurring significantly higher capital expenditures and operating
expenses;
. failing to assimilate the operations and personnel of the acquired
dealerships;
. entering new markets with which we are unfamiliar;
. potential undiscovered liabilities at acquired dealerships;
. disrupting our ongoing business;
. diverting our limited management resources;
. failing to maintain uniform standards, controls and policies;
. impairing relationships with employees, manufacturers and customers
as a result of changes in management;
. causing increased expenses for accounting and computer systems, as
well as integration difficulties; and
. failure to obtain a manufacturer's consent to the acquisition of one
or more of its dealership franchises.
We may not adequately anticipate all of the demands that our growth will
impose on our systems, procedures and structures, including our financial and
reporting control systems, data processing systems and management structure. If
we cannot adequately anticipate and respond to these demands, our business
could be materially harmed.
Failure to retain qualified management personnel at any acquired
dealership may increase the risk associated with integrating the acquired
dealership.
Installing new computer systems has disrupted existing operations in the
past as management and salespersons adjust to new technologies. We cannot
assure you that we will overcome these risks or any other problems encountered
with either our past or future acquisitions.
AUTOMOBILE MANUFACTURERS EXERCISE SIGNIFICANT CONTROL OVER OUR OPERATIONS AND
WE ARE DEPENDENT ON THEM TO OPERATE OUR BUSINESS.
Each of our dealerships operates pursuant to a franchise agreement with
the applicable automobile manufacturer or manufacturer authorized distributor.
We are significantly dependent on our relationships with these manufacturers.
Without a franchise agreement, we cannot obtain new vehicles from a
manufacturer.
S-20
Vehicles manufactured by the following manufacturers accounted for the
indicated approximate percentage of our new vehicle revenue for the year ended
December 31, 2001:
PERCENTAGE OF
HISTORICAL NEW VEHICLE
REVENUES FOR
THE YEAR ENDED
MANUFACTURER DECEMBER 31, 2001
- ------------ ----------------------
Ford.......... 18.6%
Honda......... 13.0%
General Motors 12.2%
Toyota........ 11.3%
BMW........... 10.7%
Chrysler...... 8.3%
Lexus......... 5.3%
Nissan........ 5.3%
No other manufacturer accounted for more than five percent of our new
vehicle sales during 2001. A significant decline in the sale of Ford, Honda,
Chrysler, General Motors, BMW, Toyota, Nissan or Lexus new vehicles could have
a material adverse effect on our revenue and profitability.
Manufacturers exercise a great degree of control over the operations of
our dealerships. Each of our franchise agreements provides for termination or
non-renewal for a variety of causes, including any unapproved change of
ownership or management and other material breaches of the franchise agreements.
Manufacturers may also have a right of first refusal if we seek to sell
dealerships. We believe that we will be able to renew at expiration all of our
existing franchise agreements, other than our Oldsmobile and Plymouth franchise
agreements. DaimlerChrysler phased out the Plymouth division effective October
1, 2001 and General Motors is in the process of phasing out the Oldsmobile
division. Neither of these actions will materially affect us.
. We cannot assure you that any of our existing franchise agreements
will be renewed or that the terms and conditions of such renewals
will be favorable to us.
. If a manufacturer is allowed under state franchise laws to terminate
or decline to renew one or more of our significant franchise
agreements, this action could have a material adverse effect on our
results of operations.
. Actions taken by manufacturers to exploit their superior bargaining
position in negotiating the terms of renewals of franchise agreements
or otherwise could also have a material adverse effect on our results
of operations.
. Manufacturers allocate their vehicles among dealerships generally
based on the sales history of each dealership. Consequently, we also
depend on the manufacturers to provide us with a desirable mix of
popular new vehicles. These popular vehicles produce the highest
profit margins and tend to be the most difficult to obtain from the
manufacturers.
. Our dealerships depend on the manufacturers for certain sales
incentives, warranties and other programs that are intended to
promote and support dealership new vehicle sales. Manufacturers have
historically made many changes to their incentive programs during
each year. A reduction or discontinuation of a manufacturer's
incentive programs may materially adversely affect our profitability.
Some of these programs include:
. customer rebates on new vehicles;
. dealer incentives on new vehicles;
S-21
. special financing or leasing terms;
. warranties on new and used vehicles; and
. sponsorship of used vehicle sales by authorized new vehicle
dealers.
ADVERSE CONDITIONS AFFECTING ONE OR MORE MANUFACTURERS MAY NEGATIVELY IMPACT
OUR PROFITABILITY.
The success of each of our dealerships depends to a great extent on the
manufacturers':
. financial condition;
. marketing;
. vehicle design;
. production capabilities;
. management; and
. labor relations.
Nissan, Chrysler and Volvo have had significant difficulty in the U.S.
market in the recent past. If any of our manufacturers, particularly Ford,
Honda, Chrysler, General Motors, BMW, Toyota, Nissan, or Lexus were unable to
design, manufacture, deliver and market their vehicles successfully, the
manufacturer's reputation and our ability to sell the manufacturer's vehicles
could be adversely affected.
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 our results of operations. Similarly, the delivery of
vehicles from manufacturers later than scheduled, which may occur particularly
during periods when new products are being introduced, can reduce our sales.
Although we have attempted to lessen our dependence on any one manufacturer by
establishing dealer relationships with a number of different domestic and
foreign automobile manufacturers, adverse conditions affecting manufacturers,
Ford, Honda, Chrysler, General Motors, BMW, Toyota, Nissan or Lexus in
particular, could have a material adverse effect on our results of operations.
In the event of a strike, we may need to purchase inventory from other
automobile dealers at prices higher than we would be required to pay to the
affected manufacturer in order to carry an adequate level and mix of inventory.
Consequently, strikes or other adverse labor actions could materially adversely
affect our profitability.
MANUFACTURER STOCK OWNERSHIP/ISSUANCE RESTRICTIONS LIMIT OUR ABILITY TO ISSUE
ADDITIONAL EQUITY TO MEET OUR FINANCING NEEDS.
Standard automobile franchise agreements prohibit transfers of any
ownership interests of a dealership and its parent and, therefore, often do not
by their terms accommodate public trading of the capital stock of a dealership
or its parent. Our manufacturers have agreed to permit trading in Sonic's Class
A common stock. A number of manufacturers impose restrictions on the
transferability of the Class A common stock.
. Honda may force the sale of our Honda or Acura franchises if (1) an
automobile manufacturer or distributor acquires securities having 5%
or more of the voting power of Sonic's securities, (2) an individual
or entity that has either a felony criminal record or a criminal
record relating solely to dealings with an automobile manufacturer,
distributor or dealership acquires securities having 5% or more of
the voting power of Sonic's securities or (3) any individual or
entity acquires securities having 20% or more of the voting power of
Sonic's securities and Honda reasonably deems such acquisition to be
detrimental to Honda's interests in any material respect.
S-22
. Ford may cause us to sell or resign from one or more of our Ford,
Lincoln or Mercury franchises if any person or entity (other than O.
Bruton Smith and any entity controlled by him) acquires or has a
binding agreement to acquire securities having 50% or more of the
voting power of Sonic's securities.
. General Motors and Infiniti may force the sale of their respective
franchises if 20% of more of Sonic's voting securities are similarly
acquired.
. Toyota may force the sale of one or more of Sonic's Toyota or Lexus
dealerships if (1) an automobile manufacturer or distributor acquires
securities, or the right to vote securities by proxy or voting
agreement, having more than 5% of the voting power of Sonic's
securities, (2) any individual or entity acquires securities, or the
right to vote securities by proxy or voting agreement, having more
than 20% of the voting power of Sonic's securities, (3) there is a
material change in the composition of Sonic's Board of Directors that
Toyota reasonably concludes will be materially incompatible with
Toyota's interests or will have an adverse effect on Toyota's
reputation or brands in the marketplace or the performance of Sonic
or its Toyota and Lexus dealerships, (4) there occurs an
extraordinary transaction whereby Sonic's stockholders immediately
prior to such transaction own in the aggregate securities having less
than a majority of the voting power of Sonic or the successor entity,
or (5) any individual or entity acquires control of Sonic, Sonic
Financial Corporation or any Toyota or Lexus dealership owned by
Sonic.
. Chrysler requires prior approval of any future sales that would
result in a change in voting or managerial control of Sonic.
. Mercedes requires 60 days advance notice to approve any acquisition
of 20% or more of Sonic's voting securities.
. Volkswagen has approved the sale of no more than 25% of the voting
control of Sonic, and any future changes in ownership or transfers
among Sonic's current stockholders that could affect the voting or
managerial control of Sonic's Volkswagen franchise subsidiaries
requires the prior approval of Volkswagen.
OTHER MANUFACTURERS MAY IMPOSE SIMILAR OR MORE LIMITING RESTRICTIONS.
Our lending arrangements also require that holders of Sonic's Class B
common stock maintain voting control over Sonic. We are unable to prevent our
stockholders from transferring shares of our common stock, including transfers
by holders of the Class B common stock. If such transfer results in a change in
control of Sonic, it could result in the termination or non-renewal of one or
more of our franchise agreements and a default under our credit arrangements.
Moreover, these issuance limitations may impede our ability to raise capital
through additional equity offerings or to issue our stock as consideration for
future acquisitions.
MANUFACTURERS' RESTRICTIONS ON ACQUISITIONS COULD LIMIT OUR FUTURE GROWTH.
We are required to obtain the consent of the applicable manufacturer
before the acquisition of any additional dealership franchises. We cannot
assure you that manufacturers will grant such approvals, although the denial of
such approval may be subject to certain state franchise laws.
Obtaining manufacturer consent for acquisitions could also take a
significant amount of time. Obtaining manufacturer approval for our completed
acquisitions has taken approximately three to five months. We believe that
manufacturer approvals of subsequent acquisitions from manufacturers with which
we have previously completed applications and agreements may take less time,
although we cannot provide you with assurances to that effect. In addition,
under an applicable franchise agreement or under state law, a manufacturer may
have a right of first refusal to acquire a dealership in the event we seek to
acquire that dealership franchise.
S-23
If we experience delays in obtaining, or fail to obtain, manufacturer
approvals for dealership acquisitions, our growth strategy could be materially
adversely affected. In determining whether to approve an acquisition, the
manufacturers may consider many factors, including:
. our management's moral character;
. the business experience of the post-acquisition dealership management;
. our financial condition;
. our ownership structure; and
. manufacturer-determined consumer satisfaction index scores.
In addition, a manufacturer may seek to limit the number of its
dealerships that we may own, our national market share of that manufacturer's
products or the number of dealerships we may own in a particular geographic
area. These restrictions may not be enforceable under state franchise laws.
. Our framework agreement with Ford places the following restrictions
on our ability to acquire Ford or Lincoln Mercury dealerships:
. We may not acquire additional Ford or Lincoln Mercury dealerships
unless we continue to satisfy Ford's requirement that 80% of our
Ford dealerships meet Ford's performance criteria. Beyond that,
we may not make an acquisition that would result in our owning
Ford or Lincoln Mercury dealerships with sales exceeding five
percent of the total Ford or total Lincoln Mercury retail sales
of new vehicles in the United States for the preceding calendar
year.
. We may not acquire additional Ford or Lincoln Mercury dealerships
in a particular state if such an acquisition would result in our
owning Ford or Lincoln Mercury dealerships with sales exceeding
five percent of the total Ford or total Lincoln Mercury retail
sales of new vehicles in that state for the preceding calendar
year.
. We may not acquire additional Ford dealerships in a Ford-defined
market area if such an acquisition would result in our owning
more than one Ford dealership in a market having a total of three
or less Ford dealerships or owning more than 25% of the Ford
dealerships in a market having a total of four or more Ford
dealerships. An identical market area restriction applies for
Lincoln Mercury dealerships.
. Our framework agreement with Toyota limits the number of Toyota and
Lexus dealerships that we may own on a national level, in each
Toyota-defined geographic region or distributor area, and in each
Toyota or Lexus-defined metropolitan market. Nationally, the
limitations on Toyota dealerships owned by us are for specified time
periods and are based on specified percentages of total Toyota unit
sales in the United States. In Toyota-defined geographic regions or
distributor areas, the limitations on Toyota dealerships owned by us
are specified by the applicable Toyota regional limitations policy or
distributor's policy in effect at such time. In Toyota-defined
metropolitan markets, the limitations on Toyota dealerships owned by
us are based on Toyota's metro markets limitation policy then in
effect, which currently provides a limitation based on the total
number of Toyota dealerships in the particular market. For Lexus, we
may own no more than one Lexus dealership in any one Lexus-defined
metropolitan market and no more than three Lexus dealerships
nationally.
. Our framework agreement with Honda limits the number of Honda and
Acura dealerships that we may own on a national level, in each Honda
and Acura-defined geographic zone, and in each Honda-defined
metropolitan market. Nationally, the limitations on Honda dealerships
owned by
S-24
us are based on specified percentages of total Honda unit sales in
the United States. In Honda-defined geographic zones, the limitations
on Honda dealerships owned by us are based on specified percentages
of total Honda unit sales in each of 10 Honda-defined geographic
zones. In Honda-defined metropolitan markets, the limitations on
Honda dealerships owned by us are specified numbers of dealerships in
each market, which numerical limits vary based mainly on the total
number of Honda dealerships in a particular market. For Acura, we may
own no more than (A) two Acura dealerships in a Honda-defined
metropolitan market, (B) three Acura dealerships in any one of six
Honda-defined geographic zones and (C) five Acura dealerships
nationally. Honda also prohibits ownership of contiguous dealerships.
. Mercedes restricts any company from owning Mercedes dealerships with
sales of more than three percent of total sales of Mercedes vehicles
in the U.S. during the previous calendar year.
. General Motors currently limits the maximum number of General Motors
dealerships that we may acquire to 50% of the General Motors
dealerships, by brand line, in a General Motors-defined geographic
market area having multiple General Motors dealers.
. Subaru limits us to no more than two Subaru dealerships within
certain designated market areas, four Subaru dealerships within its
Mid-America region and 12 dealerships within Subaru's entire area of
distribution.
. BMW currently prohibits publicly held companies from owning BMW
dealerships representing more than 10% of all BMW sales in the U.S.
or more than 50% of BMW dealerships in a given metropolitan market.
. Toyota, Honda and Mercedes also prohibit the coupling of a franchise
with any other brand without their consent.
As a condition to granting their consent to our acquisitions, a number of
manufacturers required additional restrictions. These agreements principally
restrict:
. material changes in our company or extraordinary corporate
transactions such as a merger, sale of a material amount of assets or
change in our board of directors or management that could have a
material adverse effect on the manufacturer's image or reputation or
could be materially incompatible with the manufacturer's interests;
. the removal of a dealership general manager without the consent of
the manufacturer; and
. the use of dealership facilities to sell or service new vehicles of
other manufacturers.
In addition, manufacturer consent to our acquisitions may impose
conditions, such as requiring facilities improvements by us at the acquired
dealership.
If we are unable to comply with these restrictions, we generally:
. must sell the assets of the dealerships to the manufacturer or to a
third party acceptable to the manufacturer; or
. terminate the dealership agreements with the manufacturer.
Other manufacturers may impose other and more stringent restrictions in
connection with future acquisitions.
S-25
As of April 30, 2002, we owned the following number of franchises for the
following manufacturers:
NUMBER OF NUMBER OF
MANUFACTURER FRANCHISES MANUFACTURER FRANCHISES
- ------------ ---------- ------------ ----------
Cadillac... 23 Hyundai..... 4
Honda...... 14 Mitsubishi.. 3
Chevrolet.. 14 Kia......... 3
Ford....... 14 Audi........ 3
BMW........ 10 Pontiac..... 3
Toyota..... 10 Porsche..... 2
Nissan..... 9 GMC......... 2
Chrysler... 8 Infiniti.... 1
Dodge...... 8 Acura....... 1
Volvo...... 8 Land Rover.. 1
Jeep....... 7 Subaru...... 1
Mercury.... 5 Mazda....... 1
Oldsmobile. 5 Saab........ 1
Isuzu...... 4 Rolls Royce. 1
Volkswagen. 4 Bentley..... 1
Lexus...... 4 Hino........ 1
Lincoln.... 4 Buick....... 1
Mercedes... 4
OUR FAILURE TO MEET A MANUFACTURER'S CONSUMER SATISFACTION REQUIREMENTS MAY
ADVERSELY AFFECT OUR ABILITY TO ACQUIRE NEW DEALERSHIPS AND OUR PROFITABILITY.
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 customer
satisfaction index, or scores. These manufacturers may use a dealership's CSI
scores as a factor in evaluating applications for additional dealership
acquisitions. The components of CSI have been modified by various manufacturers
from time to time in the past, and we cannot assure you that these components
will not be further modified or replaced by different systems in the future.
Moreover, we cannot assure you that we will be able to comply with these
standards in the future. A manufacturer may refuse to consent to an acquisition
of one of its franchises if it determines our dealerships do not comply with
the manufacturer's CSI standards. This could materially adversely affect our
acquisition strategy. In addition, we receive payments from the manufacturers
based, in part, on CSI scores, which could be materially adversely affected if
our CSI scores decline.
THERE ARE LIMITATIONS ON OUR FINANCIAL RESOURCES AVAILABLE FOR ACQUISITIONS.
We intend to finance our acquisitions with cash generated from
operations, through issuances of our stock or debt securities and through
borrowings under credit arrangements.
. We cannot assure you that we will be able to obtain additional
financing by issuing stock or debt securities.
. Using cash to complete acquisitions could substantially limit our
operating or financial flexibility.
If we are unable to obtain financing on acceptable terms, we may be
required to reduce the scope of our presently anticipated expansion, which
could materially adversely affect our growth strategy.
S-26
We estimate that as of March 31, 2002, we had approximately $107.7
million available for additional borrowings under the Revolving Facility, based
on a borrowing base calculated on the basis of our receivables, inventory and
equipment and a pledge of certain additional collateral by an affiliate of
Sonic (which borrowing base was $513.2 million of the $600.0 million facility
at March 31, 2002).
In addition, we are dependent to a significant extent on our ability to
finance our inventory with "floor plan financing." Floor plan financing is how
a dealership finances its purchase of new vehicles from a manufacturer. The
dealership borrows money to buy a particular vehicle from the manufacturer and
pays off the loan when it sells that particular vehicle, paying interest during
this period. We must obtain new floor plan financing or obtain consents to
assume existing floor plan financing in connection with our acquisition of
dealerships.
Substantially all the assets of our dealerships are pledged to secure our
floor plan indebtedness and the indebtedness under the Revolving Facility. In
addition, substantially all the real property and assets of our subsidiaries
that are constructing new dealerships are pledged under our Mortgage Facility
with Ford Motor Credit. These pledges may impede our ability to borrow from
other sources.
Finally, because Ford Motor Credit is associated with Ford, any
deterioration of our relationship with one could adversely affect our
relationship with the other. The same is true of our relationships with
Chrysler and Chrysler Financial, GM and GMAC, and Toyota and Toyota Credit.
ALTHOUGH O. BRUTON SMITH, OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, HAS
PREVIOUSLY FACILITATED OUR ACQUISITION FINANCING, WE CANNOT ASSURE YOU THAT HE
WILL BE WILLING OR ABLE TO ASSIST IN OUR FINANCING NEEDS IN THE FUTURE.
Mr. Smith initially guaranteed obligations under the Revolving Facility.
Such obligations were further secured with a pledge of shares of common stock
of Speedway Motorsports, Inc. ("SMI") owned by Sonic Financial Corporation
("SFC"), a corporation controlled by Mr. Smith having an estimated value at the
time of the pledge of approximately $50.0 million (the "Revolving Pledge").
When the Revolving Facility's borrowing limit was increased to $75.0 million in
1997, Mr. Smith's personal guarantee of Sonic's obligations under the Revolving
Facility was released, although the Revolving Pledge remained in place. Mr.
Smith was also required by Ford Motor Credit to lend $5.5 million (the
"Subordinated Smith Loan") to Sonic to increase our capitalization because the
net proceeds from our November 1997 initial public offering were significantly
less than expected. In August 1998, Ford Motor Credit released the Revolving
Pledge. In November 1999, Ford Motor Credit further increased the borrowing
limit under the Revolving Facility to $350.0 million subject to a borrowing
base calculated on the basis of our receivables, inventory and equipment and a
continuing pledge by SFC of five million shares of SMI common stock. Presently,
the borrowing limit of the Revolving Facility is $600.0 million, subject to a
similar borrowing base, including SFC's continuing pledge of SMI stock.
Before our acquisition of FirstAmerica Automotive, Inc. ("FirstAmerica")
Mr. Smith guaranteed the obligations of FirstAmerica under FirstAmerica's new
acquisition line of credit with Ford Motor Credit. FirstAmerica obtained this
new financing to enable it to complete its then pending acquisitions. The
borrowing limit on this credit facility was approximately $138 million. Mr.
Smith had guaranteed approximately $107 million of this amount, which guarantee
was secured by a pledge of five million shares of SMI common stock owned by
SFC. We assumed FirstAmerica's obligations to Ford Motor Credit under our
Revolving Facility when we acquired FirstAmerica. Mr. Smith's secured guarantee
in favor of Ford Motor Credit guaranteed a portion of our obligations under the
Revolving Facility until August 2000. After August 2000, Mr. Smith did not
provide a guarantee in favor of the Revolving Facility lenders, but SFC
continues to pledge SMI stock as collateral. We cannot assure you that Mr.
Smith will be willing or able to provide similar guarantees or credit support
in the future to facilitate Sonic's future acquisitions.
S-27
AUTOMOBILE RETAILING IS A MATURE INDUSTRY WITH LIMITED GROWTH POTENTIAL IN NEW
VEHICLE SALES, AND OUR ACQUISITION STRATEGY WILL AFFECT OUR REVENUES AND
EARNINGS.
The United States automobile dealership industry is considered a mature
industry in which minimal growth is expected in unit sales of new vehicles. As
a consequence, growth in our revenues and earnings is likely to be
significantly affected by our success in acquiring and integrating dealerships
and the pace and size of such acquisitions.
HIGH COMPETITION IN AUTOMOBILE RETAILING REDUCES OUR PROFIT MARGINS ON VEHICLE
SALES. FURTHER, THE USE OF THE INTERNET IN THE CAR PURCHASING PROCESS COULD
MATERIALLY ADVERSELY AFFECT US.
Automobile retailing is a highly competitive business. Our competition
includes:
. Franchised automobile dealerships selling the same or similar makes
of new and used vehicles that we offer in our markets and sometimes
at lower prices than we offer. Some of these dealer competitors may
be larger and have greater financial and marketing resources than we
do;
. Other franchised dealers;
. Private market buyers and sellers of used vehicles;
. Used vehicle dealers;
. Internet-based vehicle brokers that sell vehicles obtained from
franchised dealers directly to consumers;
. Service center chain stores; and
. Independent service and repair shops.
Our financing and insurance ("F&I") business and other related
businesses, which have higher margins than sales of new and used vehicles, are
subject to strong competition from various financial institutions and other
third parties. This competition is increasing as these products are now being
marketed and sold over the Internet.
Gross profit margins on sales of new vehicles have been generally
declining since 1986. We do not have any cost advantage in purchasing new
vehicles from manufacturers, due to economies of scale or otherwise. We
typically rely on advertising, merchandising, sales expertise, service
reputation and dealership location to sell new vehicles. The following factors
could have a significant impact on our business:
. The Internet has become a significant part of the sales process in
our industry. Customers are using the Internet to compare pricing for
cars and related F&I services, which may further reduce margins for
new and used cars and profits for related F&I services. If Internet
new vehicle sales are allowed to be conducted without the involvement
of franchised dealers, our business could be materially adversely
affected. In addition, other franchise groups have aligned themselves
with Internet car sellers or are spending significant sums on
developing their own Internet capabilities, which could materially
adversely affect our business.
. Our revenues and profitability could be materially adversely affected
should manufacturers decide to enter the retail market directly.
. The increased popularity of short-term vehicle leasing also has
resulted, as these leases expire, in a large increase in the number
of late model vehicles available in the market, which puts added
pressure on new and used vehicle margins.
S-28
. Some of our competitors may be capable of operating on smaller gross
margins than we are, and the on-line auto brokers have been operating
at a loss.
. As we seek to acquire dealerships in new markets, we may face
increasingly significant competition as we strive to gain market
share through acquisitions or otherwise. This competition includes
other large dealer groups and dealer groups that have publicly traded
equity.
Our franchise agreements do not grant us the exclusive right to sell a
manufacturer's product within a given geographic area. Our revenues or
profitability could be materially adversely affected if any of our
manufacturers award franchises to others in the same markets where we operate,
although certain state franchise laws may limit such activities by the
manufacturers. A similar adverse effect could occur if existing competing
franchised dealers increase their market share in our markets. Our gross
margins may decline over time as we expand into markets where we do not have a
leading position. These and other competitive pressures could materially
adversely affect our results of operations.
THE CYCLICAL AND LOCAL NATURE OF AUTOMOBILE SALES MAY ADVERSELY AFFECT OUR
PROFITABILITY.
The automobile industry is cyclical and historically has experienced
periodic downturns characterized by oversupply and weak demand. Many factors
affect the industry, including general economic conditions and consumer
confidence, fuel prices, the level of discretionary personal income,
unemployment rates, interest rates and credit availability. We are in the midst
of an industry and general economic slowdown that could materially adversely
effect our business.
Local economic, competitive and other conditions also affect the
performance of dealerships. We intend to pursue acquisitions outside of these
markets, but our operational focus is on our current markets. As a result, our
current results of operations depend substantially on general economic
conditions and consumer spending habits in the Southeast and Northern
California and, to a lesser extent, the Houston and Columbus markets. Sales in
our Northern California market represented 20% of our sales for the year ended
December 31, 2001. Our results of operations also depend on other factors, such
as tax rates and state and local regulations specific to the states in which we
currently operate. Sonic may not be able to expand geographically and any such
expansion may not adequately insulate it from the adverse effects of local or
regional economic conditions.
WE CAN OFFER YOU NO ASSURANCES THAT WE WILL BE ABLE TO CONTINUE EXECUTING OUR
ACQUISITION STRATEGY WITHOUT THE COSTS OF FUTURE ACQUISITIONS ESCALATING.
Although there are many potential acquisition candidates that fit our
acquisition criteria, we cannot assure you that we will be able to consummate
any such transactions in the future or identify those candidates that would
result in the most successful combinations, or that future acquisitions will be
able to be consummated at acceptable prices and terms. In addition, increased
competition for acquisition candidates could result in fewer acquisition
opportunities for us and higher acquisition prices. The magnitude, timing,
pricing 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;
. our financial capabilities;
. our stock price;
. the availability of skilled employees to manage the acquired
companies; and
. general economic and business conditions.
S-29
We may be required to file applications and obtain clearances under
applicable federal antitrust laws before completing an acquisition. These
regulatory requirements may restrict or delay our acquisitions, and may
increase the cost of completing acquisitions.
THE OPERATING AND FINANCIAL CONDITION OF ACQUIRED BUSINESSES CANNOT BE
DETERMINED ACCURATELY UNTIL WE ASSUME CONTROL.
Although we conduct what we believe to be a prudent level of
investigation regarding the operating and financial condition of the businesses
we purchase, in light of the circumstances of each transaction, an unavoidable
level of risk remains regarding the actual operating condition of these
businesses. Similarly, many of the dealerships we acquire, including in our
largest acquisitions, do not have financial statements audited or prepared in
accordance with generally accepted accounting principles. As a result, we may
not have an accurate understanding of the historical financial condition and
performance of our acquired entities. Until we actually assume operating
control of such business assets and their operation, we may not be able to
ascertain the actual value or understand the potential liabilities of the
acquired entities and their operations.
POTENTIAL CONFLICTS OF INTEREST BETWEEN SONIC AND ITS OFFICERS COULD ADVERSELY
AFFECT OUR FUTURE PERFORMANCE.
O. Bruton Smith serves as the chairman and chief executive officer of
SMI. Accordingly, Sonic competes with SMI for the management time of Mr. Smith.
Sonic has in the past and will likely in the future enter into
transactions with Mr. Smith, entities controlled by Mr. Smith or other
affiliates of Sonic. We believe that all of our existing arrangements with
affiliates are as favorable to us as if the arrangements were negotiated
between unaffiliated parties, although the majority of such transactions have
neither been independently verified in that regard nor are likely to be so
verified in the future. Potential conflicts of interest could arise in the
future between Sonic and its officers or directors in the enforcement,
amendment or termination of arrangements existing between them.
Under Delaware law generally, a corporate insider is precluded from
acting on a business opportunity in his individual capacity if that opportunity
is
(1)one which the corporation is financially able to undertake,
(2)is in the line of the corporation's business,
(3)is of practical advantage to the corporation, and
(4)is one in which the corporation has an interest or reasonable
expectancy.
Accordingly, our corporate insiders are generally prohibited from
engaging in new dealership-related business opportunities outside of Sonic
unless a majority of Sonic's disinterested directors decide that such
opportunities are not in our best interest.
Sonic's charter contains provisions providing that transactions between
Sonic and its affiliates must be no less favorable to Sonic than would be
available in similar transactions with an unrelated third party. Moreover, any
such transactions involving aggregate payments in excess of $500,000 must be
approved by a majority of Sonic's directors and a majority of Sonic's
independent directors. If not so approved, Sonic must obtain an opinion as to
the financial fairness of the transaction to be issued by an investment banking
or appraisal firm of national standing. In addition, the terms of the Revolving
Facility and Sonic's existing senior subordinated notes restrict transactions
with affiliates in a manner similar to Sonic's charter restrictions.
S-30
THE LOSS OF KEY PERSONNEL AND LIMITED MANAGEMENT AND PERSONNEL RESOURCES COULD
ADVERSELY AFFECT OUR OPERATIONS AND GROWTH.
Our success depends to a significant degree upon the continued
contributions of Sonic's management team, particularly its senior management,
and service and sales personnel. Additionally, manufacturer franchise
agreements may require the prior approval of the applicable manufacturer before
any change is made in franchise general managers. We do not have employment
agreements with most of our dealership managers and other key dealership
personnel. Consequently, the loss of the services of one or more of these key
employees could have a material adverse effect on our results of operations.
In addition, as we expand we may need to hire additional managers. The
market for qualified employees in the industry and in the regions in which we
operate, particularly for general managers and sales and service personnel, is
highly competitive and may subject us to increased labor costs during 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 our results of operations. In addition, the lack of qualified management or
employees employed by potential acquisition candidates may limit our ability to
consummate future acquisitions.
SEASONALITY OF THE AUTOMOTIVE RETAIL BUSINESS ADVERSELY AFFECTS FIRST QUARTER
REVENUES.
Our business is seasonal, with a disproportionate amount of revenues
received generally in the second, third and fourth fiscal quarters.
IMPORT PRODUCT RESTRICTIONS AND FOREIGN TRADE RISKS MAY IMPAIR OUR ABILITY TO
SELL FOREIGN VEHICLES PROFITABLY.
Some of the vehicles and major components of vehicles we sell are
manufactured in foreign countries. Accordingly, we are subject to the import
and export restrictions of various jurisdictions and are dependent to some
extent upon general economic conditions in, and political relations with, a
number of foreign countries, particularly Germany, Japan and Sweden.
Fluctuations in currency exchange rates may also adversely affect our sales of
vehicles produced by foreign manufacturers. Imports into the United States may
also be adversely affected by increased transportation costs and tariffs,
quotas or duties.
WE ARE SUBJECT TO NUMEROUS LEGAL AND ADMINISTRATIVE PROCEEDINGS.
In 2001, the Florida Attorney General's Office issued subpoenas to two of
our wholly-owned dealership subsidiaries located in Florida. The subpoenas
requested, among other things, documentation from the dealerships regarding
transactions with customers in the months of January 1999 and June 2000. In
subsequent discussions, the Attorney General's office informed each of these
dealership subsidiaries that it was investigating allegations of fraud against
customers by those dealerships in the sale of finance and insurance products.
In addition, in April 2002, the Florida Department of Insurance informed the
same two dealership subsidiaries that it had also initiated an investigation
into allegations similar to those underlying the Florida Attorney General's
investigation. Our two dealership subsidiaries are cooperating with this
investigation. To date, there have been no formal charges or administrative
proceedings filed against either dealership subsidiary by the Attorney General
or the Department of Insurance. Additionally, five private civil actions have
been filed against one of the dealership subsidiaries and one private civil
action has been filed against the other dealership subsidiary stating
allegations similar to those underlying the Florida Attorney General's
investigation. Two of the civil actions purport to represent a class of
customers as potential plaintiffs, although no motion for class certification
has been filed or granted to date.
We intend to vigorously defend ourselves and assert available defenses
with respect to each of the foregoing matters, and we do not believe that the
ultimate resolution of these matters will have a material adverse affect on our
business, results of operations, financial condition, cash flows or prospects.
However, because the
S-31
investigations by the Florida Attorney General's office and Florida Department
of Insurance are continuing and have not resulted in formal charges to date,
and because the civil actions are also in the early stages of litigation, we
cannot assure you as to the outcomes of such proceedings.
In addition, we are involved, and expect to continue to be involved, in
numerous other legal proceedings arising out of the conduct of our business,
including litigation with customers, employment related lawsuits and actions
brought by governmental authorities. We do not believe that the ultimate
resolution of these matters will have a material adverse affect on our
business, results of operations, financial condition, cash flows or prospects.
However, the results of these matters cannot be predicted with certainty, and
an unfavorable resolution of one or more of these matters, including the
matters specifically discussed above, could have a material adverse effect on
our business, financial condition, results of operations, cash flows and
prospects.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL REGULATION COMPLIANCE COSTS MAY
ADVERSELY AFFECT OUR PROFITABILITY.
We are subject to a wide range of federal, state and local laws and
regulations, such as local licensing requirements, retail financing and
consumer protection laws and regulations, and federal and state environmental,
health and safety, wage-hour, anti-discrimination, and other employment
practices laws and regulations. The violation of these laws and regulations can
result in administrative, civil or criminal penalties against us or in a cease
and desist order against our operations if we are not in compliance. Our future
acquisitions may also be subject to regulation, including antitrust reviews. We
believe that we comply in all material respects with all laws and regulations
applicable to our business, but future regulations may be more stringent and
require us to incur significant additional costs.
Our facilities and operations are also subject to federal, state and
local laws and regulations relating to environmental protection and human
health and safety, including those governing wastewater discharges, air
emissions, the operation and removal of underground and aboveground storage
tanks, the use, storage, treatment, transportation, release, recycling and
disposal of solid and hazardous materials and wastes and the cleanup of
contaminated property or water. We may be required by these laws to pay the
full amount of the costs of investigation and/or remediation of contaminated
properties, even if we are not at fault for disposal of the materials or if
such disposal was legal at the time. People who may be found liable under these
laws and regulations include the present or former owner or operator of a
contaminated property and companies that generated, transported, disposed of or
arranged for the transportation or disposal of hazardous substances found at
the property.
Our past and present business operations are subject to environmental
laws and regulations governing the use, storage, handling, recycling and
disposal of hazardous or toxic substances such as new and waste motor oil, oil
filters, transmission fluid, antifreeze, freon, new and waste paint and lacquer
thinner, batteries, solvents, lubricants, degreasing agents, gasoline and
diesel fuels. We are also subject to laws and regulations relating to
underground storage tanks that exist or used to exist at many of our
properties. Like many of our competitors, we have incurred, and will continue
to incur, capital and operating expenditures and other costs in complying with
such laws and regulations. In addition, soil and groundwater contamination
exists at certain of our properties. We cannot assure you that our other
properties have not been or will not become similarly contaminated. In
addition, we could become subject to potentially material new or unforeseen
environmental costs or liabilities because of our acquisitions.
Environmental laws and regulations, including those governing air
emissions and underground storage tanks, could require compliance with new or
more stringent standards that are imposed in the future. We cannot predict what
other environmental legislation or regulations will be enacted in the future,
how existing or future laws or regulations will be administered or interpreted
or what environmental conditions may be found to exist in the future.
Consequently, we may be required to make substantial expenditures in the future.
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CONCENTRATION OF VOTING POWER AND ANTI-TAKEOVER PROVISIONS OF OUR CHARTER,
DELAWARE LAW AND OUR DEALER AGREEMENTS MAY REDUCE THE LIKELIHOOD OF ANY
POTENTIAL CHANGE OF CONTROL OF SONIC.
Sonic's common stock is divided into two classes with different voting
rights. This dual class stock ownership allows the present holders of the Class
B common stock to control Sonic. Holders of Class A common stock have one vote
per share on all matters. Holders of Class B common stock have 10 votes per
share on all matters, except that they have only one vote per share on any
transaction proposed by the Board of Directors or a Class B common stockholder
or otherwise benefiting the Class B common stockholders constituting a:
(1)"going private" transaction;
(2)disposition of substantially all of our assets;
(3)transfer resulting in a change in the nature of our business; or
(4)merger or consolidation in which current holders of common stock
would own less than 50% of the common stock following such
transaction.
The holders of Class B common stock currently hold less than a majority
of Sonic's outstanding common stock, but a majority of Sonic's voting power.
This may prevent or discourage a change of control of Sonic even if such action
were favored by holders of Class A common stock.
Sonic's charter and bylaws make it more difficult for its stockholders to
take corporate actions at stockholders' meetings. In addition, options under
our 1997 Stock Option Plan become immediately exercisable on a change in
control. Also, Delaware law makes it difficult for stockholders who have
recently acquired a large interest in a company to consummate a business
transaction with the company against its directors' wishes. Finally,
restrictions imposed by our dealer agreements may impede or prevent any
potential takeover bid. Generally, our franchise agreements allow the
manufacturers the right to terminate the agreements upon a change of control of
our company and impose restrictions upon the transferability of any significant
percentage of our stock to any one person or entity who may be unqualified, as
defined by the manufacturer, to own one of its dealerships. The inability of a
person or entity to qualify with one or more of our manufacturers may prevent
or seriously impede a potential takeover bid. These agreements, corporate
documents and laws, as well as provisions of our lending arrangements creating
an event of default on a change in control, may have the effect of delaying or
preventing a change in control or preventing stockholders from realizing a
premium on the sale of their shares upon an acquisition of Sonic.
NEW ACCOUNTING PRONOUNCEMENTS COULD AFFECT FUTURE EARNINGS.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141: Business
Combinations. SFAS 141 prohibits the pooling-of-interests method of accounting
and requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001. In addition, SFAS 141 provides
additional guidance regarding the measurement and recognition of goodwill and
other acquired intangible assets. The provisions of this standard became
effective beginning July 1, 2001. For acquisitions after this date, we are
required to classify certain intangible assets, such as franchise rights
granted from automobile manufacturers, as intangible assets apart from
goodwill. We are still in the process of obtaining data necessary to complete
the allocation of the purchase price of our recent acquisitions, including the
calculation of any franchise rights, if any, we may need to recognize.
In June 2001, the FASB also issued SFAS 142: Goodwill and Other
Intangible Assets. Among other things, SFAS 142 no longer permits the
amortization of goodwill, but requires that the carrying amount of goodwill be
reviewed and reduced against operations if it is found to be impaired. This
review must be performed on at least an annual basis (with an initial review
within six months of adopting the new standard), but must also be performed
upon the occurrence of an event or circumstance that indicates a possible
reduction in value. SFAS
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142 does require the amortization of intangible assets other than goodwill over
their useful economic lives, unless the useful economic life is determined to
be indefinite. Intangible assets determined to have a finite life are required
to be reviewed for impairment in accordance with SFAS 144: Accounting for
Impairment or Disposal of Long-Lived Assets. Intangible assets that are
determined to have an indefinite economic life are not amortized and must be
reviewed for impairment in accordance with the terms of SFAS 142. The
provisions of SFAS 142 became effective for us beginning January 1, 2002;
however, goodwill and other intangible assets determined to have an indefinite
useful life acquired in business combinations completed after June 30, 2001
have not been amortized. The initial review for impairment must be completed by
June 30, 2002. We are in the process of completing that analysis and have not
yet determined its full impact on our consolidated financial statements.
The cumulative gross goodwill balance was approximately $785.2 million at
December 31, 2001 and approximately $697.8 million at December 31, 2000.
Goodwill, net of accumulated amortization, represented 40.9% of total assets at
December 31, 2001 and 37.4% at December 31, 2000. Net goodwill represented
142.7% of stockholders' equity at December 31, 2001 and 148.3% at December 31,
2000. Goodwill amortization expense was approximately $18.3 million for the
year ending December 31, 2001 and approximately $16.8 million for the year
ending December 31, 2000.
On January 1, 2002, we adopted SFAS No. 144: Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes a single
accounting and disclosure model for assets to be disposed of by sale whether
previously held and used or newly acquired. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. Under the provisions of SFAS
No. 144, assets and liabilities held for sale are required to be shown
separately in the balance sheet. Results of operations of a component of an
entity that has been disposed or is classified as held for sale are now
required to be reported in discontinued operations in the statement of income.
The adoption of SFAS No. 144 did not have a material impact on our consolidated
financial statements.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table shows our ratio of earnings to fixed charges for the
periods indicated.
YEARS ENDED DECEMBER 31
------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges 3.3 3.0 3.4 3.3 4.1
For purposes of these calculations, "earnings" consist of income from
operations before income taxes, fixed charges and amortization of capitalized
interest, less capitalized interest. "Fixed charges" consist of interest on all
indebtedness, capitalized interest, amortization of bond discounts, and the
portion of rental expense considered to be representative of the interest
factor.
USE OF PROCEEDS
The net proceeds to Sonic from the sale of the notes, after deducting
estimated offering expenses and the initial purchasers' discounts, are
estimated to be approximately $ million, or $ million if the
underwriters exercise their overallotment option in full. We expect to apply
the net proceeds from the offering to repay a portion of the amounts
outstanding under our revolving credit facility, which may be reborrowed and
utilized for general corporate purposes, including acquisitions.
The amounts outstanding under our revolving credit facility bear interest
at 2.50% above the one-month LIBOR as quoted in the WALL STREET JOURNAL. As of
March 31, 2002, there was approximately $405.5 million outstanding thereunder.
Amounts borrowed under our revolving credit facility were used to finance prior
acquisitions and for general corporate purposes.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2002,
(1) on an actual basis and (2) as adjusted for the offering and the application
of the net proceeds therefrom. See "Use of Proceeds" above.
AS OF MARCH 31, 2002
---------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Cash and cash equivalents.............................................. $ 123,737 $ 123,737
========== ==========
Short-term debt(a)..................................................... $ 2,275 $ 2,275
========== ==========
Long-term debt:
Revolving Facility(b)............................................... $ 405,465 $ 279,540
11% Senior Subordinated Notes due 2008, net of unamortized discount. 195,797 195,797
% Convertible Senior Subordinated Notes due 2009.................. -- 130,000(c)
Subordinated Smith Loan............................................. 5,500 5,500
Other debt, less current maturities of $2.3 million................. 19,430 19,430
---------- ----------
Total long-term debt............................................ 626,192 630,267
---------- ----------
Stockholders' equity(d)................................................ 579,764 579,764
---------- ----------
Total capitalization............................................ $1,205,956 $1,210,031
========== ==========
- --------
(a)Excludes $797.6 million of short-term notes payable-floor plan.
(b)As adjusted, Sonic estimates that it would have had approximately $233.7
million of availability under the Revolving Facility based on a borrowing
base calculated on the basis of our receivables, inventory and equipment and
a pledge of certain additional collateral by an affiliate of Sonic and
subject to the satisfaction of conditions for future advances.
(c)Does not reflect the discount to the underwriters.
(d)Includes Class A common stock, $.01 par value, 100,000,000 shares
authorized, 36,719,905 shares issued and 30,304,641 shares outstanding;
Class B common stock, $.01 par value, 30,000,000 shares authorized,
12,029,375 shares issued and outstanding; and preferred stock, $.10 par
value, 3,000,000 shares authorized, no shares issued and outstanding.
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DESCRIPTION OF NOTES
We will issue the notes pursuant to the indenture dated as of May ,
2002, between us and U.S. Bank Trust National Association, as trustee. We refer
to the indenture, as it may be supplemented from time to time, as the
"Indenture." The terms of the notes include those stated in the Indenture and
those made a part of the Indenture by reference to the Trust Indenture Act of
1939, as amended. For definitions of certain capitalized terms used in this
Description of Notes, see "--Certain Definitions."
The following summary does not purport to be complete, and is subject to,
and is qualified in its entirety by reference to, all of the provisions of the
notes and the Indenture. We urge you to read the Indenture and the form of the
notes, which you may obtain from us upon request and will be filed with the
Securities and Exchange Commission. As used in this description, all references
to "Sonic," "our Company" or to "we," "us" or "our" mean Sonic Automotive,
Inc., excluding, unless otherwise expressly stated or the context otherwise
requires, its subsidiaries.
GENERAL
The notes:
. will be issued only in registered form without coupons in denominations
of $1,000 and any integral multiple of $1,000 above that amount;
. will be limited to $130,000,000 aggregate principal amount, plus up to
$19,500,000 aggregate principal amount issuable upon exercise of the
over-allotment option;
. will mature on May , 2009; and
. will accrue interest at a rate of % per year from May , 2002
payable semiannually in arrears on May and November of each year,
beginning November , 2002.
Interest will be paid to the person in whose name a note is registered at
the close of business on May or November , as the case may be, immediately
preceding the relevant interest payment date. Interest on the notes will be
computed on the basis of a 360-day year composed of twelve 30-day months.
Interest will cease to accrue on a note upon its maturity, conversion,
redemption or repurchase by us upon a Change in Control on the terms and
subject to the conditions specified in the Indenture.
If any interest payment date, maturity date, redemption date or purchase
date of a note falls on a day that is not a business day, the required payment
of principal and interest will be made on the next succeeding business day as
if made on the date that the payment was due and no interest will accrue on
that payment for the period from and after that interest payment date, maturity
date, redemption date or purchase date, as the case may be, to the date of that
payment on the next succeeding business day.
The notes are redeemable prior to maturity only on or after May , 2005,
as described below under "--Redemption of Notes at Our Option," and do not have
the benefit of a sinking fund. Principal of and interest on the notes will be
payable at the office of the paying agent, which initially will be an office or
agency of the trustee, or an office or agency maintained for such purpose, in
the Borough of Manhattan, The City of New York. If certain conditions have been
satisfied, the notes may be presented for conversion at the office of the
conversion agent, and for registration of transfer or exchange at the office of
the registrar, each such agent initially being the trustee. No service charge
will be made for any registration of transfer or exchange of notes, but we may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
Maturity, conversion, purchase by us at the option of a holder or
redemption of a note will cause interest to cease to accrue on such note. We
may not reissue a note that has matured or been converted, purchased by us
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at the option of a holder, redeemed or otherwise cancelled, except for
registration of transfer, exchange or replacement of such note.
ISSUANCE AND METHODS OF RECEIVING PAYMENTS ON THE NOTES
Principal of, premium, if any, and interest on the notes will be payable,
and the notes will be exchangeable and transferable, at the office or agency of
the Company in The City of New York maintained for such purposes (which
initially will be the corporate trust office of the trustee); PROVIDED,
HOWEVER, that payment of interest may be made at the option of the Company by
check mailed to the Person entitled thereto as shown on the security register.
The notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple thereof.
RANKING OF NOTES
GENERAL
The payment of the principal of, premium, if any, and interest on, the
notes will be subordinated, as set forth in the Indenture, in right of payment,
to the prior payment in full of all Senior Indebtedness. The notes will be
senior subordinated indebtedness of the Company ranking PARI PASSU with all
other existing and future senior subordinated indebtedness of the Company and
senior to all existing and future Subordinated Indebtedness of the Company.
None of our subsidiaries will guarantee our obligations under the Indenture. As
a result, the notes will be effectively subordinated to the indebtedness and
other liabilities of our subsidiaries.
PAYMENT STOPPAGES
Upon the occurrence of any default in the payment of any Designated
Senior Indebtedness beyond any applicable grace period and after the receipt by
the trustee from a representative of holders of any Designated Senior
Indebtedness (collectively, a "Senior Representative") of written notice of
such default, no payment or distribution of any assets of the Company or any
Subsidiary of any kind or character (excluding certain permitted equity
interests or subordinated securities) may be made on account of the principal
of, premium, if any, or interest on, the notes or on account of the purchase,
redemption or other acquisition of or in respect of, the notes unless and until
such default shall have been cured or waived or shall have ceased to exist or
such Designated Senior Indebtedness shall have been discharged or paid in full
after which the Company shall resume making any and all required payments in
respect of the notes, including any missed payments.
Upon the occurrence and during the continuance of any non-payment default
with respect to any Designated Senior Indebtedness pursuant to which the
maturity thereof may then be accelerated immediately (a "Non-payment Default")
and after the receipt by the trustee and the Company from a Senior
Representative of written notice of such Non-payment Default, no payment or
distribution of any assets of the Company of any kind or character (excluding
certain permitted equity interests or subordinated securities) may be made by
the Company or any Subsidiary on account of the principal of, premium, if any,
or interest on, the notes or on account of the purchase, redemption or other
acquisition of, or in respect of, the notes for the period specified below (the
"Payment Blockage Period"). The Payment Blockage Period shall commence upon the
receipt of notice of the Non-payment Default by the trustee and the Company
from a Senior Representative and shall end on the earliest of:
(i) the 179th day after such commencement;
(ii) the date on which such Non-payment Default (and all other
Non-payment Defaults as to which notice is given after such Payment
Blockage Period is initiated) is cured, waived or ceases to exist or
on which such Designated Senior Indebtedness is discharged or paid
in full; or
(iii)the date on which such Payment Blockage Period (and all Non-payment
Defaults as to which notice is given after such Payment Blockage
Period is initiated) shall have been terminated by
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written notice to the Company or the trustee from the Senior
Representative initiating such Payment Blockage Period.
After the occurrence of any of the dates set forth in clauses (i), (ii)
or (iii), we will promptly resume making any and all required payments in
respect of the notes, including any missed payments. In no event will a Payment
Blockage Period extend beyond 179 days from the date of the receipt by the
Company and the trustee of the notice initiating such Payment Blockage Period
(such 179-day period referred to as the "Initial Period "). Any number of
notices of Non-payment Defaults may be given during the Initial Period;
PROVIDED that during any period of 365 consecutive days only one Payment
Blockage Period, during which payment of principal of, premium, if any, or
interest on, the notes may not be made, may commence and the duration of such
period may not exceed 179 days. No Non-payment Default with respect to
Designated Senior Indebtedness that existed or was continuing on the date of
the commencement of any Payment Blockage Period will be, or can be, made the
basis for the commencement of a second Payment Blockage Period, whether or not
within a period of 365 consecutive days, unless such default has been cured or
waived for a period of not less than 90 consecutive days.
If the Company fails to make any payment on the notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the notes to accelerate the
maturity thereof. See "--Events of Default, Waiver and Notice."
The Indenture will provide that in the event of any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding in connection therewith, relative to the
Company or its assets, or liquidation, dissolution or other winding up of the
Company, whether voluntary or involuntary, or whether or not involving
insolvency or bankruptcy, or any assignment for the benefit of creditors or
other marshaling of assets or liabilities of the Company, all Senior
Indebtedness must be paid in full before any payment or distribution (excluding
distributions of certain permitted equity interests or subordinated securities)
is made on account of the principal of, premium, if any, or interest on the
notes or on account of the purchase, redemption, defeasance or other
acquisition of or in respect of the notes.
LIQUIDATION/INSOLVENCY
By reason of such subordination, in the event of liquidation or
insolvency, our creditors who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the notes. Funds which would be otherwise
payable to the holders of the notes will be paid to the holders of such
Indebtedness to the extent necessary to pay such Indebtedness in full and we
may be unable to meet our obligations fully with respect to the notes.
RELATED DEFINITIONS
"Senior Indebtedness" means the principal of, premium, if any, and
interest (including interest, to the extent allowable, accruing after the
filing of a petition initiating any proceeding under any state, federal or
foreign bankruptcy law) on any Indebtedness of the Company (other than as
otherwise provided in this definition), whether outstanding on the Issue Date
or thereafter created, incurred or assumed, and whether at any time owing,
actually or contingent, unless, in the case of any particular Indebtedness, the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Indebtedness shall not be senior in
right of payment to the notes. Notwithstanding the foregoing, "Senior
Indebtedness" shall (x) include the Floor Plan Facility and the Revolving
Facility to the extent the Company is a party to them and (y) not include
(i) Indebtedness evidenced by the Outstanding Notes;
(ii) Indebtedness that is subordinate or junior in right of payment to
any Indebtedness of the Company;
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(iii)Indebtedness which when incurred and without respect to any election
under Section 1111(b) of Title 11 United States Code, is without
recourse to the Company;
(iv) Indebtedness which is represented by Redeemable Capital Stock;
(v) any liability for foreign, federal, state, local or other taxes owed
or owing by the Company to the extent such liability constitutes
Indebtedness;
(vi) Indebtedness of the Company to a Subsidiary or any other Affiliate
of the Company or any of such Affiliate's Subsidiaries;
(vii)to the extent it might constitute Indebtedness, amounts owing for
goods, materials or services purchased in the ordinary course of
business or consisting of trade accounts payable owed or owing by
the Company, and amounts owed by the Company for compensation to
employees or services rendered to the Company;
(viii)that portion of any Indebtedness which at the time of issuance is
issued in violation of the Indenture; and
(ix) Indebtedness evidenced by any guarantee of any Subordinated
Indebtedness or Pari Passu Indebtedness.
"Designated Senior Indebtedness" means (i) all Senior Indebtedness under
the Floor Plan Facility or the Revolving Facility and (ii) any other Senior
Indebtedness which at the time of determination has an aggregate principal
amount outstanding of at least $25 million and which is specifically designated
in the instrument evidencing such Senior Indebtedness or the agreement under
which such Senior Indebtedness arises as "Designated Senior Indebtedness" by
the Company.
CONVERSION RIGHTS
A holder may convert notes, in multiples of $1,000 principal amount, into
Class A common stock only if at least one of the conditions described below is
satisfied. In addition, a holder may convert notes only until the close of
business on the second business day prior to the redemption date if we call a
note for redemption. A note for which a holder has delivered a purchase notice
or a Change in Control purchase notice requiring us to purchase the note may be
surrendered for conversion only if such notice is not withdrawn in accordance
with the Indenture.
The initial conversion rate is shares of Class A common stock per
$1,000 principal amount of notes, subject to adjustment upon the occurrence of
certain events described below. A holder of a note otherwise entitled to a
fractional share will receive cash equal to the applicable portion of the then
current sale price of our Class A common stock on the trading day immediately
preceding the conversion date. Upon a conversion, we will have the option to
deliver cash or a combination of cash and shares of our Class A common stock as
described below. The ability to surrender notes for conversion will expire at
the close of business on May , 2009.
To convert a note into shares of Class A common stock, a holder must:
. complete and manually sign a conversion notice, a form of which is on
the back of the note, and deliver the conversion notice to the
conversion agent;
. surrender the note to the conversion agent;
. if required by the conversion agent, the trustee or Sonic furnish
appropriate endorsements and transfer documents; and
. if required, pay all transfer or similar taxes.
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On conversion of a note, a holder will not receive any cash payment of
interest representing accrued and unpaid interest, except as described below.
Delivery to the holder of the full number of shares of Class A common stock
into which the note is convertible, together with any cash payment of such
holder's fractional shares, will be deemed:
. to satisfy our obligation to pay the principal amount at maturity of
the note; and
. to satisfy our obligation to pay accrued and unpaid interest
attributable to the period from the date of the most recent interest
payment through the conversion date.
As a result, accrued and unpaid interest is deemed paid in full rather
than cancelled, extinguished or forfeited. Notwithstanding the foregoing,
accrued and unpaid interest, if any, will be payable upon any conversion of
notes at the option of the holder made concurrently with or after acceleration
of the notes following an event of default described under "--Events of
Default; Waiver and Notice" below. Holders of notes surrendered for conversion
during the period from the close of business on any regular record date next
preceding any interest payment date to the opening of business of such interest
payment date will receive the semiannual interest payable on such notes on the
corresponding interest payment date notwithstanding the conversion and such
notes (except notes called for redemption) upon surrender must be accompanied
by funds equal to the amount of semiannual interest payable on the principal
amount of notes so converted.
The conversion rate will not be adjusted for accrued and unpaid interest.
A certificate for the number of full shares of Class A common stock into which
any note is converted, together with any cash payment for fractional shares,
will be delivered through the conversion agent as soon as practicable following
the conversion date. For a discussion of the tax treatment of a holder
receiving shares of our Class A common stock upon surrendering notes for
conversion, see "Certain United States Tax Considerations--U.S.
Holders--Conversion of Notes into Class A Common Stock."
In lieu of delivery of shares of our Class A common stock upon notice of
conversion of any notes (for all or any portion of the notes), we may elect to
pay holders surrendering notes an amount in cash per note (or a portion of a
note) equal to the average sale price of our Class A common stock for the five
consecutive trading days immediately following either (a) the date of our
notice of our election to deliver cash as described below if we have not given
notice of redemption, or (b) the conversion date, in the case of conversion
following our notice of redemption specifying that we intend to deliver cash
upon conversion, in either case multiplied by the conversion rate in effect on
that date. We will inform the holders through the trustee no later than two
business days following the receipt of a conversion notice of our election to
deliver shares of our Class A common stock or to pay cash in lieu of delivery
of the shares, unless we have already informed holders of our election in
connection with our optional redemption of the notes as described under
"--Redemption of Notes at our Option." If we elect to deliver all of such
payment in shares of our Class A common stock, the shares will be delivered
through the conversion agent no later than the fifth business day following the
conversion date. If we elect to pay all or a portion of such payment in cash,
the payment, including any delivery of our Class A common stock, will be made
to holders surrendering notes no later than the tenth business day following
the applicable conversion date. If an event of default, as described under
"--Events of Default; Waiver and Notice" below (other than a default in a cash
payment upon conversion of the notes), has occurred and is continuing, we may
not pay cash upon conversion of any notes or portion of a note (other than cash
for fractional shares).
We will adjust the conversion rate for:
(1) dividends or distributions on our Class A common stock payable in
our Class A common stock or other Capital Stock of Sonic;
(2) subdivisions, combinations or certain reclassifications of our Class
A common stock;
(3) distributions to all holders of our Class A common stock of certain
rights to purchase our Class A common stock for a period expiring
within 60 days of issuance at less than the then current sale price;
and
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(4) distributions to the holders of our Class A common stock of a
portion of our assets (including shares of capital stock of a
subsidiary) or debt securities issued by us or certain rights to
purchase our securities (excluding cash dividends or other cash
distributions from current or retained earnings unless the
annualized amount thereof per share exceeds 5% of the sale price of
our Class A common stock on the day preceding the date of
declaration of such dividend or other distribution).
However, no adjustment to the conversion rate need be made if holders of the
notes may participate in the transaction without conversion or in certain other
cases.
If we pay a dividend or make a distribution on shares of our Class A
common stock consisting of capital stock of, or similar equity interests in, a
subsidiary or other business unit of ours, the conversion rate will be adjusted
based on the market value of the securities so distributed relative to the
market value of our Class A common stock, in each case based on the average
sale prices of those securities for the 10 trading days commencing on and
including the fifth trading day after the date on which "ex-dividend trading"
commences for such dividend or distribution on the New York Stock Exchange or
such other national or regional exchange or market on which the securities are
then listed or quoted.
If we elect to make a distribution to all holders of shares of our Class
A common stock pursuant to clause (3) or clause (4) of the second preceding
paragraph, which, in the case of clause (4), has a per share value equal to
more than 15% of the sale price of our shares of Class A common stock on the
day preceding the declaration date for such distribution, we will be required
to give notice to the holders of notes at least 20 days prior to the date for
such distribution and, upon the giving of such notice, the notes may be
surrendered for conversion at any time until the close of business on the
business day prior to the date of distribution or until we announce that such
distribution will not take place.
In addition, the Indenture provides that upon conversion of the notes,
the holders of such notes will receive, in addition to the shares of Class A
common stock issuable upon such conversion, the rights related to such Class A
common stock pursuant to any future stockholder rights plan, whether or not
such rights have separated from the Class A common stock at the time of such
conversion. However, there shall not be any adjustment to the conversion
privilege or conversion rate as a result of:
. the issuance of the rights;
. the distribution of separate certificates representing the rights;
. the exercise or redemption of such rights in accordance with any rights
agreement; or
. the termination or invalidation of the rights.
The Indenture permits us to increase the conversion rate from time to
time. Holders of the notes may, in certain circumstances, be deemed to have
received a distribution subject to United States federal income tax as a
dividend upon:
. a taxable distribution to holders of Class A common stock which results
in an adjustment of the conversion rate;
. an increase in the conversion rate at our discretion; or
. failure to adjust the conversion rate in some instances.
See "Certain United States Tax Considerations--U.S. Holders--Constructive
Dividends."
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If we are a party to a consolidation, merger or binding share exchange or
a transfer of all or substantially all of our assets, the right to convert a
note into Class A common stock may be changed into a right to convert it into
the kind and amount of securities, cash or other assets of Sonic or another
Person which the holder would have received if the holder had converted the
holder's note immediately prior to the transaction.
The conversion agent will, on our behalf, determine if the notes are
convertible and notify the trustee and us accordingly. If one or more of the
conditions to the conversion of the notes has been satisfied, we will promptly
notify the holders of the notes thereof and use our reasonable best efforts to
post this information on our website or otherwise publicly disclose this
information.
CONVERSION BASED ON CLASS A COMMON STOCK PRICE. Holders may surrender
notes for conversion into our shares of Class A common stock in any fiscal
quarter commencing after June 30, 2002 if, as of the last day of the preceding
fiscal quarter, the sale price of our Class A common stock for at least 20
trading days in a period of 30 consecutive trading days ending on the last
trading day of such preceding fiscal quarter is more than 110% of the
conversion price per share of Class A common stock on the last day of such
preceding fiscal quarter. If the foregoing condition is satisfied, then the
notes will be convertible at any time at the option of the holder, through
maturity. Upon a conversion, we will have the right to deliver cash or a
combination of cash and Class A common stock, as described above.
The conversion price per share will initially equal $ . Upon
adjustment to the conversion rate, the conversion price shall be adjusted to
equal $1,000 divided by the conversion rate and rounded to the nearest cent.
The sale price of our Class A common stock on any trading day means the closing
per share sale price (or if no closing sale price is reported, the average of
the bid and ask prices or, if more than one in either case, the average of the
average bid and the average ask prices) on such date on the principal national
securities exchange on which the Class A common stock is listed or, if our
Class A common stock is not listed on a national securities exchange, as
reported by the Nasdaq System or otherwise as provided in the Indenture.
CONVERSION BASED ON TRADING PRICE OF THE NOTES. On or before May ,
2007, a holder also may convert his notes into shares of our Class A common
stock at any time after a 10 consecutive trading-day period in which the
average of the trading prices for the notes for that 10 trading-day period was
less than 103% of the average conversion value for the notes during that
period. The conversion value of a note is equal to the product of the closing
sale price for shares of our Class A common stock on a given day multiplied by
the then current conversion rate, which is the number of shares of Class A
common stock into which each $1,000 principal amount of notes is then
convertible. The trading price of the notes on any date of determination is the
average of the secondary market bid quotations per note obtained by us or the
calculation agent for $2,500,000 principal amount of notes at approximately
3:30 p.m., New York City time, on such determination date from two independent
nationally recognized securities dealers we select, provided that if at least
two such bids cannot reasonably be obtained by us or the calculation agent, but
one such bid is obtained, then this one bid shall be used.
CONVERSION BASED ON REDEMPTION. A holder may surrender for conversion a
note called for redemption at any time prior to the close of business on the
second business day immediately preceding the redemption date, even if it is
not otherwise convertible at such time. A note for which a holder has delivered
a change in control purchase notice, as described below, requiring us to
purchase such note may be surrendered for conversion only if such notice is
withdrawn in accordance with the Indenture.
A "business day" is any Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions or trust companies in The City
of New York or the city in which the Corporate Trust Office of the Trustee is
located are authorized or obligated by law, regulation or executive order to
close. A "trading day" is any day on which the NYSE is open for trading or, if
the applicable security is quoted on the Nasdaq National Market, a day on which
trades may be made on such market or, if the applicable security is not so
listed, admitted for trading or quoted, any business day.
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CONVERSION UPON CERTAIN DISTRIBUTIONS BY THE COMPANY. In the event that
we declare certain types of dividends or distributions described in the
Indenture where, the fair market value, per share, of such dividend or
distribution per share of our Class A common stock, as determined in the
Indenture, exceeds 15% of the Sale Price of our Class A common stock on the
Business Day immediately preceding the date of declaration for such dividend or
distribution, the notes may be surrendered for conversion beginning on the date
we give notice to the holders of such right, which shall not be less than 20
days prior to the Ex-Dividend Time for such dividend or distribution, and notes
may be surrendered for conversion at any time thereafter until the close of
business on the business day prior to the Ex-Dividend Time or until we announce
that such dividend or distribution will not take place.
CONVERSION UPON OCCURRENCE OF CERTAIN CORPORATE TRANSACTIONS. If we are
party to a consolidation, merger or binding share exchange or a transfer of all
or substantially all of our assets, a note may be surrendered for conversion at
any time from and after the date which is 15 days prior to the anticipated
effective date of the transaction until 15 days after the actual effective date
of such transaction and, at the effective date, the right to convert a note
into Class A common stock will be changed into a right to convert it into the
kind and amount of securities, cash or other assets of Sonic or another person
which the holder would have received if the holder had converted the holder's
notes immediately prior to the transaction. If such transaction also
constitutes a change in control of Sonic, the holder will be able to require us
to purchase all or a portion of such holder's notes as described under
"--Change in Control Permits Purchase of Notes by Us at the Option of the
Holder."
The notes will also be convertible upon the occurrence of certain
distributions resulting in an adjustment to the conversion price as described
above.
REDEMPTION OF NOTES AT OUR OPTION
We may redeem the notes in whole or from time to time in part on or after
May , 2005, on at least 30 days', and no more than 60 days', notice at the
following redemption prices expressed as percentages of the principal amount:
PERIOD REDEMPTION PRICE
- ------ ----------------
Beginning on and ending on ........... %
Beginning on and ending on ........... %
Beginning on and ending on ........... %
Beginning on and thereafter................ %
In each case, we will pay accrued and unpaid interest to, but excluding,
the redemption date. If the redemption date is an interest payment date,
interest will be paid to the record holder on the relevant record date. If
fewer than all of the notes are to be redeemed, the trustee will select the
notes to be redeemed by lot, or in its discretion, on a pro rata basis. If any
note is to be redeemed in part only, a new note in principal amount equal to
the unredeemed principal portion will be issued. If a portion of your notes is
selected for partial redemption and you convert a portion of your notes, the
converted portion will be deemed to be of the portion selected for redemption.
No sinking fund is provided for the notes.
CHANGE IN CONTROL PERMITS PURCHASE OF NOTES BY US AT THE OPTION OF THE HOLDER
In the event of a Change in Control, each holder will have the right, at
the holder's option, subject to the terms and conditions of the Indenture, to
require us to purchase for cash all or any portion of the holder's notes.
However, the principal amount at maturity submitted for purchase by a holder
must be $1,000 or an integral multiple of $1,000.
We will be required to purchase the notes as of a date no later than 30
business days after the occurrence of such change in control at a cash price
equal to 100% of the principal amount of the notes to be purchased plus accrued
and unpaid cash interest, if any, on such note to, but excluding, such date of
purchase.
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Within 30 days after the occurrence of a Change in Control, we are
obligated to mail to the trustee and to all holders of notes at their addresses
shown in the register of the registrar and to beneficial owners as required by
applicable law a notice regarding the Change in Control, which notice shall
state, among other things:
. the events causing a Change in Control;
. the date of such Change in Control;
. the last date on which the purchase right may be exercised;
. the Change in Control purchase price;
. the Change in Control purchase date;
. the name and address of the paying agent and the conversion agent;
. the conversion rate and any adjustments to the conversion rate
resulting from such Change in Control;
. that notes with respect to which a change in control purchase notice is
given by the holder may be converted only if the change in control
purchase notice has been withdrawn in accordance with the terms of the
Indenture; and
. the procedures that holders must follow to exercise these rights.
To exercise this right, the holder must deliver a written notice to the
paying agent prior to the close of business on the business day prior to the
change in control purchase date. The required purchase notice upon a Change in
Control shall state:
. if certificated notes have been issued, the certificate numbers of the
notes to be delivered by the holder;
. the portion of the principal amount at maturity of notes to be
purchased, which portion must be $1,000 or an integral multiple of
$1,000; and
. that we are to purchase such notes pursuant to the applicable
provisions of the notes.
Any such change in control purchase notice may be withdrawn by the holder
by a written notice of withdrawal delivered to the paying agent prior to the
close of business on the business day prior to the Change in Control purchase
date.
The notice of withdrawal shall state:
. the name of the holder;
. if certificated notes have been issued, the certificate number of the
note in respect of which such notice of withdrawal is being submitted;
. the principal amount of the note (which shall be $1,000 or an integral
multiple thereof) delivered for purchase by the holder as to which such
notice of withdrawal is being submitted;
. a statement that such holder is withdrawing his election to have such
principal amount of such note purchased; and
. the principal amount, if any, of such note (which shall be $1,000 or an
integral multiple thereof) that remains subject to the original Change
in Control purchase notice and that has been or will be delivered for
purchase by us.
Payment of the change in control purchase price for a note for which a
Change in Control purchase notice has been delivered and not validly withdrawn
is conditioned upon delivery of the note (or book-entry
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transfer), together with necessary endorsements, to the paying agent at any
time prior to or on the Change of Control purchase date. Payment of this Change
in Control purchase price for such note will be made promptly following the
later of the Change in Control purchase date or the satisfaction of such
conditions.
If the paying agent holds money sufficient to pay the Change in Control
purchase price of the note on the business day following the Change in Control
purchase date in accordance with the terms of the Indenture, then immediately
after the Change in Control purchase date, interest on the note will cease to
accrue, whether or not the note is delivered to the paying agent. Thereafter,
all other rights of the holder shall terminate, other than the right to receive
the Change in Control purchase price upon delivery of the note.
Under the Indenture, a "Change in Control" of Sonic is deemed to have
occurred upon the occurrence of any of the following:
. the sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of our and our subsidiaries'
assets, taken as a whole, to any Person or group;
. the adoption of a plan relating to our liquidation or dissolution;
. the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any person or
group (as such terms are used in Section 13(d) and 14(d) of the
Exchange Act), other than the Permitted Holders, becomes the beneficial
owner, directly or indirectly, of more than 50% of the voting power of
our outstanding Voting Stock;
. the occurrence of any "going private transaction" with respect to the
Class A common stock under Rule 13e-3 of the Securities Act;
. any person or group acquires in one or more transactions an amount of
Class A common stock which is at the time great enough to result in the
Class A common stock being delisted from the principal United States
national securities exchange (or the Nadsdaq National Market) on which
the shares are then listed; or
. the first day on which more than a majority of the members of our board
of directors are not continuing directors.
"Continuing directors" means any member of our board of directors who:
(i)was a member of our board of directors on the date of original
issuance of the notes; or
(ii)was nominated for election to our board of directors with the
approval of, or whose election to our board of directors was ratified
by, at least a majority of the continuing directors who were members
of our board of directors at the time of such nomination or election.
"Permitted Holders" means:
(i) Mr. O. Bruton Smith or Mr. William S. Egan and their respective
guardians, conservators, committees, or attorneys-in-fact;
(ii) lineal descendants of Mr. Smith or Mr. Egan (in either case, a
"Descendant") and their respective guardians, conservators,
committees or attorneys-in-fact; and
(iii)each "Family Controlled Entity," as defined herein. The term "Family
Controlled Entity" means
(a) any not-for-profit corporation if at least 80% of its board of
directors is composed of Mr. Smith, Mr. Egan and/or
Descendants;
(b) any other corporation if at least 80% of the value of its
outstanding equity is owned by a Permitted Holder;
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(c) any partnership if at least 80% of the value of the
partnership interests are owned by a Permitted Holder;
(d) any limited liability or similar Company if at least 80% of
the value of the Company is owned by a Permitted Holder; and
(e) any trusts created for the benefit of any of the persons
listed in clauses (i) or (ii) of this definition.
The Indenture does not permit our board of directors to waive our
obligation to purchase notes at the option of holders in the event of a Change
in Control.
In connection with any purchase offer in the event of a Change in
Control, we will:
. comply with the provisions of Rule 13e-4, Rule 14e-1 and any other
tender offer rules under the Exchange Act which may then be applicable;
and
. file Schedule TO or any other required schedule under the Exchange Act.
The Change in Control purchase feature of the notes may, in certain
circumstances, make more difficult or discourage a takeover of Sonic. The
Change in Control purchase feature, however, is not the result of our knowledge
of any specific effort:
. to accumulate shares of our Class A common stock;
. to obtain control of us by means of a merger, tender offer,
solicitation or otherwise; or
. part of a plan by management to adopt a series of anti-takeover
provisions.
Instead, the Change in Control purchase feature is a standard term
contained in other offerings of securities similar to the notes that have been
marketed by the underwriters. The terms of the Change in Control purchase
feature resulted from negotiations between the underwriters and us.
No notes may be purchased at the option of holders upon a Change in
Control if there has occurred and is continuing an event of default with
respect to the notes, other than a default in the payment of the Change in
Control purchase price with respect to the notes.
STIPULATIONS
If the event of a Change in Control, there can be no assurance that we
will have available funds sufficient or be able to obtain financing to pay the
Change in Control purchase price for all or any of the notes that might be
delivered by holders of the notes seeking to accept the Change in Control
offer. See "-- Ranking of Notes." The failure of the Company to make or
consummate the Change in Control offer or pay the Change in Control purchase
price when due will give the trustee and the holders of the notes the rights
described under "-- Events of Default; Waiver and Notice."
In addition to the obligations of the Company under the Indenture with
respect to the notes in the event of a Change in Control, all of the Company's
Indebtedness under our revolving credit facility, floor plan facilities and the
construction/mortgage facility also contain an event of default upon a Change
in Control as defined therein which obligates the Company to repay amounts
outstanding under such indebtedness upon an acceleration of the Indebtedness
issued thereunder. In addition, a Change in Control could result in a
termination or nonrenewal of one or more of the Company's franchise agreements
or its agreements with the Manufacturers.
The term "all or substantially all" as used in the definition of "Change
in Control" has not been interpreted under New York law, the governing law of
the Indenture, to represent a specific quantitative test. As a
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consequence, in the event the holders of the notes elected to exercise their
rights under the Indenture and the Company elected to contest such election,
there could be no assurance as to how a court interpreting New York law would
interpret the phrase.
The provisions of the Indenture will not afford holders of the notes the
right to require the Company to repurchase the notes in the event of a highly
leveraged transaction or certain transactions with the Company's management or
its Affiliates, including a reorganization, restructuring, merger or similar
transaction (including, in certain circumstances, an acquisition of the Company
by management or its Affiliates) involving the Company that may adversely
affect holders of the notes, unless such transaction is a transaction defined
as a Change in Control. A transaction involving the Company's management or its
Affiliates, or a transaction involving a recapitalization of the Company, will
result in a Change in Control only if it is the type of transaction specified
by such definition.
We could, in the future, enter into certain transactions, including
certain recapitalizations, that would not constitute a Change in Control with
respect to the Change in Control purchase feature of the notes but that would
increase the amount of our (or our subsidiaries') outstanding indebtedness.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
We will not, in a single transaction or through a series of related
transactions, (1) consolidate with or merge with or into any other Person; (2)
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of our properties and assets to any Person or group of
Persons; or (3) permit any of our Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposition of all or substantially all of our
properties and assets and those of our Subsidiaries on a Consolidated basis to
any other Person or group of Persons, unless at the time and after giving
effect thereto:
(i) either (a) the Company will be the continuing corporation (in the
case of a consolidation or merger involving the Company) or (b) the
Person (if other than the Company) formed by such consolidation or
into which the Company is merged or the Person which acquires by
sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and
our Subsidiaries on a Consolidated basis (the "Surviving Entity")
will be a corporation duly organized and validly existing under the
laws of the United States of America, any state thereof or the
District of Columbia and such Person expressly assumes, by a
supplemental indenture, in a form reasonably satisfactory to the
trustee, all the obligations of the Company under the notes and the
Indenture, as the case may be, and the notes and the Indenture will
remain in full force and effect as so supplemented;
(ii) immediately before and immediately after giving effect to such
transaction on a PRO FORMA basis (and treating any Indebtedness not
previously an obligation of the Company or any of our Subsidiaries
which becomes the obligation of the Company or any of our
Subsidiaries as a result of such transaction as having been incurred
at the time of such transaction), no Default or Event of Default
will have occurred and be continuing; and
(iii)at the time of the transaction the Company or the Surviving Entity
will have delivered, or caused to be delivered, to the trustee, in
form and substance reasonably satisfactory to the trustee, an
officers' certificate and an opinion of counsel, each to the effect
that such consolidation, merger, transfer, sale, assignment,
conveyance, transfer, lease or other transaction and the
supplemental indenture in respect thereof comply with the Indenture
and that all conditions precedent therein provided for relating to
such transaction have been complied with.
In case of any such consolidation, merger, conveyance or transfer, the
successor entity will succeed to and be substituted for us as obligor on the
notes, with the same effect as if it had been named in the Indenture as
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our Company. Upon the assumption of our obligations by such corporation in such
circumstances, subject to certain exceptions, we shall be discharged from all
obligations under the notes and the Indenture. Although such transactions are
permitted under the Indenture, certain of the foregoing transactions constitute
a Change in Control of the Company permitting such holder to require us to
purchase the notes of such holder as described above.
EVENTS OF DEFAULT; WAIVER AND NOTICE
An Event of Default will occur under the Indenture if:
(1) there shall be a default in the payment of any interest on any note
when it becomes due and payable, and such default shall continue for a period
of 30 days, whether or not prohibited by the subordination provisions of the
Indenture;
(2) there shall be a default in the payment of the principal of (or
premium, if any, on) any note at its maturity (upon acceleration, conversion,
optional or mandatory redemption if any, required repurchase or otherwise),
whether or not prohibited by the subordination provisions of the Indenture;
(3) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company under the Indenture (other than a
default in the performance, or breach, of a covenant or agreement which
is specifically dealt with in clause (1), (2) or in clause (b), (c) or
(d) of this clause (3)) and such default or breach shall continue for a
period of 60 days after written notice has been given, by certified mail,
(x) to the Company by the trustee or (y) to the Company and the trustee
by the holders of at least 25% in aggregate principal amount of the
outstanding notes;
(b) there shall be a default in the performance or breach of the
provisions described in "--Consolidation, Merger, Sale or Conveyance";
(c) the Company shall have failed to consummate a Change in
Control Offer in accordance with the provisions described in "--Change in
Control Permits Purchase of Notes by Us at the Option of the Holder"; or
(d) there shall be a default by the Company in the performance of
its obligations in accordance with the provisions described in
"--Conversion Rights;"
(4) one or more defaults, individually or in the aggregate, shall have
occurred under any of the agreements, Indentures or instruments under which we
or any of our Subsidiaries then has outstanding Indebtedness in excess of $20
million in principal amount, individually or in the aggregate, and either (a)
such default results from the failure to pay such Indebtedness at its stated
final maturity or (b) such default or defaults resulted in the acceleration of
the maturity of such Indebtedness;
(5) one or more final judgments, orders or decrees (not subject to
appeal) of any court or regulatory or administrative agency for the payment of
money in excess of $20 million, either individually or in the aggregate
(exclusive of any portion of any such payment covered by insurance, if and to
the extent the insurer has acknowledged in writing its liability therefor),
shall be rendered against us or any Significant Subsidiary or any of their
respective properties and shall not be discharged or fully binded and there
shall have been a period of 60 consecutive days during which a stay of
enforcement of such judgment or order, by reason of an appeal or otherwise,
shall not be in effect;
(6) any holder or holders of at least $20 million in aggregate principal
amount of Indebtedness of Sonic or any of our Subsidiaries after a default
under such Indebtedness shall notify the trustee of the intended sale or
disposition of any assets of the Company or any Subsidiary that have been
pledged to or for the benefit of such holder or holders to secure such
Indebtedness or shall commence proceedings, or take any action, including by
way of set-off, to retain in satisfaction of such Indebtedness or to collect
on, seize, dispose of or apply in satisfaction of Indebtedness, assets of Sonic
or any of our Subsidiaries, including funds on deposit or held pursuant to
lock-box and other similar arrangements;
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(7) there shall have been the entry by a court of competent jurisdiction
of (a) a decree or order for relief in respect of the Company or any
Significant Subsidiary in an involuntary case or proceeding under any
applicable Bankruptcy Law or (b) a decree or order:
(i)adjudging Sonic or any Significant Subsidiary bankrupt or
insolvent;
(ii)seeking reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Significant Subsidiary under
any applicable federal or state law;
(iii)appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of Sonic or any
Significant Subsidiary or of any substantial part of their
respective properties; or
(iv)ordering the winding up or liquidation of their respective
affairs, and any such decree or order for relief shall continue
to be in effect, or any such other decree or order shall be
unstayed and in effect, for a period of 60 consecutive days; or
(8) (a) we or any Significant Subsidiary commence a voluntary case or
proceeding under any applicable Bankruptcy Law or any other case or
proceeding to be adjudicated bankrupt or insolvent,
(b) we or any Significant Subsidiary consent to the entry of a
decree or order for relief in respect of the Company or such Significant
Subsidiary in an involuntary case or proceeding under any applicable
Bankruptcy Law or to the commencement of any bankruptcy or insolvency
case or proceeding against it,
(c) we or any Significant Subsidiary file a petition or answer or
consent seeking reorganization or relief under any applicable federal or
state law,
(d) we or any Significant Subsidiary
(i)consent to the filing of such petition or the appointment
of, or taking possession by, a custodian, receiver,
liquidator, assignee, trustee, sequestrator or similar
official of the Company or such Significant Subsidiary or
of any substantial part of their respective properties,
(ii)make an assignment for the benefit of creditors, or
(iii)admit in writing its inability to pay its debts generally
as they become due; or
(e) we or any Significant Subsidiary take any corporate action in
furtherance of any such actions in this paragraph (8).
"Significant Subsidiary" means, at any particular time, any Subsidiary
that, together with the Subsidiaries of such Subsidiary (i) accounted for more
than five percent of the Consolidated revenues of the Company and its
Subsidiaries for their most recently completed fiscal year or (ii) is or are
the owner(s) of more than five percent of the Consolidated assets of the
Company and its Subsidiaries as at the end of such fiscal year, all as
calculated in accordance with GAAP and as shown on the Consolidated financial
statements of the Company and its Subsidiaries for such fiscal year.
RESULT OF EVENTS OF DEFAULT
If an Event of Default (other than as specified in clauses (7) and (8) of
the prior paragraph) shall occur and be continuing with respect to the
Indenture, the trustee or the holders of not less than 25% in aggregate
principal amount of the notes then outstanding may, and the trustee at the
request of such holders shall, declare all unpaid principal of, premium, if
any, and accrued interest on all notes to be due and payable immediately, by a
notice in writing to the Company (and to the trustee if given by the holders of
the notes). Upon any such declaration, such principal, premium, if any, and
interest shall become due and payable immediately. If an Event of Default
specified in clause (7) or (8) of the prior paragraph occurs and is continuing,
then all the notes shall
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IPSO FACTO become and be due and payable immediately in an amount equal to the
principal amount of the notes, together with accrued and unpaid interest, if
any, to the date the notes become due and payable, without any declaration or
other act on the part of the trustee or any holder. Thereupon, the trustee may,
at its discretion, proceed to protect and enforce the rights of the holders of
notes by appropriate judicial proceedings.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the trustee, the holders of a
majority in aggregate principal amount of notes outstanding by written notice
to the Company and the trustee, may rescind and annul such declaration and its
consequences if:
(a) we have paid or deposited with the trustee a sum sufficient to pay
(i)all sums paid or advanced by the trustee under the Indenture and
the reasonable compensation, expenses, disbursements and advances
of the trustee, its agents and counsel,
(ii)all overdue interest on all notes then outstanding,
(iii)the principal of and premium, if any, on any notes then
outstanding which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate
borne by the notes and
(iv)to the extent that payment of such interest is lawful, interest
upon overdue interest at the rate borne by the notes;
(b) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction; and
(c) all Events of Default, other than the non-payment of principal of,
premium, if any, and interest on the notes which have become due solely by such
declaration of acceleration, have been cured or waived as provided in the
Indenture. No such rescission shall affect any subsequent default or impair any
right consequent thereon.
WAIVER OF DEFAULT BY HOLDERS
The holders of not less than a majority in aggregate principal amount of
the notes outstanding may on behalf of the holders of all outstanding notes
waive any past default under the Indenture and its consequences, except a
default (i) in the payment of the principal of, premium, if any, or interest on
any note, which may only be waived with the consent of each holder of notes
affected or (ii) in respect of a covenant or provision which under the
Indenture cannot be modified or amended without the consent of the holder of
each note affected by such modification or amendment.
LEGAL RIGHTS OF HOLDERS
No holder of any of the notes has any right to institute any proceedings
with respect to the notes, the Indenture or any remedy thereunder, unless
(1)the holders of at least 25% in aggregate principal amount of the
outstanding notes have made written request, and offered reasonable
indemnity, to the trustee to institute such proceeding as trustee
under the notes and the Indenture;
(2)the trustee has failed to institute such proceeding within 15 days
after receipt of such notice; and
(3)the trustee, within such 15-day period, has not received directions
inconsistent with such written request by holders of a majority in
aggregate principal amount of the outstanding notes.
Such limitations do not, however, apply to a suit instituted by a holder
of a note for the enforcement of the payment of the principal of, premium, if
any, or interest on such note on or after the respective due dates expressed in
such note.
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NOTICE TO AND ACTION OF TRUSTEES
The Company is required to notify the trustee within five business days
of the occurrence of any Default. The Company is required to deliver to the
trustee, on or before a date not more than 60 days after the end of each fiscal
quarter and not more than 120 days after the end of each fiscal year, a written
statement as to compliance with the Indenture, including whether or not any
Default has occurred. The trustee is under no obligation to exercise any of the
rights or powers vested in it by the Indenture at the request or direction of
any of the holders of the notes unless such holders offer to the trustee
security or indemnity satisfactory to the trustee against the costs, expenses
and liabilities which might be incurred thereby.
The Trust Indenture Act contains limitations on the rights of the
trustee, should it become a creditor of the Company to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The trustee is permitted to engage
in other transactions, PROVIDED that if it acquires any conflicting interest it
must eliminate such conflict upon the occurrence of an Event of Default or else
resign.
PROVISION OF FINANCIAL STATEMENTS
Whether or not we are subject to Section 13(a) or 15(d) of the Exchange
Act, the Company will, to the extent permitted under the Exchange Act, file
with the Commission the annual reports, quarterly reports and other documents
which we would have been required to file with the Commission pursuant to
Sections 13(a) or 15(d) if the Company were so subject. The documents are to be
filed with the Commission on or prior to the date (the "Required Filing Date")
by which the Company would have been required so to file such documents if the
Company were so subject. We will also in any event (x) within 15 days of each
Required Filing Date
(i) transmit by mail to all holders, as their names and addresses appear
in the security register, without cost to such holders; and
(ii) file with the trustee copies of the annual reports, quarterly
reports and other documents which we would have been required to
file with the Commission pursuant to Sections 13(a) or 15(d) of
the Exchange Act if the Company were subject to either of such
Sections; and
(y) if filing such documents by the Company with the Commission is not
permitted under the Exchange Act, promptly upon written request and payment of
the reasonable cost of duplication and delivery, supply copies of such
documents to any prospective holder at our cost.
MODIFICATION OF THE INDENTURE
The trustee and we may modify or amend the Indenture or the notes with
the consent of the holders of not less than a majority in aggregate principal
amount at maturity of the notes then outstanding. However, the consent of the
holders of each outstanding note would be required to:
. alter the manner of calculation or rate of accrual of interest on any
note or change the time of payment;
. make any note payable in money or securities other than that stated in
the note;
. change the stated maturity of any note;
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. reduce the principal amount, redemption price or change in control
purchase price with respect to any note;
. make any change that adversely affects the rights of a holder to
convert any note;
. increase the conversion price, except as allowed under the Indenture;
. make any change that adversely affects the right to require us to
purchase a note;
. impair the right to institute suit for the enforcement of any payment
with respect to the notes or with respect to conversion of the notes;
and
. change the provisions in the Indenture that relate to modifying or
amending the Indenture.
Without the consent of any holder of notes, the trustee and we may enter
into supplemental Indentures for any of the following purposes:
. to cure any ambiguity, omission, defect or inconsistency;
. to comply with the provisions under "--Consolidation, Merger, Sale or
Conveyance" or a related provision of the Indenture;
. to mortgage, pledge, hypothecate or grant a security interest in favor
of the trustee for the benefit of the holders as additional security
for the payment and performance of our obligations under the Indenture,
in any property, or assets, including any of which are required to be
mortgaged, pledged or hypothecated, or in which a security interest is
required to be granted to the trustee pursuant to the Indenture or
otherwise;
. to add to the covenants of Sonic or any other obligor upon the notes
for the benefit of the holders, or to surrender any right or power
conferred upon us or any other obligor upon the notes, as applicable,
in the indenture, or in the notes;
. to make any change to comply with the Trust Indenture Act, or any
amendment thereto, or to comply with any requirement of the Commission
in connection with the qualification of the Indenture under the Trust
Indenture Act;
. to make any change that does not adversely affect the rights of any
holders (it being understood that any amendment to cure any ambiguity,
omission, defect or inconsistency made solely to conform this Indenture
to the final prospectus supplement provided to investors in connection
with the initial offering of the notes will be deemed not to adversely
affect the rights or interests of holders);
. to evidence the succession of another Person to Sonic or any other
obligor upon the notes, and the assumption by any such successor of the
covenants of Sonic or obligor herein and in the notes in accordance
with the provisions of the Indenture under "Consolidation, Merger, Sale
or Conveyance;" or
. to evidence and provide the acceptance of the appointment of a
successor Trustee under the Indenture.
The holders of a majority in principal amount of the outstanding notes
may, on behalf of all the holders of all notes:
. waive compliance by us with restrictive provisions of the Indenture, as
detailed in the Indenture; and
. waive any past default under the Indenture and its consequences, except
a default in the payment of the principal amount at maturity, accrued
and unpaid interest, redemption price or change in control purchase
price or obligation to deliver Class A common stock or cash, in lieu
thereof, upon conversion with respect to any note or in respect of any
provision which under the Indenture cannot be modified or amended
without the consent of the holder of each outstanding note affected.
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DISCHARGE OF THE INDENTURE
When (i) we deliver to the Trustee all outstanding notes (other than
notes replaced pursuant to the Indenture) for cancellation or (ii) all
outstanding notes have become due and payable and we irrevocably deposit with
the Trustee, the paying agent (if the paying agent is not us or any of our
Affiliates) or the conversion agent cash or, if expressly permitted by the
terms of the notes or the Indenture, Class A common stock sufficient to pay all
amounts due and owing on all outstanding notes (other than notes replaced
pursuant to the Indenture), and if in either case we pay all other sums payable
hereunder by us, then the Indenture shall, subject to proper payment to, and
indemnification of, the trustee, cease to be of further effect. The Trustee
shall join in the execution of a document prepared by us acknowledging
satisfaction and discharge of the Indenture on demand of Sonic accompanied by
an officers' certificate and opinion of counsel and at the cost and expense of
Sonic.
GOVERNING LAW
The Indenture and the notes will be governed by and construed in
accordance with the laws of the State of New York.
CERTAIN DEFINITIONS
"Affiliate" means, with respect to any specified Person:
(i) any other Person directly or indirectly controlling or controlled by
or under direct or indirect common control with such specified
Person;
(ii) any other Person that owns, directly or indirectly, five percent or
more of such specified Person's Capital Stock or any officer or
director of any such specified Person or other Person or, with
respect to any natural Person, any person having a relationship with
such Person by blood, marriage or adoption not more remote than
first cousin; or
(iii)any other Person, five percent or more of the Voting Stock of which
is beneficially owned or held directly or indirectly by such
specified Person.
For the purposes of this definition, "control" when used with respect to
any specified Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978,as
amended, or any similar United States federal or state law or foreign law
relating to bankruptcy, insolvency, receivership, winding up, liquidation,
reorganization or relief of debtors or any amendment to, succession to or
change in any such law.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its Subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, is required to be
recorded as a capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations, or other equivalents, however designated, of such Person's
capital stock or other equity interests whether now outstanding or issued after
the Issue Date, partnership interests (whether general or limited),any other
interest or participation that confers on a Person that right to receive a
share of the profits and losses of, or distributions of assets of (other than a
distribution in respect of Indebtedness), the issuing Person and any rights
(other than debt securities convertible into Capital Stock), warrants or
options exchangeable for or convertible into such Capital Stock.
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"Class A common stock" means the Company's Class A common stock, par
value $.01 per share, or any successor common stock thereto.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Exchange Act, or if at any time after
the execution of the Indenture such Commission is not existing and performing
the duties now assigned to it under the Securities Act, Exchange Act and Trust
Indenture Act then the body performing such duties at such time.
"Commodity Price Protection Agreement" means any forward contract,
commodity swap, commodity option or other similar financial agreement or
arrangement relating to, or the value which is dependent upon, fluctuations in
commodity prices.
"Company" means Sonic Automotive, Inc., a corporation incorporated under
the laws of Delaware, until a successor Person shall have become such pursuant
to the applicable provisions of the Indenture, and thereafter "Company" shall
mean such successor Person. All references to the Company exclude, unless
otherwise expressly stated or the context otherwise requires, its Subsidiaries.
"Consolidation" means, with respect to any Person, the consolidation of
the accounts of such Person and each of its Subsidiaries if and to the extent
the accounts of such Person and each of its subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"Currency Hedging Agreements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar
agreements or arrangements designed to protect against the fluctuations in
currency values.
"Default" means any event which is, or after notice or passage of any
time or both would be, an Event of Default.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute, and the rules and regulations promulgated by the
Commission thereunder.
"Fair Market Value" means, with respect to any asset or property, the
sale value that would be obtained in an arm's-length free market transaction
between an informed and willing seller under no compulsion to sell and an
informed and willing buyer under no compulsion to buy. Fair Market Value shall
be determined by the board of directors of the Company acting in good faith and
shall be evidenced by a resolution of the board of directors.
"Floor Plan Facility" means an agreement from Ford Motor Credit Company,
or any other bank or asset-based lender pursuant to which the Company or any
Subsidiary incurs Indebtedness all of the net proceeds of which are used to
purchase, finance or refinance vehicles and/or vehicle parts and supplies to be
sold in the ordinary course of business of the Company and its Subsidiaries and
which may not be secured except by a Lien that does not extend to or cover any
property other than the property of the dealership(s) which use the proceeds of
the Floor Plan Facility.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
which (i) for the purpose of determining compliance with the covenants
contained in the Indenture were in effect as of the Issue Date and (ii) for
purposes of complying with the reporting requirements contained in the
Indenture are in effect from time to time.
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"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person referred to in the definition of Indebtedness
guaranteed directly or indirectly in any manner by such Person, or in effect
guaranteed directly or indirectly by such Person through an agreement:
(i) to pay or purchase such Indebtedness or to advance or supply funds
for the payment or purchase of such Indebtedness,
(ii) to purchase, sell or lease (as lessee or lessor) property, or to
purchase or sell services, primarily for the purpose of enabling the
debtor to make payment of such Indebtedness or to assure the holder
of such Indebtedness against loss,
(iii)to supply funds to, or in any other manner invest in, the debtor
(including any agreement to pay for property or services without
requiring that such property be received or such services be
rendered),
(iv) to maintain working capital or equity capital of the debtor, or
otherwise to maintain the net worth, solvency or other financial
condition of the debtor or to cause such debtor to achieve certain
levels of financial performance or
(v) otherwise to assure a creditor against loss; PROVIDED that the term
"guarantee" shall not include endorsements for collection or
deposit, in either case in the ordinary course of business.
"Indebtedness" means, with respect to any Person, without duplication,
(i) all indebtedness of such Person for borrowed money or for the
deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities arising in the
ordinary course of business, but including, without limitation, all
obligations, contingent or otherwise, of such Person in connection
with any letters of credit issued under letter of credit facilities,
acceptance facilities or other similar facilities,
(ii) all obligations of such Person evidenced by bonds, notes, notes or
other similar instruments,
(iii)all indebtedness created or arising under any conditional sale or
other title retention agreement with respect to property acquired by
such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables
arising in the ordinary course of business,
(iv) all obligations of such Person under Interest Rate Agreements,
Currency Hedging Agreements or Commodity Price Protection Agreements
of such Person,
(v) all Capital Lease Obligations of such Person,
(vi) all Indebtedness referred to in clauses (i) through (v) above of
other Persons and all dividends of other Persons, the payment of
which is secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by)
any Lien, upon or with respect to property, including, without
limitation, accounts and contract rights owned by such Person, even
though such Person has not assumed or become liable for the payment
of such Indebtedness,
(vii)all Guaranteed Debt of such Person,
(viii)all Redeemable Capital Stock issued by such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase
price plus accrued and unpaid dividends,
(ix) Preferred Stock of any Subsidiary of the Company, and
(x) any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing of any liability of the types
referred to in clauses (i) through (ix) above.
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For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Capital Stock as if
such Redeemable Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Redeemable Capital
Stock, such Fair Market Value to be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock.
"Indenture Obligations" means the obligations of the Company and any
other obligor under the Indenture or under the notes to pay principal of,
premium, if any, and interest when due and payable, and all other amounts due
or to become due under or in connection with the Indenture, the notes and the
performance of all other obligations to the trustee and the holders under the
Indenture and the notes, according to the respective terms thereof.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest
rate protection agreements (including, without limitation, interest rate swaps,
caps, floors, collars and similar agreements)and/or other types of interest
rate hedging agreements from time to time.
"Issue Date" means the original issue date of the notes under the
Indenture.
"Lien" means any mortgage or deed of trust, charge, pledge, lien
(statutory or otherwise), privilege, security interest, assignment, deposit,
arrangement, easement, hypothecation, claim, preference, priority or other
encumbrance upon or with respect to any property of any kind (including any
conditional sale, capital lease or other title retention agreement, any leases
in the nature thereof, and any agreement to give any security interest), real
or personal, movable or immovable, now owned or hereafter acquired. A Person
will be deemed to own subject to a Lien any property which it has acquired or
holds subject to the interest of a vendor or lessor under any conditional sale
agreement, Capitalized Lease Obligation or other title retention agreement.
"Manufacturer" means a vehicle manufacturer which is a party to a
dealership franchise agreement with the Company or any Subsidiary.
"Maturity" means, when used with respect to the notes, the date on which
the principal of the notes becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the purchase date and
whether by declaration of acceleration, Change of Control Offer in respect of a
Change of Control, call for redemption or otherwise.
"Outstanding Notes" means the Company's outstanding (a) 11% Senior
Subordinated Notes due 2008, Series B and (b) 11% Senior Subordinated Notes due
2008, Series D.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is
PARI PASSU in right of payment to the notes, including without limitation, the
Outstanding Notes.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes, however designated, which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
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"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise,
(1) is or upon the happening of an event or passage of time would be,
required to be redeemed prior to the final Stated Maturity of the
principal of the notes,
(2) is redeemable at the option of the holder thereof at any time prior
to such final Stated Maturity (other than upon a change of control
of the Company in circumstances where the holders of the notes would
have similar rights), or
(3) is convertible into or exchangeable for debt securities at any time
prior to any such Stated Maturity at the option of the holder
thereof.
"Revolving Facility" means the Credit Agreement among the Company,
certain of the Company's subsidiaries and Ford Motor Credit Company, dated as
of December 15, 1997, as such agreement, in whole or in part, may have been or
may be amended, renewed, extended, substituted, refinanced, restructured,
replaced, supplemented or otherwise modified from time to time, including,
without limitation, any successive renewals, extensions, substitutions,
refinancings, restructurings, replacements, supplementations or other
modifications of the foregoing.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute, and the rules and regulations promulgated by the Commission
thereunder.
"Stated Maturity" means, when used with respect to any Indebtedness or
any installment of interest thereon, the dates specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest, as the case may be, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company
subordinated in right of payment to the notes.
"Subsidiary" of a Person means:
(i) any corporation more than 50% of the outstanding voting power of the
Voting Stock of which is owned or controlled, directly or
indirectly, by such Person or by one or more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries of
such Person,
(ii) any limited partnership of which such Person or any Subsidiary of
such Person is a general partner, or
(iii)any other Person in which such Person, or one or more other
Subsidiaries of such Person, or such Person and one or more other
Subsidiaries, directly or indirectly, has more than 50% of the
outstanding partnership or similar interests or has the power, by
contract or otherwise, to direct or cause the direction of the
policies, management and affairs thereof.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended,
or any successor statute.
"Voting Stock" means Capital Stock of the class or classes pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of such Person (irrespective of whether or not at the time Capital
Stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency).
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BOOK-ENTRY SYSTEM
The notes will only be issued in the form of global securities held in
book-entry form. DTC or its nominee will be the sole registered holder of the
notes for all purposes under the Indenture. Owners of beneficial interests in
the notes represented by the global securities will hold their interests
pursuant to the procedures and practices of DTC. As a result, beneficial
interests in any such securities will be shown on, and may only be transferred
through, records maintained by DTC and its direct and indirect participants and
any such interest may not be exchanged for certificated securities, except in
limited circumstances. Owners of beneficial interests must exercise any rights
in respect of their interests, including any right to convert or require
purchase of their interests in the notes, in accordance with the procedures and
practices of DTC. Beneficial owners will not be holders and will not be
entitled to any rights under the global securities or the Indenture. Sonic and
the trustee, and any of their respective agents, may treat DTC as the sole
holder and registered owner of the global securities.
EXCHANGE OF GLOBAL SECURITIES
Notes represented by a global security will be exchangeable for
certificated securities with the same terms only if:
. DTC is unwilling or unable to continue as depositary or if DTC ceases
to be a clearing agency registered under the Exchange Act and a
successor depositary is not appointed by us within 90 days;
. we decide to discontinue use of the system of book-entry transfer
through DTC (or any successor depositary); or
. a default under the indenture occurs and is continuing.
DTC has advised us as follows: DTC is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
facilitates the settlement of transactions among its participants through
electronic computerized book-entry changes in participants' accounts,
eliminating the need for physical movement of securities certificates. DTC's
participants include securities brokers and dealers, including the
underwriters, banks, trust companies, clearing corporations and other
organizations, some of whom and/or their representatives, own DTC. Access to
DTC's book-entry system is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
CERTAIN UNITED STATES TAX CONSIDERATIONS
The following summary describes the material United States federal income
tax consequences and, in the case of a holder that is a non-U.S. holder (as
defined below), the United States federal estate tax consequences, of
purchasing, owning and disposing of the notes. This summary applies to you only
if you are the initial holder of the notes and you acquire the notes for a
price equal to the issue price of the notes. The issue price of the notes is
the first price at which a substantial amount of the notes is sold other than
to bond houses, brokers, or similar persons or organizations acting in the
capacity of underwriters, placement agents or wholesalers.
This summary deals only with notes held as capital assets (generally,
investment property) and does not deal with special tax situations such as:
. dealers in securities or currencies;
. traders in securities;
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. United States holders (as defined below) whose functional currency is
not the United States dollar;
. persons holding notes as part of a hedge, straddle, conversion or other
integrated transaction;
. certain United States expatriates;
. financial institutions;
. insurance companies; and
. entities that are tax-exempt for United States federal income tax
purposes.
This summary does not discuss all of the aspects of United States federal
income and estate taxation that may be relevant to you in light of your
particular investment or other circumstances. In addition, this summary does
not discuss any United States state or local income or foreign income or other
tax consequences. This summary is based on United States federal income tax
law, including the provisions of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code"), Treasury regulations, administrative rulings and
judicial authority, all as in effect as of the date of this prospectus
supplement. Subsequent developments in United States federal income tax law,
including changes in law or differing interpretations, which may be applied
retroactively, could have a material effect on the United States federal income
tax consequences of purchasing, owning and disposing of notes as set forth in
this summary. Before you purchase notes, you should consult your own tax
advisor regarding the particular United States federal, state and local and
foreign income and other tax consequences of acquiring, owning and disposing of
the notes that may be applicable to you.
U.S. HOLDERS
The following summary applies to you only if you are a United States
holder (as defined below).
DEFINITION OF A UNITED STATES HOLDER
A "United States holder" is a beneficial owner of a note or common stock
received upon conversion of a note who or which is for United States federal
income tax purposes:
. an individual citizen or resident of the United States;
. a corporation or partnership (or other entity classified as a
corporation or partnership for these purposes) created or organized in
or under the laws of the United States or of any political subdivision
of the United States, including any State;
. an estate, the income of which is subject to United States federal
income taxation regardless of the source of that income; or
. a trust, if, in general, a United States court is able to exercise
primary supervision over the trust's administration and one or more
United States persons (within the meaning of the Internal Revenue Code)
has the authority to control all of the trust's substantial decisions.
PAYMENTS OF INTEREST
Interest on your notes will be taxed as ordinary interest income. In
addition:
. if you use the cash method of accounting for United States federal
income tax purposes, you will have to include the interest on your
notes in your gross income at the time you receive the interest; and
. if you use the accrual method of accounting for United States federal
income tax purposes, you will have to include the interest on your
notes in your gross income at the time the interest accrues.
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CONSTRUCTIVE DIVIDENDS
. Certain corporate transactions, such as the distribution of assets to
holders of our Class A common stock, may be treated as deemed
distributions to you if the conversion price of the notes is adjusted
to reflect those transactions. Other adjustments to the conversion
price of the notes may also be treated as deemed distributions to you.
Such deemed distributions will be taxable as a dividend, return of
capital or capital gain in accordance with the rules discussed below
under "United States Tax Considerations--U.S. Holders--Dividends on
Class A Common Stock," and you may recognize income as a result even
though you receive no cash or property.
SALE OR OTHER DISPOSITION OF NOTES
Your tax basis in your notes generally will be their cost. You generally
will recognize taxable gain or loss when you sell or otherwise dispose of your
notes equal to the difference, if any, between:
. the amount realized on the sale or other disposition (less any amount
attributable to accrued interest, which will be taxable in the manner
described under "United States Tax Considerations--U.S.
Holders--Payments of Interest"); and
. your tax basis in the notes.
Your gain or loss generally will be capital gain or loss. This capital
gain or loss will be long-term capital gain or loss if at the time of the sale
or other disposition you have held the notes for more than one year. Subject to
limited exceptions, your capital losses cannot be used to offset your ordinary
income. If you are a non-corporate United States holder, your long-term capital
gain generally will be subject to a maximum tax rate of 20%.
SALE OR OTHER DISPOSITION OF CLASS A COMMON STOCK
In general, if you hold Class A common stock into which the notes have
been converted, you will recognize gain or loss upon the sale, exchange or
other disposition of the Class A common stock measured by the difference between
. the amount of cash and the fair market value of any property you
receive, and
. your adjusted tax basis in the Class A common stock.
Your gain or loss generally will be capital gain or loss. This capital
gain or loss will be long-term capital gain or loss if at the time of the sale
or other disposition you have held the notes for more than one year. Subject to
limited exceptions, your capital losses cannot be used to offset your ordinary
income. If you are a non-corporate United States holder, your long-term capital
gain generally will be subject to a maximum tax rate of 20%.
CONVERSION OF NOTES INTO CLASS A COMMON STOCK
You generally will not recognize gain or loss on the conversion of the
notes solely into Class A common stock, except with respect to cash received in
lieu of fractional shares, and except for Class A common stock, if any,
attributable to accrued interest, which may be taxable to you as interest as
discussed above. Except for Class A common stock attributable to accrued
interest, your tax basis in the shares of Class A common stock received upon
conversion of the notes will be equal to your adjusted tax basis in the notes
exchange therefor (less any portion thereof allocable to cash received in lieu
of a fractional share of Class A common stock). Except for Class A common stock
attributable to any accrued interest, the holding period of the Class A common
stock will generally include the period during which you held the notes prior
to conversion. Under the current ruling policy
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of the IRS, cash received in lieu of a fractional share of Class A common stock
should generally be treated as a payment in exchange for such fractional share
rather than as a dividend. You generally will recognize gain or loss on the
receipt of cash paid in lieu of such fractional shares equal to the difference
between the amount of cash received and the amount of tax basis allocable to
the fractional shares. To the extent that the Class A common stock you receive
on conversion is attributable to accrued interest on the notes, you will
recognize ordinary income in accordance with your regular method of accounting
for federal income tax purposes. Your tax basis in the Class A common stock
attributable to accrued interest generally should equal the value of that Class
A common stock on the date of conversion and your holding period in that Class
A common stock will not include the period during which you held the notes
prior to conversion.
DIVIDENDS ON CLASS A COMMON STOCK
Distributions on shares of our Class A common stock will constitute
dividends and be taxed as ordinary income for United States federal income tax
purposes to the extent of our current or accumulated earnings and profits as
determined under United States federal income tax principles. Dividends paid to
those of you that are United States corporations will generally qualify for the
dividends-received deduction. To the extent that you receive distributions on
shares of Class A common stock that would otherwise constitute dividends for
United States federal income tax purposes but that exceed our current and
accumulated earnings and profits, such distributions will be treated first as a
non-taxable return of capital reducing your adjusted tax basis in the shares of
Class A common stock. Any such distributions in excess of your adjusted tax
basis in the shares of Class A common stock will generally be treated as
capital gain.
A failure to fully adjust the conversion price of the notes to reflect a
stock dividend or other event increasing the proportionate interest of holders
of our Class A common stock in our earnings and profits or assets could, in
some circumstances, be deemed to result in the payment of a taxable dividend to
the holders of our Class A common stock.
BACKUP WITHHOLDING
In general, "backup withholding" at a rate of 30%, which rate will be
periodically reduced to 28% for payments made in 2006, may apply:
. to any payments made to you of principal of and interest on your note,
and
. to payment of the proceeds of a sale or other disposition of your note
before maturity, if you are a non-corporate United States holder and
fail to provide a correct taxpayer identification number or otherwise
comply with applicable requirements of the backup withholding rules.
The backup withholding tax is not an additional tax and may be credited
against your United States federal income tax liability, provided that correct
information is provided to the Internal Revenue Service.
NON-U.S. HOLDERS
The following summary applies to you if you are a beneficial owner of a
note or Class A common stock received upon conversion of a note who or which is
not a United States holder (as defined above) (a "non-U.S. holder"). An
individual may, subject to exceptions, be deemed to be a resident alien, as
opposed to a non-resident alien, by among other ways being present in the
United States:
. on at least 31 days in the calendar year, and
. for an aggregate of at least 183 days during a three-year period ending
in the current calendar year, counting for such purposes all of the
days present in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in the
second preceding year.
S-62
Resident aliens are subject to United States federal income tax as if
they were United States citizens.
UNITED STATES FEDERAL WITHHOLDING TAX
NOTES
Under current United States federal income tax laws, and subject to the
discussion below, United States federal withholding tax will not apply to
payments by us or our paying agent (in its capacity as such) of principal of
and interest on your notes under the "portfolio interest" exception of the
Internal Revenue Code, provided that in the case of interest:
. you do not, directly or indirectly, actually or constructively, own ten
percent or more of the total combined voting power of all classes of
our stock entitled to vote within the meaning of section 871(h)(3) of
the Internal Revenue Code and the Treasury regulations thereunder;
. you are not (i) a controlled foreign corporation for United States
federal income tax purposes that is related, directly or indirectly, to
us through sufficient stock ownership (as provided in the Internal
Revenue Code), or (ii) a bank receiving interest described in section
881(c)(3)(A) of the Internal Revenue Code;
. such interest is not effectively connected with your conduct of a
United States trade or business; and
. you provide a signed written statement, under penalties of perjury,
which can reliably be related to you, certifying that you are not a
United States person within the meaning of the Internal Revenue Code
and providing your name and address to:
(A) us or our paying agent; or
(B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary
course of its trade or business and holds your notes on your
behalf and that certifies to us or our paying agent under
penalties of perjury that it, or the bank or financial institution
between it and you, has received from you your signed, written
statement and provides us or our paying agent with a copy of this
statement.
Treasury regulations provide alternative methods for satisfying the
certification requirement described in this section. In addition, under these
Treasury regulations:
. if you are a foreign partnership, the certification requirement will
generally apply to partners in you, and you will be required to provide
certain information;
. if you are a foreign trust, the certification requirement will
generally be applied to you or your beneficial owners depending on
whether you are a "foreign complex trust," "foreign simple trust," or
"foreign grantor trust" as defined in the Treasury regulations; and
. look-through rules will apply for tiered partnerships, foreign simple
trusts and foreign grantor trusts.
If you are a foreign partnership or a foreign trust, you should consult
your own tax advisor regarding your status under these Treasury regulations and
the certification requirements applicable to you.
DIVIDENDS
If we pay dividends (including constructive dividends and deemed
dividends, see "United States Tax Considerations--U.S. Holders--Constructive
Dividends" and "United States Tax Considerations--U.S. Holders--Dividends on
Class A Common Stock") on our Class A common stock, we will have to withhold a
U.S. federal withholding tax at a rate of 30%, or a lower rate under an
applicable income tax treaty, from the gross amount of the dividends paid to a
non-U.S. holder. Non-U.S. holders should consult their tax advisors regarding
their entitlement to benefits under a relevant income tax treaty.
S-63
Dividends that are effectively connected with a non-U.S. holder's conduct
of a trade or business in the United States and, if an income tax treaty
applies, attributable to a permanent establishment in the United States, are
taxed on a net income basis at the regular graduated rates and in the manner
applicable to U.S. persons. In that case, we will not have to withhold U.S.
federal withholding tax if the non-U.S. holder complies with applicable
certification and disclosure requirements. In addition, a "branch profits tax"
may be imposed at a 30% rate, or a lower rate under an applicable income tax
treaty, on dividends received by a foreign corporation that are effectively
connected with the conduct of a trade or business in the United States.
A non-U.S. holder who claims the benefit of an applicable income tax
treaty rate generally will be required to satisfy applicable certification and
other requirements. However,
. in the case of Class A common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of
the partnership and the partnership will be required to provide certain
information;
. in the case of Class A common stock held by a foreign trust, the
certification requirement will generally be applied to the trust or the
beneficial owners of the trust depending on whether the trust is a
"foreign complex trust," "foreign simple trust," or "foreign grantor
trust" as defined in the U.S. Treasury regulations; and
. look-through rules will apply for tiered partnerships, foreign simple
trusts and foreign grantor trusts.
A non-U.S. holder that is a foreign partnership or a foreign trust is
urged to consult its own tax advisor regarding its status under these U.S.
Treasury regulations and the certification requirements applicable to it.
A non-U.S. holder that is eligible for a reduced rate of U.S. federal
withholding tax under an income tax treaty may obtain a refund or credit of any
excess amounts withheld by filing an appropriate claim for a refund with the
U.S. Internal Revenue Service.
UNITED STATES FEDERAL INCOME TAX
NOTES
Except for the possible application of United States withholding tax (see
"United States Tax Considerations--Non-U.S. Holders--United States Federal
Withholding Tax" above) and backup withholding tax (see "United States Tax
Considerations--Non-U.S. Holders--Backup Withholding and Information Reporting"
below), you generally will not have to pay United States federal income tax on
payments of principal of and interest on your notes, unless:
. in the case of gain, you are an individual who is present in the United
States for 183 days or more during the taxable year of the sale or
other disposition of your notes, and specific other conditions are met;
or
. the gain is effectively connected with your conduct of a United States
trade or business, and, if an income tax treaty applies, is generally
attributable to a United States "permanent establishment" maintained by
you.
If you are engaged in a trade or business in the United States and
interest, gain or any other income in respect of your notes is effectively
connected with the conduct of your trade or business, and, if an income tax
treaty applies, you maintain a United States "permanent establishment" to which
the interest, gain or other income is generally attributable, you may be
subject to United States income tax on a net basis on the interest, gain or
income (although interest is exempt from the withholding tax discussed in the
preceding paragraphs provided that you provide a properly executed applicable
Internal Revenue Service form on or before any payment date to claim the
exemption).
S-64
In addition, if you are a foreign corporation, you may be subject to a
branch profits tax equal to 30% of your effectively connected earnings and
profits for the taxable year, as adjusted for certain items, unless a lower
rate applies to you under a United States income tax treaty with your country
of residence. For this purpose, you must include interest, gain or income on
your notes in the earnings and profits subject to the branch tax if these
amounts are effectively connected with the conduct of your United States trade
or business.
CONVERSION OF THE NOTES
A non-U.S. holder generally will not recognize any income, gain or loss
on converting a note into Class A common stock. Any gain recognized as a result
of the holder's receipt of cash in lieu of a fractional share would also
generally not be subject to U.S. federal income tax.
GAIN ON DISPOSITION OF CLASS A COMMON STOCK OR NOTES
A non-U.S. holder generally will not be taxed on gain recognized on a
disposition of our Class A common stock or notes unless:
. the gain is effectively connected with the non-U.S. holder's conduct of
a trade or business in the United States and, if an income tax treaty
applies, is attributable to a permanent establishment maintained by the
non-U.S. holder in the United States; in these cases, the gain will be
taxed on a net income basis at the regular graduated rates and in the
manner applicable to U.S. persons (unless an applicable income tax
treaty provides otherwise) and, if the non-U.S. holder is a foreign
corporation, the "branch profits tax" described above may also apply;
. the non-U.S. holder is an individual who holds our Class A common stock
or note as a capital asset, is present in the United States for more
than 182 days in the taxable year of the disposition and meets other
requirements; or
. we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the
five-year period ending on the date of disposition or the period that
the non-U.S. holder held our Class A common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property
interests plus its other assets used or held for use in a trade or business. We
believe that we are not currently, and we do not anticipate becoming in the
future, a U.S. real property holding corporation.
UNITED STATES FEDERAL ESTATE TAX
NOTES
If you are an individual and are not a United States citizen or a
resident of the United States (as specially defined for United States federal
estate tax purposes) at the time of your death, your notes will generally not
be subject to the United States federal estate tax, unless, at the time of your
death:
. you directly or indirectly, actually or constructively, own ten percent
or more of the total combined voting power of all classes of our stock
entitled to vote within the meaning of section 871(h)(3) of the
Internal Revenue Code and the Treasury regulations thereunder; or
. your interest on the notes is effectively connected with your conduct
of a United States trade or business.
S-65
CLASS A COMMON STOCK
Class A Common stock owned or treated as owned by an individual who is a
non-U.S. holder (as specially defined for U.S. federal estate tax purposes) at
the time of death will be included in the individual's gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax or other treaty
provides otherwise and, therefore, may be subject to U.S. federal estate tax.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current Treasury regulations, backup withholding and information
reporting will not apply to payments on the notes or Class A common stock made
by us or our paying agent (in its capacity as such) to you if you have provided
the required certification that you are a non-U.S. holder as described in
"United States Tax Considerations--Non-U.S. Holders--United States Federal
Withholding Tax" above, and provided that neither we nor our paying agent has
actual knowledge that you are a United States holder (as described in "United
States Tax Considerations--U.S. Holders" above). We or our paying agent may,
however, report payments of interest on the notes.
The gross proceeds from the disposition of your notes or Class A common
stock may be subject to information reporting and backup withholding tax at a
current rate of 30%, which rate will be periodically reduced to 28% for
payments made in 2006. If you sell your notes or Class A common stock outside
the United States through a non-U.S. office of a non-U.S. broker and the sales
proceeds are paid to you outside the United States, then the U.S. backup
withholding and information reporting requirements generally will not apply to
that payment. However, U.S. information reporting, but not backup withholding,
will apply to a payment of sales proceeds, even if that payment is made outside
the United States, if you sell your notes or Class A common stock though a
non-U.S. office of a broker that:
. is a United States person (as defined in the Internal Revenue Code);
. derives 50% or more of its gross income in specific periods from the
conduct of a trade or business in the United States;
. is a "controlled foreign corporation" for U.S. federal income tax
purposes; or
. is a foreign partnership, if at any time during its tax year:
. one or more of its partners are U.S. persons who in the aggregate hold
more than 50% of the income or capital interests in the partnership; or
. the foreign partnership is engaged in a U.S. trade or business,
unless the broker has documentary evidence in its files that you are a non-U.S.
person and certain other conditions are met or you otherwise establish an
exemption. If you receive payments of the proceeds of a sale of your notes or
Class A common stock to or through a U.S. office of a broker, the payment is
subject to both U.S. backup withholding and information reporting unless you
provide a Form W-8BEN certifying that you are a non-U.S. person or you
otherwise establish an exemption.
You should consult your own tax advisor regarding application of backup
withholding in your particular circumstance and the availability of and
procedure for obtaining an exemption from backup withholding under current
Treasury regulations. Any amounts withheld under the backup withholding rules
from a payment to you will be allowed as a refund or credit against your United
States federal income tax liability, provided the required information is
furnished to the Internal Revenue Service.
S-66
UNDERWRITING
We intend to offer the notes through the underwriters. Subject to the
terms and conditions contained in the purchase agreement between us and Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Banc of America
Securities LLC and First Union Securities, Inc., we have agreed to sell to the
underwriters, and the underwriters severally have agreed to purchase from us,
the principal amount of the notes listed opposite their names below.
PRINCIPAL
UNDERWRITER AMOUNT
----------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................ $
Banc of America Securities LLC.......
First Union Securities, Inc..........
------------
Total....................... $130,000,000
============
The underwriters have agreed to purchase all of the notes sold pursuant
to the purchase agreement if any of these notes are purchased. If an
underwriter defaults, the purchase agreement provides that the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreement may be terminated.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
the underwriters may be required to make in respect of those liabilities.
The underwriters are offering the notes, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the notes, and other conditions
contained in the purchase agreement, such as receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.
Merrill Lynch will be facilitating Internet distribution for this
offering to certain of its Internet subscription customers. An electronic
prospectus is available on the Internet website maintained by Merrill Lynch.
Other than the prospectus in electronic format, the information on the Merrill
Lynch web site is not part of the prospectus.
COMMISSIONS AND DISCOUNTS
The underwriters have advised us that they propose initially to offer the
notes to the public at the public offering price on the cover page of this
prospectus supplement and to dealers at that price less a concession not in
excess of % of the principal amount of the notes. After the initial public
offering, the public offering price, concession and discount may be changed.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to Sonic. The information assumes either
no exercise or full exercise by the underwriters of their over-allotment option.
PER NOTE WITHOUT OPTION WITH OPTION
-------- -------------- -----------
Public offering price.............. % $ $
Underwriting discount.............. % $ $
Proceeds, before expenses, to Sonic % $ $
The expenses of the offering, not including the underwriting discount,
are estimated at $ and are payable by Sonic, although the underwriters
have agreed to reimburse Sonic for the cost of certain of its expenses.
S-67
OVER-ALLOTMENT OPTION
We have granted options to the underwriters to purchase up to $19,500,000
of the notes at the public offering price on the cover page of this prospectus
supplement, less the underwriting discount. The underwriters may exercise these
options for 30 days from the date of this prospectus supplement solely to cover
over-allotments. If the underwriters exercise these options, each underwriter
will be obligated, subject to conditions contained in the purchase agreement,
to purchase a number of additional notes proportionate to such underwriter's
initial amount reflected in the above table.
NO SALES OF SIMILAR SECURITIES
We have agreed and our directors and executive officers and certain
stockholders have agreed not to directly or indirectly, without the prior
written consent of the underwriters, for a period of 90 days after the date of
this prospectus supplement:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our Class A common stock or securities
convertible into or exchangeable or exercisable for or repayable with
our Class A common stock (including our Class B Common Stock), or file
a registration statement under the Securities Act, as amended, with
respect to the foregoing; or
. enter into any swap or hedging arrangement or other agreement or any
transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of our Class A common
stock whether any such swap or transaction is to be settled by delivery
of our shares of Class A common stock or other securities, in cash or
otherwise.
The foregoing restrictions do not apply to (i) notes to be sold to the
underwriters pursuant to the purchase agreement, (ii) shares of Class A common
stock issued upon the exercise of an option or warrant or the conversion of a
security outstanding on the date of this prospectus supplement, (iii) sales
transactions described above if such transactions, including those involving
all other persons subject to these restrictions, relate to no more than an
aggregate of 300,000 shares of our Class A common stock and (iv) shares of
Class A common stock issued in connection with dealership acquisitions we make.
NO STOCK EXCHANGE LISTING
The notes are a new issue of securities with no established trading
market. We do not intend to apply for listing of the notes on any national
securities exchange or for quotation of the notes on any automated dealer
quotation system. We cannot assure the liquidity of the trading market for the
notes or that an active public market for the notes will develop. If an active
public trading market for the notes does not develop, they may trade at a
discount from their initial offering price, depending on prevailing interest
rates, the market for similar securities, our Class A common stock price, our
performance and other factors.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the notes is completed, SEC rules may limit the
underwriters from bidding for and purchasing the notes and the Class A common
stock. However, the underwriters may engage in transactions that stabilize the
price of the notes and the Class A Common stock such as bids or purchases to
peg, fix or maintain the price of these securities.
If the underwriters create a short position in the notes or the Class A
common stock in connection with the offering, i.e., if they sell more notes
than are listed on the cover page of this prospectus supplement, the
S-68
underwriters may reduce that short position by purchasing notes in the open
market. The underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above. Purchases
of a security to stabilize the price or to reduce a short position may cause
the price of the security to be higher than it might be in the absence of such
purchases.
Neither we 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 notes or the Class A common stock.
In addition, neither we nor any of the underwriters makes any representation
that the underwriters will engage in these transactions or that these
transactions, once commenced, will not be discontinued without notice.
OTHER RELATIONSHIPS
First Union Securities, Inc., a subsidiary of Wachovia Corporation,
conducts its investment banking, institutional and capital markets business
under the trade name of Wachovia Securities. Any references to "Wachovia
Securities" in this prospectus, however, do not include Wachovia Securities,
Inc., a separate broker-dealer subsidiary of Wachovia Corporation and affiliate
of First Union Securities, Inc. which may or may not be participating as a
separate selling dealer in the distribution of the securities offered by this
prospectus.
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commissions for these transactions.
LEGAL MATTERS
The legality of the notes being offered hereby will be passed upon for
Sonic by Moore & Van Allen PLLC, Charlotte, North Carolina. Certain legal
matters will be passed upon for the underwriters by Fried, Frank, Harris,
Shriver & Jacobson (a partnership including professional corporations), New
York, New York.
EXPERTS
The consolidated financial statements incorporated in this prospectus
supplement by reference from Sonic Automotive, Inc.'s Annual Report on Form
10-K for the year ended December 31, 2001 have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report, which is
incorporated by reference, and have been so incorporated in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
S-69
SONIC AUTOMOTIVE, INC.
DEBT SECURITIES, PREFERRED STOCK,
CLASS A COMMON STOCK, WARRANTS TO
PURCHASE CLASS A COMMON STOCK,
GUARANTEES OF DEBT SECURITIES
Through this prospectus, we may periodically offer and sell:
. our debt securities;
. shares of our preferred stock;
. shares of our Class A common stock;
. warrants to purchase our Class A common stock; and
. guarantees by our subsidiaries of our debt securities.
The offering price of all securities we issue under this prospectus may not
exceed $300,000,000. We will provide the specific terms of these securities in
supplements to this prospectus. This prospectus may be used to offer and sell
securities only if accompanied by the prospectus supplement for those
securities. You should read this prospectus and any prospectus supplement
carefully before you invest in any of these securities.
In addition, the selling stockholders who are identified in this prospectus
may offer and sell all of the shares of Class A common stock offered by them
under this prospectus from time to time. We previously issued these shares in
connection with our acquisitions of the selling stockholders' businesses. We
are registering the offer and sale of the selling stockholders' shares to
satisfy our contractual obligations to provide the selling stockholders with
freely tradable shares. We will not receive any of the proceeds from the sale
of the selling stockholders' shares. We do not know when the proposed sale of
the shares by the selling stockholders will occur.
Our Class A common stock trades on the New York Stock Exchange under the
symbol "SAH." We will list any shares of our Class A common stock we sell under
this prospectus on the New York Stock Exchange. If we decide to list or seek a
quotation for any other securities, the prospectus supplement will disclose the
exchange or market on which such securities will be listed or quoted. The last
sale price of our Class A common stock on the New York Stock Exchange on
December 8, 2000 was $7.75 per share. You are urged to obtain current market
data.
Investing in our securities involves risks that are described in the "Risk
Factors" section beginning on page 6 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This prospectus is dated December 11, 2000.
TABLE OF CONTENTS
Page
----
About This Prospectus................................. 3
Where You Can Find More Information About Sonic....... 3
Cautionary Notice Regarding Forward-Looking Statements 5
The Company........................................... 6
Risk Factors.......................................... 6
Use of Proceeds....................................... 25
Ratios of Earnings to Fixed Charges................... 25
Description of Debt Securities........................ 25
Description of Capital Stock.......................... 35
Description of Warrants............................... 42
Certain Manufacturer Restrictions..................... 43
Selling Stockholders.................................. 45
Plan of Distribution.................................. 46
Legal Matters......................................... 47
Experts............................................... 48
2
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission utilizing a "shelf" registration process.
Under this shelf registration process, we may sell any combination of the
securities described in this prospectus in one or more offerings up to a total
dollar amount of $300,000,000 and the selling stockholders may collectively
sell up to 57,976 shares of Class A common stock in one or more offerings. This
prospectus provides you with a general description of the securities we may
offer. Each time we sell securities, we will provide a prospectus supplement
that will contain specific information about the terms of the offering and the
securities. The prospectus supplement may also add, update or change
information contained in this prospectus. Any statement that we make in this
prospectus will be modified or superseded by any inconsistent statement made by
us in a prospectus supplement. You should read both this prospectus and any
prospectus supplement together with additional information described under the
heading "Where You Can Find More Information About Sonic."
-----------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized any other person to
provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. We will not make an
offer to sell these securities (1) in any jurisdiction where the offer or sale
is not permitted, (2) where the person making the offer is not qualified to do
so, or (3) to any person who cannot legally be offered the securities. You
should assume that the information appearing in this prospectus is accurate
only as of the date on the front cover of this prospectus. Our business,
financial condition, results of operations and prospects may have changed since
that date.
This prospectus is based on information provided by us and other sources
that we believe are reliable. However, we cannot assure you that the
information is accurate or complete. For example, in preparing estimates of
market share and industry data, we utilized third party sources when possible,
but cannot verify some of the estimates through independent sources.
You should not consider any information in this prospectus to be legal,
business or tax advice. You should consult your own attorney, business advisor
and tax advisor for legal, business and tax advice regarding an investment in
the Company's securities.
You should base your decision to invest in the Company's securities solely
on information contained in this prospectus, related prospectus supplement and
information incorporated by reference herein and therein.
No representation or warranty, express or implied, is made as to the
accuracy or completeness of the information set forth herein, and nothing
contained in this prospectus is, or shall be relied upon as, a promise or
representation, whether as to the past or the future.
WHERE YOU CAN FIND MORE INFORMATION ABOUT SONIC
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. These reports and
information relate to our business, financial condition and other matters. You
may read and copy these reports, proxy statements and other information at the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may obtain information on the
operation of the Commission's Public Reference Room in Washington, D.C. by
calling the Commission at 1-800-SEC-0330. Copies may be obtained from the
Commission by paying the required fees. The Commission maintains an internet
web site that contains reports, proxy and information statements and other
information regarding us and
3
other registrants that file electronically with the Commission. The
Commission's web site is http://www.sec.gov. Information that we file with the
Commission may also be read and copied at the offices of the New York Stock
Exchange at 20 Broad Street, New York, New York 10005.
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring to documents we have previously filed with the Commission. The
information incorporated by reference is considered to be part of this
prospectus, and information that we file later with the Commission will
automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the
Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), until we decide or terminate this
offering earlier:
(1) Our Annual Report on Form 10-K for the fiscal year ended December 31,
1999 (File No. 1-13395);
(2) Our Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2000;
(3) Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2000;
(4) Our Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2000;
(5) Our Current Report on Form 8-K/A filed January 18, 2000 (Manhattan and
Freeland acquisitions);
(6) Our Current Report on Form 8-K/A filed January 27, 2000 (FirstAmerica
acquisition);
(7) Our Current Report on Form 8-K filed September 15, 2000;
(8) The combined financial statements of Williams Automotive Group, the
financial statements of Economy Cars, Inc., the financial statements of Global
Imports, Inc., the combined financial statements of Newsome Automotive Group,
the combined financial statements of Lloyd Automotive Group and the financial
statements of Lute Riley Motors, Inc., included in our Amendment No. 1 to our
Registration Statement on Form S-3 (Registration No. 333-71803) filed April 9,
1999;
(9) Our Definitive Proxy Statement dated May 1, 2000; and
(10) The description of our Class A common stock contained in our
registration statement on Form 8-A, as amended, filed with the Commission
pursuant to Section 12 of the Exchange Act.
We will provide upon request a free copy of any or all of the documents
incorporated by reference in this prospectus (excluding exhibits to such
documents unless such exhibits are specifically incorporated by reference) to
anyone who receives this prospectus. Written or telephone requests should be
directed to Mr. Todd Atenhan, Director of Investor Relations, P.O. Box 18747,
Charlotte, North Carolina 28218, Telephone (888) 766-4218.
This prospectus is a part of our registration statement on Form S-3 filed
with the Commission. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits to the registration
statement. Statements about the contents of contracts or other documents
contained in this prospectus or in any other filing to which we refer you are
not necessarily complete. You should review the actual copy of these documents
filed as an exhibit to the registration statement or such other filing. You may
obtain a copy of the registration statement and the exhibits filed with it from
the Commission at any of the locations listed above.
4
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements are not historical facts, but only predictions and generally can be
identified by use of statements that include words such as "believe," "expect,"
"anticipate," "intend," "plan," "foresee" or other words or phrases of similar
import. Similarly, statements that describe our objectives, plans or goals are
also forward-looking statements. We intend such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Litigation Securities Reform Act of 1995, and we are
including this statement for purposes of complying with these safe harbor
provisions. These statements appear in a number of places in this prospectus
and include statements regarding our intent, belief or current expectations, or
those of our directors or officers, with respect to, among other things:
. our potential acquisitions;
. trends in our industry;
. our financing plans;
. the effect of the Internet on our business and our ability to implement
our Internet business strategy;
. trends affecting our financial condition or results of operations; and
. our business and growth strategies.
You are cautioned that these forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, and that actual
results may differ materially from those projected in the forward-looking
statements as a result of various factors. Among others, factors that could
materially adversely affect actual results and performance include:
. local and regional economic conditions in the areas we serve;
. the level of consumer spending;
. our relationships with manufacturers;
. high competition;
. site selection and related traffic and demographic patterns;
. inventory management and turnover levels;
. the effect of the Internet on our business;
. realization of cost savings; and
. our success in integrating recent and potential future acquisitions,
including integration of acquired information systems.
5
THE COMPANY
Sonic is the second largest automotive retailer in the United States, as
measured by total revenue, operating dealerships and collision repair centers
in several metropolitan areas of the southeastern, midwestern, mid-Atlantic,
western and southwestern United States. We sell new and used cars, light trucks
and replacement parts and provide vehicle maintenance, warranty, paint and
repair services. We also arrange related extended warranty and financing and
insurance for our automotive customers.
Our Class A common stock is traded on the New York Stock Exchange under the
trading symbol "SAH." Our principal executive offices are located at 5401 East
Independence Blvd., Charlotte, North Carolina 28212, Telephone (704) 532-3320.
We were incorporated in Delaware in 1997.
RISK FACTORS
The risk factors described below are not necessarily exhaustive, and you are
encouraged to perform your own investigation with respect to the securities
being offered and our company.
Our significant indebtedness could materially adversely affect our financial
health and prevent us from fulfilling our obligations.
As of September 30, 2000, our total outstanding indebtedness was
approximately $1,039.9 million, including the following:
. $341.6 million under a revolving credit agreement dated August 10, 2000
with Ford Motor Credit Company ("Ford Motor Credit") and Chrysler
Financial Company, LLC ("Chrysler Financial") (the "2000 Revolving
Facility" and together with any of our predecessor revolving credit
arrangements with Ford Motor Credit, as in effect from time to time, the
"Revolving Facility") with a borrowing limit of $500 million, subject to a
borrowing base calculated on the basis of our receivables, inventory and
equipment and a pledge of certain additional collateral by an affiliate of
Sonic;
. $384.4 million under a standardized secured inventory floor plan facility
(the "Ford Floor Plan Facility") with Ford Motor Credit;
. $131.4 million under a standardized secured floor plan facility (the
"Chrysler Floor Plan Facility") with Chrysler Financial;
. $25.1 million under a standardized secured floor plan facility (the "GMAC
Floor Plan Facility" and together with the Ford Floor Plan Facility and
the Chrysler Floor Plan Facility, the "Floor Plan Facilities") with
General Motors Acceptance Corporation ("GMAC");
. $121.2 million in 11% Senior Subordinated Notes due 2008 representing
$125.0 million in aggregate principal amount less unamortized discount of
approximately $3.8 million; and
. $30.2 million of other secured debt, including $21.5 million under a
revolving real estate acquisition and new dealership construction line of
credit (the "Construction Loan") and a related mortgage refinancing
facility (the "Permanent Loan" and together with the Construction Loan,
the "Mortgage Facility") with Ford Motor Credit.
As of September 30, 2000, we had approximately $78.5 million available for
additional borrowings under the Mortgage Facility for real estate acquisitions
and new dealership construction. We also have significant additional capacity
under our Floor Plan Facilities. In addition, the indentures relating to our
senior subordinated notes and other debt instruments allow us to incur
additional indebtedness, including secured indebtedness.
6
The degree to which we are leveraged after the offering could have important
consequences to the holders of our securities, including the following:
. our ability to obtain additional financing for acquisitions, capital
expenditures, working capital or general corporate purposes may be
impaired in the future;
. a substantial portion of our current cash flow from operations must be
dedicated to the payment of principal and interest on our senior
subordinated notes, borrowings under the Revolving Facility and the Floor
Plan Facilities and other indebtedness, thereby reducing the funds
available to us for our operations and other purposes;
. some of our borrowings are and will continue to be at variable rates of
interest, which exposes us to the risk of increased interest rates;
. the indebtedness outstanding under our credit facilities is secured by a
pledge of substantially all the assets of our dealerships; and
. we may be substantially more leveraged than some of our competitors, which
may place us at a relative competitive disadvantage and make us more
vulnerable to changing market conditions and regulations.
In addition, our debt agreements contain numerous covenants that limit our
discretion with respect to business matters, including mergers or acquisitions,
paying dividends, incurring additional debt, making capital expenditures or
disposing of assets.
Your right to receive payments on Debt Securities may be junior to significant
amounts of our existing indebtedness, including borrowings currently
outstanding under the Revolving Facility, the Floor Plan Facilities and the
Mortgage Facility. Further, the subsidiary guarantees of any Debt Securities
will be junior to our subsidiary guarantors' existing indebtedness and possibly
to all their future borrowings.
All Debt Securities will be subordinated in right of payment to all of our
existing and future senior indebtedness, including borrowings currently under
the Revolving Facility, the Floor Plan Facilities and the Mortgage Facility.
Our senior indebtedness includes all debt allowed under the indenture governing
any Debt Securities, except for trade payables, tax obligations and any future
debt that is expressly equal with, or subordinated in right of payment to, Debt
Securities. The holders of our senior debt will be entitled to be paid in full
before any payment may be made on Debt Securities in any bankruptcy,
liquidation, reorganization or similar proceeding. In the event of such a
proceeding, holders of any Debt Securities will participate with holders of our
other subordinated indebtedness in the distribution of assets remaining after
all of our senior debt has been paid in full. We may not have sufficient funds
to pay all of our creditors, and holders of Debt Securities may receive less,
ratably, than the holders of senior debt or holders of trade payables. We may
not pay principal of, or premium, if any, or interest on, any other amounts
owing on any Debt Securities, make any deposit pursuant to defeasance
provisions or purchase, redeem or otherwise retire any Debt Securities, if any
senior indebtedness is not paid when due or any other default on senior
indebtedness occurs and the maturity of such indebtedness is accelerated in
accordance with its terms. However, those restrictions would be lifted if, in
either case, the default is cured or waived, the acceleration is rescinded or
the indebtedness is repaid in full.
In addition, all payments on Debt Securities will be blocked in the event of
a payment default on senior debt and may be blocked for a period of time under
the governing indenture in the event of a non-payment default, unless the
default has been cured or waived, any acceleration of the indebtedness has been
rescinded or such indebtedness has been repaid in full.
As of September 30, 2000, we had:
. $540.9 million of floor plan indebtedness and $372.3 million of other
indebtedness, including under the Revolving Facility, that would have
ranked senior in right of payment to any Debt Securities, all of which is
secured; and
7
. $125.0 million of indebtedness under our existing senior subordinated
notes, which may be either equal or senior in right of payment to the Debt
Securities.
Substantially all of our outstanding indebtedness is secured; Debt Securities
may not be secured.
Debt Securities may not be secured by any of our assets. The indebtedness
under the Revolving Facility, the Floor Plan Facilities and the Mortgage
Facility is secured variously by (1) a pledge of all the equity we own in our
subsidiaries and that our subsidiary holding companies own in the subsidiaries,
(2) guarantees by all of our subsidiaries that are, in turn, secured by a lien
on all of the assets of the subsidiaries, (3) a lien on substantially all of
our other assets and (4) direct liens on the real estate and other assets of
our subsidiaries that own or acquire real estate. In the event of a default on
any Debt Securities or our bankruptcy, liquidation or reorganization, those
assets will be available to satisfy the secured obligations prior to being
available to repay any Debt Securities. Accordingly, there may not be
sufficient funds or other assets remaining to pay amounts due on any Debt
Securities. The indenture for any Debt Securities may permit, and the indenture
for our senior subordinated notes does permit, us to incur additional
indebtedness, which may also be secured.
Our future operating results depend on our ability to integrate our operations
with recent acquisitions.
Our future operating results depend on our ability to integrate the
operations of our recently acquired dealerships, as well as dealerships we
acquire in the future, with our existing operations. In particular, we need to
integrate our systems, procedures and structures, which can be difficult. Our
growth strategy has focused on the pursuit of strategic acquisitions that
either expand or complement our business. We acquired 19 dealerships in 1998,
72 during 1999 and 10 to date in 2000.
We cannot assure you that we will effectively and profitably integrate the
operations of these dealerships without substantial costs, delays or
operational or financial problems, including as a result of:
. the difficulties of managing operations located in geographic areas where
we have not previously operated;
. the management time and attention required to integrate and manage newly
acquired dealerships;
. the difficulties of assimilating and retaining employees; and
. the challenges of keeping customers.
These factors could have a material adverse effect on our financial
condition and results of operations.
Risks associated with acquisitions may hinder our ability to increase revenues
and earnings.
The automobile retailing industry is considered a mature industry in which
minimal growth is expected in industry unit sales. Accordingly, our future
growth depends in large part on our ability to acquire additional dealerships,
as well as on our ability to manage expansion, control costs in our operations
and consolidate both completed and anticipated dealership acquisitions, into
existing operations. In pursuing a strategy of acquiring other dealerships, we
face risks commonly encountered with growth through acquisitions. These risks
include, but are not limited to:
. incurring significantly higher capital expenditures and operating expenses;
. failing to assimilate the operations and personnel of the acquired
dealerships;
. entering new markets with which we are unfamiliar;
. potential undiscovered liabilities at acquired dealerships;
. disrupting our ongoing business;
8
. diverting our limited management resources;
. failing to maintain uniform standards, controls and policies;
. impairing relationships with employees, manufacturers and customers as a
result of changes in management;
. causing increased expenses for accounting and computer systems, as well as
integration difficulties; and
. failure to obtain a manufacturer's consent to the acquisition of one or
more of its dealership franchises.
We may not adequately anticipate all of the demands that our growth will
impose on our systems, procedures and structures, including our financial and
reporting control systems, data processing systems and management structure. If
we cannot adequately anticipate and respond to these demands, our business
could be materially harmed.
Failure to retain qualified management personnel at any acquired dealership
may increase the risk associated with integrating the acquired dealership.
Installing new computer systems has disrupted existing operations in the past
as management and salespersons adjust to new technologies. We cannot assure you
that we will overcome these risks or any other problems encountered with our
acquisitions, including our 1998, 1999 and 2000 acquisitions.
Automobile manufacturers exercise significant control over our operations, and
we are dependent on them to operate our business.
Each of our dealerships operates pursuant to a franchise agreement with the
applicable automobile manufacturer or manufacturer authorized distributor. We
are significantly dependent on our relationships with these manufacturers.
Without a franchise agreement, we cannot obtain new vehicles from a
manufacturer.
Vehicles manufactured by the following manufacturers accounted for the
indicated approximate percentage of our new vehicle revenue for the nine months
ended September 30, 2000:
Percentage of Historical
New Vehicle Revenues for
the Nine Months ended
Manufacturer September 30, 2000
------------ ------------------------
Honda 14.6%
Ford 13.8%
Chrysler 12.3%
General Motors 10.9%
BMW 10.1%
Toyota 8.5%
Nissan 6.4%
Lexus 5.0%
No other manufacturer accounted for more than 5% of our new vehicle sales
during the first nine months of 2000. A significant decline in the sale of
Honda, Ford, Chrysler, General Motors ("GM"), BMW, Toyota, Nissan or Lexus new
vehicles could have a material adverse effect on our revenue and profitability.
Manufacturers exercise a great degree of control over the operations of our
dealerships. Each of our franchise agreements provides for termination or
non-renewal for a variety of causes, including any unapproved change of
ownership or management and other material breaches of the franchise
agreements. Manufacturers may also have a right of first refusal if we seek to
sell dealerships. We believe that we will be able to renew at expiration all of
our existing franchise agreements.
9
. We cannot assure you that any of our existing franchise agreements will be
renewed or that the terms and conditions of such renewals will be
favorable to us.
. If a manufacturer is allowed under state franchise laws to terminate or
decline to renew one or more of our significant franchise agreements, this
action could have a material adverse effect on our results of operations.
. Actions taken by manufacturers to exploit their superior bargaining
position in negotiating the terms of renewals of franchise agreements or
otherwise could also have a material adverse effect on our results of
operations.
. Manufacturers allocate their vehicles among dealerships generally based on
the sales history of each dealership. Consequently, we also depend on the
manufacturers to provide us with a desirable mix of popular new vehicles.
These popular vehicles produce the highest profit margins and tend to be
the most difficult to obtain from the manufacturers.
. Our dealerships depend on the manufacturers for certain sales incentives,
warranties and other programs that are intended to promote and support
dealership new vehicle sales. Manufacturers have historically made many
changes to their incentive programs during each year. A reduction or
discontinuation of a manufacturer's incentive programs may materially
adversely affect our profitability. Some of these programs include:
. customer rebates on new vehicles;
. dealer incentives on new vehicles;
. special financing or leasing terms;
. warranties on new and used vehicles; and
. sponsorship of used vehicle sales by authorized new vehicle dealers.
Adverse conditions affecting one or more manufacturers may negatively impact
our profitability.
The success of each of our dealerships depends to a great extent on the
manufacturers':
. financial condition;
. marketing;
. vehicle design;
. production capabilities;
. management; and
. labor relations.
Nissan, Dodge (a Chrysler brand) and Volvo have had significant difficulty
in the U.S. market in the recent past. If any of our manufacturers,
particularly Honda, Ford, Chrysler, GM, BMW, Toyota, Nissan, or Lexus were
unable to successfully design, manufacture, deliver and market their vehicles,
the manufacturer's reputation and our ability to sell the manufacturer's
vehicles could be adversely affected.
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 our results of operations. Similarly, the delivery of
vehicles from manufacturers later than scheduled, which may occur particularly
during periods when new products are being introduced, can reduce our sales.
Although, we have attempted to lessen our dependence on any one manufacturer by
establishing dealer relationships with a number of different domestic and
foreign
10
automobile manufacturers, adverse conditions affecting manufacturers, Honda,
Ford, Chrysler, GM, BMW, Toyota, Nissan or Lexus in particular, could have a
material adverse effect on our results of operations. For example, in June
1998, the United Auto Workers went on strike at two GM facilities in Flint,
Michigan. The strike lasted 53 days, causing 27 GM manufacturing facilities to
shut down during the strike and severely affecting production of GM vehicles
during the strike. In the event of another strike, we may need to purchase
inventory from other automobile dealers at prices higher than we would be
required to pay to the affected manufacturer in order to carry an adequate
level and mix of inventory. Consequently, strikes or other adverse labor
actions could materially adversely affect our profitability.
Manufacturer stock ownership/issuance restrictions limit our ability to issue
additional equity to meet our financing needs.
Standard automobile franchise agreements prohibit transfers of any ownership
interests of a dealership and its parent and, therefore, often do not by their
terms accommodate public trading of the capital stock of a dealership or its
parent. Our manufacturers have agreed to permit trading in Sonic's Class A
common stock. A number of manufacturers impose restrictions on the
transferability of the Class A common stock.
. Honda may force the sale of our Honda or Acura franchises if (1) an
automobile manufacturer or distributor acquires securities having 5% or
more of the voting power of Sonic's securities, (2) an individual or
entity that has either a felony criminal record or a criminal record
relating solely to dealings with an automobile manufacturer, distributor
or dealership acquires securities having 5% or more of the voting power of
Sonic's securities or (3) any individual or entity acquires securities
having 20% or more of the voting power of Sonic's securities and Honda
reasonably deems such acquisition to be detrimental to Honda's interests
in any material respect.
. Ford may cause us to sell or resign from one or more of our Ford, Lincoln
or Mercury franchises if any person or entity (other than O. Bruton Smith
and any entity controlled by him) acquires or has a binding agreement to
acquire securities having 50% or more of the voting power of Sonic's
securities.
. GM, Toyota and Nissan Motor Corporation In U.S.A. may force the sale of
their respective franchises if 20% of more of Sonic's voting securities
are similarly acquired.
. Chrysler requires prior approval of any future sales that would result in
a change in voting or managerial control of Sonic.
. Mercedes requires 60 days advance notice to approve any acquisition of 20%
or more of Sonic's voting securities.
. Volkswagen has approved the sale of no more than 25% of the voting control
of Sonic, and any future changes in ownership or transfers among Sonic's
current stockholders that could affect the voting or managerial control of
Sonic's Volkswagen franchise subsidiaries requires the prior approval of
Volkswagen.
Other manufacturers may impose similar or more limiting restrictions.
Our lending arrangements also require that holders of Sonic's Class B common
stock maintain voting control over Sonic. We are unable to prevent our
stockholders from transferring shares of our common stock, including transfers
by holders of the Class B common stock. If such transfer results in a change in
control of Sonic, it could result in the termination or non-renewal of one or
more of our franchise agreements and a default under our credit arrangements.
Moreover, these issuance limitations may impede our ability to raise capital
through additional equity offerings or to issue our stock as consideration for
future acquisitions.
11
Manufacturers' restrictions on acquisitions could limit our future growth.
We are required to obtain the consent of the applicable manufacturer before
the acquisition of any additional dealership franchises. We cannot assure you
that manufacturers will grant such approvals, although the denial of such
approval may be subject to certain state franchise laws. Jaguar declined to
consent to our proposed 1997 acquisitions of franchises associated with
dealerships in Chattanooga, Tennessee and Greenville, South Carolina, and we
subsequently agreed with Jaguar not to acquire any Jaguar franchise until
August 3, 2001.
Obtaining manufacturer consent for acquisitions could also take a
significant amount of time. Obtaining manufacturer approval for each of our
completed acquisitions has taken approximately three to five months. We believe
that manufacturer approvals of subsequent acquisitions from manufacturers with
which we have previously completed applications and agreements may take less
time, although we cannot provide you with assurances to that effect. In
addition, under an applicable franchise agreement or under state law, a
manufacturer may have a right of first refusal to acquire a dealership in the
event we seek to acquire that dealership franchise.
If we experience delays in obtaining, or fail to obtain, manufacturer
approvals for dealership acquisitions, our growth strategy could be materially
adversely affected. In determining whether to approve an acquisition, the
manufacturers may consider many factors, including:
. our management's moral character;
. the business experience of the post-acquisition dealership management;
. our financial condition;
. our ownership structure; and
. manufacturer-determined consumer satisfaction index (CSI) scores.
In addition, a manufacturer may seek to limit the number of its dealerships
that we may own, our national market share of that manufacturer's products or
the number of dealerships we may own in a particular geographic area. These
restrictions may not be enforceable under state franchise laws.
. In September 1999, Ford and Sonic signed a new framework agreement. The
agreement places the following restrictions on our ability to acquire Ford
or Lincoln Mercury dealerships:
. We may not acquire additional Ford or Lincoln Mercury dealerships
unless we continue to satisfy Ford's requirement that 80% of our Ford
dealerships meet Ford's performance criteria. Beyond that, we may not
make an acquisition that would result in our owning Ford or Lincoln
Mercury dealerships with sales exceeding 5% of the total Ford or total
Lincoln Mercury retail sales of new vehicles in the United States for
the preceding calendar year.
. We may not acquire additional Ford or Lincoln Mercury dealerships in a
particular state if such an acquisition would result in our owning
Ford or Lincoln Mercury dealerships with sales exceeding 5% of the
total Ford or total Lincoln Mercury retail sales of new vehicles in
that state for the preceding calendar year.
. We may not acquire additional Ford dealerships in a Ford-defined
market area if such an acquisition would result in our owning more
than one Ford dealership in a market having a total of three or less
Ford dealerships or owning more than 25% of the Ford dealerships in a
market having a total of four or more Ford dealerships. An identical
market area restriction applies for Lincoln Mercury dealerships.
. In September 1999, Honda and Sonic signed a new framework agreement.
This framework agreement limits the number of Honda and Acura
dealerships that we may own on a national level, in each Honda and
Acura-defined geographic zone, and in each Honda-defined metropolitan
market. Nationally, the limitations on Honda dealerships owned by us
are based on specified percentages of
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total Honda unit sales in the United States. In Honda-defined
geographic zones, the limitations on Honda dealerships owned by us are
based on specified percentages of total Honda unit sales in each of 10
Honda-defined geographic zones. In Honda-defined metropolitan markets,
the limitations on Honda dealerships owned by us are specified numbers
of dealerships in each market, which numerical limits vary based
mainly on the total number of Honda dealerships in a particular
market. For Acura, we may own no more than (1) two Acura dealerships
in a Honda-defined metropolitan market, (2) three Acura dealerships in
any one of six Honda-defined geographic zones and (3) five Acura
dealerships nationally.
. Toyota currently restricts the number of dealerships that may be owned by
any one group to seven Toyota and three Lexus dealerships nationally and
restricts the number of dealerships that may be owned to (1) the greater
of one dealership, or 20% of the Toyota dealer count in a Toyota-defined
"Metro" market, (2) the lesser of five dealerships or 5% of the Toyota
dealerships in any Toyota region (currently 12 geographic regions) and (3)
two Lexus dealerships in any one of the four Lexus geographic areas.
Toyota further requires that at least nine months elapse between
acquisitions.
. Mercedes restricts any company from owning Mercedes dealerships with sales
of more than 3% of total sales of Mercedes vehicles in the U.S. during the
previous calendar year.
. GM currently limits the maximum number of GM dealerships that we may
acquire to 50% of the GM dealerships, by brand line, in a GM-defined
geographic market area having multiple GM dealers.
. Subaru limits us to no more than two Subaru dealerships within certain
designated market areas, four Subaru dealerships within its Mid-America
region and 12 dealerships within Subaru's entire area of distribution.
. BMW prohibits publicly held companies from owning BMW dealerships
representing more than 5% of all BMW sales in the U.S. or more than 50% of
BMW dealerships in a given metropolitan market. We believe we are
currently at BMW's national sales limitation.
. Toyota, Honda and Mercedes also prohibit the coupling of a franchise with
any other brand without their consent.
. Honda also prohibits ownership of contiguous dealerships.
As a condition to granting their consent to our acquisitions, a number of
manufacturers required additional restrictions. These agreements principally
restrict:
. material changes in our company or extraordinary corporate transactions
such as a merger, sale of a material amount of assets or change in our
board of directors or management that could have a material adverse effect
on the manufacturer's image or reputation or could be materially
incompatible with the manufacturer's interests;
. the removal of a dealership general manager without the consent of the
manufacturer; and
. the use of dealership facilities to sell or service new vehicles of other
manufacturers.
In addition, manufacturer consent to our acquisitions may impose conditions,
such as requiring facilities improvements by us at the acquired dealership.
If we are unable to comply with these restrictions, we generally:
. must sell the assets of the dealerships to the manufacturer or to a third
party acceptable to the manufacturer; or
. terminate the dealership agreements with the manufacturer.
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Other manufacturers may impose other and more stringent restrictions in
connection with future acquisitions.
We currently own the following number of franchises for the following
manufacturers:
Number Number
of of
Manufacturer Franchises Manufacturer Franchises
------------ ---------- ------------ ----------
Dodge...... 12 Lincoln..... 4
Honda...... 11 Mercedes.... 4
BMW........ 10 Mitsubishi.. 3
Ford....... 10 GMC......... 3
Nissan..... 10 Hyundai..... 3
Chevrolet.. 10 Isuzu....... 3
Cadillac... 10 KIA......... 3
Volvo...... 9 Pontiac..... 3
Oldsmobile. 7 Audi........ 2
Chrysler... 7 Infiniti.... 2
Jeep....... 7 Range Rover. 2
Plymouth... 7 Porsche..... 2
Toyota..... 7 Acura....... 1
Volkswagen. 6 Buick....... 1
Mercury.... 5 Subaru...... 1
Lexus...... 4
---
169
Our failure to meet a manufacturer's consumer satisfaction requirements may
adversely affect our ability to acquire new dealerships and our profitability.
Many manufacturers attempt to measure customers' satisfaction with their
sales and warranty service experiences through systems which vary from
manufacturer to manufacturer, but which are generally known as "CSI." These
manufacturers may use a dealership's CSI scores as a factor in evaluating
applications for additional dealership acquisitions. The components of CSI have
been modified by various manufacturers from time to time in the past, and we
cannot assure you that these components will not be further modified or
replaced by different systems in the future. To date, we have not been
materially adversely affected by these standards and have not been denied
approval of any acquisition based on low CSI scores, except for Jaguar's
refusal to approve our acquisition of a Chattanooga Jaguar franchise in 1997.
However, we cannot assure you that we will be able to comply with these
standards in the future. A manufacturer may refuse to consent to an acquisition
of one of its franchises if it determines our dealerships do not comply with
the manufacturer's CSI standards. This could materially adversely affect our
acquisition strategy. In addition, we receive payments from the manufacturers
based, in part, on CSI scores, which could be materially adversely affected if
our CSI scores decline.
There are limitations on our financial resources available for acquisitions.
We intend to finance our acquisitions with cash generated from operations,
through issuances of our stock or debt securities and through borrowings under
credit arrangements.
. We cannot assure you that we will be able to obtain additional financing
by issuing stock or debt securities.
. Using cash to complete acquisitions could substantially limit our
operating or financial flexibility.
. If we are unable to obtain financing on acceptable terms, we may be
required to reduce the scope of our presently anticipated expansion, which
could materially adversely affect our growth strategy.
14
We estimate that we have approximately $97.5 million available for
additional borrowings under the 2000 Revolving Facility, based on a borrowing
base calculated on the basis of our receivables, inventory and equipment and a
pledge of certain additional collateral by an affiliate of Sonic (which
borrowing base was $431.7 million of the $500.0 million facility at September
30, 2000).
In addition, we are dependent to a significant extent on our ability to
finance our inventory. Automotive retail inventory financing involves
significant sums of money in the form of "floor plan financing." Floor plan
financing is how a dealership finances its purchase of new vehicles from a
manufacturer. The dealership borrows money to buy a particular vehicle from the
manufacturer and pays off the loan when it sells that particular vehicle,
paying interest during this period. We must obtain new floor plan financing or
obtain consents to assume such financing in connection with our acquisition of
dealerships. As of September 30, 2000, we had approximately $540.9 million of
floor plan indebtedness outstanding, of which $384.4 million was under the Ford
Floor Plan Facility, $131.4 million was under the Chrysler Floor Plan Facility
and $25.1 million was under the GMAC Floor Plan Facility.
Substantially all the assets of our dealerships are pledged to secure this
floor plan indebtedness. In addition, substantially all the real property and
assets of our subsidiaries that are constructing new dealerships are pledged
under our newly obtained Mortgage Facility. These pledges may impede our
ability to borrow from other sources.
Finally, because Ford Motor Credit is associated with Ford, any
deterioration of our relationship with one could adversely affect our
relationship with the other. The same is true of our relationships with
Chrysler and Chrysler Financial, as well as GM and GMAC.
Although our officers and directors have previously facilitated our acquisition
financing, we cannot assure you that these individuals will be willing or able
to assist in our financing needs in the future.
O. Bruton Smith, our Chief Executive Officer and Chairman of the Board,
previously guaranteed our credit facilities and other financing arrangements to
facilitate our acquisitions. Mr. Smith may be unwilling to make any such
commitments in the future if such commitments are needed.
Mr. Smith initially guaranteed obligations under the Revolving Facility.
Such obligations were further secured with a pledge of shares of common stock
of Speedway Motorsports, Inc. owned by Sonic Financial Corporation, a
corporation controlled by Mr. Smith ("SFC"), having an estimated value at the
time of pledge of approximately $50.0 million (the "Revolving Pledge"). When
the Revolving Facility's borrowing limit was increased to $75.0 million in
1997, Mr. Smith's personal guarantee of Sonic's obligations under the Revolving
Facility was released, although the Revolving Pledge remained in place. Mr.
Smith was also required by Ford Motor Credit to lend $5.5 million (the
"Subordinated Smith Loan") to Sonic to increase our capitalization because the
net proceeds from our November 1997 initial public offering were significantly
less than expected. In August 1998, Ford Motor Credit released the Revolving
Pledge. In November 1999, Ford Motor Credit further increased the borrowing
limit under the 1999 Revolving Facility to $350.0 million subject to a
borrowing base calculated on the basis of our receivables, inventory and
equipment and a pledge by SFC of five million shares of Speedway Motorsports,
Inc. common stock. The 2000 Revolving Facility is subject to a similar
borrowing base, including SFC's continuing pledge of Speedway Motorsports, Inc.
stock.
Before our acquisition of FirstAmerica, Mr. Smith guaranteed the obligations
of FirstAmerica under FirstAmerica's new acquisition line of credit with Ford
Motor Credit. FirstAmerica obtained this new financing to enable it to complete
its then pending acquisitions. The borrowing limit on this credit facility was
approximately $138 million. Mr. Smith had guaranteed approximately $107 million
of this amount, which guarantee was secured by a pledge of 5.0 million shares
of Speedway Motorsports, Inc. common stock owned by SFC. We assumed
FirstAmerica's obligations to Ford Motor Credit under our 1999 Revolving
Facility when we acquired FirstAmerica. Mr. Smith's secured guarantee in favor
of Ford Motor Credit guaranteed a portion of our
15
obligations under the 1999 Revolving Facility. Under the 2000 Revolving
Facility, Mr. Smith did not provide a guarantee in favor of the lenders, but
SFC continues to pledge Speedway Motorsports, Inc. stock as collateral. We
cannot assure you that Mr. Smith will be willing or able to provide similar
guarantees or credit support in the future to facilitate Sonic's future
acquisitions.
Automobile retailing is a mature industry with limited growth potential in new
vehicle sales, and our acquisition strategy will affect our revenues and
earnings.
The United States automobile dealership industry is considered a mature
industry in which minimal growth is expected in unit sales of new vehicles. As
a consequence, growth in our revenues and earnings is likely to be
significantly affected by our success in acquiring and integrating dealerships
and the pace and size of such acquisitions.
High competition in automobile retailing reduces our profit margins on
vehicle sales. Further, the use of the Internet in the car purchasing process
could materially adversely affect us.
Automobile retailing is a highly competitive business with approximately
22,400 franchised automobile dealerships in the United States at the end of
1999. Our competition includes:
. Franchised automobile dealerships selling the same or similar makes of new
and used vehicles that we offer in our markets and sometimes at lower
prices than we offer. Some of these dealer competitors may be larger and
have greater financial and marketing resources than we do;
. Other franchised dealers;
. Private market buyers and sellers of used vehicles;
. Used vehicle dealers;
. Internet-based vehicle brokers that sell vehicles obtained from franchised
dealers directly to consumers;
. Service center chain stores; and
. Independent service and repair shops.
Our financing and insurance business and other related businesses, which
provide higher contributions to our earnings than sales of new and used
vehicles, are subject to strong competition from various financial institutions
and other third parties. This competition is increasing as these products are
now being marketed and sold over the Internet.
Gross profit margins on sales of new vehicles have been generally declining
since 1986. We do not have any cost advantage in purchasing new vehicles from
manufacturers, due to economies of scale or otherwise. We typically rely on
advertising, merchandising, sales expertise, service reputation and dealership
location to sell new vehicles. The following factors could have a significant
impact on our business:
. The Internet has become a significant part of the sales process in our
industry. Customers are using the Internet to compare pricing for cars and
related financing and insurance services, which may further reduce margins
for new and used cars and profits for related financing and insurance
services. In addition, CarsDirect.com and others are selling vehicles over
the Internet without the benefit of having a dealership franchise,
although they must currently source their vehicles from a franchised
dealer. CarsDirect.com has entered into an alliance with United Auto Group
to facilitate their sourcing of vehicles. Also, AutoNation is selling
vehicles for its new car dealerships through its AutoNationDirect.com web
site. If Internet new vehicle sales are allowed to be conducted without
the involvement of franchised dealers, our business could be materially
adversely affected. In addition, other franchise groups have aligned
themselves with Internet car sellers or are spending significant sums on
developing their own Internet capabilities, which could materially
adversely affect our business.
16
. Ford has entered into joint ventures to acquire dealerships in various
cities in the United States, and Saturn has acquired some of its
dealerships. GM, which previously announced similar intentions, has
cancelled its initiative in this area. Other manufacturers may directly
enter the retail market in the future. Our revenues and profitability
could be materially adversely affected by manufacturers' direct retailing
efforts.
. The increased popularity of short-term vehicle leasing also has resulted,
as these leases expire, in a large increase in the number of late model
vehicles available in the market, which puts added pressure on new and
used vehicle margins.
. Some of our competitors may be capable of operating on smaller gross
margins than we are, and the on-line auto brokers have been operating at a
loss.
. As we seek to acquire dealerships in new markets, we may face increasingly
significant competition as we strive to gain market share through
acquisitions or otherwise. This competition includes other large dealer
groups and dealer groups that have publicly traded equity.
Our franchise agreements do not grant us the exclusive right to sell a
manufacturer's product within a given geographic area. Our revenues or
profitability could be materially adversely affected if any of our
manufacturers award franchises to others in the same markets where we operate,
although certain state franchise laws may limit such activities by the
manufacturers. A similar adverse effect could occur if existing competing
franchised dealers increase their market share in our markets. Our gross
margins may decline over time as we expand into markets where we do not have a
leading position. These and other competitive pressures could materially
adversely affect our results of operations.
The cyclical and local nature of automobile sales may adversely affect our
profitability.
The automobile industry is cyclical and historically has experienced
periodic downturns characterized by oversupply and weak demand. Many factors
affect the industry, including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
credit availability. For example, recent interest rate increases and other
factors have impacted the market and have reduced the seasonally adjusted
annualized selling rate of new cars since the beginning of the year.
Future recessions may have a material adverse effect on our business. In
addition, significant changes in interest rates may significantly impact our
car sales since many car buyers finance their purchases. Furthermore, higher
gasoline prices may lead to a reduction in automobile purchases or a shift in
buying patterns from luxury/SUV models (which typically provide high profit
margins to retailers) to smaller, more economical vehicles (which typically
have lower margins).
Local economic, competitive and other conditions also affect the performance
of dealerships. Our dealerships currently are located in the Atlanta,
Baltimore, Birmingham, Charleston, Charlotte, Chattanooga, Columbia, Columbus,
Dallas, Daytona Beach, Fort Myers, Greenville/Spartanburg, Houston, Las Vegas,
Los Angeles, Mobile/Pensacola, Montgomery, Nashville, San Diego, San Francisco,
San Jose/Silicon Valley, Tampa/Clearwater, Tulsa and Washington, D.C. markets.
We intend to pursue acquisitions outside of these markets, but our operational
focus is on our current markets. As a result, our results of operations depend
substantially on general economic conditions and consumer spending habits in
the Southeast and Northern California and, to a lesser extent, the Houston and
Columbus markets. Sales in our Northern California market represented 15.7% of
our sales for the nine months ended September 30, 2000. Our results of
operations also depend on other factors, such as tax rates and state and local
regulations specific to Alabama, California, Florida, Georgia, Maryland,
Nevada, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas and
Virginia. Sonic may not be able to expand geographically and any such expansion
may not adequately insulate it from the adverse effects of local or regional
economic conditions.
17
We can offer you no assurances that we will be able to continue executing our
acquisition strategy without the costs of future acquisitions escalating.
Although there are many potential acquisition candidates that fit our
acquisition criteria, we cannot assure you that we will be able to consummate
any such transactions in the future or identify those candidates that would
result in the most successful combinations, or that future acquisitions will be
able to be consummated at acceptable prices and terms. In addition, increased
competition for acquisition candidates could result in fewer acquisition
opportunities for us and higher acquisition prices. The magnitude, timing,
pricing 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;
. our financial capabilities;
. our stock price;
. the availability of skilled employees to manage the acquired companies; and
. general economic and business conditions.
We may be required to file applications and obtain clearances under
applicable federal antitrust laws before completing an acquisition. These
regulatory requirements may restrict or delay our acquisitions, and may
increase the cost of completing acquisitions.
The operating condition of acquired businesses cannot be determined accurately
until we assume control.
Although we conduct what we believe to be a prudent level of investigation
regarding the operating condition of the businesses we purchase, in light of
the circumstances of each transaction, an unavoidable level of risk remains
regarding the actual operating condition of these businesses. Until we actually
assume operating control of such assets, we may not be able to ascertain the
actual value of the acquired entity.
18
Additional shares eligible for future sale could have an adverse effect on the
market price of our Class A common stock.
The market price of our Class A common stock could be adversely affected by
the availability for public sale of up to 23,534,990 shares held or issuable on
November 16, 2000, including:
Number of Shares of
Class A Common Stock Manner of Holding and/or Issuance
- -------------------- ---------------------------------
12,250,000(1) Issuable on conversion of 12,250,000 shares of our Class B common stock owned
by existing stockholders of Sonic. These shares of Class A common stock are
subject to certain piggyback registration rights.
242,782(1) Issuable on exercise of warrants issued in our business acquisitions.
29,384(1)(2) Issuable on conversion of outstanding shares of our Class A convertible preferred
stock that were issued in our business acquisitions.
5,500,699 Issued in our business acquisitions and currently registered for sale under the
Securities Act pursuant to shelf registrations.
4,834,635 Issuable on exercise of options granted under our 1997 Stock Option Plan. All
such shares are registered for sale under the Securities Act.
232,458 Issuable on exercise of options granted under our employee stock purchase plans.
All such shares are registered for sale under the Securities Act.
335,032 Issuable on exercise of options granted under our Amended and Restated
FirstAmerica Automotive 1997 Stock Option Plan. All such shares are registered
for sale under the Securities Act.
110,000 Issuable on exercise of options granted under our Directors Formula Stock Option
Plan. All such shares are registered for sale under the Securities Act.
- --------
(1) All such shares are "restricted securities" as defined in Rule 144 under
the Securities Act and may be resold in compliance with Rule 144.
(2) The number of shares of Class A common stock issuable upon conversion of
outstanding shares of our preferred stock is an estimate based on the
assumption that the average of the daily closing prices for the Class A
common stock on the New York Stock Exchange for the 20 consecutive trading
days ending one trading day before such conversion was $8.525 per share
This number is subject to adjustment based on the common stock price on the
date of conversion and could be materially more or less than this estimated
amount depending on factors that we cannot presently determine. These
factors include the future market price of the Class A common stock and the
decisions of the holders of the preferred stock as to when to convert their
shares of preferred stock. Generally, such issuances of Class A common
stock will vary inversely with the market price of the Class A common stock.
In connection with pending acquisitions, we have agreed to issue
approximately $2.0 million in Class A common stock and approximately $4.6
million in liquidation value of preferred stock. Approximately $4.6 million in
value of these securities will have registration rights, all of which shares
will be subject to prohibitions on resales for the six months after their
issuance. We intend in our business acquisitions to issue additional shares of
equity securities that may have registration rights as well as be eligible for
resale under Rule 144. The resale of substantial amounts of Class A common
stock, or the perception that such resales may occur, could materially and
adversely affect the prevailing market prices for the Class A common stock and
our ability to raise equity capital in the future.
19
Potential conflicts of interest between Sonic and its officers could adversely
affect our future performance.
O. Bruton Smith serves as the chairman and chief executive officer of
Speedway Motorsports Inc. Accordingly, Sonic competes with Speedway Motorsports
Inc. for the management time of Mr. Smith. Under his employment agreement with
Sonic, Mr. Smith is required to devote approximately 50% of his business time
to our business. The remainder of his business time may be devoted to other
entities, including Speedway Motorsports Inc.
Sonic has in the past and will likely in the future enter into transactions
with Mr. Smith, entities controlled by Mr. Smith or other affiliates of Sonic.
For example, Sonic previously entered into property transactions with MMR
Holdings, L.L.C. and its subsidiaries (the "MMR Group"). The MMR Group was
owned, directly and indirectly, and controlled by Mr. Smith. On August 13,
1999, Mr. Smith and SFC sold the ownership of the MMR Group to CAR MMR L.L.C.
("CAR MMR"), an affiliate of Capital Automotive REIT, which is unaffiliated
with Sonic or Mr. Smith. The MMR Group owned 50 properties leased to 42 Sonic
dealerships at the time of the MMR Group sale. As a part of the sale of the MMR
Group, Mr. Smith and SFC signed agreements with Sonic to induce Sonic to sign
its agreement with CAR MMR. Mr. Smith and SFC, under these agreements, agreed
to pay approximately $2.5 million to Sonic, which amount represented Mr.
Smith's and SFC's profits on the sale of the MMR Group less their expenses in
selling the MMR Group and a 14% annual return on their initial investment in
the MMR Group, net of any advances previously made by Sonic to the MMR Group.
We believe that all of our existing arrangements with affiliates are as
favorable to us as if the arrangements were negotiated between unaffiliated
parties, although such transactions have neither been independently verified in
that regard nor are likely to be so verified in the future. Potential conflicts
of interest could arise in the future between Sonic and its officers or
directors in the enforcement, amendment or termination of arrangements existing
between them.
Under Delaware law generally, a corporate insider is precluded from acting
on a business opportunity in his individual capacity if that opportunity is
(1) one which the corporation is financially able to undertake,
(2) is in the line of the corporation's business,
(3) is of practical advantage to the corporation, and
(4) is one in which the corporation has an interest or reasonable expectancy.
Accordingly, our corporate insiders are generally prohibited from engaging in
new dealership-related business opportunities outside of Sonic unless a
majority of Sonic's disinterested directors decide that such opportunities are
not in our best interest.
Sonic's charter contains provisions providing that transactions between
Sonic and its affiliates must be no less favorable to Sonic than would be
available in similar transactions with an unrelated third party. Moreover, any
such transactions involving aggregate payments in excess of $500,000 must be
approved by a majority of Sonic's directors and a majority of its independent
directors. Otherwise, Sonic must obtain an opinion as to the financial fairness
of the transaction to be issued by an investment banking or appraisal firm of
national standing. In addition, the terms of the Revolving Facility, the Notes
offered by this offering memorandum and Sonic's existing senior subordinated
notes restrict transactions with affiliates in a manner similar to Sonic's
charter restrictions.
20
Lack of majority of independent directors could result in conflicts between us
and our management and majority stockholders that may reduce our future
performance.
Independent directors do not constitute a majority of our board, and our
board may not have a majority of independent directors in the future. Without a
majority of independent directors, Sonic's executive officers, principal
stockholders and directors could establish policies and enter into transactions
without independent review and approval, subject to certain restrictions under
our charter. These policies and transactions could present the potential for a
conflict of interest between Sonic and its minority stockholders and the
controlling officers, stockholders or directors.
The loss of key personnel and limited management and personnel resources could
adversely affect our operations and growth.
Our success depends to a significant degree upon the continued contributions
of Sonic's management team, particularly its senior management, and service and
sales personnel. The loss of any of these executives may have a material
adverse effect on our operations. Additionally, manufacturer franchise
agreements may require the prior approval of the applicable manufacturer before
any change is made in franchise general managers. We do not have employment
agreements with most of our dealership managers and other key dealership
personnel. Consequently, the loss of the services of one or more of these key
employees could have a material adverse effect on our results of operations.
In addition, we may need to hire additional managers as we expand. The
market for qualified employees in the industry and in the regions in which we
operate, particularly for general managers and sales and service personnel, is
highly competitive and may subject us to increased labor costs during 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 our results of operations. In addition, the lack of qualified management or
employees employed by potential acquisition candidates may limit our ability to
consummate future acquisitions.
Seasonality of the automotive retail business adversely affects first quarter
revenues.
Our business is seasonal, with a disproportionate amount of revenues
received generally in the second, third and fourth fiscal quarters.
Import product restrictions and foreign trade risks may impair our ability to
sell foreign vehicles profitably.
Some of the vehicles and major components of vehicles we sell are
manufactured in foreign countries. Accordingly, we are subject to the import
and export restrictions of various jurisdictions and are dependent to some
extent upon general economic conditions in, and political relations with, a
number of foreign countries, particularly Germany, Japan and Sweden.
Fluctuations in currency exchange rates may also adversely affect our sales of
vehicles produced by foreign manufacturers. Imports into the United States may
also be adversely affected by increased transportation costs and tariffs,
quotas or duties.
Governmental regulation and environmental regulation compliance costs may
adversely affect our profitability.
We are subject to a wide range of federal, state and local laws and
regulations, such as local licensing requirements and consumer protection laws.
The violation of these laws and regulations can result in civil and criminal
penalties against us or in a cease and desist order against our operations if
we are not in compliance. Our future acquisitions may also be subject to
regulation, including antitrust reviews. We believe that we comply in all
material respects with all laws and regulations applicable to our business, but
future regulations may be more stringent and require us to incur significant
additional costs.
21
Our facilities and operations are also subject to federal, state and local
laws and regulations relating to environmental protection and human health and
safety, including those governing wastewater discharges, air emissions, the
operation and removal of underground and aboveground storage tanks, the use,
storage, treatment, transportation, release, recycling and disposal of solid
and hazardous materials and wastes and the cleanup of contaminated property or
water. We may be required by these laws to pay the full amount of the costs of
investigation and/or remediation of contaminated properties, even if we are not
at fault for disposal of the materials or if such disposal was legal at the
time. People who may be found liable under these laws and regulations include
the present or former owner or operator of a contaminated property and
companies that generated, transported, disposed of or arranged for the
transportation or disposal of hazardous substances found at the property.
Our past and present business operations are subject to environmental laws
and regulations governing the use, storage, handling, recycling and disposal of
hazardous or toxic substances such as new and waste motor oil, oil filters,
transmission fluid, antifreeze, freon, new and waste paint and lacquer thinner,
batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels.
We are also subject to laws and regulations relating to underground storage
tanks that exist or used to exist at many of our properties. Like many of our
competitors, we have incurred, and will continue to incur, capital and
operating expenditures and other costs in complying with such laws and
regulations. In addition, soil and groundwater contamination exists at certain
of our properties. We cannot assure you that our other properties have not been
or will not become similarly contaminated. In addition, we could become subject
to potentially material new or unforeseen environmental costs or liabilities
because of our acquisitions.
Environmental laws and regulations, including those governing air emissions
and underground storage tanks, could require compliance with new or more
stringent standards that are imposed in the future. We cannot predict what
other environmental legislation or regulations will be enacted in the future,
how existing or future laws or regulations will be administered or interpreted
or what environmental conditions may be found to exist in the future.
Consequently, we may be required to make substantial expenditures in the future.
Concentration of voting power and antitakeover provisions of our charter,
Delaware law and our dealer agreements may reduce the likelihood of any
potential change of control of Sonic.
Sonic's common stock is divided into two classes with different voting
rights. This dual class stock ownership allows the present holders of the Class
B common stock to control Sonic. Holders of Class A common stock have one vote
per share on all matters. Holders of Class B common stock have 10 votes per
share on all matters, except that they have only one vote per share on any
transaction proposed by the Board of Directors or a Class B common stock holder
or otherwise benefiting the Class B common stock holders constituting a:
(1) "going private" transaction;
(2) disposition of substantially all of our assets;
(3) transfer resulting in a change in the nature of our business; or
(4) merger or consolidation in which current holders of common stock would
own less than 50% of the common stock following such transaction.
The holders of Class B common stock currently hold less than a majority of
Sonic's outstanding common stock, but a majority of Sonic's voting power. This
may prevent or discourage a change of control of Sonic even if such action were
favored by holders of Class A common stock.
Sonic's charter and bylaws make it more difficult for its stockholders to
take corporate actions at stockholders' meetings. In addition, options under
our 1997 Stock Option Plan become immediately exercisable on a change in
control. Also, Delaware law makes it difficult for stockholders who have
recently acquired a large
22
interest in a company to consummate a business transaction with the company
against its directors' wishes. Finally, restrictions imposed by our dealer
agreements may impede or prevent any potential takeover bid. Generally, our
franchise agreements allow the manufacturers the right to terminate the
agreements upon a change of control of our company and impose restrictions upon
the transferability of any significant percentage of our stock to any one
person or entity who may be unqualified, as defined by the manufacturer, to own
one of its dealerships. The inability of a person or entity to qualify with one
or more of our manufacturers may prevent or seriously impede a potential
takeover bid. These agreements, corporate documents and laws, as well as
provisions of our lending arrangements creating an event of default on a change
in control, may have the effect of delaying or preventing a change in control
or preventing stockholders from realizing a premium on the sale of their shares
upon an acquisition of Sonic.
Amortization of goodwill from acquisitions could change, resulting in
significant reduction in earnings for future periods.
Goodwill, net of accumulated amortization, represented approximately 39.5%
of our total assets and 147.2% of our stockholders' equity as of December 31,
1999, and represented approximately 38.4% of our total assets and 143.3% of our
stockholders' equity as of September 30, 2000. Goodwill arises when an acquiror
pays more for a business than the fair value of the tangible and separately
measurable intangible net assets. Accounting principles generally accepted in
the United States of America require that this and all other intangible assets
be amortized over the period benefited. We determined that the period benefited
by all of the goodwill will be no less than 40 years. Accordingly, we amortize
goodwill over a 40 year period. Earnings reported in periods immediately
following the acquisition would be overstated if we attributed a 40 year
benefit period to an intangible asset that should have had a shorter benefit
period. In later years, we would be burdened by a continuing charge against
earnings without the associated benefit to income valued by management in
arriving at the price paid for the businesses. Earnings in later years also
could be significantly affected if management determined then that the
remaining balance of goodwill was impaired. We periodically compare the
carrying value of goodwill with anticipated undiscounted future cash flows from
operations of the businesses we have acquired to evaluate the recoverability of
goodwill. We have concluded that the anticipated future cash flows associated
with intangible assets recognized in the acquisitions will continue
indefinitely, and there is no persuasive evidence that any material portion
will dissipate over a period shorter than 40 years. We will incur additional
goodwill in our future acquisitions.
The Financial Accounting Standards Board recently proposed new rules
relating to the accounting for business combinations and intangible assets. One
aspect of the proposal would not permit goodwill to be amortized over a period
in excess of 20 years; however, we cannot assure you that such a rule will be
adopted and, if adopted, as to the final provisions of any such rules. If such
a rule is adopted, we have been advised that it would likely only affect the
period over which we amortize goodwill on our future acquisitions.
Federal and state statutes allow courts, under specific circumstances, to void
guarantees and requires Debt Security holders to return payments received from
guarantors.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of
a guarantee could be subordinated to all other debts of that guarantor if,
among other things, the guarantor, at the time it incurred the indebtedness
evidenced by its guarantee received less than reasonably equivalent value or
fair consideration for the incurrence of such guarantee; and
. was insolvent or rendered insolvent by reason of such incurrence; or
. was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
23
. intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could be
voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
. the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets, or
. if the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature, or
. it could not pay its debts as they became due.
We can give you no assurance as to what standard a court would apply in
making such a determination or that a court would agree with our conclusions
that, after giving effect to a guarantee of Debt Securities, each guarantor
will not be insolvent.
24
USE OF PROCEEDS
Unless otherwise provided in a prospectus supplement, we will use the net
proceeds from the sale of the securities offered by this prospectus and any
prospectus supplement for our general corporate purposes, which may include
repayment of indebtedness, the acquisition of additional automobile
dealerships, additions to our working capital, and capital expenditures.
We will not receive any proceeds from the sale of Class A common stock by
the selling stockholders.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table contains our consolidated ratios of earnings to fixed
charges and earnings to fixed charges for the periods indicated.
Year Ended December 31,
-----------------------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Ratio of earnings to fixed charges 8.1 7.3 4.1 3.3 3.4 3.2
For purposes of computing the ratios of earnings to fixed charges and
earnings to fixed charges: (1) earnings consist of income before provision for
income taxes plus fixed charges (excluding capitalized interest) and (2) fixed
charges consist of interest expensed and capitalized, amortization of debt
discount and expense relating to indebtedness and the portion of rental expense
representative of the interest factor attributable to leases for rental
property. There were no dividends paid or accrued during the periods presented
above.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities may be issued from time to time in one or more series.
The particular terms of each series that are offered by a prospectus supplement
will be described in the prospectus supplement.
The Debt Securities will be either our senior debt securities ("Senior Debt
Securities") or our subordinated debt securities ("Subordinated Debt
Securities"). The Senior Debt Securities and the Subordinated Debt Securities
will be issued under separate Indentures among us, our subsidiaries, if our
subsidiaries are guarantors of the Debt Securities, and a U.S. banking
institution (a "Trustee"). Senior Debt Securities will be issued under a
"Senior Indenture" and Subordinated Debt Securities will be issued under a
"Subordinated Indenture." Together, the Senior Indenture and the Subordinated
Indenture are called "Indentures."
We will describe the particular terms of any Debt Securities that we offer
and the extent to which the general provisions below will apply to those Debt
Securities in a prospectus supplement relating to those Debt Securities. The
terms of the Debt Securities will include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended. The Debt Securities will be subject to all those terms, and
we refer the holders of the Debt Securities to the Indenture and the Trust
Indenture Act for a statement of those terms. Unless we indicate otherwise,
capitalized terms have the meanings given in the applicable Indenture.
We have summarized selected provisions of the Indenture below. The summary
is not complete. The forms of the Indenture have been filed as exhibits to the
registration statement and you should read the Indentures for provisions that
may be important to you. In the summary below we have included references to
section numbers of the applicable Indentures so that you can easily locate
these provisions. Whenever we refer in this prospectus or in the prospectus
supplement to particular sections or defined terms of the Indenture, such
sections or defined terms are incorporated by reference herein or therein, as
applicable.
25
General
The Indentures provide that Debt Securities in separate series may be issued
from time to time without limitation as to aggregate principal amount. We may
specify a maximum aggregate principal amount for the Debt Securities of any
series. (Section 301) We will determine the terms and conditions of the Debt
Securities, including the maturity, principal and interest, but those terms
must be consistent with the Indenture. The Debt Securities will be our
unsecured obligations.
The Subordinated Debt Securities will be subordinated in right of payment to
the prior payment in full of all of our Senior Indebtedness (as defined) as
described under "--Subordination of Subordinated Debt Securities" and in the
prospectus supplement applicable to any Subordinated Debt Securities.
If specified in the prospectus supplement, our subsidiaries (the
"Guarantors") will unconditionally guarantee (the "Subsidiary Guarantees") on a
joint and several basis the Debt Securities as described under "--Subsidiary
Guarantees" and in the prospectus supplement. The Subsidiary Guarantees will be
unsecured obligations of each Guarantor.
The applicable prospectus supplement will set forth the price or prices at
which the Debt Securities to be offered will be issued and will describe the
following additional terms:
. the title of the Debt Securities;
. whether the Debt Securities are Senior Debt Securities or Subordinated
Debt Securities and, if Subordinated Debt Securities, subordinated terms
relating thereto;
. whether the Guarantors will provide Subsidiary Guarantees of the Debt
Securities;
. the aggregate principal amount of the Debt Securities or any limit thereon;
. the dates on which the principal of the Debt Securities will be payable;
. the interest rate of the Debt Securities and the interest payment dates
for the Debt Securities;
. the places where payments on the Debt Securities will be payable;
. any terms upon which the Debt Securities may be redeemed at our option;
. any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the Debt Securities;
. the portion of the principal amount, if less than all, of the Debt
Securities that will be payable upon declaration of acceleration of the
Maturity of the Debt Securities;
. if convertible into our common stock or any of our other securities, the
terms on which such Debt Securities are convertible;
. whether the Debt Securities are secured and the terms of such security;
. whether the Debt Securities are defeasible;
. any addition to or change in the Events of Default;
. any addition to or change in the covenants in the applicable Indenture; and
. any other terms of the Debt Securities not inconsistent with the
provisions of the applicable Indenture. (Section 301)
Debt Securities, including Original Issue Discount Securities, may be sold
at a substantial discount below their principal amount. Special United States
federal income tax considerations applicable to Debt Securities sold at an
original issue discount may be described in the applicable prospectus
supplement. In addition, special
26
United States federal income tax or other considerations applicable to any Debt
Securities that are denominated in a currency other than United States dollars
may be described in the applicable prospectus supplement.
Subordination of Subordinated Debt Securities
The indebtedness evidenced by the Subordinated Debt Securities will, to the
extent set forth in the Subordinated Indenture with respect to each series of
Subordinated Debt Securities, be subordinate in right of payment to the prior
payment in full of all of our Senior Debt, including the Senior Debt
Securities. The prospectus supplement relating to any Subordinated Debt
Securities will summarize the subordination provisions of the Subordinated
Indenture applicable to that series including:
. the applicability and effect of such provisions upon any payment or
distribution of our assets to creditors upon any liquidation, bankruptcy,
insolvency or similar proceedings;
. the applicability and effect of such provisions in the event of specified
defaults with respect to any or certain Senior Debt, including the
circumstances under which and the periods in which we will be prohibited
from making payments on the Subordinated Debt Securities; and
. the definition of Senior Indebtedness applicable to the Subordinated Debt
Securities of that series.
The prospectus supplement will also describe as of a recent date the
approximate amount of Senior Indebtedness to which the Subordinated Debt
Securities of that series will be subordinated.
The failure to make any payment on any of the Subordinated Debt Securities
due to the subordination provisions of the Subordinated Indenture described in
the prospectus supplement will not prevent the occurrence of an Event of
Default on the Subordinated Debt Securities arising from any such failure to
make payment.
The subordination provisions described above will not be applicable to
payments in respect of the Subordinated Debt Securities from a defeasance trust
established in connection with any defeasance or covenant defeasance of the
Subordinated Debt Securities as described under "--Defeasance and Covenant
Defeasance."
Conversion Rights
The Debt Securities may be converted into other securities of our company,
if at all, according to the terms and conditions of an applicable prospectus
supplement. Such terms will include the conversion price, the conversion
period, provisions as to whether conversion will be at the option of the
holders of such series of Debt Securities or at the option of our company, the
events requiring an adjustment of the conversion price and provisions affecting
conversion in the event of the redemption of such series of Debt Securities.
Subsidiary Guarantees
If specified in the prospectus supplement, the Guarantors will guarantee the
Debt Securities of a series. Unless otherwise indicated in the prospectus
supplement, the following provisions will apply to the Subsidiary Guarantees of
the Guarantors.
Subject to the limitations described below and in the prospectus supplement,
the Guarantors will, jointly and severally, unconditionally guarantee the
performance and punctual payment when due, whether at Stated Maturity, by
acceleration or otherwise, of all our obligations under the Indentures and the
Debt Securities of a series (the "Guaranteed Obligations"). The Guarantors will
also pay, in addition to the amount stated above, any and all expenses
(including reasonable counsel fees and expenses) incurred by the applicable
Trustee in enforcing any rights under a Subsidiary Guarantee with respect to a
Guarantor.
27
In the case of Subordinated Debt Securities, a Guarantor's Subsidiary
Guarantee will be subordinated in right of payment to the Senior Indebtedness
of such Guarantor on the same basis as the Subordinated Debt Securities are
subordinated to our Senior Indebtedness. No payment will be made by any
Guarantor under its Subsidiary Guarantee during any period in which payments by
us on the Subordinated Debt Securities are suspended by the subordination
provisions of the Subordinated Indenture.
Each Subsidiary Guarantee will be limited in amount to an amount not to
exceed the maximum amount that can be guaranteed by the relevant Guarantor
without rendering such Subsidiary Guarantee voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally.
Each Subsidiary Guarantee will be a continuing guarantee and will:
. remain in full force and effect until either (a) payment in full of all
the Guaranteed Obligations (or the applicable Debt Securities are defeased
and discharged in accordance with the defeasance provisions of the
Indentures) or (b) released as described in the following paragraph,
. be binding upon each Guarantor, and
. inure to the benefit of and be enforceable by the applicable Trustee, the
holders and their successors, transferees and assigns.
In the event that a Guarantor ceases to be a Significant Subsidiary, whether
as a result of a disposition of all of the assets or all of the capital stock
of such Guarantor, by way of sale, merger, consolidation or otherwise, such
Guarantor will be deemed released and relieved of its obligations under its
Subsidiary Guarantee without any further action required on the part of the
Trustee or any holder and no other person acquiring or owning the assets or
capital stock of such Guarantor (if not otherwise a Significant Subsidiary)
will be required to enter into a Subsidiary Guarantee; provided, in each case,
that the transaction or transactions resulting in such Guarantor's ceasing to
be a Significant Subsidiary are carried out pursuant to and in compliance with
all of the applicable covenants in the Indenture. In addition, the prospectus
supplement may specify additional circumstances under which a Guarantor can be
released from its Subsidiary Guarantee.
Form, Exchange and Transfer
The Debt Securities of each series will be issuable only in fully registered
form, without coupons, and, unless otherwise specified in the applicable
prospectus supplement, only in denominations of $1,000 and integral multiple
thereof. (Section 302)
At the option of the Holder, subject to the terms of the applicable
Indenture and the limitations applicable to Global Securities, Debt Securities
of each series will be exchangeable for other Debt Securities of the same
series of any authorized denomination and of a like tenor and aggregate
principal amount. (Section 305)
Subject to the terms of the applicable Indenture and the limitations
applicable to Global Securities, Debt Securities may be presented for exchange
as provided above or for registration of transfer (duly endorsed or with the
form of transfer endorsed thereon duly executed) at the office of the Security
Registrar or at the office of any transfer agent designated by us for such
purpose. No service charge will be made for any registration of transfer or
exchange of Debt Securities, but we may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Such transfer or exchange will be effected upon the Security Registrar or such
transfer agent, as the case may be, begin satisfied with the documents of title
and identity of the person making the request. The Security Registrar and any
other transfer agent initially designated by us for any Debt Securities will be
named in the applicable prospectus supplement. (Section 305) We may at any time
designate additional transfer agents or rescind the designation of any transfer
agent or approve a change
28
in the office through which any transfer agent acts, except that we will be
required to maintain a transfer agent in each Place of Payment for the Debt
Securities of each series. (Section 1002).
If the Debt Securities of any series (or of any series and specified terms)
are to be redeemed in part, we will not be required to (i) issue, register the
transfer of or exchange any Debt Security of that series (or of that series and
specified tenor, as the case may be) during a period beginning at the opening
of business 15 days before the day of mailing of a notice of redemption of any
such Debt Security selected for redemption and ending at the close of business
on the day of such mailing or (ii) register the transfer of or exchange any
Debt Security so selected for redemption, in whole or in part, except the
unredeemed portion of any such Debt Security being redeemed in part. (Section
305)
Global Securities
Some or all of the Debt Securities of any series may be represented, in
whole or in part, by one or more Global Securities which will have an aggregate
principal amount equal to that of the Debt Securities represented thereby. Each
Global Security will be registered in the name of a Depositary or a nominee
thereof identified in the applicable prospectus supplement, will be deposited
with such Depository or nominee or a custodian therefor and will bear a legend
regarding the restrictions on exchanges and registration of transfer thereof
referred to below and any such other matters as may be provided for pursuant to
the Indenture.
Notwithstanding any provision of the applicable Indenture or any Debt
Security described herein, no Global Security may be exchanged or transferred
in whole or in part for Debt Securities registered in the name of any person
other than the Depositary for such Global Security or any nominee of such
Depositary unless:
. the Depositary is unwilling or unable to continue as depositary;
. an Event of Default has occurred and is continuing under the Debt
Securities represented by the Global Security; or
. as otherwise provided in a prospectus supplement.
All Debt Securities issued in exchange for a Global Security or any portion
thereof will be registered in such names as the Depositary may direct. (Section
305)
As long as the Depositary, or its nominee, is the registered Holder of a
Global Security, the Depositary or such nominee, as the case may be, will be
considered the sole owner and Holder of such Global Security and the Debt
Securities represented thereby for all purposes under the Debt Securities and
the applicable Indenture. Except in the limited circumstances referred to
above, owners of beneficial interests in a Global Security will not be entitled
to have such Global Security or any Debt Securities represented thereby
registered in their names, will not receive or be entitled to receive physical
delivery of certificated Debt Securities in exchange therefor and will not be
considered to be the owners or Holders of such Global Security or any Debt
Securities represented thereby for any purpose under the Debt Securities or the
applicable Indenture. All payments of principal of and any premium and interest
on a Global Security will be made to the Depositary or its nominee, as the case
may be, as the Holder thereof. The laws of some jurisdictions require that
certain purchasers of Debt Securities take physical delivery of such Debt
Securities in definitive form. These laws may impair the ability to transfer
beneficial interests in a Global Security.
Ownership of beneficial interests in a Global Security will be limited to
institutions that have accounts with the Depositary or its nominee
("participants") and to persons that may hold beneficial interests through
participants. In connection with the issuance of any Global Security, the
Depositary will credit, on its book-entry registration and transfer system, the
respective principal amounts of Debt Securities represented by the Global
Security to the accounts of its participants. Ownership of beneficial interests
in a Global Security will be shown
29
only on, and the transfer of those ownership interests will be effected only
through, records maintained by the Depositary (with respect to participants'
interests) or any such participant (with respect to interests of persons held
by such participants on their behalf). Payments, transfers, exchanges and other
matters relating to beneficial interests in a Global Security may be subject to
various policies and procedures adopted by the Depositary from time to time.
None of us, the Guarantors, the Trustees or our agents or the Trustees will
have any responsibility or liability for any aspect of the Depositary's or any
participant's records relating to, or for payments made on account of,
beneficial interests in a Global Security, or for maintaining, supervising or
reviewing any records relating to such beneficial interests.
Payment and Paying Agent
Unless otherwise indicated in the applicable prospectus supplement, payment
of interest on a Debt Security on any Interest Payment Date will be made to the
person in whose name such Debt Security is registered at the close of business
on the regular record date for such interest. (Section 307)
Unless otherwise indicated in the applicable prospectus supplement,
principal of and any premium and interest on the Debt Securities of a
particular series will be payable at the office of such Paying Agent or Paying
Agents as we may designate for such purpose from time to time, except that at
our option payment of any interest may be made by check mailed to the address
of the Person entitled thereto as such address appears in the Security
Register. Unless otherwise indicated in the applicable prospectus supplement,
the corporate trust office of the trustee under the Senior Indenture (the
"Senior Trustee") in The City of New York will be designated as sole Paying
Agent for payments with respect to Senior Debt Securities of each series, and
the corporate trust office of the Subordinated Trustee in the City of New York
will be designated as the sole Paying Agent for payment with respect to
Subordinated Debt Securities of each series. Any other Paying Agents initially
designated by us for the Debt Securities of a particular series will be named
in the applicable prospectus supplement. We may at any time designate
additional Paying Agents or rescind the designation of any Paying Agent or
approve a change in the office through which any Paying Agent acts, except that
we will be required to maintain a Paying Agent in each Place of Payment for the
Debt Securities of a particular series. (Section 1002)
All moneys paid by us to a Paying Agent for the payment of the principal of
or any premium or interest on any Debt Security which remain unclaimed at the
end of two years after such principal, premium or interest has become due and
payable will be repaid to us, and the Holder of such Debt Security thereafter
may look only to us for payment thereof. (Section 1003)
Consolidation, Merger and Sale of Assets
We may consolidate with or merge into, or sell or lease substantially all of
our properties to any person only if:
. the successor person (if any) is a corporation, partnership, trust or
other entity organized and validly existing under the laws of any domestic
jurisdiction and assumes our obligations on the Debt Securities and under
the Indentures;
. immediately after giving effect to the transaction, no Event of Default,
and no event which, after notice or lapse of time or both,would become an
Event of Default, shall have occurred and be continuing; and
. any other conditions specified in the applicable prospectus supplement are
met. (Section 801)
Events of Default
Unless otherwise specified in the prospectus supplement, each of the
following will constitute an Event of Default under the applicable Indenture
with respect to Debt Securities of any series:
. failure to pay principal or premium on any Debt Security of that series
when due;
30
. failure to pay any interest on any Debt Security of that series when due,
continued for 30 days;
. failure to deposit any sinking fund payment, when due, on any Debt
Security of that series;
. failure to perform or comply with the provisions described under
"--Consolidation, Merger and Sale of Assets";
. failure to perform any of our other covenants in the Indenture (other than
a covenant included in such Indenture solely for the benefit of a series
other than that series) for 60 days after being given written notice by
the Trustee or holders of at least 25% in principal amount of the
Outstanding Debt Securities of that series;
. default under the terms of any instrument evidencing or securing any of
our Debt or any Significant Subsidiary having an outstanding principal
amount of $20 million individually or in the aggregate which default
results in the acceleration of the payment of all or any portion of such
Debt (which acceleration is not rescinded within a period of 10 days from
the occurrence of such acceleration) or constitutes the failure to pay all
or any portion of the principal amount of such Debt when due;
. the rendering of a final judgment or judgments against us or any
Significant Subsidiary in an amount in excess of $20 million that remains
undischarged or unstayed for a period of 60 days after the date on which
the right to appeal has expired;
. certain events of bankruptcy, insolvency or reorganization affecting us,
any Significant Subsidiary Guarantor or any group of Significant
Subsidiaries that together would constitute a Significant Subsidiary
Guarantor; and
. in the case of Debt Securities guaranteed by any Guarantor, the Subsidiary
Guarantee of any Guarantor is held by a final non-appealable order or
judgment of a court of competent jurisdiction to be unenforceable or
invalid or ceases for any reason to be in full force and effect (other
than in accordance with the terms of the applicable Indenture) or any
Guarantor or any person acting on behalf of any Guarantor denies or
disaffirms such Guarantor's obligations under its Subsidiary Guarantee
(other than by reason of a release of such Guarantor from its Subsidiary
Guarantee in accordance with the terms of the applicable Indenture).
(Section 501)
If an Event of Default (other than as a result of bankruptcy, insolvency or
reorganization) for any series of Debt Securities occurs and continues, the
applicable Trustee or the holders of at least 25% in aggregate principal amount
of the outstanding Debt Securities of that series may declare the principal
amount of the Debt Securities of that series (or, such portion of the principal
amount of such Debt Securities as may be specified in a prospectus supplement)
to be due and payable immediately. If an Event of Default results from
bankruptcy, insolvency or reorganization, the principal amount of all the Debt
Securities of a series (or, such portion of the principal amount of such Debt
Securities as may be specified in a prospectus supplement) will automatically
become immediately due and payable. If an acceleration occurs, subject to
specified conditions, the holders of a majority of the aggregate principal
amount of the outstanding Debt Securities of that series may rescind and annul
such acceleration. (Section 502)
Other than its duties in case of an Event of Default, a Trustee is not
obligated to exercise any of its rights or powers under the applicable
Indenture at the request or direction of any of the Holders, unless the Holders
offer the Trustee reasonable indemnity. (Section 603) Subject to the
indemnification of the Trustees, the Holders of a majority in aggregate
principal amount of the Outstanding Debt Securities of any series may direct
the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Debt Securities of that series. (Section 512)
The Holders of Debt Securities of any series will not have any right to
institute any proceeding with respect to the applicable Indenture unless:
. the Holder previously gave written notice to the Trustee of an Event of
Default;
31
. the Holders of at least 25% in aggregate principal amount of the
Outstanding Debt Securities of that series have made a written request,
and such Holder or Holders have offered reasonable indemnity, to the
Trustee to institute such proceeding as trustee; and
. the Trustee fails to institute such proceeding, and has not received from
the Holders of a majority in aggregate principal amount of the Outstanding
Debt Securities of that series a direction inconsistent with such request,
within 15 days after such notice, request and offer. (Section 507)
However, such limitations do not apply to a suit instituted by a Holder of a
Debt Security for the enforcement of payment of the principal, interest or
premium on such Debt Security on or after the applicable due date specified in
such Debt Security (Section 508).
We will be required to furnish to each Trustee annually a statement by
certain of our officers as to whether or not we are in default in the
performance of any of the terms of the applicable Indenture. (Section 1004)
Amendment and Waiver
Modifications and amendments of the Indentures may be made by us, the
Guarantors and the applicable Trustee with the consent of the Holders of a
majority in aggregate principal amount of the Outstanding Debt Securities of
each series affected by such modification or amendment; provided, however, that
no such modification or amendment may, without the consent of the Holder of
each Outstanding Debt Security affected thereby:
(1) change the Stated Maturity of the principal of, or any installment of
principal of or interest on, any Debt Security,
(2) reduce the principal amount of, or any premium or interest on, any Debt
Security,
(3) reduce the amount of principal of an Original Issue Discount Security or
any other Debt Security payable upon acceleration of the Maturity
thereof,
(4) change the place or currency of payment of principal of, or any premium
or interest on, any Debt Security,
(5) impair the right to institute suit for the enforcement of any payment on
or with respect to any Debt Security,
(6) in the case of Subordinated Debt Securities, modify the subordination
provisions in a manner adverse to the Holders of the Subordinated Debt
Securities,
(7) except as provided in the applicable Indenture, release the Subsidiary
Guarantee of a Guarantor,
(8) reduce the percentage in principal amount of Outstanding Debt Securities
of any series, the consent of whose Holders is required for modification
or amendment of the Indenture,
(9) reduce the percentage in principal amount of Outstanding Debt Securities
of any series necessary for waiver of compliance with certain provisions
of the Indenture or for waiver of certain defaults or
(10) modify such provisions with respect to modification and waiver. (Section
902)
The Holders of a majority in principal amount of the Outstanding Debt
Securities of any series may waive compliance by us with certain restrictive
provisions of the applicable Indenture. The Holders of a majority in principal
amount of the Outstanding Debt Securities of any series may waive any past
default under the applicable Indenture, except a default in the payment of
principal, premium or interest and certain covenants and provisions of the
Indenture which cannot be amended without the consent of the Holder of each
Outstanding Debt Security of such series affected. (Section 513)
32
The Indentures provide that in determining whether the Holders of the
requisite principal amount of the Outstanding Debt Securities have given or
taken any direction, notice, consent, waiver or other action under such
Indenture as of any date, (A) the principal amount of an Original Issue
Discount Security that will be deemed to be Outstanding will be the amount of
the principal thereof that would be due and payable as of such date upon
acceleration of the Maturity thereof to such date, (B) if, as of such date, the
principal amount payable at the Stated Maturity of a Debt Security is not
determinable (for example, because it is based on an index), the principal
amount of such Debt Security deemed to be Outstanding as of such date will be
an amount determined in the manner prescribed for such Debt Security and (C)
the principal amount of a Debt Security denominated in one or more foreign
currencies or currency units that will be deemed to be Outstanding will be the
U.S. dollar equivalent, determined as of such date in the manner prescribed for
such Debt Security, of the principal amount of such Debt Security (or, in the
case of a Debt Security described in clause (A) or (B) above, of the amount
described in such clause). Certain Debt Securities, including those for whose
payment or redemption money has been deposited or set aside in trust for the
Holders and those that have been fully defeased pursuant to Section 1502, will
not be deemed to be Outstanding. (Section 101)
Except in certain limited circumstances, we will be entitled to set any day
as a record date for the purpose of determining the Holders of Outstanding Debt
Securities of any series entitled to give or take any direction, notice,
consent, waiver or other action under the applicable Indenture, in the manner
and subject to the limitations provided in the Indenture. In certain limited
circumstances, the Trustee will be entitled to set a record date for action by
Holders. If a record date is set for any action to be taken by Holders of a
particular series, such action may be taken only by persons who are Holders of
Outstanding Debt Securities of that series on the record date. To be effective,
such action must be taken by Holders of the requisite principal amount of such
Debt Securities within a specified period following the record date. For any
particular record date, this period will be 180 days or such other period as
may be specified by us (or the Trustee, if it set the record date), and may be
shortened or lengthened (but not beyond 180 days) from time to time. (Section
104)
Defeasance And Covenant Defeasance
If and to the extent indicated in the applicable prospectus supplement, we
may elect, at our option at any time, to have the provisions of the Indentures,
relating to defeasance and discharge of indebtedness (Section 1502) and to
defeasance of certain restrictive covenants (Section 1503) applied to the Debt
Securities of any series, or to any specified part of a series.
Defeasance and Discharge. The Indentures provide that, upon our exercise of
our option (if any) we will be discharged from all our obligations, and have
the subordination provisions of any Subordinated Indenture (if any) cease to be
effective, with respect to the applicable Debt Securities upon the deposit in
trust for the benefit of the holders of such Debt Securities of money or U.S.
Government Obligations, or both, which, through the payment of principal and
interest in respect thereof in accordance with their terms, will provide money
in an amount sufficient to pay the principal of and any premium and interest on
such Debt Securities on the respective Stated Maturities in accordance with the
terms of the applicable Indenture and such Debt Securities.
Such defeasance or discharge may occur only if, among other things,
(1) we have delivered to the applicable Trustee an Opinion of Counsel to the
effect that we have received from, or there has been published by, the
United States Internal Revenue Service a ruling, or there has been a
change in tax law, in either case to the effect that Holders of such
Debt Securities will not recognize gain or loss for federal income tax
purposes as a result of such deposit, defeasance and discharge and will
be subject to federal income tax on the same amount, in the same manner
and at the same times as would have been the case if such deposit,
defeasance and discharge were not to occur;
(2) no Event of Default or event that with the passing of time or the giving
of notice, or both, shall constitute an Event of Default shall have
occurred and be continuing;
33
(3) such deposit, defeasance and discharge will not result in a breach or
violation of, or constitute a default under, any agreement or instrument
to which we or any Significant Subsidiary is a party or by which we or
any Significant Subsidiary is bound;
(4) in the case of Subordinated Debt Securities, at the time of such
deposit, no default in the payment of all or a portion of principal of
(or premium, if any) or interest on or other obligations in respect of
any of our Senior Indebtedness shall have occurred and be continuing and
no other event of default with respect to any of our Senior Indebtedness
shall have occurred and be continuing permitting after notice or the
lapse of time, or both, the acceleration thereof; and
(5) we have delivered to the Trustee an Opinion of Counsel to the effect
that such deposit shall not cause the Trustee or the trust so created to
be subject to the Investment Company Act of 1940. (Sections 1502 and
1504)
Any additional conditions to the discharge of our obligations with respect
to a series of Debt Securities will be described in an applicable prospectus
supplement.
Defeasance of Certain Covenants. The Indentures provide that, upon our
exercise of our option (if any), we may omit to comply with specified
restrictive covenants as described in an applicable prospectus supplement and
the occurrence of specified Events of Default in "--Events of Default" and any
Events of Default described in an applicable prospectus supplement, will not be
deemed to either be or result in an Event of Default and, if such Debt
Securities are Subordinated Debt Securities, the provisions of the Subordinated
Indenture relating to subordination will cease to be effective, in each case
with respect to such Debt Securities. In order to exercise such option, we must
deposit, in trust for the benefit of the Holders of such Debt Securities, money
or U.S. Government Obligations, or both, which, through the payment of
principal and interest in respect thereof in accordance with their terms, will
provide money in an amount sufficient to pay the principal of and any premium
and interest on such Debt Securities on the respective Stated Maturities in
accordance with the terms of the applicable Indenture and such Debt Securities.
Such covenant defeasance may occur only if we have delivered to the applicable
Trustee an Opinion of Counsel that in effect says that Holders of such Debt
Securities will not recognize gain or loss for federal income tax purposes as a
result of such deposit and defeasance of certain obligations and will be
subject to federal income tax on the same amount, in the same manner and at the
same times as would have been the case if such deposit and defeasance were not
to occur and the requirements set forth in clauses (2), (3), (4) and (5) above
are satisfied. If we exercise this option with respect to any Debt Securities
and such Debt Securities were declared due and payable because of the
occurrence of any Event of Default, the amount of money and U.S. Government
Obligations so deposited in trust would be sufficient to pay amounts due on
such Debt Securities at the time of their respective Stated Maturities but may
not be sufficient to pay amounts due on such Debt Securities upon any
acceleration resulting from such Event of Default. In such case, we would
remain liable for such payments. (Sections 1503 and 1504) Any additional
conditions to exercising this option with respect to a series of Debt
Securities will be described in an applicable prospectus supplement.
Notices
Notices to Holders of Debt Securities will be given by mail to the addresses
of such Holders as they may appear in the Security Register. (Sections 101 and
106)
Title
We, the Guarantors, the Trustees and any agent of ours may treat the Person
in whose name a Debt Security is registered as the absolute owner of the Debt
Security, whether or not such Debt Security may be overdue, for the purpose of
making payment and for all other purposes. (Section 309)
Governing Law
The Indentures and the Debt Securities will be governed by, and construed in
accordance with, the laws of the State of New York. (Section 112)
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DESCRIPTION OF CAPITAL STOCK
Sonic's authorized capital stock consists of (a) 100,000,000 shares of Class
A common stock, $.01 par value, (b) 30,000,000 shares of Class B common stock,
$.01 par value and (c) 3,000,000 shares of preferred stock, $.10 par value (of
which 300,000 shares have been designated as Class A convertible preferred
stock). As of November 16, 2000, Sonic had 30,074,938 outstanding shares of
Class A common stock, 12,250,000 outstanding shares of Class B common stock and
250.5 outstanding shares of Class A convertible preferred stock. In pending
acquisitions, Sonic has agreed to issue approximately $2.0 million in Class A
common stock and $4.6 million in Class A convertible preferred stock
convertible into Class A common stock.
The following summary description of Sonic's capital stock does not purport
to be complete and is qualified in its entirety by reference to Sonic's Amended
and Restated Certificate of Incorporation (which was filed as an exhibit to
Sonic's Registration Statement on Form S-1 (File No. 333-33295)), Sonic's
amendment to its Amended and Restated Certificate of Incorporation (which is
filed as an exhibit to the registration statement on Form S-3 (File No.
333-82615)), Sonic's Certificate of Designations relating to the Class A
convertible preferred stock (which was filed as an exhibit to Sonic's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998) and to Delaware law.
Reference is made to such exhibits and to Delaware law for a detailed
description of the provisions thereof summarized below.
Preferred Stock
Class A Convertible Preferred Stock
Dividends. The preferred stock has no preferential dividends. Rather,
holders of preferred stock are entitled to participate in dividends payable on
the Class A common stock on an "as-if-converted" basis.
Voting Rights. Each share of preferred stock entitles its holder to a
number of votes equal to that number of shares of Class A common stock into
which it could be converted as of the record date for the vote.
Liquidation Rights. The preferred stock has a liquidation preference of
$1,000 per share.
Conversion Rights. Each share of preferred stock is convertible into shares
of Class A common stock at the holder's option at specified conversion rates.
After the second anniversary of the date of issuance, any shares of preferred
stock that have not been converted are subject to mandatory conversion to Class
A common stock at the option of Sonic. No fractional shares of Class A common
stock will be issued upon conversion of any shares of preferred stock. Instead,
Sonic will pay cash equal to the value of such fractional share.
Generally, each share of preferred stock is convertible into that number of
shares of Class A common stock that has an aggregate Market Price at the time
of conversion equal to $1,000 (with certain adjustments for the Series II and
Series III preferred stock). Conversion of Series II preferred stock is subject
to certain adjustments that have the effect of limiting increases and decreases
in the value of the Class A common stock receivable upon conversion by 10% of
the original value of the shares of Series II preferred stock. Conversion of
Series III preferred stock is subject to certain adjustments that have the
effect of limiting increases in the value of Class A common stock receivable
upon conversion by 10% of the original value of the shares of Series III
preferred stock. "Market Price" is defined as the average closing price per
share of Class A common stock on the New York Stock Exchange for the 20 trading
days immediately preceding the date of conversion. If the Class A common stock
is no longer listed on the New York Stock Exchange, then the Market Price will
be determined on the basis of prices reported on the principal exchange on
which the Class A common stock is listed, or if not so listed, prices furnished
by NASDAQ. If the Class A common stock is not listed on an exchange or reported
on by NASDAQ, then the Market Price will be determined by Sonic's board of
directors.
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Before the first anniversary of the date of issuance of preferred stock,
each holder of preferred stock is unable to convert without first giving Sonic
10 business days' notice and an opportunity to redeem such preferred stock at
the then applicable redemption price.
Redemption. The preferred stock is redeemable at Sonic's option at any time
after the date of issuance. The redemption price for the Series I preferred
stock is $1,000 per share. The redemption price for the Series II preferred
stock and the Series III preferred stock is as follows: (a) prior to the second
anniversary of the date of issuance, the redemption price is the greater of
$1,000 per share or the aggregate Market Price of the Class A common stock into
which it could be converted at the time of redemption, and (b) after the second
anniversary of the date of issuance, the redemption price is the aggregate
Market Price of the Class A common stock into which it could be converted at
the time of redemption. There is no restriction on Sonic's ability to redeem
the preferred stock while there is an arrearage in payment of dividends on such
preferred stock.
Undesignated Preferred Stock
As of the date of this prospectus, no shares of preferred stock are
outstanding other than the Class A convertible preferred stock discussed above.
Our board of directors may authorize the issuance of preferred stock in one or
more series from our undesignated preferred stock or our Class A convertible
preferred stock and, with respect to presently undesignated preferred stock,
may determine, with respect to any series, the designations, powers,
preferences and rights of that series, and the qualifications, limitations and
restrictions of that series, including:
. the designation of the series;
. the number of shares of the series, which number may thereafter be
increased or decreased by our board of directors (but not below the number
of shares of that series then outstanding);
. whether dividends, if any, will be cumulative or noncumulative and the
dividend rate of the series;
. the conditions under which and the dates upon which dividends will be
payable, and the relation which those dividends will bear to the dividends
payable on any other class or classes of stock;
. the redemption rights and price or prices, if any, for shares of the
series;
. the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series;
. the amounts payable on and the preferences of shares of the series, in the
event of any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of our company;
. whether the shares of the series will be convertible into shares of any
other class or series, or any other security, of our company or any other
corporation, and, if so, the specification of that other class or series
or that other security, the conversion price or prices or rate or rates,
that adjustments to that price or those prices or that rate or those
rates, the date or dates as of which those shares will be convertible and
all other terms and conditions upon which the conversion may be made;
. restrictions on the issuance of shares of the same series or of any other
class or series; and
. the voting rights, if any, of the holders of shares of that series.
The prospectus supplement will specify any terms of any series of preferred
stock offered by it. The description of the terms of the preferred stock to be
set forth in an applicable prospectus supplement will not be complete and will
be subject to and qualified in its entirety by reference to the statement of
resolution relating to the applicable series of preferred stock. The
registration statement of which this prospectus forms a part will include the
statement of resolution as an exhibit or incorporate it by reference.
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We believe that the ability of our board of directors to issue one or more
series of preferred stock from our undesignated preferred stock will provide us
with flexibility in structuring possible future financings and acquisitions and
in meeting other corporate needs that might arise. Our authorized shares of
preferred stock will be available for issuance without further action by our
stockholders, unless that action is required by applicable law or the rules of
any stock exchange or automated quotation system on which our securities may be
listed or traded. The New York Stock Exchange currently requires stockholder
approval as a prerequisite to listing shares in several instances, including
where the present or potential issuance of shares could result in an increase
in the number of shares of common stock outstanding, or in the amount of voting
securities outstanding, of at least 20%.
Although our board of directors has no intention at the present time of
doing so, it could issue a series of preferred stock that could, depending on
the terms of that series, impede the completion of a merger, tender offer or
other takeover attempt. Our board of directors may decide to issue those shares
based on its judgment as to the best interests of our company and our
stockholders. Our board of directors, in so acting, could issue preferred stock
having terms that could discourage a potential acquiror from making an
unsolicited and unwanted acquisition attempt through which that acquiror may be
able to change the composition of our board of directors, including a tender
offer or other transaction that some, or a majority, of our stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then current market price of that stock.
Common Stock
Sonic's Class A common stock and Class B common stock are equal in all
respects except for voting rights, conversion rights of the Class B common
stock and as required by law, as discussed more fully below.
Voting Rights; Conversion of Class B Common Stock to Class A Common Stock
The voting powers, preferences and relative rights of the Class A common
stock and the Class B common stock are subject to the following provisions.
Holders of Class A common stock have one vote per share on all matters
submitted to a vote of the stockholders of Sonic. Holders of Class B common
stock are entitled to 10 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 our classes of
common stock.
Notwithstanding the foregoing, the holders of Class A common stock and Class
B common stock vote as a single class, with each share of each class entitled
to one vote per share, with respect to any transaction proposed or approved by
the board of directors of Sonic or proposed by or on behalf of holders of the
Class B common stock or as to which any member of the Smith Group or any
affiliate thereof has a material financial interest other than as a then
existing stockholder of Sonic constituting a
. "going private" transaction,
. sale or other disposition of all or substantially all of Sonic's assets,
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. sale or transfer that would cause the nature of Sonic's business to be no
longer primarily oriented toward automobile dealership operations and
related activities, or merger or consolidation of Sonic in which the
holders of the common stock will own less than 50% of the common stock
following such transaction.
A "going private" transaction is defined as any "Rule 13e-3 Transaction," as
such term is defined in Rule 13e-3 promulgated under the Securities Exchange
Act of 1934. An "affiliate" is defined as (a) any individual or entity who or
that, directly or indirectly, controls, is controlled by, or is under common
control with any member of the Smith Group, (b) any corporation or organization
(other than Sonic or a majority-owned subsidiary of Sonic) of which any member
of the Smith Group is an officer, partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of voting securities, or in which
any member of the Smith Group has a substantial beneficial interest, (c) a
voting trust or similar arrangement pursuant to which any member of the Smith
Group generally controls the vote of the shares of common stock held by or
subject to such trust or arrangement, (d) any other trust or estate in which
any member of the Smith Group has a substantial beneficial interest or as to
which any member of the Smith Group serves as trustee or in a similar fiduciary
capacity or (e) any relative or spouse of any member of the Smith Group or any
relative of such spouse, who has the same residence as any member of the Smith
Group.
As used in this prospectus, the term the "Smith Group" consists of the
following persons:
. Mr. Smith and his guardian, conservator, committee, or attorney-in-fact;
. William S. Egan and his guardian, conservator, committee, or
attorney-in-fact;
. each lineal descendant of Messrs. Smith and Egan (a "Descendant") and
their respective guardians, conservators, committees or attorneys-in-fact;
and
. each "Family Controlled Entity."
The term "Family Controlled Entity" means (a) any not-for-profit corporation
if at least 80% of its board of directors is composed of Mr. Smith, Mr. Egan
and/or Descendants; (b) any other corporation if at least 80% of the value of
its outstanding equity is owned by members of the Smith Group; (c) any
partnership if at least 80% of the value of the partnership interests are owned
by members of the Smith Group; and (d) any limited liability or similar company
if at least 80% of the value of the company is owned by members of the Smith
Group.
Under Sonic's charter and Delaware law, the holders of Class A common stock
and/or Class B common stock are each entitled to vote as a separate class, as
applicable, with respect to any amendment to Sonic's Certificate that would
increase or decrease the aggregate number of authorized shares of such class,
increase or decrease the par value of the shares of such class, or modify or
change the powers, preferences or special rights of the shares of such class so
as to affect such class adversely.
Dividends
Holders of the Class A common stock and the Class B common stock are
entitled to receive ratably such dividends, if any, as are declared by our
Board of Directors out of funds legally available for that purpose. An
additional requirement is that dividends paid in shares of Class A common stock
shall be paid only to holders of Class A common stock, and dividends paid in
shares of Class B common stock shall be paid only to holders of Class B common
stock. Sonic's charter provides that if there is any dividend, subdivision,
combination or reclassification of either class of common stock, a
proportionate dividend, subdivision, combination or reclassification of the
other class of common stock must be made at the same time.
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Other Rights
Stockholders of Sonic have no preemptive or other rights to subscribe for
additional shares. In the event of the liquidation, dissolution or winding up
of Sonic, holders of Class A common stock and Class B common stock are entitled
to share ratably in all assets available for distribution to holders of common
stock after payment in full of creditors. No shares of any class of common
stock are subject to a redemption or a sinking fund.
Delaware Law, Certain Charter and Bylaw Provisions
Certain provisions of Delaware Law and of Sonic's charter and bylaws,
summarized in the following paragraphs, may be considered to have an
antitakeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.
Delaware Antitakeover Law. Sonic is subject to the provisions of Delaware
law, including Section 203. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which such person became an interested stockholder unless: (a) prior to such
date, the Board of Directors approved either the business combination or the
transaction, which resulted in the stockholder becoming an interested
stockholder; or (b) upon becoming an interested stockholder, the stockholder
then owned at least 85% of the voting stock, as defined in Section 203; or (c)
subsequent to such date, the business combination is approved by both the Board
of Directors and by holders of at least 66 2/3% of the corporation's
outstanding voting stock, excluding shares owned by the interested stockholder.
For these purposes, the term "business combination" includes mergers, asset
sales and other similar transactions with an "interested stockholder." An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of the
corporation's voting stock. Although Section 203 permits a corporation to elect
not to be governed by its provisions, Sonic to date has not made this election.
Classified Board of Directors. Sonic's bylaws provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of
Directors will be elected each year. Classification of the Board of Directors
expands the time required to change the composition of a majority of directors
and may tend to discourage a takeover bid for Sonic. Moreover, under Delaware
law, in the case of a corporation having a classified board of directors, the
stockholders may remove a director only for cause. This provision, when coupled
with the provision of the bylaws authorizing only the board of directors to
fill vacant directorships, will preclude stockholders of Sonic from removing
incumbent directors without cause, simultaneously gaining control of the Board
of Directors by filing the vacancies with their own nominees.
Special Meetings of Stockholders. Sonic's bylaws provide that special
meetings of stockholders may be called only by the Chairman or by the Secretary
or any Assistant Secretary at the request in writing of a majority of Sonic's
Board of Directors. Sonic's bylaws also provide that no action required to be
taken or that may be taken at any annual or special meeting of stockholders may
be taken without a meeting; the powers of stockholders to consent in writing,
without a meeting, to the taking of any action is specifically denied. These
provisions may make it more difficult for stockholders to take action opposed
by the Board of Directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Sonic's bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates
for election as directors at an annual or a special meeting of stockholders,
must provide timely notice thereof in writing. To be timely, a stockholder's
notice must be delivered to, or mailed and received at, the principal executive
office of Sonic, (a) in the case of an annual meeting that is called for a date
that is within 30 days before or after the anniversary date of the immediately
preceding annual meeting of stockholders, not less
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than 60 days nor more than 90 days prior to such anniversary date, and, (b) in
the case of an annual meeting that is called for a date that is not within 30
days before or after the anniversary date of the immediately preceding annual
meeting, or in the case of a special meeting of stockholders called for the
purpose of electing directors, not later than the close of business on the
tenth day following the day on which notice of the date of the meeting was
mailed or public disclosure of the date of the meeting was made, whichever
occurs first. Our bylaws also specify certain requirements for a stockholder's
notice to be in proper written form. These provisions may preclude some
stockholders from bringing matters before the stockholders at an annual or
special meeting or from making nominations for directors at an annual or
special meeting.
Conflict of Interest Procedures. Sonic's charter contains provisions
providing that transactions between Sonic and its affiliates must be no less
favorable to Sonic than would be available in transactions involving arms'
length dealing with unrelated third parties. Moreover, any such transaction
involving aggregate payments in excess of $500,000 must be approved by a
majority of Sonic's directors and a majority of Sonic's independent directors.
Otherwise, Sonic must obtain an opinion as to the financial fairness of the
transactions to be issued by an investment banking or appraisal firm of
national standing.
Limitation of Liability of Officers and Directors
Delaware law authorizes corporations to limit or eliminate the personal
liability of officers and directors to corporations and their stockholders for
monetary damages for breach of officers' and directors' fiduciary duty of care.
The duty of care requires that, when acting on behalf of the corporation,
officers and directors must exercise an informed business judgment based on all
material information reasonably available to them. Absent the limitations
authorized by Delaware law, officers and directors are accountable to
corporations and their stockholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Delaware
law enables corporations to limit available relief to equitable remedies such
as injunction or rescission.
Our certificate of incorporation limits the liability of our officers and
directors to us and our stockholders to the fullest extent permitted by
Delaware law. Specifically, our officers and directors will not be personally
liable for monetary damages for breach of an officer's or director's fiduciary
duty in such capacity, except for liability
. for any breach of the officer's or director's duty of loyalty to us or our
stockholders,
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation
law, or
. for any transaction from which the officer or director derived an improper
personal benefit.
The inclusion of this provision in our certificate of incorporation may
reduce the likelihood of derivative litigation against our officers and
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against our officers and directors for breach of their duty of care,
even though such an action, if successful, might have otherwise benefited us
and our stockholders.
Both our certificate of incorporation and bylaws provide indemnification to
our officers and directors and certain other persons with respect to certain
matters to the maximum extent allowed by Delaware law as it exists now or may
hereafter be amended. These provisions do not alter the liability of officers
and directors under federal securities laws and do not affect the right to sue
(nor to recover monetary damages) under federal securities laws for violations
thereof.
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Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Sonic pursuant
to the foregoing provisions, Sonic has been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Transfer Agent and Registrar
Our transfer agent and registrar of our common stock is First Union National
Bank.
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DESCRIPTION OF WARRANTS
We may issue Class A common stock warrants for the purchase of our Class A
common stock. Class A common stock warrants are referred to in this prospectu
as "Warrants." Warrants may be issued independently or together with any Class
A common stock, preferred stock or Debt Securities offered by any prospectus
supplement and may be attached to or separate from the Class A common stock,
preferred stock or Debt Securities.
Each series of Warrants will be issued under a separate warrant agreement to
be entered into between us and a bank or trust company, as warrant agent. The
warrant agent will act solely as our agent in connection with warrant
certificates evidencing the Warrants. The warrant agent will not assume any
obligation or relationship of agency or trust for or with any holders of
warrant certificates or beneficial owners of Warrants.
The following description summarizes the general terms of the form of
warrant agreements and warrant certificates, which have been filed as exhibits
to the registration statement of which this prospectus forms a part. You should
read the warrant agreement and warrant certificates for provisions summarized
below and others that may be important to you.
General
The prospectus supplement relating to a particular series of warrants will
include the specific forms of the series, including, where applicable, the
following:
. the title of the Warrants;
. the offering price;
. the currency or currency units in which the purchase price for offered
Warrants may be payable;
. the number of shares of Class A common stock purchasable upon the exercise
of a Warrant;
. the redemption or call provisions, if any, applicable to the Warrants:
. the date on and after which the Warrants and the related shares of Class A
common stock or preferred stock or the related Debt Securities will be
separately transferable;
. the price and currency or currency units at which the shares of Class A
common stock, as the case may be, may be purchased upon exercise;
. the date on which the right to exercise the Warrants begins and the date
on which the right to exercise expires (the "expiration date");
. the minimum and maximum amount of Warrants that may be exercised at any
one time;
. the antidilution provisions of the Warrants, if any;
. United States federal income tax consequences applicable to that Warrant;
. whether the Warrants represented by the warrant certificates will be
issued in registered or bearer form;
. procedures for cashless exercise, if any, for the Warrants; and
. any other terms of the Warrants, including terms, procedures and
limitations relating to exchange and exercise of the Warrants.
Transfers and Exchange
Warrant certificates may be exchanged for new warrant certificates of
different denominations, may, if in registered form, be presented for
registration of transfer, and may be exercised at the corporate trust office of
the
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warrant agent. We may specify other offices where these activities may be
conducted in an applicable prospectus supplement. Before the exercise of any
Warrants, holders of the Warrants will not have any of the rights of holders of
Class A common stock, as applicable, purchasable upon exercise. This means
holders of Warrants will not have the right to receive payments of dividends,
if any, on the Class A common stock purchasable upon such exercise or to
exercise any applicable right to vote.
Exercise
Each Warrant will entitle its holder to purchase the number of shares of
Class A common stock at the exercise price that is set forth in, or calculable
from, the applicable prospectus supplement. Holders will be able to exercise
Warrants at any time up to the time on the expiration date set forth in the
applicable prospectus supplement. After that time, or a later date to which
such expiration date may be extended by us, unexercised Warrants will become
void.
Holders will be able to exercise Warrants by delivering to the warrant agent
at its corporate trust office warrant certificates properly completed and
paying the exercise price. As soon as practicable after such delivery, we will
issue and deliver to the indicated holder the shares of Class A common stock
issuable upon that exercise. If fewer than all of the Warrants represented by a
warrant certificate are exercised, we will issue a new warrant certificate for
the remaining number of Warrants.
CERTAIN MANUFACTURER RESTRICTIONS
Under agreements between Sonic and certain manufacturers, Sonic has agreed
to provide the statement provided below:
No automobile manufacturer or distributor has been involved, directly or
indirectly, in the preparation of this prospectus or in the offering being
made hereby. No automobile manufacturer or distributor has been authorized
to make any statements or representations in connection with the offering,
and no automobile manufacturer or distributor has any responsibility for the
accuracy or completeness of this prospectus or for the offering.
Under Sonic's Dealer Agreement with General Motors ("GM"), Sonic has agreed,
among other things, to disclose the following provisions:
Sonic will deliver to GM copies of all Schedules 13D and 13G, and all
amendments thereto and terminations thereof, received by Sonic, within five
days of receipt of such Schedules. If Sonic is aware of any ownership of its
stock that should have been reported to it on Schedule 13D but that is not
reported in a timely manner, it will promptly give GM written notice of such
ownership, with any relevant information about the owner that Sonic
possesses.
If Sonic, through its board of directors or through shareholder action,
proposes or if any person, entity or group sends Sonic a Schedule 13D, or
any amendments thereto, disclosing (a) an agreement to acquire or the
acquisition of aggregate ownership of more than 20% of the voting stock of
Sonic and (b) Sonic, through its board of directors or through shareholder
action, proposes or if any plans or proposals which relate to or would
result in the following: (i) the acquisition by any person of more than 20%
of the voting stock of Sonic other than for the purposes of ordinary passive
investment; (ii) an extraordinary corporate transaction, such as a material
merger, reorganization or liquidation, involving Sonic or a sale or transfer
of a material amount of assets of Sonic and its subsidiaries; (iii) any
change which, together with any changes made to the board of directors
within the preceding year, would result in a change in control of the then
current board of Sonic; or (iv) in the case of an entity that produces motor
vehicles or controls or is controlled by or is under common control with an
entity that either produces motor vehicles or is a motor vehicle franchiser,
the
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acquisition by any person, entity or group of more than 20% of the voting
stock of Sonic and any proposal by any such person, entity or group, through
the Sonic board of directors or shareholders action, to change the board of
directors of Sonic, then, if such actions in GM's business judgment could
have a material or adverse effect on its image or reputation in the GM
dealerships operated by Sonic or be materially incompatible with GM's
interests (and upon notice of GM's reasons for such judgment), Sonic has
agreed that it will take one of the remedial actions set forth in the next
paragraph within 90 days of receiving such Schedule 13D or such amendment.
If Sonic is obligated under the previous paragraph to take remedial
action, it will (a) transfer to GM or its designee, and GM or its designee
will acquire the assets, properties or business associated with any GM
dealership operated by Sonic at fair market value as determined in
accordance with GM's dealership agreement with Sonic, or (b) provide
evidence to GM that such person, entity or group no longer has such
threshold level of ownership interest in Sonic or that the actions described
in clause (b) of the previous paragraph will not occur.
Should Sonic or its GM franchisee subsidiary enter into an agreement to
transfer the assets of the GM franchisee subsidiary to a third party, the
right of first refusal described in the GM dealer agreement shall apply to
any such transfer.
44
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the shares to be offered hereby by the selling stockholders as of
November 16, 2000, and as adjusted to reflect the sale of the securities
offered hereby by the selling stockholders. Except as otherwise indicated, to
our knowledge, all persons listed below have sole voting and investment power
with respect to their securities, except to the extent that authority is shared
by spouses under applicable law or as otherwise noted below. The information in
the table concerning the selling stockholders who may offer Class A common
stock hereunder from time to time is based on information provided to us by
such stockholders. Information concerning such selling stockholders may change
from time to time and any changes of which we are advised will be set forth in
a prospectus supplement to the extent required. See "Plan of Distribution." To
our knowledge, none of the selling stockholders has had within the past three
years any material relationship with Sonic or any of its predecessors or
affiliates, except as set forth in the footnotes to the following table.
Shares Shares Shares
Beneficially to be Beneficially
Owned Sold In Owned
Prior to the the After the
Name of Selling Stockholder Offering Offering Offering
- --------------------------- ------------ -------- ------------
TCW Leveraged Income Trust, L.P. (1)................ 177,864 7,247 170,617*
TCW Shared Opportunity Fund II, L.P. (1)............ 19,734 724 19,010*
Crescent/Mach I Partners, L.P. (1).................. 98,675 3,623 95,052*
TCW/Crescent Mezzanine Partners, L.P. (1)........... 948,460 34,831 913,629*
TCW/Crescent Mezzanine Trust........................ 288,643 10,595 278,048*
TCW/Crescent Mezzanine Investment Partners, L.P. (1) 25,956 956 25,000*
- --------
* Represents less than 1% of the outstanding Class A common stock.
(1) Except as otherwise noted below, these selling stockholders agreed not to
offer, sell or otherwise dispose of, or contract to sell or dispose of, all
shares shown as beneficially owned, as follows: (A) as to 15% of the shares
indicated, until June 7, 2000 and (B) as to the remaining shares indicated,
until December 10, 2000. Beginning on March 9, 2000, the TCW affiliated
selling stockholders were entitled to sell as a group, without accumulation
of amounts previously unsold, up to 7,500 shares per day from 419,530 of
the total shares held by such group. The shares to be sold in the offering
were issued to these stockholders and are now being registered pursuant to
a price protection provision in the Agreement and Plan of Merger and
Reorganization dated as of October 31, 1999, among Sonic Automotive, Inc.,
FAA Acquisition Corp., FirstAmerica Automotive, Inc. and certain of the
stockholders of FirstAmerica Automotive, Inc.
45
PLAN OF DISTRIBUTION
We may sell securities pursuant to this prospectus (a) through underwriters
or dealers; (b) through agents; or (c) directly to one or more purchasers,
including existing stockholders in a rights offering.
The selling stockholders may sell or distribute some or all of their shares
from time to time through dealers or brokers or other agents or directly to one
or more purchasers, including pledges, in a variety of ways, including:
. transactions, which may involve crosses and block transactions, on the New
York Stock Exchange or other exchanges on which the Class A common stock
may be listed for trading;
. privately negotiated transactions, including sales pursuant to pledges;
. in the over-the-counter market;
. in brokerage transactions; or
. in a combination of these types of transactions.
These transactions may be effected by the selling stockholders at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at negotiated prices, or at fixed prices, which may be changed.
This prospectus also may be used, with Sonic's consent, by donees of the
selling stockholders, or by other persons, including pledgees, acquiring the
shares from the selling stockholders and who wish to offer and sell their
shares under circumstances requiring or making desirable its use. To the extent
required, Sonic will file, during any period in which offers or sales are being
made, one or more supplements to this prospectus to set forth the names of
donees or pledgees of selling stockholders and any other material information
with respect to the plan of distribution not previously disclosed.
By Underwriters
If underwriters are used in the sale, the offered securities will be
acquired by the underwriters for their own account. The underwriters may resell
the securities in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices determined at the time of
sale. The obligations of the underwriters to purchase the securities will be
subject to certain conditions. Unless indicated in the prospectus supplement
the underwriters must purchase all the securities of the series offered by a
prospectus supplement if any of the securities are purchased. Any initial
public offering price and any discounts or concessions allowed or re-allowed or
paid to dealers may be changed from time to time. The underwriters may, from
time to time, effect transactions that stabilize or maintain the market price
of the securities at a level above that which might otherwise prevail in the
open market, such stabilizing activities, if commenced, may be discontinued at
any time.
By Agents
Securities may also be sold through agents. Unless indicated in the
prospectus supplement, any such agent is acting on a best efforts basis for the
period of its appointment.
Direct Sales; Rights Offerings
Securities may also be sold directly by us or the selling stockholders. In
this case, no underwriters or agents would be involved. We or the selling
stockholders may sell offered securities upon the exercise of rights that may
be issued to our security holders.
46
Delayed Delivery Arrangements
We or the selling stockholders may authorize agents, underwriters or dealers
to solicit offers by certain institutional investors to purchase offered
securities providing for payment and delivery on a future date specified in the
prospectus supplement. Institutional investors to which such offers may be
made, when authorized, include commercial and savings banks, insurance
companies, pension funds, investment companies, education and charitable
institutions and other institutions. The obligations of any such purchasers
under such delayed delivery and payment arrangements will be subject to the
condition that the purchase of the offered securities will not at the time of
delivery be prohibited under applicable law. The underwriters and such agents
will not have any responsibility with respect to the validity or performance of
such contracts.
General Information
Underwriters, brokers, dealers and agents that participate in the
distribution of offered securities may be underwriters as defined in the
Securities Act, and any discounts, concessions or commissions received by them
from us or the selling stockholders and any profit on the resale of the offered
securities by them may be treated as underwriting discounts and commissions
under the Securities Act. Any underwriters or agents will be identified and
their compensation described in a prospectus supplement. Neither Sonic nor the
selling stockholders can presently estimate the amount of such compensation.
Sonic knows of no existing arrangements between any selling stockholder and any
other selling stockholder, broker, dealer or other agent relating to the sale
or distribution of the shares.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of any of the selling stockholders' shares may not
simultaneously engage in market activities with respect to the Class A common
stock for the applicable period under Regulation M prior to the commencement of
such distribution. In addition and without limiting the foregoing, the selling
stockholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation Rule 10b-5
and Regulation M, which provisions may limit the timing of purchases and sales
of any of the shares by the selling stockholders. All of the foregoing may
affect the marketability of the Class A common stock.
Sonic will pay substantially all of the expenses incident to the offering of
the shares by the selling stockholders to the public other than commissions,
concessions and discounts of brokers, dealers or other agents. We or the
selling stockholders may have agreements with the underwriters, brokers,
dealers and agents to indemnify them against certain civil liabilities,
including liabilities under the Securities Act, or to contribute with respect
to payments that the underwriters, brokers, dealers or agents may be required
to make. Sonic may agree to indemnify the selling stockholders and any such
statutory "underwriters" and controlling persons of such "underwriters" against
certain liabilities, including certain liabilities under the Securities Act.
Underwriters, brokers, dealers and agents may engage in transactions with,
or perform services for, us or our subsidiaries in the ordinary course of their
businesses. In order to comply with certain states' securities laws, if
applicable, the shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers.
LEGAL MATTERS
The validity of the securities issuable under this prospectus will be passed
upon for Sonic by Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North
Carolina.
47
EXPERTS
The consolidated financial statements of Sonic Automotive, Inc. and
Subsidiaries, the combined financial statements of Williams Automotive Group,
the financial statements of Economy Cars, Inc., the financial statements of
Global Imports, Inc., the combined financial statements of Newsome Automotive
Group, the combined financial statements of Lloyd Automotive Group, the
financial statements of Lute Riley Motors, Inc., the combined financial
statements of Certain Dealerships, Assets and Liabilities of Lucas Dealership
Group, Inc., the combined financial statements of Manhattan Automotive Group
and the financial statements of Freeland Automotive, incorporated by reference
in this prospectus and elsewhere in the registration statement, have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, which are incorporated by reference herein and have been so
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of FirstAmerica Automotive, Inc. and
Subsidiaries incorporated by reference in this prospectus and elsewhere in the
registration statement, have been audited by KPMG LLP, independent auditors, as
stated in their reports, which are incorporated by reference herein and have
been so incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
48
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$130,000,000
[LOGO]
SONIC
AUTOMOTIVE/TM/
% CONVERTIBLE SENIOR SUBORDINATED NOTES DUE 2009
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO. BANC OF AMERICA SECURITIES LLC
(SOLE BOOK-RUNNING MANAGER) (CO-LEAD MANAGER)
WACHOVIA SECURITIES
MAY , 2002
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