As filed with the Securities and Exchange Commission on February 4, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Sonic Automotive, Inc.
(Exact name of registrant as specified in its charter)
Delaware 56-2010790
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5401 East Independence Boulevard
P.O. Box 18747
Charlotte, North Carolina 28218
Telephone (704) 532-3320
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
---------------
Mr. O. Bruton Smith
Chief Executive Officer
Sonic Automotive, Inc.
5401 East Independence Boulevard
P.O. Box 18747
Charlotte, North Carolina 28218
Telephone (704) 532-3320
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
---------------
Copies to:
Peter J. Shea, Esq. Stuart H. Gelfond, Esq.
Parker, Poe, Adams & Bernstein L.L.P. Fried, Frank, Harris, Shriver & Jacobson
2500 Charlotte Plaza One New York Plaza
Charlotte, North Carolina 28244 New York, New York 10004
Telephone (704) 372-9000 Telephone (212) 859-8000
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Title of Each Class Proposed Maximum Proposed Maximum Amount of
of Securities to Amount to be Offering Price Aggregate Registration
be Registered Registered (1) Per Unit(2) Offering Price(2) Fee
Class A common stock, par value
$0.01 per share................... 9,267,037 $ 15.15625 $140,453,530 $39,050
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(1) This Registration Statement covers the sale of up to 9,267,037 shares of
Class A common stock, par value $.01 per share, of the Registrant, of
which 7,000,000 shares are being registered for an offering by the
Registrant, 1,058,293 shares are being registered for resale on behalf of
selling stockholders and 1,208,744 shares are being registered for an
offering by the Registrant and for resale by selling stockholders upon the
exercise of an over-allotment option to be granted to the Underwriters.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
amount of the registration fee. The average of the high and low prices
reported on the New York Stock Exchange was $15.15625 on February 3, 1999.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated February 4, 1999
PROSPECTUS
8,058,293 Shares
[SONIC AUTOMOTIVE INC LOGO]
Class A Common Stock
---------------
Sonic Automotive, Inc. is selling 7,000,000 of the shares of Class A
common stock and certain of our stockholders are selling 1,058,293 of the
shares of Class A common stock.
The Class A common stock trades on the New York Stock Exchange under the
symbol "SAH." On February 3, 1999, the last sale price of the Class A common
stock as reported on the New York Stock Exchange was $14 5/8 per share.
Investing in the Class A common stock involves risks which are described
in the "Risk Factors" section beginning on page 11 of this prospectus.
---------------
Per Share Total
----------- ------
Public Offering Price .......................................... $ $
Underwriting Discount .......................................... $ $
Proceeds, before expenses, to Sonic ............................ $ $
Proceeds, before expenses, to the selling stockholders ......... $ $
The Underwriters may also purchase up to an additional 1,063,156 shares
from us, and up to an additional 145,588 shares from one of the selling
stockholders, at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of Class A common stock will be ready for delivery in New York,
New York on or about , 1999.
---------------
Merrill Lynch & Co.
BancBoston Robertson Stephens
Stephens Inc.
NationsBanc Montgomery Securities LLC
---------------
The date of this prospectus is , 1999.
[SONIC AUTOMOTIVE INC LOGO APPEARS HERE]
[MAP OF UNITED STATES APPEARS HERE HIGHLIGHTING STATES WHERE SONIC AUTOMOTIVE
HAS DEALERSHIPS, ASSUMING THE PENDING ACQUISITIONS ARE COMPLETED.]
BMW and Volkswagen of Economy Honda Infiniti of Chattanooga Sam White Motor City
Nashville Fitzgerald Chevrolet Imports of Florence Superior Oldsmobile-Cadillac-GMC
BMW and Volvo of Fort Mill Chrysler- Kia and Volkswagen of Tampa Volvo
Chattanooga Plymouth-Dodge Chattanooga Tom Williams Buick
Bondesen Chevrolet Oldsmobile Fort Mill Ford Lake Norman Chrysler- Tom Williams Cadillac
Cadillac GMC Freedom Ford Plymouth-Jeep Tom Williams Lexus
Capitol Chevrolet Frontier Oldsmobile-Cadillac Lake Norman Dodge Tom Williams Imports
Capitol Imports Global Imports Lloyd Mercedes-Nissan Town and Country Chrysler-
Casa Ford Halifax Ford-Mercury Lloyd Pontiac-Cadillac-GMC Plymouth-Jeep of Rock Hill
Century BMW Hatfield Hyundai-Isuzu-Subaru Lone Star Ford Town and Country Ford
Clearwater Mitsubishi Hatfield Lincoln-Mercury Newsome Automotive Town and Country Ford of Cleveland
Clearwater Toyota Hatfield Volkswagen-Jeep Newsome Chevrolet World Town and Country Toyota
Cleveland Chrysler- Heritage Lincoln-Mercury Rally Mitsubishi Toyota West
Plymouth-Jeep Higginbotham Chevy-Olds Ron Craft Chevrolet-Cadillac- Trader Bud's Westside
Dodge of Chattanooga Higginbotham Automobiles Oldsmobile Chrysler-Plymouth
Dyer & Dyer Volvo Infiniti of Charlotte Ron Craft Chrysler Plymouth Trader Bud's Westside Dodge
Jeep
This list of dealerships shown above assumes that Sonic completes its pending acquisitions.
2
TABLE OF CONTENTS
Page
-----
Prospectus Summary ................................................................... 5
Risk Factors ......................................................................... 11
Recent Acquisitions .................................................................. 23
Use of Proceeds ...................................................................... 23
Dividend Policy ...................................................................... 24
Price Range of Class A Common Stock .................................................. 24
Capitalization ....................................................................... 25
Selected Consolidated Financial Data ................................................. 26
Unaudited Pro Forma Consolidated Financial Data ...................................... 28
Management's Discussion and Analysis of Financial Condition and Results of Operations 36
Business ............................................................................. 44
Management ........................................................................... 59
Principal and Selling Stockholders ................................................... 61
Certain Transactions ................................................................. 63
Description of Capital Stock ......................................................... 68
Description of Certain Indebtedness .................................................. 71
Certain Manufacturer Restrictions .................................................... 74
Shares Eligible for Future Sale ...................................................... 75
Underwriting ......................................................................... 77
Legal Matters ........................................................................ 79
Experts .............................................................................. 79
Where You Can Find More Information About Sonic ...................................... 79
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, its supplements and documents incorporated by reference
into it contain statements that constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We intend such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Litigation Securities Reform Act of 1995, and we are
including this statement for purposes of complying with these safe harbor
provisions. These statements appear in a number of places in this prospectus
and include statements regarding our intent, belief or current expectations, or
of our directors or officers, with respect to, among other things:
o our potential acquisitions;
o our financing plans;
o trends affecting our financial condition or results of operations; and
o our business and growth strategies.
You are cautioned that these forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, and that actual
results may differ materially from those projected in the forward-looking
statements as a result of various factors. Among others, factors that could
adversely affect actual results and performance include:
o local and regional economic conditions in the areas we serve;
o the level of consumer spending;
o our relationships with manufacturers;
o high competition;
o site selection and related traffic and demographic patterns;
o inventory management and turnover levels;
o realization of cost savings; and
o our success in integrating recent and potential future acquisitions.
3
Additional factors that could negatively affect our future financial
condition and operations are discussed under the heading "Risk Factors" and in
other parts of this prospectus. You are urged to consider these factors
carefully before investing in our Class A common stock.
All forward-looking statements made by us in this prospectus are qualified
by the cautionary statement above.
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You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the Underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities (1) in any jurisdiction where the offer or sale is not
permitted, (2) where the person making the offer is not qualified to do so, or
(3) to any person who can not legally be offered the securities. You should
assume that the information appearing in this prospectus is accurate only as of
the date on the front cover of this prospectus. Our business, financial
condition, results of operations and prospects may have changed since that
date.
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This prospectus includes statistical data regarding the retail automotive
industry. Unless otherwise indicated, this data is taken from information
published by (1) The Wall Street Journal, (2) a division of Intertec Publishing
Corp. in its "Ward's Dealer Business," (3) Crain's Communications, Inc. in its
"Automotive News" and "1998 Market Data Book," (4) ADT Automotive in its "1998
Used Car Market Report," (5) the U.S. Census Bureau, or (6) the Industry
Analysis Division of the National Automobile Dealers Association ("NADA") in
its "Industry Analysis and Outlook" and "Automotive Executive Magazine"
publications.
4
PROSPECTUS SUMMARY
This summary highlights the more detailed information and financial
statements from this prospectus. Unless we indicate otherwise, all information
in this prospectus reflects our 2-for-1 common stock split that occurred on
January 25, 1999 and assumes that the Underwriters' over-allotment option is
not exercised.
Sonic Automotive, Inc.
Sonic is one of the top five automotive retailers in the United States, as
measured by total revenue, operating 39 dealerships and 14 collision repair
centers in 10 metropolitan areas of the Southeastern, Southwestern and
Midwestern United States. We sell new and used cars, light trucks and
replacement parts and provide vehicle maintenance, warranty, paint and repair
services. We also arrange related financing and insurance ("F&I") for our
automotive customers. Sonic operates dealerships in metropolitan markets which
on average are experiencing population growth that is more than one and a half
times the national average. These markets are:
o Atlanta, Georgia o Daytona Beach, Florida o Montgomery, Alabama
o Charlotte, North Carolina o Greenville/Spartanburg, South Carolina o Nashville, Tennessee
o Chattanooga, Tennessee o Houston, Texas o Tampa/Clearwater, Florida
o Columbus, Ohio
In several of our markets, our dealerships have a significant market share
for new cars and light trucks. Sonic has signed definitive agreements to
acquire 16 additional dealerships in some of its existing markets and in the
new markets of Birmingham, Alabama and Columbia, South Carolina.
Company Strengths
o Disciplined Acquisition Strategy. Sonic applies a disciplined approach
to potential acquisitions, utilizing a "hub and spoke" acquisition strategy. In
1998, our senior managers reviewed approximately 138 potential acquisitions
with approximately $10.2 billion in revenue and were approached by numerous
other dealerships interested in being acquired. After performing these reviews,
Sonic signed definitive agreements for 18 acquisitions representing over $1.4
billion in revenue, of which 8 have been consummated. When analyzing a
potential acquisition, we consider the following factors:
o overall fit with operating strategy; o quality of existing management;
o return on investment; o impact on our relationships with manufacturers; and
o impact on earnings per share; o real estate and facilities.
o Proven Track Record of Integrating and Improving Acquisitions. In recent
years, Sonic has grown primarily through acquisitions. Senior management of
Sonic has collectively acquired and integrated more than 75 dealerships during
their careers to date. This acquisition experience helps us to identify and
capitalize on opportunities for improvement and determine and implement
corrective actions. For example, pro forma operating income (including floor
plan interest expense) of dealerships acquired before December 31, 1997
increased 13.7% from the first nine months of 1997 to the first nine months of
1998.
o Benefits of Scale. After acquiring a dealership, we have the potential
to improve its performance by utilizing our existing strengths of experienced
management, best practices and employee training. We have been most successful
at leveraging these strengths in Charlotte and Houston where, subsequent to
acquiring satellite dealerships in these markets, we have improved
significantly both the revenue and, more importantly, the margins of such
dealerships. As we acquire more dealerships in a particular market, we benefit
from the following additional economies of scale:
o Improved terms on bank and floor plan financing and inventory
management. Our floor plan expense, as a percentage of sales, has been
reduced from 1.5% for the nine months ended September 30, 1997 to 1.0%
for the nine months ended September 30, 1998 as a result of negotiating
with a single provider and improved inventory management.
o Reduced advertising costs as a percentage of sales. We have reduced our
advertising costs from 1.4% of sales for the nine months ended September
30, 1997 to 1.1% of sales for the nine months ended September 30, 1998.
More specifically, we were able to reduce our print advertising costs in
both Charlotte and Houston by over 40%.
5
o Improved commissions on sales of finance and insurance products.
Sonic's large and increasing volume of F&I sales has allowed us to
renegotiate more favorable commissions on the sales of these products.
These renegotiated commission rates resulted in incremental commissions
of $1.1 million for the first nine months of 1998.
o Lower costs for property and casualty and workers' compensation
insurance. Annual premiums under these policies have decreased from
approximately $3.5 million to $2.6 million.
o Consistent Record of Internal Growth. In addition to identifying,
consummating and integrating attractive acquisitions, Sonic continually focuses
on improving its existing dealership operations. As a result, we have a history
of internal growth as demonstrated by same store sales growth of 16.3% in 1995,
6.4% in 1996, 10.1% in 1997 and 5.4% for the nine months ended September 30,
1998. Sonic believes that its historical level of internal growth exceeds the
industry average.
% OF GROSS PROFIT
[Pie Chart Appears Here]
USED NEW SERVICE, PARTS AND
VEHICLES F&I VEHICLES COLLISION REPAIR
15% 14% 37% 34%
o Diverse Offering of Automotive Brands, Products and Services. We sell a
wide variety of 23 domestic and international brands of new automotive vehicles
in 10 metropolitan areas. We believe this product and geographic diversity (1)
reduces our reliance on any single manufacturer and (2) mitigates the effect of
regional economic conditions and changing consumer preference.
In addition to selling a broad range of new vehicles, Sonic has a balanced
portfolio of other automotive products and services including F&I, used
vehicles, and service, parts and collision repair. The graphic to the right
shows the breakdown of these products and services, represented as a percentage
of Sonic's total gross profit for the nine months ended September 30, 1998.
o Experienced Management Team with Extensive Automotive Retailing
Background. Sonic's senior management team, which consists of O. Bruton
Smith, Chairman and Chief Executive Officer; B. Scott Smith, President and
Chief Operating Officer; Dennis Higginbotham, President of Retail
Operations; Theodore Wright, Chief Financial Officer; and Jeff Rachor, Vice
President of Retail Operations, has, on average, 20 years of experience
working in the automotive industry. During the course of their individual
careers, Messrs. Bruton Smith, Scott Smith, Higginbotham and Rachor have
each owned and/or operated individual dealerships. We believe that this
first-hand operating experience among our senior management will enable us
to continue to acquire and integrate dealerships into the Sonic platform
quickly and effectively.
Strategy
o Acquire Selected Dealerships. We believe that attractive acquisition
opportunities exist for dealership groups with significant equity capital and
experience in identifying, acquiring and professionally managing dealerships.
The automotive retailing industry is highly fragmented, with the largest 100
dealer groups generating approximately 10% of the industry's $673 billion of
total sales in 1997 and controlling less than 5% of all new vehicle dealerships
in the United States. We believe that these factors, together with the
increasing capital costs of operating automobile dealerships, the lack of
alternative exit strategies (especially for larger dealerships) and the aging
of many dealership owners provide attractive consolidation opportunities. We
believe our "hub and spoke" acquisition strategy will allow us to capitalize on
economies of scale, offer a greater breadth of products and services and
increase brand diversity. Generally, we retain the management of a well-run
dealership in order to benefit from its market knowledge, name recognition and
local reputation. In addition, we selectively acquire dealerships that have
underperformed the industry average but which carry attractive product lines or
have attractive locations and which would benefit from our existing
infrastructure.
6
o Increase Sales of Higher Margin Products and Services. Sonic intends to
increase its sales of higher-margin products and services by, for instance,
expanding its collision repair business and increasing sales of used vehicles.
o Control Costs. We are focused on controlling expenses and expanding
margins at the dealerships we acquire and integrate into our organization.
Approximately 73% of our operating costs for the first nine months of 1998 were
variable. We are able to adjust these expenses as the operating or economic
environment impacting our dealerships changes. We manage these variable costs,
such as floor plan (9%), advertising (10%) and compensation (50%) expenses, so
that they are generally related to vehicle sales and can be adjusted in
response to changes in vehicle sales volume. We also focus on controlling
components of fixed cost.
o Enhance Profit Opportunities in Finance and Insurance. Sonic offers a
wide range of financing and leasing alternatives for the purchase of vehicles,
as well as credit life, accident and health and disability insurance and
extended service contracts. As a result of our size and scale, we have
negotiated increased commissions on the origination of customer vehicle
financing and insurance policies, which resulted in incremental F&I commissions
of $1.1 million for the first nine months of 1998.
o Train, Develop and Motivate Qualified Management. We believe that our
well trained dealership personnel is key to our long-term prospects. We believe
that our comprehensive training of all employees and the institution of a
decentralized, multi-tiered management structure to supervise effectively our
dealership operations provide us with a competitive advantage over other
dealership groups. In order to motivate management, we employ an incentive
compensation program for each officer, vice president and executive manager, a
portion of which is provided in the form of Sonic stock options with additional
incentives based on the performance of individual profit centers. We believe
that this organizational structure, together with the opportunity for promotion
and for equity participation, serve as a strong motivation for our employees.
o Achieve High Levels of Customer Satisfaction. We focus on maintaining
high levels of customer satisfaction. Our personalized sales process is
designed to satisfy customers by providing high-quality vehicles in a positive,
"consumer friendly" buying environment.
Recent Acquisitions
Sonic recently acquired the Higginbotham automotive group, Tampa Volvo,
Ron Craft Chevrolet-Cadillac-Oldsmobile, Infiniti of Charlotte and Ron Craft
Chrysler Plymouth Jeep for a total purchase price of $45.8 million. In
addition, we have recently entered into definitive agreements to acquire Rally
Mitsubishi, the Tom Williams dealerships, Global Imports, Bondesen Chevrolet
Oldsmobile Cadillac, Fitzgerald Chevrolet, the Newsome dealerships, Superior
Oldsmobile-Cadillac-GMC, the Lloyd dealerships and Sam White Motor City for a
total purchase price of $98.0 million. We intend to use a portion of the
proceeds from this offering to repay debt used to fund these completed
acquisitions and to pay a portion of the purchase price for these pending
acquisitions.
Risk Factors
See "Risk Factors" beginning on page 11 for a discussion of other factors
that should be considered by prospective purchasers of the Class A common stock
offered hereby.
7
The Offering
Class A Common Stock offered:
By Sonic....................... 7,000,000 shares(1)
By the selling stockholders.... 1,058,293 shares(2)
Total shares offered.......... 8,058,293 shares(1)(2)
Common Stock to be outstanding after the offering:
Class A common stock........... 19,912,405 shares
Class B common stock........... 12,400,000 shares
Total shares of common stock outstanding
after the offering........... 32,312,405 shares(1)(2)
Voting rights................... The Class A common stock and Class B common
stock vote as a single class on all matters,
except as otherwise required by law or
Sonic's charter, with each share of Class A
common stock entitling its holders to one
vote and each share of Class B common stock
entitling its holder to ten votes except with
respect to certain limited matters. See
"Description of Capital Stock."
Use of proceeds................. We estimate that the net proceeds to Sonic
from this offering (without exercise of the
over-allotment options) will be approximately
$ million.
We intend to use these net proceeds to fund
our pending and future acquisitions and to
repay debt incurred to fund previous
acquisitions. Currently, Sonic has pending
acquisitions for $66.6 million in cash.
Pending consummation of our future
acquisitions, we will temporarily use the
funds to repay debt, which may subsequently
be reborrowed.
We will not receive any proceeds from the
sale of common stock by selling stockholders.
New York Stock Exchange symbol... "SAH"
- ---------
(1) Does not include (a) up to an aggregate of 1,208,744 shares of Class A
common stock that may be sold by Sonic and by one of the selling
stockholders upon exercise of the over-allotment options granted to the
Underwriters, see "Underwriting," (b) 3,261,680 shares of Class A common
stock issuable upon exercise of outstanding options, and (c) 1,320,172
estimated shares of Class A common stock issuable upon conversion of
outstanding preferred stock (assuming such shares were converted on
February 3, 1999).
(2) The selling stockholders collectively hold 17,985 shares of preferred stock
of Sonic, of which 12,769 shares will be converted into 722,609 shares of
Class A common stock to be sold in this offering (assuming such shares
were converted on the basis of the Class A common stock being $18.00 per
share). If the number of shares received on actual conversion of preferred
stock differs, the number of shares to be sold by the selling stockholders
in the offering may be appropriately adjusted and the number of shares to
be sold by Sonic will also be adjusted so that the total number of shares
to be sold in the offering will remain 8,058,293 shares.
---------------
Our principal executive offices are located at 5401 East Independence
Boulevard, P.O. Box 18747, Charlotte, North Carolina 28218 and our telephone
number is (704) 532-3320.
8
Summary Historical and Pro Forma Consolidated Financial and Operating Data
The following Summary Historical and Pro Forma Consolidated Financial and
Operating Data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," (included elsewhere
in this prospectus) the Consolidated Financial Statements of Sonic and the
related notes (incorporated by reference in this prospectus). For information
regarding the unaudited pro forma adjustments made to Sonic's historical
financial data, which give effect to our 1997 initial public offering and
related reorganization, our 1997 and 1998 acquisitions, the pending acquisition
of the Economy Honda dealership, our 1998 offering of senior subordinated notes
and this offering, see "Unaudited Pro Forma Consolidated Financial Data." We
refer to this treatment of financial information as "pro forma" throughout this
prospectus.
Year ended December 31,
---------------------------------------------------------
Pro
Actual Forma
----------------------------------------- ---------------
1995 1996(a) 1997(b) 1997
------------- ------------- ------------- ---------------
(in thousands, except per share amounts and vehicle unit
data)
Consolidated Statement of Income
Data:
Revenue:
Vehicle sales .............................. $ 267,650 $ 327,674 $ 467,858 $ 1,592,802
Parts, service and collision repair ........ 35,860 42,075 57,537 176,299
Finance and insurance ...................... 7,813 7,118 10,606 37,532
--------- --------- --------- -----------
Total revenue ............................ 311,323 376,867 536,001 1,806,453
Cost of sales ............................... 272,130 332,122 473,003 1,584,691
--------- --------- --------- -----------
Gross profit ................................ 39,193 44,745 62,998 221,762
Selling, general and administrative
expenses ................................... 28,091 32,602 46,770 161,038
Depreciation and amortization ............... 832 1,076 1,322 6,629
--------- --------- --------- -----------
Operating income ............................ 10,270 11,067 14,906 54,095
Interest expense, floor plan ................ 4,504 5,968 8,007 19,123
Interest expense, other ..................... 436 433 1,199 15,163
Other income ................................ 106 355 298 1,188
--------- --------- --------- -----------
Income before income taxes and
minority interest .......................... 5,436 5,021 5,998 20,997
Provision for income taxes .................. 2,176 1,924 2,249 8,319
--------- --------- --------- -----------
Income before minority interest ............. 3,260 3,097 3,749 12,678
Minority interest in earnings of
subsidiary ................................. 22 114 47 --
--------- --------- --------- -----------
Net income .................................. $ 3,238 $ 2,983 $ 3,702 $ 12,678
========= ========= ========= ===========
Diluted net income per share(c) ............. $ 0.27 $ .44
========= ===========
Weighted average number of common
shares outstanding --
diluted(c) ................................. 13,898 28,830
========= ===========
Other Consolidated Financial and
Operating Data:
New vehicle units sold ...................... 10,273 11,693 15,715 48,079
Used vehicle units sold -- retail ........... 5,172 5,488 6,712 32,478
New vehicle sales revenues .................. $ 186,859 $ 233,979 $ 343,941 $ 1,076,553
Used vehicle sales revenues -- retail ....... 60,766 68,054 85,132 386,207
Gross margin ................................ 12.6% 11.9% 11.8 % 12.3 %
New vehicle gross margin .................... 7.5% 7.7% 7.7 % 7.9 %
Used vehicle gross margin -- retail ......... 9.5% 8.4% 8.6 % 10.2 %
Parts, service and collision repair gross
margin ..................................... 36.1% 35.8% 36.9 % 41.7 %
EBITDAR(d) .................................. $ 7,681 $ 7,619 $ 10,668 $ 55,117
Rental Expense .............................. 977 1,089 2,149 12,328
--------- --------- --------- -----------
EBITDA(e) ................................... $ 6,704 $ 6,530 $ 8,519 $ 42,789
========= ========= ========= ===========
Nine Months Ended September 30,
---------------------------------------------
Pro
Actual Forma
----------------------------- ---------------
1997(b) 1998 1998
------------- --------------- ---------------
(in thousands, except per share amounts and
vehicle unit
data)
Consolidated Statement of Income
Data:
Revenue:
Vehicle sales .............................. $ 295,878 $ 1,015,001 $ 1,314,425
Parts, service and collision repair ........ 36,317 118,917 147,316
Finance and insurance ...................... 8,046 24,587 32,705
--------- ----------- -----------
Total revenue ............................ 340,241 1,158,505 1,494,446
Cost of sales ............................... 301,855 1,012,432 1,306,620
--------- ----------- -----------
Gross profit ................................ 38,386 146,073 187,826
Selling, general and administrative
expenses ................................... 28,442 105,511 135,405
Depreciation and amortization ............... 772 3,364 4,755
--------- ----------- -----------
Operating income ............................ 9,172 37,198 47,666
Interest expense, floor plan ................ 5,005 11,875 14,783
Interest expense, other ..................... 430 5,567 13,520
Other income ................................ 292 24 298
--------- ----------- -----------
Income before income taxes and
minority interest .......................... 4,029 19,780 19,661
Provision for income taxes .................. 1,531 7,550 7,660
--------- ----------- -----------
Income before minority interest ............. 2,498 12,230 12,001
Minority interest in earnings of
subsidiary ................................. 47 -- --
--------- ----------- -----------
Net income .................................. $ 2,451 $ 12,230 $ 12,001
========= =========== ===========
Diluted net income per share(c) ............. $ .20 $ .50 $ .41
========= =========== ===========
Weighted average number of common
shares outstanding --
diluted(c) ................................. 12,500 24,280 29,522
========= =========== ===========
Other Consolidated Financial and
Operating Data:
New vehicle units sold ...................... 10,348 29,262 38,273
Used vehicle units sold -- retail ........... 4,245 17,211 25,184
New vehicle sales revenues .................. $ 217,963 $ 698,189 $ 889,557
Used vehicle sales revenues -- retail ....... 52,745 232,060 315,032
Gross margin ................................ 11.3 % 12.6 % 12.6 %
New vehicle gross margin .................... 6.8 % 7.7 % 7.7 %
Used vehicle gross margin -- retail ......... 8.2 % 10.0 % 10.4 %
Parts, service and collision repair gross
margin ..................................... 35.7 % 41.5 % 41.7 %
EBITDAR(d) .................................. $ 7,023 $ 36,914 $ 47,161
Rental Expense .............................. 1,792 8,203 9,225
--------- ----------- -----------
EBITDA(e) ................................... $ 5,231 $ 28,711 $ 37,936
========= =========== ===========
(footnotes on following page)
9
As of
September 30, 1998
-------------------
Consolidated Balance Sheet Data:
Working capital .................. $ 87,052
Total assets ..................... 490,338
Long-term debt(f) ................ 141,923
Total liabilities ................ 358,669
Stockholders' equity ............. 131,669
- ---------
(a) Sonic acquired Fort Mill Ford, Inc. in February 1996. The acquisition was
accounted for using the purchase method of accounting. As a result, the
actual financial data does not include the results of this dealership
before the date we acquired it. Accordingly, the actual financial data for
periods after the acquisition may not be comparable to data presented for
periods before the acquisition.
(b) Sonic acquired Fort Mill Chrysler-Plymouth-Dodge in June 1997, Lake Norman
Chrysler/Plymouth/Jeep and Lake Norman Dodge in September 1997, Williams
Motors and Ken Marks Ford in October 1997, and the Bowers Automotive Group
and Dyer & Dyer Volvo in November 1997. Our 1997 acquisitions were
accounted for using the purchase method of accounting. As a result, the
actual financial data does not include the results of operations of these
dealerships before the date we acquired them. Accordingly, the actual
financial data for periods after the acquisitions may not be comparable to
data presented for periods before the acquisitions.
(c) In accordance with generally accepted accounting principles, the earnings
per share information has been retroactively restated to reflect our
2-for-1 common stock split that occurred on January 25, 1999.
(d) EBITDAR means earnings before interest (other than interest expense related
to notes payable-floor plan), taxes, depreciation, amortization and rent
expense. You should not consider EBITDAR to be a substitute for operating
income or a better measure of liquidity than cash flows from operating
activities, which are determined in accordance with generally accepted
accounting principles. We include it to provide additional information on
our ability to meet future debt service, our capital expenditures and our
working capital requirements. This measure may not be comparable to
similarly titled measures reported by other companies.
(e) EBITDA means earnings before interest (other than interest expense related
to notes payable-floor plan), taxes, depreciation and amortization. This
is consistent with the measure used to calculate Sonic's consolidated
fixed charge coverage ratio for purposes of the limitations on
indebtedness covenant in the indenture governing Sonic's senior
subordinated notes. You should not consider EBITDA to be a substitute for
operating income or a better measure of liquidity than cash flows from
operating activities, which are determined in accordance with generally
accepted accounting principles. We include it to provide additional
information on our ability to meet future debt service, our capital
expenditures and our working capital requirements. This measure may not be
comparable to similarly titled measures reported by other companies.
(f) Long-term debt, including current portion, includes the payable to Sonic's
Chairman and the payable to affiliates of Sonic. See Sonic's Consolidated
Financial Statements and the related notes incorporated by reference in
this prospectus.
10
RISK FACTORS
You should carefully consider and evaluate all of the information in this
prospectus, including the risk factors set forth below, before investing in the
shares we are offering.
Automobile Manufacturers Exercise Significant Control Over Sonic's Operations
and Sonic Is Dependent on Them to Operate its Business
Each of Sonic's dealerships operates pursuant to a franchise agreement
with the applicable automobile manufacturer or manufacturer authorized
distributor. Sonic is dependent to a significant extent on its relationships
with such manufacturers.
Vehicles manufactured by the following manufacturers accounted for the
indicated approximate percentage of our pro forma 1997 new vehicle revenue:
Percentage of
Our 1997 New Vehicle
Manufacturer Pro Forma Revenues
- ------------------------------- ---------------------
Ford Motor Company 42.4%
Chrysler Corporation 18.6%
Toyota Motor Sales (U.S.A.) 10.9%
General Motors Corporation 6.7%
No other manufacturer accounted for more than 5% of our pro forma new
vehicle sales during 1997. A significant decline in the sale of Ford, Chrysler,
Toyota or GM new vehicles could have a material adverse effect on us.
Manufacturers exercise a great degree of control over the operations of
Sonic's dealerships. Each of our franchise agreements provides for termination
or non-renewal for a variety of causes, including any unapproved change of
ownership or management and other material breaches of the franchise
agreements. We believe that we will be able to renew all of our existing
franchise agreements upon expiration.
o We cannot assure you that any of our franchise agreements will be renewed
or that the terms and conditions of such renewals will be favorable to us.
o If a manufacturer is allowed under state franchise laws to terminate or
decline to renew one or more of Sonic's significant franchise agreements,
such action could have a material adverse effect on our business.
o Actions taken by manufacturers to exploit their superior bargaining
position in negotiating the terms of such renewals or otherwise could also
have a material adverse effect on us.
Manufacturers allocate their vehicles among dealerships generally based on
the sales history of each dealership. Consequently, we also depend on the
manufacturers to provide us with a desirable mix of popular new vehicles. These
popular vehicles produce the highest profit margins and tend to be the most
difficult to obtain from the manufacturers.
o Sonic's dealerships depend on the manufacturers for certain sales
incentives and other programs that are intended to promote and support
dealership new vehicle sales. Manufacturers have historically made many
changes to their incentive programs during each year. A reduction or
discontinuation of a manufacturer's incentive programs may materially
adversely affect our profitability.
Adverse Conditions Affecting One or More Manufacturers May Negatively Impact
Sonic's Profitability
The success of each of Sonic's dealerships depends to a great extent on
the manufacturers':
o financial condition;
o marketing;
o vehicle design;
o production capabilities; and
o management.
Events such as strikes and other labor actions by unions, or negative
publicity concerning a particular manufacturer or vehicle model, may materially
and adversely affect us. Similarly, the delivery of vehicles from manufacturers
later than
11
scheduled, which may occur particularly during periods when new products are
being introduced, can lead to reduced sales. Although, we have attempted to
lessen our dependence on any one manufacturer by establishing dealer
relationships with a number of different domestic and foreign automobile
manufacturers, adverse conditions affecting manufacturers, and Ford, Chrysler,
Toyota or GM in particular, could have a material adverse effect on us. For
instance, workers at a Chrysler engine plant went on strike in April 1997 for
29 days. The strike by the United Auto Workers caused Chrysler's vehicle
production to drop during the Spring of 1997, especially for production of its
most popular truck and van models. This strike materially affected Sonic due to
Chrysler's inability to provide us with a sufficient supply of new vehicles and
parts during such period. In addition, in June 1998, the United Auto Workers
went on strike at two GM facilities in Flint, Michigan. The strike lasted 53
days, causing 27 GM manufacturing facilities to shut down during the strike and
severely affecting production of GM vehicles during the strike period. In the
event of another such strike, Sonic may need to purchase inventory from other
automobile dealers at prices higher than it would be required to pay to the
affected manufacturer in order to carry an adequate level and mix of inventory.
Consequently, such events could materially adversely affect our financial
results.
Manufacturer Stock Ownership/Issuance Limits Limit Sonic's Ability to Issue
Additional Equity to Meet Its Financing Needs
Standard automobile franchise agreements prohibit transfers of any
ownership interests of a dealership and its parent, such as Sonic, and,
therefore, often do not by their terms accommodate public trading of the
capital stock of a dealership or its parent. Our manufacturers have agreed to
permit trading in the Class A common stock. A number of manufacturers impose
restrictions upon the transferability of the Class A common stock.
o Ford may cause us to sell or resign from one or more of our Ford
franchises if any person or entity (other than the current holders of our
Class B common stock, and their lineal descendants and affiliates
(collectively, the "Smith Group")) acquires 15% or more of our voting
securities.
o General Motors, Toyota and Nissan Motor Corporation In U.S.A.
("Infiniti") may force the sale of their respective franchises if 20% of
more of our voting securities are similarly acquired.
o American Honda Co., Inc. may force the sale of our Honda franchise if any
person or entity, excluding members of the Smith Group, acquires 5% of the
common stock (10% if such entity is an institutional investor), and Honda
deems such person or entity to be unsatisfactory.
o Volkswagen of America, Inc. approved of the public sale of only 25% of
the voting control of Sonic in Sonic's initial public offering, and
requires prior approval of any change in control or management of Sonic
that would affect Sonic's control or management of its Volkswagen
franchise subsidiaries.
o Chrysler approved of the public sale of only 50% of Sonic's common stock
in Sonic's initial public offering, and requires prior approval of any
future sales that would result in a change in voting or managerial control
of Sonic.
o Mercedes requires 60 days notice to approve the acquisition of securities
representing 20% or more of the voting rights of Sonic.
In addition, other manufacturers may seek to impose other restrictions.
In a similar manner, Sonic's lending arrangements require that voting
control over Sonic be maintained by the Smith Group. Any transfer of shares of
common stock, including a transfer by members of the Smith Group, will be
outside our control. If such transfer results in a change in control of Sonic,
it could result in the termination or non-renewal of one or more of our
franchise agreements and a default under our credit arrangements. Moreover,
these issuance limitations may impede Sonic's ability to raise capital through
additional equity offerings or to issue Sonic stock as consideration for future
acquisitions. Such restrictions also may prevent or deter prospective acquirors
from acquiring control of Sonic and adversely impact Sonic's equity value.
Manufacturers' Restrictions on Acquisitions Could Limit Sonic's Future Growth
We are required to obtain the consent of the applicable manufacturer
before the acquisition of any additional dealership franchises. We cannot
assure you that manufacturers will grant such approvals, although the denial of
such approval may be subject to certain state franchise laws. In the course of
acquiring Jaguar franchises associated with dealerships in Chattanooga,
Tennessee and Greenville, South Carolina, Jaguar declined to consent to Sonic's
proposed 1997 acquisitions of those franchises.
12
Obtaining the consent of the manufacturers for acquisitions of dealerships
could also take a significant amount of time. Obtaining the approvals of the
manufacturers for our 1997 and 1998 acquisitions, other than Jaguar, which was
not obtained, took approximately five months. We believe that manufacturer
approvals of subsequent acquisitions from manufacturers with which Sonic has
previously completed applications and agreements may take less time, although
we cannot provide you with assurances to that effect.
Sonic has obtained manufacturer consent to all of its 1998 acquisitions
other than from Honda in the acquisition of the Economy Honda dealership in
Chattanooga, Tennessee. We currently expect to receive the consent of Honda to
the Economy Honda acquisition prior to the closing of this acquisition,
although we cannot provide you with assurances to that effect. See " -- Honda
Has Not Consented to the Economy Honda Acquisition."
If we experience delays in obtaining, or fail to obtain, approvals of the
manufacturers for acquisitions of dealerships, our growth strategy could be
materially adversely affected. In determining whether to approve an
acquisition, the manufacturers may consider many factors, including the moral
character, business experience, financial condition, ownership structure and
customer satisfaction index scores ("CSI scores") of Sonic and its management.
In addition, under an applicable franchise agreement or under state law a
manufacturer may have a right of first refusal to acquire a dealership in the
event we seek to acquire a dealership franchise.
In addition, a manufacturer may seek to limit the number of such
manufacturers' dealerships that may be owned by Sonic, Sonic's national market
share of such manufacturer's products or the number of dealerships Sonic may
own in a particular geographic area. These restrictions may not be enforceable
under state franchise laws. See "Business -- Relationships with Manufacturers."
o Ford currently limits us to no more than the lesser of (1) 15 Ford and 15
Lincoln Mercury dealerships or (2) that number of Ford and Lincoln Mercury
dealerships accounting for 2% of the preceding year's retail sales of
those brands in the United States. Ford also limits us to owning only one
Ford dealership in any Ford-defined market area having three or fewer Ford
dealerships in it and no more than 25% of the Ford dealerships in a market
area having four or more Ford dealerships.
o Toyota currently restricts the number of dealerships which may be owned
by any one group to seven Toyota and three Lexus dealerships nationally
and restricts the number of dealerships that may be owned to (1) the
greater of one dealership, or 20% of the Toyota dealer count in a
Toyota-defined "Metro" market, (2) the lesser of five dealerships or 5% of
the Toyota dealerships in any Toyota region (currently 12 geographic
regions), and (3) two Lexus dealerships in any one of the four Lexus
geographic areas. Toyota further requires that at least nine months elapse
between acquisitions.
o Honda restricts any company from holding more than seven Honda or more
than three Acura franchises nationally and restricts the number of
franchises to (1) one Honda dealership in a Honda-defined "Metro" market
with two to 10 Honda dealerships, (2) two Honda dealerships in a Metro
market with 11 to 20 Honda dealerships, (3) three Honda dealerships in a
Metro market with 21 or more Honda dealerships, (4) no more than 4% of the
Honda dealerships in any one of 10 Honda-defined geographic zones, (5) one
Acura dealership in a Metro market, and (6) two Acura dealerships in any
one of the six Acura-defined geographic zones.
o Mercedes restricts any company from owning that number of Mercedes
dealerships with sales of more than 3% of total sales of Mercedes vehicles
in the U.S. during the previous calendar year. In addition, Mercedes has
limited Sonic from acquiring more than four additional Mercedes
dealerships until November 1999. During this period, Mercedes will
evaluate the performance of our acquired Mercedes dealerships before
permitting us to acquire additional Mercedes dealerships.
o GM limited the number of GM dealerships that we may acquire during the 12
months after our November 1997 initial public offering to five additional
GM dealership locations. GM currently limits the maximum number of GM
dealerships that we may acquire to 50% of the GM dealerships, by franchise
line, in a GM-defined geographic market area having multiple GM dealers.
o Toyota and Honda also prohibit ownership of contiguous dealerships. The
Economy Honda acquisition would violate Honda's contiguous dealership
policy since it would result in our having two contiguous dealership
points in Chattanooga. See " -- Honda Has Not Consented to the Economy
Honda Acquisition."
o Subaru limits us to no more than two Subaru dealerships within certain
designated market areas, four Subaru dealerships within the Mid-America
region and twelve dealerships within Subaru's entire area of distribution.
o Toyota, Honda and Mercedes also prohibit the coupling of a franchise
with any other brand without their consent.
13
As a condition to granting their consent to our 1997 acquisitions, a
number of manufacturers forced Sonic to agree to additional restrictions. These
agreements principally restrict (1) certain material changes in Sonic or
extraordinary corporate transactions such as a merger, sale of a material
amount of assets or change in the Board of Directors or management of Sonic
which could have a material adverse effect on the manufacturer's image or
reputation or could be materially incompatible with the manufacturer's
interests; (2) the removal of a dealership general manager without the consent
of the manufacturer; and (3) the use of dealership facilities to sell or
service new vehicles of other manufacturers. If we are unable to comply with
these restrictions, we generally must (1) sell the assets of the dealerships to
the manufacturer or to a third party acceptable to the manufacturer, or (2)
terminate the dealership agreements with the manufacturer. Other manufacturers
may impose other and more stringent restrictions in connection with future
acquisitions.
We own:
seven Ford franchises,
six Chrysler franchises,
five Plymouth franchises,
four Dodge franchises,
three Jeep franchises,
three BMW franchises,
three Toyota franchises,
three Volkswagen franchises,
three Volvo franchises,
three KIA franchises,
three Mercury franchises,
three Chevrolet franchises,
three Oldsmobile franchises,
two Cadillac franchises,
two Lincoln franchises,
two Infiniti franchises,
two Hyundai franchises,
two Mitsubishi franchises, and
one franchise each of Acura, Isuzu, Mercedes, Honda and Subaru.
Honda Has Not Consented to the Economy Honda Acquisition
Sonic requested the consent of Honda to the Economy Honda acquisition.
Honda has informed us that our acquisition of the Economy Honda dealership
would violate Honda's policy against the ownership of contiguous dealerships,
since we already own the Cleveland Village Honda dealership located in the
Chattanooga market. Therefore, Honda's approval of the Economy Honda
acquisition is contingent upon us divesting our ownership of the Cleveland
Village Honda dealership. We are working with Honda in good faith to comply
with their policy and are currently negotiating with potential buyers for the
sale of the Cleveland Village Honda dealership. We may be unable to sell the
Cleveland Village Honda dealership. We also cannot assure you that the approval
of Honda to the Economy Honda acquisition will be obtained. These Honda
dealerships represented or would have represented the following percentages of
Sonic's 1997 revenues and gross profits on a pro forma basis:
% of Revenues % of Gross Profits
--------------- -------------------
Cleveland Village Honda 1.9% 2.1%
Economy Honda 2.7% 3.0%
Jaguar Has Not Consented to Two Acquisitions
In the course of seeking to acquire Jaguar franchises in Chattanooga,
Tennessee and Greenville, South Carolina, Jaguar declined to consent to Sonic's
proposed acquisitions of these franchises. In settling legal actions brought
against Jaguar by the seller of the Chattanooga Jaguar franchise, Sonic agreed
with Jaguar not to acquire any Jaguar franchise until August 3, 2001.
Sonic's Failure to Meet A Manufacturer's Consumer Satisfaction Requirements May
Adversely Affect Our Ability to Acquire New Dealerships
Many manufacturers attempt to measure customers' satisfaction with their
sales and warranty service experiences through systems which vary from
manufacturer to manufacturer but which are generally known as "CSI." These
manufacturers may use a dealership's CSI scores as a factor in evaluating
applications for additional dealership acquisitions. The components of CSI have
been modified from time to time in the past, and we cannot assure you that such
components will not be further modified or replaced by different systems in the
future. To date, we have not been materially adversely affected by these
standards and have not been denied approval of any acquisition based on low CSI
scores, except for Jaguar's refusal to approve our acquisition of a Chattanooga
Jaguar franchise in 1997. See " -- Jaguar Has Not Consented to Two
Acquisitions." However, we cannot assure you that Sonic will be able to comply
with such standards in the future. Failure of Sonic's dealerships to comply
with the standards imposed by manufacturers at any given time may have a
material adverse effect on us.
14
Limitations on Sonic's Financial Resources Available for Acquisitions
We intend to finance our acquisitions with cash on hand, through issuances
of equity or debt securities and through borrowings under credit arrangements.
o We cannot assure you that we will be able to obtain additional debt or
equity securities financing.
o Using equity to complete acquisitions could significantly dilute
existing equity holders.
o Using cash to complete acquisitions could substantially limit our
operating or financial flexibility.
o If we are unable to obtain financing on acceptable terms, we may be
required to reduce significantly the scope of our presently anticipated
expansion, which could materially adversely affect our business.
In addition, Sonic is dependent to a significant extent on its ability to
finance its inventory. Automotive retail inventory financing involves
significant sums of money in the form of "floor plan financing." Floor plan
financing is how a dealership finances its purchase of new vehicles from a
manufacturer. The dealership borrows money to buy a particular vehicle from the
manufacturer and pays off the loan when it sells that particular vehicle,
paying interest during this period. As of September 30, 1998, Sonic had
approximately $174.0 million of floor plan indebtedness outstanding, all of
which is under Sonic's floor plan credit facility (the "Floor Plan Facility")
with Ford Motor Credit. Substantially all the assets of our dealerships are
pledged to secure such indebtedness, which may impede our ability to borrow
from other sources. Ford Motor Credit is associated with Ford. Consequently,
any deterioration of our relationship with Ford could adversely affect our
relationship with Ford Motor Credit and vice-versa. In addition, Sonic must
obtain new floor plan financing or obtain consents to assume such financing in
connection with its acquisition of dealerships.
O. Bruton Smith, our Chief Executive Officer and Chairman of the Board,
initially guaranteed the obligations of Sonic under Sonic's unsecured line of
credit (the "Revolving Facility") with Ford Motor Credit. Such obligations were
further secured with a pledge of shares of common stock of Speedway
Motorsports, Inc. owned by Sonic Financial Corporation, a corporation
controlled by Mr. Smith, having an estimated value at the time of pledge of
approximately $50.0 million (the "Revolving Pledge"). When the Revolving
Facility's borrowing limit was increased to $75.0 million in 1997, Mr. Smith's
personal guarantee of Sonic's obligations under the Revolving Facility was
released, although the Revolving Pledge remained in place. Mr. Smith was also
required by Ford Motor Credit to lend $5.5 million (the "Subordinated Smith
Loan") to Sonic to increase Sonic's capitalization because the net proceeds
from Sonic's November 1997 initial public offering were significantly less than
expected by Sonic and Ford Motor Credit. In August 1998, Ford Motor Credit
released the Revolving Pledge. In December 1998, Ford Motor Credit agreed to
increase the borrowing limit under the Revolving Facility to $100.0 million.
Mr. Smith may be unwilling to make any such commitments in the future if such
commitments are needed.
Leverage
As of September 30, 1998, Sonic's long-term debt was 51.6% of its total
capitalization. As of September 30, 1998, Sonic's total consolidated long-term
indebtedness (including certain affiliated payables) was $140.6 million, its
total consolidated short-term indebtedness (including floor plan notes payable)
was $175.3 million and its total stockholders' equity was $131.7 million. In
addition, the indenture relating to our senior subordinated notes and other
debt instruments of Sonic and its subsidiaries allow Sonic and its subsidiaries
to incur certain additional indebtedness, including secured indebtedness.
The degree to which Sonic is leveraged could have important consequences
to the holders of our securities, including the following:
o our ability to obtain additional financing for acquisitions, capital
expenditures, working capital or general corporate purposes may be
impaired in the future;
o a substantial portion of the our cash flow from operations must be
dedicated to the payment of principal and interest on our senior
subordinated notes, borrowings under the revolving facility, a
standardized floor plan credit facility with Ford Motor Credit for each of
our dealership subsidiaries and other indebtedness, thereby reducing the
funds available to us for our operations and other purposes;
o certain of our borrowings are and will continue to be at variable rates
of interest, which exposes us to the risk of increased interest rates;
15
o the indebtedness outstanding under our credit facilities is secured by a
pledge of substantially all the assets of our dealerships; and
o we may be substantially more leveraged than certain of our competitors,
which may place us at a relative competitive disadvantage and make us more
vulnerable to changing market conditions and regulations.
In addition, our debt agreements contain numerous covenants that will
limit the discretion of Sonic's and its subsidaries' management with respect to
certain business matters.
Automobile Retailing Is A Mature Industry With Limited Growth Potential in New
Vehicle Sales and Sonic's Acquisition Strategy Will Affect Its Revenues and
Earnings
The United States automobile dealership industry is considered a mature
industry in which minimal growth is expected in unit sales of new vehicles. As
a consequence, growth in our revenues and earnings is likely to be
significantly affected by our success in acquiring and integrating dealerships
and the pace and size of such acquisitions.
High Competition in Automobile Retailing Reduces Sonic's Profit Margins on
Vehicle Sales
Automobile retailing is a highly competitive business with over 22,000
franchised automobile dealerships in the United States at the beginning of
1998. Our competition includes:
o Franchised automobile dealerships selling the same or similar makes of
new and used vehicles we offer in our markets and sometimes at lower
prices than us. Some of these dealer competitors may be larger and have
greater financial and marketing resources than Sonic;
o Other franchised dealers;
o Private market buyers and sellers of used vehicles;
o Used vehicle dealers;
o Service center chain stores; and
o Independent service and repair shops.
Gross profit margins on sales of new vehicles have been declining since
1986. The used car market faces increasing competition from untraditional
outlets such as used-vehicle "superstores" and sales using the Internet. Many
used-vehicle superstores use sales techniques, such as one price shopping, that
are untraditional and appealing to certain consumers. Presently, only one of
Sonic's dealerships uses one price shopping techniques. Several groups have
begun to establish nationwide networks of used-vehicle superstores. In many of
the markets where we have significant operations, used- vehicle superstores
operate in competition with us. "No negotiation" sales methods are also being
tried for new cars by at least one of these superstores and by dealers for
Saturn and other dealerships. Some of Sonic's competitors may be capable of
operating on smaller gross margins than us, and may have greater financial,
marketing and personnel resources than us.
In addition, Ford and GM have announced that they are entering into joint
ventures to acquire dealerships in various cities in the United States and
Saturn has announced its intention to acquire its dealerships. In addition,
other manufacturers may directly enter the retail market in the future.
Manufacturer direct retailing efforts that comply with state franchise statutes
could have a material adverse effect on us.
The increased popularity of short-term vehicle leasing also has resulted,
as these leases expire, in a large increase in the number of late model
vehicles available in the market, which puts added pressure on new vehicle
margins. As Sonic seeks to acquire dealerships in new markets, it may face
increasingly significant competition as it strives to gain market share through
acquisitions or otherwise. Such competition includes other large dealer groups
and dealer groups that have publicly-traded equity.
Our franchise agreements do not grant us the exclusive right to sell a
manufacturer's product within a given geographic area. We could be materially
adversely affected if any of our manufacturers award franchises to others in
the same markets where we operate, although certain state franchise laws may
limit such activities by the manufacturers. See "Business -- Relationships
with Manufacturers." A similar adverse affect could occur if existing competing
franchised dealers increase their market share in our markets. Our gross
margins may decline over time as we expand into markets where we do not have a
leading position. These and other competitive pressures could materially
adversely affect Sonic's results of operations.
16
The Cyclical and Local Nature of Automobile Sales May Adversely Affect Sonic's
Profitability
The automobile industry is cyclical and historically has experienced
periodic downturns characterized by oversupply and weak demand. Many factors
affect the industry, including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
credit availability. For the year ended December 31, 1998, industry retail unit
sales increased 2.9% as a result of retail car unit sales declines of 1.1%
offset by retail truck unit sales gains of 7.7% from the same period in 1997.
Future recessions may have a material adverse effect on our business.
Local economic, competitive and other conditions also affect the
performance of dealerships. Sonic's dealerships currently are located in the
Atlanta, Charlotte, Chattanooga, Columbus, Daytona Beach,
Greenville/Spartanburg, Houston, Montgomery, Nashville and Tampa/Clearwater
markets. We intend to pursue acquisitions outside of these markets, but our
operational focus is on our current markets. As a result, Sonic's results of
operations depend substantially on general economic conditions and consumer
spending habits in the Southeast and, to a lesser extent, in the Houston and
Columbus markets. Sonic's results of operations also depend on other factors,
such as tax rates and state and local regulations specific to Alabama, Florida,
Georgia, North Carolina, Ohio, South Carolina, Tennessee and Texas. Sonic may
not be able to expand geographically and any such expansion may not adequately
insulate it from the adverse effects of local or regional economic conditions.
Risks of Consolidating Operations as a Result of Recent Acquisitions May
Adversely Affect Sonic's Future Operating Results
We acquired 19 dealerships in 1998. Each of these dealerships was operated
and managed as a separate independent entity until acquired. Sonic's future
operating results will depend on our ability to integrate the operations of
these businesses and manage the combined enterprise. We cannot assure you that
we will be able to effectively and profitably integrate in a timely manner any
of the dealerships included in our 1998 acquisitions or any future
acquisitions, or to manage the combined entity without substantial costs,
delays or other operational or financial problems. Our inability to do so could
have a material adverse effect on Sonic's business, financial condition and
results of operations.
Risks Associated with Acquisitions May Hinder Sonic's Ability to Increase
Revenues and Earnings
The retail automobile industry is considered a mature industry in which
minimal growth is expected in industry unit sales. Accordingly, our future
growth depends in large part on our ability to acquire additional dealerships
as well as on our ability to manage expansion, control costs in our operations
and consolidate dealership acquisitions, including our 1998 acquisitions, into
existing operations. In pursuing a strategy of acquiring other dealerships, we
face risks commonly encountered with growth through acquisitions. These risks
include, but are not limited to:
o incurring significantly higher capital expenditures and operating
expenses;
o failing to assimilate the operations and personnel of the acquired
dealerships;
o disrupting Sonic's ongoing business;
o dissipating Sonic's limited management resources;
o failing to maintain uniform standards, controls and policies;
o impairing relationships with employees and customers as a result of
changes in management;
o causing increased expenses for accounting and computer systems, as well
as integration difficulties; and
o failure to obtain a manufacturer's consent to one of its dealership
franchises.
Failure to retain qualified management personnel at any acquired
dealership may increase the risk associated with integrating such acquired
dealership. Installing new computer systems has in the past disrupted existing
operations as management and salespersons adjust to new technologies. We cannot
assure you that we will be successful in overcoming these risks or any other
problems encountered with such acquisitions, including our 1998 acquisitions.
Although there are many potential acquisition candidates that fit our
acquisition criteria, we cannot assure you that we will be able to consummate
any such transactions in the future or identify those candidates that would
result in the most successful combinations, or that future acquisitions will be
able to be consummated at acceptable prices and terms. In addition, increased
competition for acquisition candidates could result in fewer acquisition
opportunities for us and higher acquisition prices. The magnitude, timing and
nature of future acquisitions will depend upon various factors, including:
17
o the availability of suitable acquisition candidates;
o competition with other dealer groups for suitable acquisitions;
o the negotiation of acceptable terms;
o Sonic's financial capabilities;
o the availability of skilled employees to manage the acquired companies;
and
o general economic and business conditions.
In addition, Sonic's future growth as a result of our acquisition of
automobile dealerships will depend on our ability to obtain the requisite
manufacturer approvals. We cannot assure you that we will be able to obtain
such consents in the future.
In certain cases, we may be required to file applications and obtain
clearances under applicable federal antitrust laws before consummation of an
acquisition. These regulatory requirements may restrict or delay our
acquisitions, and may increase the cost of completing such transactions.
The Operating Condition of Acquired Businesses Cannot Be Determined Accurately
Until Sonic Assumes Control
Although we have conducted what we believe to be a prudent level of
investigation regarding the operating condition of the businesses we purchase
in light of the circumstances of each transaction, certain unavoidable levels
of risk remain regarding the actual operating condition of these businesses.
Until we actually assume operating control of such assets, we may not be able
to ascertain the actual value of the acquired entity.
Potential Adverse Market Price Effect of Additional Shares Eligible for Future
Sale
The market price of our Class A common stock could be adversely affected
by the availability for public sale of up to 18,546,564 shares held or issuable
on January 4, 1999, including:
Number of Shares of
Class A Common Stock Manner of Holding and/or Issuance
- ------------------------ --------------------------------------------------------------
12,400,000(1) Issuable on conversion of 12,400,000 shares of our Class B
common stock owned by existing stockholders of Sonic.
These shares of Class A common stock are subject to
certain piggyback registration rights.
242,782(1) Issuable on exercise of warrants issued in our business
acquisitions.
1,445,374(1)(2) Issuable on conversion of outstanding shares of our Class
A convertible preferred stock that were issued in our
business acquisitions if such shares were converted to
shares of Class A common stock as of January 4, 1999.
1,602,832 Issued in our business acquisitions and currently registered
for sale under the Securities Act pursuant to a shelf
registration.
2,076,306 Issuable on exercise of options granted under our 1997
Stock Option Plan. All such shares are registered for sale
under the Securities Act.
719,270 Issuable on exercise of options granted under our employee
stock purchase plans. All such shares are registered for sale
under the Securities Act.
60,000 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
average of the daily closing prices for the Class A common stock on the
18
NYSE for the 20 consecutive trading days ending one trading day before
January 4, 1999. This number is subject to adjustment based on the common
stock price on the date of conversion and could be materially more or
less than this estimated amount depending on factors that we cannot
presently determine. These factors include the future market price of the
Class A common stock and the decisions of the holders of the preferred
stock as to when to convert their shares of preferred stock. Generally,
such issuances of Class A common stock will vary inversely with the
market price of the Class A common stock.
In connection with pending acquisitions, Sonic has agreed to issue
approximately $31.4 million in Class A common stock or securities convertible
into Class A common stock. All of these securities will have certain
registration rights. Sonic intends in its business acquisitions to issue
additional shares of equity securities that may have registration rights as
well as be eligible for resale under Rule 144. The resale of substantial
amounts of Class A common stock, or the perception that such resales may occur,
could materially and adversely affect the prevailing market prices for the
Class A common stock and the ability of Sonic to raise equity capital in the
future.
Potential Conflicts of Interest Between Sonic and Its Officers Could Adversely
Affect Our Future Performance
Bruton Smith serves as the chairman and chief executive officer of
Speedway Motorsports, Inc. and as the chairman of Mar Mar Realty Trust, a real
estate investment trust that is specializing in the acquisition and leasing of
the real estate of automobile dealerships and automotive related businesses
("MMRT"). Accordingly, Sonic will compete with Speedway Motorsports and MMRT
for the management time of Mr. Smith. Under his employment agreement with
Sonic, Mr. Smith is required to devote approximately 50% of his business time
to the affairs of Sonic. The remainder of his business time may be devoted to
other entities including Speedway Motorsports and MMRT.
We have in the past and will likely in the future enter into transactions
with entities controlled by Mr. Smith or other affiliates of Sonic, including
transactions with MMRT. Sonic has recently entered into certain property
transactions with MMRT. We believe that all of our existing arrangements are
favorable to us and are as if the arrangements were negotiated between
unaffiliated parties, although certain rent rates may be below market rates.
Since no independent appraisals were obtained, we cannot assure you that our
transactions with MMRT are on terms no less favorable than could have been
obtained from unaffiliated third parties. Potential conflicts of interest could
also arise in the future between Sonic and these affiliated parties in
connection with the enforcement, amendment or termination of these
arrangements. Sonic anticipates renegotiating its leases with all related
parties at lease expiration at fair market rentals, which may be higher than
current rents. See "Certain Transactions -- Transactions with MMRT."
Under Delaware law generally, a corporate insider is precluded from acting
on a business opportunity in his individual capacity if that opportunity is (a)
one which the corporation is financially able to undertake, (b) is in the line
of the corporation's business, (c) is of practical advantage to the corporation
and (d) is one in which the corporation has an interest or reasonable
expectancy. Accordingly, corporate insiders are generally required to engage in
new business opportunities of Sonic, only through Sonic unless a majority of
our disinterested directors decide that such opportunities are not in our best
interest.
Our charter contains provisions providing that transactions between Sonic
and its affiliates must be no less favorable to Sonic than would be available
in similar transactions with an unrelated third party. Moreover, any such
transactions involving aggregate payments in excess of $500,000 must be
approved by a majority of our directors and a majority of our independent
directors. Otherwise, Sonic must obtain an opinion as to the financial fairness
of the transaction to be issued by an investment banking or appraisal firm of
national standing. In addition, the terms of the Revolving Facility and our
senior subordinated notes will restrict certain transactions with affiliates.
Lack of Majority of Independent Directors Could Result in Conflicts with
Management and Majority Stockholders That May Reduce Sonic's Future Performance
Independent directors do not constitute a majority of the Board, and our
Board may not have a majority of independent directors in the future. Without a
majority of independent directors, our executive officers, principal
stockholders and directors could establish policies and enter into transactions
without independent review and approval, subject to certain restrictions under
our charter. These policies and transactions could present the potential for a
conflict of interest between Sonic and its minority stockholders and the
controlling officers, stockholders or directors.
19
The Loss of Key Personnel and the Limited Management and Personnel Resources of
Sonic Could Adversely Affect Sonic's Operations and Growth
Our success depends to a significant degree upon the continued
contributions of its management team (particularly its senior management) and
service and sales personnel. Additionally, manufacturer franchise agreements
require the prior approval of the applicable manufacturer before any change is
made in franchise general managers. For instance, Volvo has required that
Richard Dyer maintain a 20% interest in, and be the general manager of, Sonic's
Volvo dealerships formerly owned by him. In addition, Mercedes requires that
the individual dealer operator of our Mercedes dealerships own at least a 20%
interest in our Mercedes dealerships. We do not have employment agreements with
many of our dealership managers and other key dealership personnel.
Consequently, the loss of the services of one or more of these key employees
could have a material adverse effect on us.
In addition, as we expand we may need to hire additional managers and will
likely be dependent on the senior management of any businesses acquired. The
market for qualified employees in the industry and in the regions in which
Sonic operates, particularly for general managers and sales and service
personnel, is highly competitive and may subject Sonic to increased labor costs
in periods of low unemployment. The loss of the services of key employees or
the inability to attract additional qualified managers could have a material
adverse effect on us. In addition, the lack of qualified management or
employees employed by our potential acquisition candidates may limit our
ability to consummate future acquisitions.
Seasonality of the Automotive Retail Business Adversely Affects First Quarter
Revenues
Our business is seasonal, with a disproportionate amount of revenues
received in the second, third and fourth fiscal quarters.
Imported Product Restrictions and Foreign Trade Risks May Impair Sonic's
Ability to Sell Foreign Vehicles Profitably
Certain motor vehicles as well as certain major components of vehicles
retailed by Sonic are of foreign origin. Accordingly, Sonic is subject to the
import and export restrictions of various jurisdictions and is dependent to
some extent upon general economic conditions in and political relations with a
number of foreign countries, particularly Germany, Japan and Sweden.
Additionally, fluctuations in currency exchange rates may adversely affect our
sales of vehicles produced by foreign manufacturers. Imports into the United
States may also be adversely affected by increased transportation costs and
tariffs, quotas or duties.
Governmental Regulation and Environmental Regulation Compliance Costs May
Adversely Affect Sonic's Profitability
We are subject to a wide range of federal, state and local laws and
regulations, such as local licensing requirements, and consumer protection
laws. The violation of these laws and regulations can result in civil and
criminal penalties being levied against us or in a cease and desist order
against our operations that are not in compliance. Our future acquisitions may
also be subject to regulation, including antitrust reviews. We believe that we
comply in all material respects with all laws and regulations applicable to our
business, but future regulations may be more stringent and require us to incur
significant additional costs.
Our facilities and operations are also subject to federal, state and local
laws and regulations relating to environmental protection and human health and
safety. Specific types of environmental regulations that apply to our business
include those governing wastewater discharges, air emissions, the operation and
removal of underground and aboveground storage tanks, the use, storage,
treatment, transportation, release and disposal of solid and hazardous
materials and wastes and the clean up of contaminated property or water.
Certain environmental laws and regulations may make us liable for the full
amount of the costs of investigation and/or remediation of contaminated
properties, even if we are not at fault for the materials disposed or if such
disposal was legal at the time. People who can become liable under these laws
and regulations include the present or former owner or operator of a
contaminated property and companies that generated, disposed of or arranged for
the disposal of hazardous substances found at the property.
Our past and present business operations that are subject to such laws and
regulations include the use, storage, handling and disposal of hazardous or
toxic substances such as new and waste motor oil, oil filters, transmission
fluid, antifreeze, freon, new and waste paint and lacquer thinner, batteries,
solvents, lubricants, degreasing agents, gasoline and diesel fuels. We are also
subject to laws and regulations because of underground storage tanks that exist
or used to exist at many of our properties. Sonic, like many of its
competitors, has incurred, and will continue to incur, capital and operating
20
expenditures and other costs in complying with such laws and regulations. In
addition, soil and groundwater contamination exists at certain of our
properties. We cannot assure you that our other properties have not been or
will not become similarly contaminated. In addition, we could become subject to
new or unforeseen environmental costs or liabilities because of our
acquisitions.
Certain laws and regulations, including those governing air emissions and
underground storage tanks, require compliance with new or more stringent
standards that are imposed in the future. We cannot predict what other
environmental legislation or regulations will be enacted in the future, how
existing or future laws or regulations will be administered or interpreted or
what environmental conditions may be found to exist in the future.
Consequently, we may be required to make substantial expenditures in the
future.
Concentration of Voting Power and Antitakeover Provisions of Our Charter May
Reduce Stockholder Value in Any Potential Change of Control of Sonic
Our common stock is divided into two classes with different voting rights.
This dual class stock ownership allows the present holders of the Class B
common stock to control Sonic. Holders of Class A common stock have one vote
per share on all matters. Holders of Class B common stock have ten votes per
share on all matters, except that they have only one vote per share on any
transaction proposed by the Board of Directors or a Class B common stock holder
or otherwise benefitting the Class B common stock holders constituting a:
(a) "going private" transaction;
(b) disposition of substantially all of Sonic's assets;
(c) transfer resulting in a change in the nature of Sonic's business; or
(d) merger or consolidation in which current holders of common stock would
own less than 50% of the common stock following such transaction.
After the offering, holders of Class B common stock will hold less than a
majority of Sonic's outstanding common stock but a majority of Sonic's voting
power. This may prevent or discourage a change of control of Sonic even if such
action were favored by holders of Class A common stock.
Certain provisions of our charter and bylaws make it more difficult for
our stockholders to take certain corporate actions. See "Description of Capital
Stock -- Delaware Law, Certain Charter and Bylaw Provisions and Certain
Franchise Agreement Provisions." Options under our 1997 Stock Option Plan
become immediately exercisable on a change in control of Sonic. These
agreements, corporate documents and laws, as well as provisions of our
franchise agreements permitting manufacturers to terminate such agreements upon
a change of control and provisions of our lending arrangements creating an
event of default on a change in control, may have the effect of delaying or
preventing a change in control of Sonic or preventing stockholders from
realizing a premium on the sale of their shares upon an acquisition of Sonic.
Year 2000 Computer Problems May Create Costs and Problems Adversely Affecting
Sonic's Profitability
We recognize the need to ensure that our operations will not be adversely
impacted by Year 2000 software failures. We have completed an assessment of our
operations in this regard. We have determined that our systems are either
currently Year 2000 compliant or that the costs associated with making our
systems Year 2000 compliant were immaterial. However, many of our lenders and
suppliers, including suppliers of finance and insurance products, may be
significantly impacted by Year 2000 complications. We are in the process of
making inquiries to our lenders and suppliers regarding their Year 2000
compliance efforts, and are reviewing the Year 2000 disclosures in documents
filed with the Commission for those lenders and suppliers that are
publicly-held companies. We do not believe that our lenders' or suppliers'
failure to ensure that their computer systems are Year 2000 compliant will have
a material adverse impact on our business, results of operations, and financial
condition. Nevertheless, we cannot assure you in this regard. Furthermore, we
cannot assure you that Year 2000 deficiencies at dealerships we acquire would
not have a material adverse impact on our business, results of operations, and
financial condition.
We have not yet established a contingency plan in the event that our
expectations regarding Year 2000 problems are incorrect, but we are in the
process of creating such a contingency plan, which we expect to be finalized in
the next three months. At this time, we cannot state with certainty whether
Year 2000 computer software or equipment failures on the part of Sonic or
others will not have a material adverse impact on our results of operations,
liquidity and financial condition. However, based on our assessment of our
operations, we believe that we are adequately prepared to deal with Year 2000
problems which may arise. In a worst case scenario, Year 2000 problems
affecting Sonic, Sonic's bank accounts or
21
the business operations of Sonic's manufacturers or lenders could materially
and adversely affect Sonic's ability to sell vehicles, complete acquisitions or
meet obligations to third parties.
Amortization of Goodwill From Acquisitions Could Change, Resulting in
Significant Reduction in Earnings for Future Periods
Goodwill represented approximately 33.3% of our total assets and 124.4% of
our stockholders' equity as of September 30, 1998. Goodwill arises when an
acquiror pays more for a business than the fair value of the tangible and
separately measurable intangible net assets. Generally accepted accounting
principles require that this and all other intangible assets be amortized over
the period benefited. We determined that the period benefited by all of the
goodwill will be no less than 40 years. Accordingly, we amortize goodwill over
a 40 year period. Earnings reported in periods immediately following the
acquisition would be overstated if Sonic attributed a 40 year benefit period to
an intangible asset that should have had a shorter benefit period. In later
years, we would be burdened by a continuing charge against earnings without the
associated benefit to income valued by management in arriving at the price paid
for the businesses. Earnings in later years also could be significantly
affected if management determined then that the remaining balance of goodwill
was impaired. We periodically compare the carrying value of goodwill with
anticipated undiscounted future cash flows from operations of the businesses we
have acquired to evaluate the recoverability of goodwill. We have concluded
that the anticipated future cash flows associated with intangible assets
recognized in the acquisitions will continue indefinitely, and there is no
persuasive evidence that any material portion will dissipate over a period
shorter than 40 years. Sonic will incur additional goodwill in its future
acquisitions.
22
RECENT ACQUISITIONS
The following table summarizes acquisitions of automobile dealerships and
related businesses that we have completed, or for which we have agreed in
writing to purchase, since August 1, 1998:
1998
Date of Revenue(1)
Dealership/Company Brands Location Acquisition (in millions)
Acura, Chevrolet, Ford,
Higginbotham Automotive Group Mercedes, Mercury, Oldsmobile Daytona Beach, FL Sept. 1998 $ 123.5
Tampa Volvo Volvo Tampa, FL Dec. 1998 11.8
Ron Craft Chevrolet-Cadillac-
Oldsmobile Cadillac, Chevrolet, Oldsmobile Houston, TX Dec. 1998 75.9
Infiniti of Charlotte Infiniti Charlotte, NC Jan. 1999 27.9
Ron Craft Chrysler Plymouth Jeep Chrysler, Jeep, Plymouth Houston, TX Jan. 1999 18.0
Rally Mitsubishi Mitsubishi Nashville, TN Feb. 1999(2) 14.4
Audi, BMW, Buick, Cadillac,
Tom Williams Dealerships Lexus, Porsche, Range Rover Birmingham, AL Feb. 1999(2) 210.6
Global Imports BMW Atlanta, GA Feb. 1999(2) 77.0
Bondesen Chevrolet Oldsmobile Cadillac, Chevrolet,
Cadillac Oldsmobile Central Florida Feb. 1999(2) 51.1
Fitzgerald Chevrolet Chevrolet Charlotte, NC Feb. 1999(2) 27.4
Newsome Dealerships BMW, Chevrolet, Isuzu, Mercedes Columbia, SC Mar. 1999(2) 120.0
Superior Oldsmobile-
Cadillac-GMC Cadillac, GMC, Oldsmobile Chattanooga, TN Mar. 1999(2) 20.5
Cadillac, GMC, Mercedes,
Lloyd Dealerships Nissan, Pontiac Panama City, FL Mar. 1999(2) 56.8
Sam White Motor City Nissan, Oldsmobile Houston, TX (3) 52.4
(1) Based on dealer statements prepared for manufacturers.
(2) Acquisition is pending; date shown is anticipated closing date.
(3) This acquisition is subject to approval by a bankruptcy court presiding
over the dealership's pending bankruptcy proceeding. Consequently, the
date of acquisition is currently unknown.
Total consideration for the acquisitions listed above plus the pending
Economy Honda acquisition is $143.8 million. We currently estimate that this
total purchase price will be payable in a combination of $101.1 million in cash
and $42.7 million in equity securities.
Sonic was recently awarded two new Volvo franchises and a new Oldsmobile
franchise in the Atlanta market. Sonic currently expects to open these new
dealerships in the first half of 1999.
USE OF PROCEEDS
The net proceeds to Sonic from the sale of 7,000,000 shares of Class A
common stock are approximately $ million after deducting the underwriting
discount and estimated expenses of the offering. If the Underwriters exercise
their over-allotment option in full, the net proceeds to Sonic would be
approximately $ million.
We intend to use these net proceeds to fund $ million of the purchase
price of our pending and future acquisitions and to repay approximately $8.9
million of debt incurred subsequent to September 30, 1998 to fund previous
acquisitions. This debt was borrowed under our Revolving Facility and bore
interest at 7.55% per annum as of February 1, 1999. Ford Motor Credit has
committed to increase the amount available under the Revolving Facility from
$75 million to $100 million and to extend the maturity date of the Revolving
Facility to December 31, 2000. Pending consummation of our future acquisitions,
we will temporarily use the funds to repay our Revolving Facility or Floor Plan
Facility, which may subsequently be reborrowed. See "Description of Certain
Indebtedness."
We will not receive any proceeds from the sale of common stock by the
selling stockholders.
23
DIVIDEND POLICY
We have not paid any cash dividends on our common stock to date, and do
not anticipate paying any cash dividends on our common stock for the
foreseeable future. We intend to retain our earnings to provide funds for our
operations and for paying our acquisition costs. In addition, the Revolving
Facility includes covenants that prohibit our payment of cash dividends and our
senior subordinated notes include covenants that restrict our ability to pay
cash dividends.
PRICE RANGE OF CLASS A COMMON STOCK
Since our November 10, 1997 initial public offering, our Class A common
stock has been traded on the New York Stock Exchange under the symbol "SAH."
The following table sets forth the high and low closing sales prices for the
Class A common stock, as reported on the NYSE Composite Tape for each calendar
quarter indicated, as adjusted for our January 25, 1999 2-for-1 stock split.
Before November 10, 1997, we were privately held and there was no public market
for our common stock.
High Low
------------ -------------
1997:
Fourth Quarter (from November 10, 1997) . $ 5 31/32 $ 4 13/16
1998:
First Quarter ........................... 8 5/8 4 7/8
Second Quarter .......................... 9 3/8 7 11/16
Third Quarter ........................... 11 15/16 8 1/4
Fourth Quarter .......................... 17 9/16 6 11/32
1999:
First Quarter (through February 3, 1999) 18 7/16 14 5/8
24
CAPITALIZATION
The following table shows the capitalization of Sonic as of September 30,
1998 (a) on an actual basis, and (b) on a pro forma basis, as adjusted to
reflect the offering and the application of the estimated net proceeds of the
offering to be received by Sonic. See "The Acquisitions" and "Use of Proceeds."
You should read this table in connection with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of this
prospectus.
September 30, 1998
---------------------------------------
Pro Forma
for the
Actual Adjustments Offering (1)
----------- ------------- -------------
(dollars in thousands)
Short-term debt:
Notes payable -- floor plan ..................................................... $173,977 $ -- $173,977
Notes payable -- other .......................................................... 532 -- 532
Current maturities of long-term debt ............................................ 788 -- 788
-------- --------- --------
Total short-term debt .......................................................... $175,297 $ -- $175,297
======== ========= ========
Long-term debt:
Revolving Facility .............................................................. $ -- -- $ --
Senior subordinated notes ....................................................... 120,666 -- 120,666
Mortgage notes .................................................................. 3,859 -- 3,859
Subordinated Smith Loan ......................................................... 5,500 -- 5,500
Other debt ...................................................................... 10,578 -- 10,578
-------- --------- --------
Total long-term debt ........................................................... $140,603 $ -- $140,603
======== ========= ========
Stockholders' equity:
Preferred stock, $.10 par value, 3,000,000 shares authorized; 27,058.8 shares
issued and outstanding ......................................................... $ 25,788 $ (12,352) $ 13,436
Class A common stock, $.01 par value, 50,000,000 shares authorized;
11,053,510 shares issued and outstanding as of September 30, 1998
(18,934,745 on a pro forma basis, as adjusted to reflect the offering) (2)(3) .. 111 79 190
Class B common stock, $.01 par value, 15,000,000 shares authorized;
12,500,000 shares issued and outstanding (3) ................................... 125 -- 125
Additional paid-in capital ...................................................... 77,229 133,470 210,699
Retained earnings ............................................................... 28,416 -- 28,416
Total stockholders' equity ..................................................... 131,669 121,197 252,866
-------- --------- --------
Total capitalization ......................................................... $272,272 $ 121,197 $393,469
======== ========= ========
- ---------
(1) Sonic intends to use the net proceeds from the offering to fund pending and
future acquisitions. Sonic's commitments for acquisitions that will close
after September 30, 1998 are $82.9 million. Remaining amounts of net
proceeds from the offering will be applied to outstanding long-term debt
that may be reborrowed to pay for future acquisitions.
(2) As of February 3, 1999, there were 12,031,170 shares issued and outstanding
(19,912,405 on a pro forma basis, as adjusted to reflect the offering, or
20,975,561 shares if the Underwriters' over-allotment option is exercised
in full). Does not include (i) 3,261,680 shares issuable upon exercise of
outstanding options, and (ii) 1,320,172 shares issuable upon conversion of
outstanding preferred stock (assuming such shares were converted to Class
A common stock on February 3, 1999).
(3) The issued and outstanding shares of Class A common stock and Class B
common stock shown above reflect the 2-for-1 stock split effected January
25, 1999.
25
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of income data for the years ended
December 31, 1994, 1995, 1996 and 1997 and the selected balance sheet data as
of December 31, 1995, 1996 and 1997 are derived from Sonic's audited financial
statements, which are incorporated by reference in this prospectus. The
selected consolidated statement of income data for the year ended December 31,
1993 and the selected consolidated balance sheet data as of December 31, 1993
and 1994 are derived from Sonic's unaudited financial statements, which are not
included in this prospectus. The selected consolidated statement of income data
for the nine months ended September 30, 1997 and 1998, and the selected
consolidated balance sheet data at September 30, 1998, are derived from the
unaudited financial statements of Sonic, which are incorporated by reference in
this prospectus. In the opinion of management, these unaudited financial
statements reflect all adjustments necessary for a fair presentation of its
results of operations and financial condition. All such adjustments are of a
normal recurring nature. The results of operations for an interim period are
not necessarily indicative of results that may be expected for a full year or
any other interim period. In accordance with generally accepted accounting
principles, the selected consolidated financial data has been retroactively
restated to reflect Sonic's 2-for-1 common stock split that occurred on January
25, 1999. This selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" (included elsewhere in this prospectus) and the
Consolidated Financial Statements and related notes (incorporated by reference
in this prospectus).
Year Ended December 31,
-------------------------------------------------------------
1993 1994 1995 1996(a) 1997(b)
----------- ----------- ----------- ----------- -------------
(in thousands, except per share amounts)
Consolidated Statement of Income
Data:
Revenue:
Vehicle sales .......................... $204,243 $228,569 $267,650 $327,674 $ 467,858
Parts, service and collision repair..... 30,337 33,984 35,860 42,075 57,537
Finance and insurance .................. 3,711 5,181 7,813 7,118 10,606
-------- -------- -------- -------- ---------
Total revenue ........................ 238,291 267,734 311,323 376,867 536,001
Cost of sales ........................... 209,113 233,833 272,130 332,122 473,003
-------- -------- -------- -------- ---------
Gross profit ............................ 29,178 33,901 39,193 44,745 62,998
Selling, general and administrative
expenses ............................... 22,070 23,810 28,091 32,602 46,770
Depreciation and amortization ........... 788 838 832 1,076 1,322
-------- -------- -------- -------- ---------
Operating income ........................ 6,320 9,253 10,270 11,067 14,906
Interest expense, floor plan ............ 2,743 3,001 4,504 5,968 8,007
Interest expense, other ................. 263 443 436 433 1,199
Other income ............................ 613 609 106 355 298
-------- -------- -------- -------- ---------
Income before income taxes and
minority interest ...................... 3,314 5,809 5,436 5,021 5,998
Provision for income taxes .............. 723 2,118 2,176 1,924 2,249
-------- -------- -------- -------- ---------
Income before minority interest ......... 2,591 3,691 3,260 3,097 3,749
Minority interest in earnings (loss)
of subsidiary .......................... (22) 15 22 114 47
-------- -------- -------- -------- ---------
Net income .............................. $ 2,613 $ 3,676 $ 3,238 $ 2,983 $ 3,702
======== ======== ======== ======== =========
Diluted net income per common
share .................................. $ 0.27
=========
Weighted average number of
common shares -- diluted ............... 13,898
=========
Consolidated Balance Sheet Data:
Working capital ......................... $ 9,629 $ 13,246 $ 18,140 $ 19,780 $ 44,676
Total assets ............................ 54,917 69,061 79,462 110,976 291,450
Long-term debt(c) ....................... 4,142 3,773 6,950 5,286 49,563
Total liabilities ....................... 52,235 63,541 62,956 84,367 207,085
Minority interest ....................... 139 177 200 314 --
Stockholders' equity .................... 2,543 5,343 16,306 26,295 84,365
Nine Months Ended
September 30,
-----------------------------
1997(b) 1998
------------- ---------------
Consolidated Statement of Income
Data:
Revenue:
Vehicle sales .......................... $ 295,878 $ 1,015,001
Parts, service and collision repair..... 36,317 118,917
Finance and insurance .................. 8,046 24,587
--------- -----------
Total revenue ........................ 340,241 1,158,505
Cost of sales ........................... 301,855 1,012,432
--------- -----------
Gross profit ............................ 38,386 146,073
Selling, general and administrative
expenses ............................... 28,442 105,511
Depreciation and amortization ........... 772 3,364
--------- -----------
Operating income ........................ 9,172 37,198
Interest expense, floor plan ............ 5,005 11,875
Interest expense, other ................. 430 5,567
Other income ............................ 292 24
--------- -----------
Income before income taxes and
minority interest ...................... 4,029 19,780
Provision for income taxes .............. 1,531 7,550
--------- -----------
Income before minority interest ......... 2,498 12,230
Minority interest in earnings (loss)
of subsidiary .......................... 47 --
--------- -----------
Net income .............................. $ 2,451 $ 12,230
========= ===========
Diluted net income per common
share .................................. $ 0.20 $ 0.50
========= ===========
Weighted average number of
common shares -- diluted ............... 12,500 24,280
========= ===========
Consolidated Balance Sheet Data:
Working capital ......................... $ 21,136 $ 87,052
Total assets ............................ 161,875 490,338
Long-term debt(c) ....................... 30,631 141,923
Total liabilities ....................... 131,787 358,669
Minority interest ....................... -- --
Stockholders' equity .................... 30,088 131,669
(footnotes on following page)
26
- ---------
(a) Sonic acquired Fort Mill Ford, Inc. in February 1996. The acquisition was
accounted for using the purchase method of accounting. As a result, the
actual financial data does not include the results of this dealership
before the date we acquired it. Accordingly, the actual financial data for
periods after the acquisition may not be comparable to data presented for
periods before the acquisition.
(b) Sonic acquired Fort Mill Chrysler-Plymouth-Dodge in June 1997, Lake Norman
Chrysler/Plymouth/Jeep and Lake Norman Dodge in September 1997, Williams
Motors and Ken Marks Ford in October 1997, and the Bowers Automotive Group
and Dyer & Dyer Volvo in November 1997. Our 1997 acquisitions were
accounted for using the purchase method of accounting. As a result, the
actual financial data does not include the results of operations of these
dealerships before the date we acquired them. Accordingly, the actual
financial data for periods after the acquisitions may not be comparable to
data presented for periods before the acquisitions.
(c) Long-term debt, including current portion, includes the payable to Sonic's
Chairman and the payable to affiliates of Sonic. See Sonic's Consolidated
Financial Statements and the related notes incorporated by reference in
this prospectus.
27
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of income for the
year ended December 31, 1997 reflects the historical accounts of Sonic for that
period, adjusted giving effect to the following events, as if those events had
occurred on January 1, 1997:
o the acquisitions Sonic completed in 1997 and 1998;
o Sonic's pending acquisition of the Economy Honda dealership;
o Sonic's initial public offering of its Class A common stock in November
1997;
o the reorganization of Sonic in anticipation of its initial public
offering;
o Sonic's sale of its senior subordinated notes in July 1998 and the
application of the net sale proceeds; and
o this offering of Class A common stock and the application of the
estimated net proceeds to Sonic from this offering.
The following unaudited pro forma consolidated statement of income for the
nine months ended September 30, 1998 reflects the historical accounts of Sonic
for that period, adjusted to give effect to the following events, as if those
events had occurred on January 1, 1998:
o the acquisitions Sonic completed in 1998 (other than the acquisition of
the Clearwater dealerships and affiliated companies, which was effective
January 1, 1998);
o Sonic's pending acquisition of the Economy Honda dealership;
o our senior subordinated notes offering; and
o this offering.
The following unaudited pro forma consolidated balance sheet as of
September 30, 1998 reflects the historical accounts of the Company as of that
date as adjusted to give pro forma effect to the following events, as if those
events had occurred on September 30, 1998:
o acquisitions by Sonic that were closed after September 30, 1998 (other
than the acquisition of the Higginbotham Automotive Group, which was
effective August 1, 1998);
o Sonic's pending acquisition of the Economy Honda dealership; and
o this offering.
The unaudited pro forma consolidated financial data and accompanying notes
should be read in conjunction with the Consolidated Financial Statements and
related notes of Sonic (which are incorporated by reference in this prospectus)
as well as the financial statements and related notes of the Clearwater
Dealerships and Affiliated Companies, the Hatfield Automotive Group, Economy
Honda Cars, Casa Ford of Houston, Inc., Higginbotham Automotive Group, the
Bowers Dealerships and Affiliated Companies, Lake Norman Dodge Inc. and
Affiliated Companies, Ken Marks Ford Inc. and Dyer and Dyer, Inc., all of which
are incorporated by reference in this prospectus. Such unaudited pro forma
consolidated data and accompanying notes do not give effect to Sonic's
acquisitions of Fort Mill Chrysler-Plymouth-Dodge and Williams Motors, or the
financing of these acquisitions, because such transactions are not required to
be presented in this prospectus on a pro forma basis in accordance with
Securities and Exchange Commission rules. Sonic believes that the assumptions
used in the following statements provide a reasonable basis on which to present
the unaudited pro forma financial data. The unaudited pro forma consolidated
financial data are provided for informational purposes only and should not be
construed to be indicative of Sonic's financial condition, results of
operations or covenant compliance had the transactions and events described
above been consummated on the dates assumed, and are not intended to project
Sonic's financial condition on any future date or its results of operation for
any future period.
28
Unaudited Pro Forma Consolidated Statement of Income
Year Ended December 31, 1997
The Acquisitions (a)
--------------------------------------------------------------- Pro Forma
Hatfield Higginbotham Adjustments
1997 Automotive Automotive Other 1998 for the
Actual(b) Acquisitions(c) Group(d) Group Acquisitions(e) Acquisitions
----------- ----------------- ------------ -------------- ----------------- -----------------
(in thousands except per share amounts)
Revenues:
Vehicle sales ............ $467,858 $364,756 $251,981 $102,594 $405,613 $
Parts, service and
collision repair ........ 57,537 42,164 16,400 10,496 49,702
Finance and
insurance ............... 10,606 7,723 6,899 3,060 8,505 559 (f)
-------- -------- -------- -------- -------- ----------
Total revenues ........... 536,001 414,643 275,280 116,150 463,820 559
Cost of sales ............. 473,003 361,902 244,330 98,430 407,905 (879)(g)
-------- -------- -------- -------- -------- ----------
Gross profit .............. 62,998 52,741 30,950 17,720 55,915 1,438
Selling, general and
administrative
expenses ................. 46,770 40,801 20,193 13,099 43,151 (5,925)(h)
2,658 (j)
Management bonus .......... 7,121 (7,121)(h)
Depreciation and
amortization ............. 1,322 914 221 338 1,245 (436)(l)
(601)(j)
3,611 (m)
----------
Operating income .......... 14,906 11,026 3,415 4,283 11,519 9,252
Interest expense, floor
plan ..................... 8,007 4,722 3,663 1,208 4,258 (2,608)(n)
Interest expense, other ... 1,199 234 303 1,969 (923)(j)
267 (p)
(698)(q)
Other income .............. 298 180 224 20 466
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
minority interest ........ 5,998 6,250 (24) 2,792 5,758 13,214
Provision for income
taxes .................... 2,249 178 1,140 5,401 (r)
4,211 (t)
----------
Income (loss) before
minority interest ........ 3,749 6,072 (24) 2,792 4,618 3,602
Minority interest in
earnings of
subsidiary ............... 47
--------
Net income (loss) ......... $ 3,702 $ 6,072 $ (24) $ 2,792 $ 4,618 $ 3,602
======== ======== ======== ======== ======== ==========
Pro forma basic net
income per share(v) ......
Pro forma weighted
average common
shares outstanding
-- basic (v) .............
Pro forma diluted net
income per share (v)......
Pro forma weighted
average common
shares outstanding
-- diluted (v) ...........
Pro Forma
Pro Forma for the
Adjustments Reorganization,
for the the Acquisitions,
Reorganization, the IPO, the
the IPO and Pro Forma Notes Offering
the Notes for this and this
Offering Offering(x) Offering
------------------- ------------- ------------------
(in thousands except per share amounts)
Revenues:
Vehicle sales ............ $ $ 1,592,802
Parts, service and
collision repair ........ 176,299
Finance and
insurance ............... 37,352
------------- -----------
Total revenues ........... 1,806,453
Cost of sales ............. 1,584,691
-----------
Gross profit .............. 221,762
Selling, general and
administrative
expenses ................. 291 (i) 161,038
Management bonus ..........
Depreciation and
amortization ............. 15 (k) 6,629
Operating income .......... (306) 54,095
Interest expense, floor
plan ..................... (127)(o) 19,123
Interest expense, other ... 12,812 (o) 15,163
Other income .............. 1,188
-----------
Income (loss) before
income taxes and
minority interest ........ (12,991) 20,997
Provision for income
taxes .................... 6 (s)
(4,866) (u) 8,319
----------- -----------
Income (loss) before
minority interest ........ (8,131) 12,678
Minority interest in
earnings of
subsidiary ............... (47) (k)
-----------
Net income (loss) ......... $ (8,084) $ 12,678
=========== ===========
Pro forma basic net
income per share(v) ...... $ 0.54
===========
Pro forma weighted
average common
shares outstanding
-- basic (v) ............. 23,470
===========
Pro forma diluted net
income per share (v)...... $ 0.44
===========
Pro forma weighted
average common
shares outstanding
-- diluted (v) ........... 28,830
===========
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Income)
29
Unaudited Pro Forma Consolidated Statement of Income
Nine Months Ended September 30, 1998
The 1998
Acquisitions (a)
------------------------------------------------------------------
Other Hatfield Pro Forma
1998 Automotive Higginbotham Adjustments for
Actual(b) Acquisitions(e) Group Automotive the Acquisitions
------------- ----------------- ------------ -------------- --------------------
(in thousands except per share amounts)
Revenues:
Vehicle sales ........................ $1,015,001 $ 97,889 $133,661 $67,874 $
Parts, service and collision
repair .............................. 118,917 13,316 8,774 6,309
Finance and insurance ................ 24,587 2,019 4,190 1,835 74(f)
---------- -------- -------- ------- ---------
Total revenues ....................... 1,158,505 113,224 146,625 76,018 74
Cost of sales ......................... 1,012,432 98,884 130,221 65,110 (27)(g)
---------- -------- -------- ------- ---------
Gross profit .......................... 146,073 14,340 16,404 10,908 101
Selling, general and adminis-
trative expenses ..................... 105,511 11,032 11,308 7,434 (612)(h)
732 (j)
Management bonus ...................... -- -- 3,181 -- (3,181)(h)
Depreciation and amortization ......... 3,364 305 158 168 (181)(j)
(74)(l)
1,015 (m)
---------
Operating income ...................... 37,198 3,003 1,757 3,306 2,402
Interest expense, floor plan .......... 11,875 948 1,245 780 (2) (n)
Interest expense, other ............... 5,567 179 196 (87)(j)
(212)(q)
Other income (expense) ................ 24 73 244 (43)
---------- -------- -------- -------
Income before income taxes ............ 19,780 1,949 756 2,287 2,703
Provision for income taxes ............ -- 1,028 (r)
7,550 554 1,458 (t)
---------- -------- -----------
Net income ............................ $ 12,230 $ 1,395 $ 756 $ 2,287 $ 217
========== ======== ======== ======= ===========
Pro forma basic net income per
share (v) ............................
Pro forma weighted average
common shares
outstanding -- basic (v) .............
Pro forma diluted net income
per share (v) ........................
Pro forma weighted average
common shares
outstanding -- diluted (v) ...........
Pro Forma
Pro Forma Pro Forma for the Acquisitions,
Adjustments for for this the Notes Offering
the Notes Offering Offering(x) and this Offering
-------------------- ------------- ----------------------
(in thousands except per share amounts)
Revenues:
Vehicle sales ........................ $ $ $ 1,314,425
Parts, service and collision
repair .............................. 147,316
Finance and insurance ................ 32,705
-----------
Total revenues ....................... 1,494,446
Cost of sales ......................... 1,306,620
-----------
Gross profit .......................... 187,826
Selling, general and adminis-
trative expenses ..................... 135,405
Management bonus ......................
Depreciation and amortization ......... 4,755
Operating income ...................... 47,666
Interest expense, floor plan .......... (63)(o) 14,783
Interest expense, other ............... 7,877 (o) 13,520
Other income (expense) ................ 298
-----------
Income before income taxes ............ (7,814) 19,661
Provision for income taxes ............ (2,930)(w) 7,660
Net income ............................ $ (4,884) $ 12,001
========== ===========
Pro forma basic net income per
share (v) ............................ $ 0.51
===========
Pro forma weighted average
common shares
outstanding -- basic (v) ............. 23,516
===========
Pro forma diluted net income
per share (v) ........................ $ 0.41
===========
Pro forma weighted average
common shares
outstanding -- diluted (v) ........... 29,522
===========
(See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Income)
30
- ---------
(a) Sonic has obtained manufacturer consent to all of its 1998 acquisitions
other than from Honda in the Economy Honda acquisition, which Sonic
expects to receive prior to the closing of the acquisition. We cannot
assure you that such consent will be obtained. Sonic's request for consent
to the acquisition of two Jaguar franchises in 1997 and 1998 were denied.
The two Jaguar franchises and the Economy Honda dealership, which are
included in the Unaudited Pro Forma Consolidated Financial Data,
represented in the aggregate 3.2% of Sonic's pro forma revenues and 3.3%
of gross profit for 1997, and 1.9% of Sonic's pro forma revenues and 1.8%
of gross profit for the first nine months of 1998. See "Risk Factors --
Jaguar Has Not Consented to Two Acquisitions" and " -- Honda Has Not
Consented to the Economy Honda Acquisition."
(b) The actual consolidated statement of income data for Sonic for the year
ended December 31, 1997 includes the results of operations of the
following dealerships and dealership groups acquired during the year ended
December 31, 1997 from their respective dates of acquisition:
Date
Dealership Acquired of Acquisition
- ------------------------------------- ------------------
Fort Mill Chrysler-Plymouth-Dodge June 3, 1997
Lake Norman Dealerships September 1, 1997
Ken Marks Ford October 1, 1997
Williams Motors October 10, 1997
Dyer Volvo November 1, 1997
Bowers Dealerships November 1, 1997
The actual consolidated statement of income data for Sonic for the nine
months ended September 30, 1998 includes the results of operations of the
following dealerships and dealership groups acquired during the first nine
months of 1998 from their respective dates of acquisition:
Date
Dealership Acquired of Acquisition
- -------------------------------------------------- ----------------
Clearwater Dealerships and Affiliate Companies January 1, 1998
Casa Ford of Houston, Inc. May 1, 1998
Capitol Chevrolet and Imports April 1, 1998
Century BMW April 1, 1998
Heritage Lincoln Mercury April 1, 1998
Hatfield Automotive Group July 1, 1998
Higginbotham Automotive Group August 1, 1998
(c) Reflects the results of operations of Sonic's 1997 acquisitions for the
period from January 1, 1997 to their respective dates of acquisition. Pro
forma adjustments have not been presented to include the results of (i)
Fort Mill Chrysler-Plymouth-Dodge for the period from January 1, 1997 to
June 3, 1997, the effective date of the acquisition or (ii) Williams Motors
for the period from January 1, 1997 to October 10, 1997, the effective date
of acquisition, because Sonic believes such results are not material.
(d) The combined statement of operations data for Hatfield Automotive Group
include the results of Trader Bud's Westside Chrysler-Plymouth from May 1,
1997, the effective date of the acquisition by Hatfield Automotive Group.
Pro forma adjustments have not been presented to include the results of
operations of Trader Bud's Westside Chrysler-Plymouth for the four month
period ended April 30, 1997 because Sonic believes such results are not
material.
(e) Reflects the results of operations of Sonic's 1998 acquisitions (other than
the Hatfield acquisition and the Higginbotham acquisition) and its pending
acquisition of Economy Honda for the year ended December 31, 1997 and
reflects the results of operations of Sonic's 1998 acquisitions (other
than the Hatfield acquisition, the Higginbotham acquisition and the
Clearwater acquisition) and its pending acquisition of Economy Honda from
January 1, 1998 to their respective dates of acquisition. Certain
historical amounts have been reclassified to conform to Sonic's method of
presentation.
(f) Reflects finance and insurance revenues generated by Sonic's 1997
acquisitions and 1998 acquisitions, including its pending acquisition of
Economy Honda, in the amounts of $252,000 and $307,000, respectively for
the year ended December 31, 1997, and by Sonic's 1998 acquisitions (other
than the Clearwater acquisition) and its pending acquisition of Economy
Honda in the amount of $74,000 for the nine months ended September 30,
1998, that were paid directly to the dealership owners or wholly-owned
management companies and excluded from revenue in the historical financial
statements of the acquired dealerships. No adjustment has been made to
reflect such amounts for the
(footnotes continued on following pages)
31
Economy Honda acquisition, the Capitol Chevrolet & Imports acquisition, the
Hatfield acquisition, the Century BMW acquisition or the Heritage
Lincoln-Mercury acquisition as such amounts could not be reasonably
ascertained.
(g) Adjustment reflects the conversion from the "last-in, first-out" method of
inventory accounting to the "first-in, first-out" method of inventory
accounting for Sonic's 1997 acquisitions and 1998 acquisitions (other than
the Hatfield acquisition and the Clearwater acquisition), including its
pending acquisition of Economy Honda, in the amounts of $371,000 and
$508,000, respectively, for the year ended December 31, 1997 and for
Sonic's 1998 acquisitions (other than the Hatfield acquisition and the
Clearwater acquisition) and its pending acquisition of Economy Honda in the
amount of $27,000 for the nine months ended September 30, 1998, to conform
to Sonic's method of accounting for vehicle inventories.
(h) Reflects the net decrease in selling, general and administrative expenses
related to the net reduction in salaries, bonuses, fringe benefits and
related expenses of owners and officers of the acquired dealerships who
have become or will become employees, consistent with reduced salaries
pursuant to employment agreements with Sonic, or whose positions have been
or will be eliminated as part of Sonic's 1997 and 1998 acquisitions and
its pending acquisition of Economy Honda.
(i) Reflects the increase in salaries of existing officers who entered into
employment agreements with Sonic, effective upon consummation of Sonic's
inital public offering in November 1997.
(j) Reflects the increase in rent expense related to lease agreements entered
into with the sellers of certain acquired dealerships for the dealerships'
real property that will not be acquired by Sonic, and the decreases in
depreciation expense and interest expense related to mortgage indebtedness
encumbering such property of approximately $9.5 million bearing interest
at rates from 7.0% to 9.5%.
(k) Reflects the elimination of minority interest in earnings as a result of
the acquisition of the 31% minority interest in Town & Country Toyota for
$3.2 million of Class B common stock in connection with Sonic's
reorganization, and the amortization over 40 years of approximately $1.2
million in goodwill arising from such acquisition.
(l) Reflects the elimination of amortization expense related to goodwill that
arose in previous acquisitions in certain of the acquired dealerships from
the effective date of the acquisitions.
(m) Reflects the amortization over an assumed useful life of 40 years, of
intangible assets, consisting primarily of goodwill, resulting from
Sonic's 1997 and 1998 acquisitions and its pending acquisition of Economy
Honda which were assumed to occur on January 1, 1997. Certain of Sonic's
1998 acquisitions have purchase agreements which require Sonic to pay
additional amounts in cash or preferred stock based on future operating
results. Amount includes amortization of the additional goodwill
associated with the $1.8 million contingent purchase price related to the
Clearwater acquisition. Should Sonic be required to pay the maximum
additional amounts contingent in the purchase agreements for its 1998
acquisitions (other than Casa Ford), Sonic would incur goodwill
amortization charges in addition to the amounts recorded in the Unaudited
Pro Forma Consolidated Statements of Income of approximately $81,000 in
1997 and $76,000 for the nine months ended September 30, 1998,
respectively. Sonic's purchase agreement for Casa Ford does not provide a
maximum contingent amount to be paid based on future operating results,
therefore a maximum additional amount of amortization expense cannot be
estimated.
(n) Reflects the decrease in interest expense, floor plan resulting from the
refinancing of the notes payable, floor plan arrangements of Sonic and the
dealerships being acquired, under the Floor Plan Facility as if such
refinancing had occurred at the beginning of the period presented. The
aggregate balance of notes payable, floor plan arrangements of Sonic and
the dealerships being acquired was $232.3 million and $177.1 million at
December 31, 1997 and September 30, 1998, respectively, prior to the
assumed repayment by Sonic reflected in (o) below. The average interest
rate under the Floor Plan Facility is approximately 7.6% compared to
historical interest rates ranging from 7.8% to 9.5%.
(o) Reflects the increase in interest expense associated with Sonic's senior
subordinated notes issued in July 1998 and the decrease in interest
expense as a result of the repayment of approximately $75.0 million of
debt outstanding under the Revolving Facility and $1.2 million of debt
outstanding under the Floor Plan Facility with the net proceeds from
Sonic's issuance of its senior subordinated notes not used to finance
Sonic's 1998 acquisitions.
(p) In connection with the acquisition of the Bowers Automotive Group in 1997,
Sonic issued a promissory note to the former owner in the amount of $4.0
million bearing interest at NationsBank's prime rate less 0.5%. This
adjustment reflects an increase in interest expense related to the
promissory note assuming a prime rate of 8.5% as if the note was issued at
the beginning of the period presented.
(footnotes continued on following page)
32
(q) Reflects the decrease in interest expense related to debt, other than
mortgage indebtedness, which has not or will not be assumed of
approximately $7.4 million bearing interest at rates from 8.5% to 10.0%.
(r) Reflects the net increase in provision for income taxes resulting from pro
forma adjustments above, computed using a combined statutory income tax
rate of approximately 39%.
(s) Reflects the net increase in the provision for income taxes due to the
amortization of goodwill related to the acquisition of the minority
interest pursuant to Sonic's reorganization, computed at the combined
statutory income tax rate of approximately 40%.
(t) Certain of the acquired dealerships were not subject to federal and state
income taxes because they were either S corporations, partnerships, or
limited liability companies during the period indicated. Upon completion
of these acquisitions, these dealerships became subject to federal and
state income tax as C corporations. This adjustment reflects the resulting
increase in the federal and state income tax provision as if these
entities had been taxable at the combined statutory income tax rate of
approximately 39%.
(u) Reflects the net decrease in the provision for income taxes resulting from
adjustments (i) and (o), computed using a combined statutory income tax
rate of approximately 38%.
(v) All earnings per share information reflects Sonic's 2-for-1 common stock
split effective January 25, 1999. Pro forma basic and diluted net income
per share and the related weighted average shares outstanding for the year
ended December 31, 1997 have been adjusted to reflect the issuance of 10
million shares of Class A common stock in connection with Sonic's initial
public offering in November 1997 and the issuance of 970,588 shares of
Class A common stock in connection with the Higginbotham acquisition as if
such shares had been issued on January 1, 1997. Pro forma diluted net
income per share and the related weighted average shares outstanding for
the year ended December 31, 1997 includes the dilutive effect of the
issuance of 32,158.8 shares of preferred stock in connection with the 1998
acquisitions. Warrants to purchase 88,782 shares of Class A common stock
issued in January 1998 in connection with the consummation of the 1997
acquisitions and warrants to purchase 150,000 shares of Class A common
stock to be issued in connection with the 1998 acquisitions were not
included in the reported amounts because they were anti-dilutive. Pro
forma net income per share and the related weighted average shares
outstanding for the nine months ended September 30, 1998 includes the
dilutive effect of the issuance of 32,158.8 shares of preferred stock in
connection with the 1998 acquisitions and warrants to purchase 150,000
shares of Class A common stock issued in connection with the Century BMW
acquisition as if such shares and warrants had been issued on January 1,
1998. The following is a reconciliation of the pro forma weighted average
shares for the year ended December 31, 1997 and the nine months ended
September 30, 1998:
Nine Months
Year Ended Ended
December 31, 1997 September 30, 1998
------------------- -------------------
Weighted Average Shares -- Basic (actual) ................................ 13,898 22,596
Issuance of Common Stock in connection with IPO .......................... 8,602 --
Issuance of Common Stock in connection with Higginbotham Acquisition ..... 970 920
------ ------
Weighted Average Shares -- Basic (pro forma) ............................. 23,470 23,516
====== ======
Weighted Average Shares -- Diluted (actual) .............................. 13,898 24,280
Issuance of Common Stock in connection with Higginbotham acquisition ..... 971 920
Issuance of Common Stock in connection with IPO .......................... 8,601 --
Class A Convertible Preferred Stock ...................................... 5,360 4,232
Warrants ................................................................. -- 90
------ ------
Weighted Average Shares -- Diluted (pro forma) ........................... 28,830 29,522
====== ======
(w) Reflects the net decrease in the provision for income taxes resulting from
adjustment (o) computed using a combined statutory income tax rate of
approximately 38%.
(x) The net proceeds to Sonic from this offering will be used to fund pending
and future acquisitions and to repay approximately $8.9 million of debt
that was borrowed under our Revolving Facility subsequent to September 30,
1998. Accordingly, the proceeds of this offering will not be used to repay
any debt incurred prior to September 30, 1998, and therefore there will be
no reduction of interest expense recorded on the Unaudited Pro Forma
Statements of Income included in this prospectus.
33
Unaudited Pro Forma Consolidated Balance Sheet
As of September 30, 1998
Pro Forma Pro Forma
Adjustments Pro Forma for the Economy
Economy Honda for the Economy for this Honda Acquisition
Actual Acquisition Honda Acquisition Offering and this Offering
---------- --------------- ------------------- ----------------- ------------------
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 40,091 $ 8,867 $ (4,969)(a) $ 121,197(f) $159,484
3,165 (e)
(8,867) (b)
Receivables ................... 38,617 302 38,919
Inventories ................... 210,947 2,983 551 (c) 214,481
Deferred incomes taxes ........ 898 898
Due from affiliates ........... 1,215 1,215
Other current assets .......... 4,220 3 4,223
-------- ------- --------
Total current assets ....... 295,988 12,155 (10,120) 121,197 419,220
Property and equipment, net 24,444 1,695 (1,691) (d) 24,448
Goodwill, net .................. 163,253 7,500 (a) 170,753
Other assets ................... 6,653 6,653
-------- --------
Total assets ............... $490,338 $13,850 $ (4,311) $ 121,197 $621,074
======== ======= ========== ========== ========
Liabilities and
Stockholders' Equity
Current Liabilities:
Notes payable-floor plan ...... $173,977 $ $ 3,165(e) $177,142
Trade accounts payable ........ 9,161 175 9,336
Accrued interest .............. 3,513 3,513
Other accrued liabilities ..... 20,690 807 21,497
Payable for acquisitions ...... 275 275
Payable to affiliates ......... 532 532
Current maturities of
long-term debt ............... 788 788
-------- --------
Total current
liabilities ............... 208,936 982 3,165 213,083
Long-term debt ................. 131,213 131,213
Payable for acquisitions ....... 275 275
Payable to the Company's
Chairman ...................... 5,500 5,500
Payable to affiliates .......... 3,890 3,890
Deferred income taxes .......... 1,079 78 1,157
Income tax payable ............. 7,776 214 (c) 7,990
Stockholders' Equity:
Common stock of
Economy Honda ................ 50 (50) (a) --
Preferred stock ............... 25,788 5,100 (a) 30,888
Class A common stock .......... 111 79(f) 190
Class B common stock .......... 125 125
Paid-in capital ............... 77,229 121,118(f) 198,347
Retained earnings ............. 28,416 12,740 (2,519) (a) 28,416
(8,867) (b)
337 (c)
(1,691) (d)
----------
Total stockholders'
equity .................... 131,669 12,790 (7,690) 121,197 257,966
-------- ------- ---------- ---------- --------
Total liabilities and
stockholders' equity .......... $490,338 $13,850 $ (4,311) $ 121,197 $621,074
======== ======= ========== ========== ========
(See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet)
34
- ---------
(a) Reflects the preliminary allocation of the aggregate purchase price of the
pending Economy Honda acquisition based on the estimated fair value of the
net assets acquired. Because the carrying amount of the net assets
acquired, which primarily consist of accounts receivable, inventory,
equipment, and floor plan indebtedness, approximates their fair value,
management believes the application of purchase accounting will not result
in a significant adjustment to the carrying amount of those net assets.
The amount of goodwill and the corresponding amortization actually
recorded may ultimately be different from amounts estimated here,
depending on the actual fair value of tangible net assets acquired at
closing of the Economy Honda acquisition. The estimated purchase price
allocation consists of the following:
Estimated total consideration (in thousands):
Cash ........................................ $ 4,969
Preferred stock ............................. 5,100
-------
Total ....................................... 10,069
Less: Estimated fair value of tangible net
assets acquired ............................. 2,569
-------
Excess of purchase price over fair value of
net tangible assets acquired ................ $ 7,500
=======
Sonic has not obtained Honda's consent to the Economy Honda acquisition, but
expects to receive such consent prior to the closing of the acquisition. We
cannot assure you that such consent will be obtained. See "Risk Factors --
Honda Has Not Consented to the Economy Honda Acquisition."
(b) Reflects the elimination of certain assets and liabilities other than the
real property of the Economy Honda dealership that will not be acquired.
(c) Reflects the conversion from the "last-in, first-out" method of inventory
accounting to the "first-in, first-out" method of inventory accounting at
the Economy Honda dealership, including the resulting tax liability
calculated at the applicable statutory income tax rate of approximately
39%.
(d) Reflects the elimination of the real property at the Economy Honda
dealership which is not being acquired.
(e) Reflects the proceeds received from the issuance of floor plan notes
payable used to finance vehicles acquired in the Economy Honda
acquisition.
(f) Reflects the estimated net proceeds to be received from the issuance of
Class A common stock at the per share price of the offering of $18.00.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition should be read in conjunction with the Sonic Automotive, Inc. and
Subsidiaries Consolidated Financial Statements and the related notes thereto
incorporated by reference in this prospectus.
Overview
Sonic is one of the leading automotive retailers in the United States,
operating 35 dealerships and 12 collision repair centers in the Southeastern,
Southwestern and Midwestern United States as of September 30, 1998. We sell new
and used cars and light trucks, sell replacement parts, provide vehicle
maintenance, warranty, paint and repair services and arrange related F&I for
our automotive customers. Our business is geographically diverse, with
dealership operations in the Atlanta, Charlotte, Chattanooga, Columbus, Daytona
Beach, Greenville/Spartanburg, Houston, Montgomery, Nashville and
Tampa/Clearwater markets as of September 30, 1998. Sonic sold 23 domestic and
foreign brands as of September 30, 1998, consisting of Acura, BMW, Cadillac,
Chevrolet, Chrysler, Dodge, Ford, Honda, Hyundai, Infiniti, Isuzu, Jeep, KIA,
Lincoln, Mercedes, Mercury, Mitsubishi, Oldsmobile, Plymouth, Subaru, Toyota,
Volkswagen and Volvo.
New vehicle revenues include both the sale and lease of new vehicles. Used
vehicle revenues include amounts received for used vehicles sold to retail
customers, other dealers and wholesalers. Other operating revenues include
parts and services revenues, fees and commissions for arranging F&I and sales
of third party extended warranties for vehicles. In connection with vehicle
financing contracts, Sonic receives a finance fee from the lender for
originating the loan. If, within 90 days of origination, the customer pays off
the loans through refinancing or selling/trading in the vehicle or defaults on
the loan, the finance company will assess a charge (a "chargeback") for a
portion of the original commission. The amount of the chargeback depends on how
long the related loan was outstanding. As a result, Sonic has established
reserves based on its historical chargeback experience. Sonic also sells
warranties provided by third-party vendors, and recognizes a commission at the
time of sale.
While the automotive retailing business is cyclical, we sell several
products and services that are not closely tied to the sale of new and used
vehicles. Such products and services include our parts and service and
collision repair businesses, both of which are not dependent upon near-term new
vehicle sales volume. One measure of cyclical exposure in the automotive
retailing business is based on the dealerships' ability to cover fixed costs
with gross profit from revenues independent of vehicle sales. According to this
measurement of "fixed coverage," a higher percentage of non-vehicle sales
revenue to fixed costs indicates a lower exposure to economic cycles. Each
manufacturer requires its dealerships to report fixed coverage according to a
specific method, and the methods used vary widely among the manufacturers and
are not comparable.
Our cost of sales and profitability are also affected by the allocations
of new vehicles which our dealerships receive from manufacturers. When we do
not receive allocations of new vehicle models adequate to meet customer demand,
we purchase additional vehicles from other dealers at a premium to the
manufacturer's invoice, reducing the gross margin realized on the sales of such
vehicles. In addition, we follow a disciplined approach in selling vehicles to
other dealers and wholesalers when the vehicles have been in our inventory
longer than the guidelines set by us. Such sales are frequently at or below
cost and, therefore, reduce our overall gross margin on vehicle sales. Sonic's
salary expense, employee benefits costs and advertising expenses comprise the
majority of our selling, general and administrative expenses. Sonic's interest
expense fluctuates based primarily on the level of the inventory of new
vehicles held at our dealerships, substantially all of which is financed
through floor plan financing as well as the amount of indebtedness incurred for
acquisitions.
We have accounted for all of our dealership acquisitions using the
purchase method of accounting and, as a result, we do not include in our
financial statements the results of operations of these dealerships prior to
the date they were acquired by us. The Consolidated Financial Statements of
Sonic discussed below reflect the results of operations, financial position and
cash flows of each of our dealerships acquired prior to September 30, 1998. As
a result of the effects of the acquisitions, the historical consolidated
financial information described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is not necessarily indicative of
the results of operations, financial position and cash flows of Sonic in the
future or the results of operations, financial position and cash flows which
would have resulted had the acquisitions occurred at the beginning of the
periods presented in the Consolidated Financial Statements.
36
The automobile industry is cyclical and historically has experienced
periodic downturns, characterized by oversupply and weak demand. Many factors
affect the industry including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
available credit.
Sonic's profit margins are primarily impacted by changes in the percentage
of revenues attributed to new vehicle sales.
Results of Operations
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in Sonic's statement
of operations.
Percentage of Total Revenues for
Year Ended Nine Months Ended
December 31, September 30,
--------------------- ---------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
Revenue:
New vehicle sales ........................... 62.0% 64.2% 64.1% 60.3%
Used vehicle sales .......................... 24.9% 23.1% 22.9% 27.3%
Parts, service and collision repair ......... 11.2% 10.7% 10.7% 10.3%
Finance and insurance ....................... 1.9% 2.0% 2.3% 2.1%
Total revenue ............................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................... 88.1% 88.2% 88.7% 87.4%
Gross profit ................................ 11.9% 11.8% 11.3% 12.6%
Selling, general and administrative ......... 8.9% 9.0% 8.6% 9.4%
Operating income ............................ 2.9% 2.8% 2.7% 3.2%
Interest expense ............................ 1.7% 1.7% 1.6% 1.5%
Income before taxes ......................... 1.3% 1.5% 1.2% 1.7%
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Revenue. Revenue grew in each of Sonic's primary revenue areas for the
first nine months of 1998 as compared with the first nine months of 1997,
causing total revenue to increase 240.5% to $1,158.5 million. New vehicle sales
revenue increased 220.3% to $698.2 million in the first nine months of 1998,
compared with $218.0 million in the first nine months of 1997. The increase was
due primarily to an increase in new vehicle unit sales of 182.8% to 29,262, as
compared with 10,348 in the first nine months of 1997 resulting principally
from additional unit sales contributed by the acquisitions of Jeff Boyd
Chrysler-Plymouth-Dodge in June 1997; Lake Norman Dodge and Affiliates in
September 1997; Ken Marks Ford in October 1997; Dyer Volvo and the Bowers
Dealerships and Affiliated Companies in November 1997; Clearwater Toyota,
Clearwater Mitsubishi, and Clearwater Collision Center in January 1998; Century
BMW, Heritage Lincoln Mercury, and Capitol Chevrolet and Imports in April 1998;
Casa Ford of Houston in May 1998; Hatfield Automotive Group in July 1998 and
Higginbotham Automotive Group in August 1998. The remainder of the increase was
due to a 13.3% increase in the average selling price of new vehicles resulting
principally from sales of higher priced import vehicles contributed by our
closed 1998 acquisitions.
Used vehicle revenue from retail sales increased 340.0% to $232.1 million
in the first nine months of 1998 from $52.7 million in the first nine months of
1997. The increase was due primarily to an increase in used vehicle unit sales
of 305.4% to 17,211, as compared with 4,245 in the first nine months of 1997,
resulting from additional unit sales contributed by our closed acquisitions.
The remainder of the increase was due to a 8.5% increase in the average selling
price of used vehicles resulting principally from sales of higher priced luxury
and import vehicles contributed by our closed acquisitions along with an
increase in used vehicle revenues of 15.4% in the first nine months of 1998
compared to the first nine months of 1997 from used vehicle revenues from
stores owned for longer than one year.
Sonic's parts, service and collision repair revenue increased 227.4% to
$118.9 million in the first nine months of 1998 compared to $36.3 million in
the first nine months of 1997, due principally to our closed 1998 acquisitions.
Finance and insurance revenue increased $16.5 million, or 205.6%, due
principally to increased new vehicle sales and related financing.
Gross Profit. Gross profit increased 280.5% to $146.1 million in the first
nine months of 1998 from $38.4 million in the first nine months of 1997 due
principally to increases in revenues contributed by our closed 1998
acquisitions. Gross
37
profit as a percentage of sales increased to 12.6% from 11.3% due to increases
in new vehicle gross margins from 6.8% to 7.7% resulting from sales of higher
margin import vehicles contributed by our closed 1998 acquisitions, as well as
improved gross margins of used vehicles from 8.2% to 10.0% resulting from
efforts made to improve management of used vehicle inventories. In addition,
because gross margins from used vehicle revenue are higher than gross margins
from new vehicle revenue, an increase in used vehicle revenue as a percentage
of total revenue from 15.5% in the first nine months of 1997 to 20.0% in first
nine months of 1998, and a decrease in new vehicle revenue as a percentage of
total revenue from 64.1% in the first nine months of 1997 to 60.3% in the first
nine months of 1998, also contributed to the overall increase in gross profits
as a percentage of total revenue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, including depreciation and amortization, increased
272.7% to $108.9 million in the first nine months of 1998 from $29.2 million in
the first nine months of 1997. Such expenses as a percentage of revenue
increased to 9.4% from 8.6% due principally to expenses inherent with the
initial growth and formation of Sonic. In addition, the increase in used
vehicle revenue and decrease in new vehicle revenue as a percentage of total
revenue which resulted in the increase in gross profits and gross profit
margins also resulted in increased expenses related to employee commissions.
Interest Expense, floor plan. Interest expense, floor plan increased
137.3% to $11.9 million from $5.0 million, due primarily to floor plan interest
incurred by our closed 1998 acquisitions. As a percentage of total revenue,
floor plan interest decreased from 1.5% to 1.0% primarily due to decreased
interest rates under Sonic's floor plan financing arrangements, as well as
improvement in turnover rates.
Interest Expense, other. Interest expense, other increased to $5.6 million
from $0.4 million, due primarily to interest incurred on the Notes and on
acquisition-related indebtedness.
Net Income. As a result of the factors noted above, Sonic's net income
increased by $9.8 million in the first nine months of 1998 compared to the
first nine months of 1997.
Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended
December 31, 1996
Revenue. Revenue grew in each of Sonic's primary revenue areas for 1997 as
compared with 1996, causing total revenue to increase 42.2% to $536.0 million.
New vehicle sales revenue increased 47.0% to $343.9 million, compared with
$233.9 million. New vehicle unit sales increased from 11,693 to 15,715,
accounting for 34.4% of the increase in vehicle sales revenue. The remainder of
the increase was primarily due to a 9.4% increase in the average selling price
resulting from changes in vehicle prices, particularly a shift in customer
preference to higher cost light trucks and sport utility vehicles, and
additional revenue from our 1997 acquisitions.
Used vehicle revenue from retail sales increased 25.1% from $68.0 million
in 1996 to $85.1 million in 1997. The increase in used vehicle revenue was due
principally to additional revenues contributed from our 1997 acquisitions in
the fourth quarter of 1997.
Sonic's parts, service and collision repair revenue increased 36.7% to
$57.5 million from $42.1 million, and declined as a percentage of revenue to
10.7% from 11.2%. The increase in service and parts revenue was due principally
to increased parts revenue, including wholesale parts, from our Lone Star Ford
and Fort Mill Ford locations and additional revenue from our 1997 acquisitions
in the fourth quarter 1997. F&I revenue increased $3.5 million, due principally
to increased new vehicle sales and related financings.
Gross Profit. Gross profit increased 40.8% in 1997 to $63.0 million from
$44.7 million in 1996 due to increases in new vehicle sales revenue principally
at our Lone Star Ford and Fort Mill Ford locations and additional revenue from
our 1997 acquisitions in the third and fourth quarters of 1997. Parts and
service revenue increases also contributed to the increase in gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, including depreciation and amortization, increased
42.8% from $33.7 million to $48.1 million. These expenses increased due to
increases in sales volume as well as expenses associated with Sonic's 1997
acquisitions and its initial public offering of Class A common stock.
Interest Expense, floor plan. Interest expense, floor plan increased 34.2%
to $8.0 million from $6.0 million, primarily due to our 1997 acquisitions. As a
percentage of total revenue, floor plan interest decreased from 1.6% to 1.5%.
Interest Expense, other. Interest expense, other increased 176.9% from
$0.4 million to $1.2 million. The increase in interest expense was due to
funding of Sonic's 1997 acquisitions in the fourth quarter.
38
Net Income. As a result of the factors noted above, Sonic's net income
increased by $0.7 million in 1997 compared to 1996.
Liquidity and Capital Resources:
Sonic's principal needs for capital resources are to finance acquisitions
and fund debt service and working capital requirements. Historically, we have
relied primarily upon internally generated cash flows from operations,
borrowings under our various credit facilities, and borrowings and capital
contributions from our stockholders to finance our operations and expansion. On
November 10, 1997, Sonic completed its initial public offering of its Class A
common stock, providing approximately $53.7 million of additional capital
resources for the consummation of certain of Sonic's 1997 and 1998
acquisitions. In addition, on July 31, 1998, Sonic completed its private
placement of $125 million of its senior subordinated notes which provided an
additional $120.6 million of capital resources for the consummation of certain
of Sonic's 1998 acquisitions and for future acquisitions.
As of September 30, 1998, there was an aggregate of $174.0 million
outstanding under Sonic's Floor Plan Facility with Ford Motor Credit. The Floor
Plan Facility at September 30, 1998 had an effective rate of prime less .9%,
subject to certain incentives. Typically new vehicle floor plan indebtedness
exceeds the related inventory balances. The inventory balance is generally
reduced by the applicable automobile manufacturer's purchase discounts, and
such reduction is not reflected in the related floor plan liability. These
manufacturer purchase discounts are standard in the industry, typically occur
on all new vehicle purchases, and are not used to offset the related floor plan
liability. These discounts are aggregated and generally paid to Sonic by the
manufacturer on a quarterly basis. The related floor plan liability becomes due
as vehicles are sold.
Sonic makes monthly interest payments on the amount financed under the
Floor Plan Facility but is not required to make loan principal repayments prior
to the sale of the vehicles. The underlying notes are due when the related
vehicles are sold and are collateralized by vehicle inventories and other
assets of the relevant dealership subsidiary. The Floor Plan Facility contains
a number of covenants, including among others, covenants restricting Sonic with
respect to the creation of liens and changes in ownership, officers and key
management personnel.
During the first nine months of 1998, Sonic generated net cash of $4.2
million from operating activities, compared to $8.1 million in the first nine
months of 1997. The decrease was attributable principally to repayments on notes
payable -- floorplan as well as increases in receivables and other assets due to
additional acquisitions and revenue growth.
Cash used in investing activities for the first nine months of 1998,
excluding amounts paid in acquisitions, was approximately $2.6 million, all of
which represented capital expenditures. For the first nine months of 1997, cash
used in investing activities, excluding amounts paid in acquisitions, was
approximately $1.6 million, all of which represented capital expenditures.
Sonic's principal capital expenditures typically include building improvements
and equipment for use in our dealerships.
Cash provided by financing activities for the nine months of 1998 of $87.1
million primarily reflects net proceeds received from the issuance of the Notes
as well as amounts borrowed under Sonic's revolving credit facility to finance
acquisitions.
In August 1997, Sonic obtained a $20 million loan from NationsBank, N.A.
The proceeds from the NationsBank loan were used in the consummation of the
acquisition of the two Lake Norman dealerships and of Fort Mill Chrysler-
Plymouth-Dodge. The NationsBank loan was guaranteed by Mr. O. Bruton Smith
personally, which guarantee was released in February 1998. The NationsBank loan
matured in February 1998 and was repaid with proceeds from Sonic's initial
public offering and the Revolving Facility (as defined below).
Sonic's $75 million Revolving Facility with Ford Motor Credit currently
bears interest at a fluctuating per annum rate equal to the "prime" or "base"
rate announced by a majority (or if there is no majority, the median rate
announced by the five) of the following banks: The Chase Manhattan Bank,
NationsBank, N.A., Citibank, N.A., Bank America and Morgan Guaranty Trust
Company of New York (the "Revolving Facility Prime Rate"). However, if the
amount of debt exceeds the sum of the scaled assets (as defined in the
Revolving Facility), then the interest rate will be the prime rate plus 1.0%.
The Revolving Facility Prime Rate as of September 30, 1998 was 8.5%. The
Revolving Facility will mature in December 1999, unless Sonic requests that the
term be extended, at the option of Ford Motor Credit, for up to three (3)
additional one year terms to be negotiated by the parties. No assurance can be
given that such extensions will be granted. On July 31, 1998, all indebtedness
outstanding under the Revolving Facility was repaid with a portion of the net
proceeds from Sonic's offering of its senior subordinated notes. As of
September 30, 1998, there were no amounts outstanding
39
under the Revolving Facility. Future amounts to be drawn under the Revolving
Facility will be used to repay certain existing indebtedness, for the
acquisition of additional dealerships as approved by Ford Motor Credit and to
provide general working capital needs of Sonic not to exceed $10 million. See
"Description of Certain Indebtedness -- The Revolving Facility."
Ford Motor Credit has committed to increase the amount available under the
Revolving Facility from $75 million to $100 million and to extend the maturity
date of the Revolving Facility to December 31, 2000. When the amended agreement
with Ford Motor Credit is completed, amounts outstanding under the Revolving
Facility after November 14, 1998 will bear interest at a rate equal to 2.75%
plus the interest rate for one month commercial paper (the "Commercial Paper
Rate"). The Commercial Paper Rate as of February 1, 1999 was 7.55%.
We agreed under the Revolving Facility not to pledge any of our assets to
any third party (with the exception of currently encumbered real estate and
assets of our dealership subsidiaries that are subject to previous pledges or
liens as approved by Ford Motor Credit). The Revolving Facility also contains
certain negative covenants made by us, including covenants restricting or
prohibiting the payment of dividends, capital expenditures and material
dispositions of assets as well as other customary covenants. Additional
negative covenants include specified ratios of
o total debt to tangible base capital (as defined in the Revolving
Facility)
o current assets to current liabilities
o earnings before interest, taxes, depreciation and amortization (EBITDA)
and rent to fixed charges
o EBITDA to interest expense,
o total debt to EBITDA and
o the current lending commitment under the Revolving Facility to scaled
assets (as defined in the
Revolving Facility).
In addition, the loss of voting control over Sonic by O. Bruton Smith, B.
Scott Smith and their spouses or immediate family members or the failure by
Sonic, with certain exceptions, to own all the outstanding equity, membership
or partnership interests in its dealership subsidiaries will constitute an
event of default under the Revolving Facility. Sonic did not meet the specified
total debt to tangible equity ratios required by the Revolving Facility at
March 31, 1998 and at June 30, 1998 and obtained a waiver with regard to such
requirement from Ford Motor Credit. In connection with Sonic's offering of its
senior subordinated notes, Sonic and Ford Motor Credit amended the Revolving
Facility to provide that the senior subordinated notes (which are subordinated
to the Revolving Facility) will be treated as equity capital for purposes of
this ratio. Accordingly, Sonic was in compliance with this and all other
restrictive covenants as of September 30, 1998.
On July 31, 1998, Sonic completed its private placement of its senior
subordinated notes in the aggregate principal amount of $125,000,000. The notes
are unsecured, mature on August 1, 2008, and are redeemable at Sonic's option
after August 1, 2003. Interest payments are due semi-annually on February 1 and
August 1, commencing February 1, 1999. The notes are subordinated to all
present and future senior indebtedness of Sonic, including the Revolving
Facility. Redemption prices during 12 month periods beginning August 1 are
105.500% in 2003, 103.667% in 2004, 101.833% in 2005 and 100% thereafter. Net
proceeds after commissions and discounts, including issuance discount of
$937,500, amounted to $120,625,000 and were used to finance certain of the 1998
acquisitions and to repay amounts outstanding under the Revolving Facility. On
December 7, 1998, the Company completed an exchange offer to exchange the
senior subordinated notes for identical senior subordinated notes registered
under the Securities Act of 1933.
The indenture governing the senior subordinated notes contains certain
specified restrictive and required financial covenants. The indenture also
contains certain limitations on other indebtedness, liens, capital stock,
guaranties, asset sales, investments, cash dividends to shareholders,
distributions and redemptions.
In 1997, Sonic authorized 3 million shares of preferred stock with such
designations, rights and preferences as may be determined from time to time by
our Board of Directors. In March, 1998, our Board of Directors designated
300,000 shares of preferred stock as Class A convertible preferred stock, which
was divided into 100,000 of Series I preferred stock, 100,000 shares of Series
II preferred stock and 100,000 shares of Series III preferred stock.
The Class A convertible preferred stock has a liquidation preference of
$1,000 per share. Each share of Class A convertible preferred stock is
convertible, at the option of the holder, into that number of shares of Class A
common stock as is determined by dividing $1,000 by the average closing price
for the Class A common stock on the NYSE for the 20 days preceding the date of
issuance of the shares of Class A convertible preferred stock. Conversion of
Series II preferred
40
stock and Series III preferred stock is subject to certain adjustments which
have the effect of limiting increases and decreases in the value of the Class A
common stock receivable upon conversion by 10% of the original value of the
shares of Series II preferred stock or Series III preferred stock.
The preferred stock is redeemable at Sonic's option at any time after the
date of issuance. The redemption price of the Series I preferred stock is
$1,000 per share. The redemption price for the Series II preferred stock and
Series III preferred stock is as follows: (i) prior to the second anniversary
of the date of issuance, the redemption price is the greater of $1,000 per
share or the aggregate market price of the Class A common stock into which it
could be converted at the time of redemption, and (ii) after the second
anniversary of the date of issuance, the redemption price is the aggregate
market price of the Class A common stock into which it could be converted at
the time of redemption.
Each share of Class A convertible preferred stock entitles its holder to a
number of votes equal to that number of shares of Class A common stock into
which it could be converted as of the record date for the vote. Holders of
Class A convertible preferred stock are entitled to participate in dividends
payable on the Class A common stock on an "as-if-converted" basis. The Class A
convertible preferred stock has no preferential dividends.
Acquisitions Closed During the Nine Months Ended September 30, 1998
On January 1, 1998, Sonic began operation and obtained control of
Clearwater Toyota, Clearwater Mitsubishi and Clearwater Collision Center
located in Clearwater, Florida. On April 1, 1998, we began operation and
obtained control of Capitol Chevrolet and Imports located in Montgomery,
Alabama, Century BMW located in Greenville, South Carolina and Heritage
Lincoln-Mercury located in Greenville, South Carolina. On May 1, 1998, we began
operation and obtained control of Casa Ford of Houston, Inc. located in
Houston, Texas. On July 7, 1998, we closed its acquisition of the Hatfield
Automotive Group located in Columbus, Ohio. On August 1, 1998, we began
operation and obtained control of the Higginbotham Automotive Group located in
Daytona, Florida. The aggregate purchase price for the Clearwater acquisition,
the Montgomery acquisition, the Century acquisition, the Heritage acquisition,
the Casa Ford acquisition, the Hatfield acquisition and the Higginbotham
acquisition was approximately $117.5 million, paid (or payable) with $83.5
million in cash, with 485,294 shares of Class A common stock having an
estimated fair value of approximately $8.2 million, and with 27,058.8 shares of
preferred stock (14,406.3 shares of Series I preferred stock, 6,379.5 shares of
Series II preferred stock, and 6,273 shares of Series III preferred stock)
having an aggregate liquidation preference of approximately $27.1 million and
an estimated fair value of approximately $25.8 million. Of the $83.5 million
cash portion of the aggregate purchase price, $38.9 million was financed with
borrowings under the Revolving Facility, which was subsequently repaid with a
portion of the net proceeds from Sonic's senior subordinated notes offering,
$42.2 million was financed with a portion of the net proceeds from Sonic's
senior subordinated notes offering, and $1.8 million was paid with cash
generated from our existing operations. The remaining $0.6 million is payable
to the seller of the Montgomery acquisition on the first and second
anniversaries of the closing date of the Montgomery acquisition. In addition,
Sonic has issued to the seller of the Century acquisition warrants to purchase
75,000 shares of the Company's Class A common stock at a purchase price equal
to the market value of the Class A common stock on the date of grant. The
estimated fair value of these warrants is approximately $0.5 million. In
accordance with terms of the Clearwater acquisition and the Montgomery
acquisition, we may be required to pay additional amounts up to $5.1 million
contingent on the future performance of the dealerships acquired in such
acquisitions. In addition, in accordance with the terms of the Casa Ford
acquisition, we may be required to pay additional amounts to the seller based
on the dealership's pre-tax earnings for 1998 and 1999. Any additional amounts
paid will be accounted for as additional goodwill.
Acquisitions Closed After September 30, 1998
On December 1, 1998, Sonic began operation and obtained control of Tampa
Volvo located in Tampa, Florida. On November 1, 1998, Sonic began operation and
obtained control of Ron Craft Chevrolet-Cadillac-Oldsmobile located in Baytown,
Texas. On November 1, 1999, Sonic began operation and obtained control of Ron
Craft Chrysler Plymouth Jeep located in Baytown, Texas. In January 1999, Sonic
began operation and obtained control of Infiniti of Charlotte located in
Charlotte, North Carolina. The aggregate purchase price for these acquisitions
was paid with approximately $15.7 million in cash, with the issuance of 3,675
shares of Series II preferred stock having a liquidation preference of
approximately $3.7 million and with the issuance of warrants to purchase 4,000
shares of Class A common stock. The cash portion of the purchase price was
financed with a combination of cash borrowed under the Revolving Facility and
cash generated from Sonic's existing operations.
41
Pending Acquisitions
Sonic has signed definitive agreements to acquire 16 dealerships located
in Chattanooga, TN, Nashville, TN, Birmingham, AL, Atlanta, GA, DeLand, FL,
Columbia, SC, Houston, TX and Panama City, FL. The aggregate purchase price for
these acquisitions will be approximately $98.0 million plus the book value of
certain of the assets to be acquired and the assumption of certain liabilities.
The aggregate purchase price will be payable with approximately $67.2 million
in cash to be obtained from borrowings under the Revolving Facility and cash
generated from Sonic's existing operations, with the remainder to be payable
with a combination of Class A common stock and Class A convertible preferred
stock. Sonic may be required to pay additional amounts based on future pre-tax
earnings of certain of these dealerships. These acquisitions are expected to be
consummated in the first quarter of 1999.
Conversion to FIFO Method of Inventory Accounting
Sonic incurred a tax liability of approximately $7.1 million in connection
with the change in its tax basis of accounting for inventory from the "last-in,
first-out" method of inventory accounting to the "first-in, first-out" method
of inventory accounting, which is payable over a six-year period beginning in
January 1998. In addition, in connection with the Montgomery Acquisition and
the Casa Ford acquisition, Sonic incurred an additional tax liability in the
amount of approximately $2.2 million as a result of the change in accounting
for the inventory from the "last-in, first-out" method of inventory accounting
to the "first-in, first-out" method of inventory accounting, which will be a
payable over a six year period. As of September 30, 1998, the remaining
cumulative balance of the "last-in, first-out" method of inventory accounting
tax liability was $7.1 million. We expect to pay such obligation with cash
provided by operations.
We believe that funds generated through future operations and availability
of borrowings under our floor plan financing (or any replacements thereof) and
our other credit arrangements will be sufficient to fund our debt service and
working capital requirements and any seasonal operating requirements, including
our currently anticipated internal growth, for the foreseeable future. We
expect to fund any future acquisitions from our future cash flow from
operations, additional debt financing (including the Revolving Facility), the
offering or future offerings of Class A common stock or issuance of other
convertible instruments.
Year 2000 Compliance
We recognize the need to ensure that our operations will not be adversely
impacted by Year 2000 software failures and we have completed an assessment of
our operations in this regard. We have determined that our systems are
currently Year 2000 compliant and the costs associated with making our systems
Year 2000 compliant were immaterial. However, many of our lenders and
suppliers, including suppliers that provide finance and insurance products, may
be impacted by Year 2000 complications.
We are in the process of making inquiries to our lenders and suppliers
regarding their Year 2000 compliance efforts, and we are reviewing the Year
2000 disclosures in documents filed with the Commission for those lenders and
suppliers that are publicly-held companies. We do not believe that failure of
our lenders or suppliers to ensure that their computer systems are Year 2000
compliant will have a material adverse impact on our business, results of
operations, and financial condition, although no assurances can be given in
this regard. Furthermore, there can be no assurances that Year 2000
deficiencies on the part of dealerships to be acquired by us would not have a
material adverse impact on our business, results of operations, and financial
condition.
We are in the process of establishing a contingency plan in the event that
our expectations regarding Year 2000 problems are incorrect, and we expect such
a contingency plan to be completed within the next three months. At this time,
it is impossible to state with certainty whether Year 2000 computer software or
equipment failures on the part of Sonic or third parties involved with Sonic
will have a material adverse impact on our results of operations, liquidity and
financial condition. However, based on our assessment of our operations, we
believe we are adequately prepared to deal with Year 2000 problems which may
arise. In a worst case scenario, Year 2000 problems affecting Sonic, Sonic's
bank accounts or the business operations of Sonic's manufacturers or lenders
could materially and adversely affect Sonic's ability to sell vehicles,
complete acquisitions or meet obligations to third parties.
Significant Materiality of Goodwill
Goodwill represents the excess purchase price over the estimated fair
value of the tangible and separately measurable intangible net assets acquired.
The cumulative amount of goodwill at December 31, 1997 was $75.0 million and at
September 30, 1998 was $166.1 million. As a percentage of total assets and
stockholders' equity, goodwill, net of accumulated amortization, represented
25.5% and 88.1%, respectively, at December 31, 1997, and 33.2% and 124.0%,
respectively, at September 30, 1998. Generally accepted accounting principles
require that goodwill and all other intangible
42
assets be amortized over the period benefited. We have determined that the
period benefited by the goodwill will be no less than 40 years. Accordingly, we
are amortizing goodwill over a 40 year period. Earnings reported in periods
immediately following an acquisition would be overstated if Sonic attributed a
40 year benefit period to an intangible asset that should have had a shorter
benefit period. In later years, Sonic would be burdened by a continuing charge
against earnings without the associated benefit to income valued by management
in arriving at the price paid for the businesses acquired. Earnings in later
years also could be significantly affected if management then determined that
the remaining balance of goodwill was impaired. We periodically compare the
carrying value of goodwill with the anticipated undiscounted future cash flows
from operations of the businesses we have acquired to evaluate the
recoverability of goodwill. We have concluded that the anticipated future cash
flows associated with intangible assets recognized in our acquisitions will
continue indefinitely, and there is no persuasive evidence that any material
portion will dissipate over a period shorter than 40 years. We will incur
additional goodwill in future acquisitions.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures and Segments of an
Enterprise and Related Information." This Standard redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. This Statement
will be effective for Sonic's fiscal year ending December 31, 1998, and we do
not intend to adopt this statement prior to the effective date. We do not
expect the implementation of FAS 131 to have a significant impact on our
financial statements or related disclosures.
43
BUSINESS
Sonic is one of the top five automotive retailers in the United States, as
measured by total revenue, operating 39 dealerships and 14 collision repair
centers in 10 metropolitan areas of the Southeastern, Southwestern and
Midwestern United States. We sell new and used cars, light trucks and
replacement parts and provide vehicle maintenance, warranty, paint and repair
services. We also arrange related financing and insurance ("F&I") for our
automotive customers. Sonic operates dealerships in metropolitan markets which
on average are experiencing population growth that is more than one and a half
times the national average. These markets are:
o Atlanta
o Charlotte
o Chattanooga
o Columbus
o Daytona Beach
o Greenville/Spartanburg
o Houston
o Montgomery
o Nashville
o Tampa/Clearwater
In several of our markets, our dealerships have a significant market share for
new cars and light trucks.
We sell the following 23 domestic and foreign brands:
o Acura
o BMW
o Cadillac
o Chevrolet
o Chrysler
o Dodge
o Ford
o Honda
o Hyundai
o Infiniti
o Isuzu
o Jeep
o KIA
o Lincoln
o Mercedes
o Mercury
o Mitsubishi
o Oldsmobile
o Plymouth
o Toyota
o Subaru
o Volkswagen
o Volvo
Sonic has signed definitive agreements to acquire 16 additional
dealerships in some of its existing markets and in the new markets of
Birmingham, Alabama and Columbia, South Carolina. Upon consummation of these
acquisitions, we will also sell Audi, Buick, GMC, Lexus, Nissan, Pontiac,
Porsche and Range Rover vehicles. For the year ended December 31, 1997, and the
nine months ended September 30, 1998, we would have had pro forma revenue of
$1.8 billion for the year ended December 31, 1997 and $1.5 billion for the nine
months ended September 30, 1998 and net income of $12.7 million for the year
ended December 31, 1997 and $11.9 million for the nine months ended September
30, 1998.
Company Strengths
o Disciplined Acquisition Strategy. Sonic applies a disciplined approach
to potential acquisitions, utilizing a "hub and spoke" acquisition strategy.
Generally, when we enter a new geographic market, we first seek to acquire a
well-performing dealership with an excellent management team. We then
capitalize on management's operating experience and knowledge of the
surrounding markets to identify and acquire additional dealerships. In 1998,
our senior managers reviewed approximately 138 potential acquisitions with
approximately $10.2 billion in revenue and were approached by numerous other
dealerships interested in being acquired. After performing these reviews, Sonic
signed definitive agreements for 18 acquisitions representing over $1.4 billion
in revenue, of which 8 have been consummated. To date in 1999, we have
evaluated over 24 potential acquisitions representing over $1.3 billion in
revenue. When analyzing a potential acquisition, we consider the following
factors:
o overall fit with operating strategy; o quality of existing management;
o return on investment; o impact on our relationships with manufacturers; and
o impact on earnings per share; o real estate and facilities.
o Proven Track Record of Integrating and Improving Acquisitions. In recent
years, Sonic has grown primarily through acquisitions. Senior management of
Sonic has collectively acquired and integrated more than 75 dealerships during
their careers to date. This acquisition experience helps us to identify and
capitalize on opportunities for improvement and determine and implement
corrective actions. For example, pro forma operating income (including floor
plan interest expense) of dealerships acquired before December 31, 1997
increased 13.7% from the first nine months of 1997 to the first nine months of
1998.
44
o Benefits of Scale. After acquiring a dealership, we have the potential
to improve its performance by utilizing our existing strengths of experienced
management, best practices and employee training. We have been most successful
at leveraging these strengths in Charlotte and Houston where, subsequent to
acquiring satellite dealerships in these markets, we have improved
significantly both the revenues and, more importantly, the margins of such
dealerships. We intend to implement this strategy in other markets such as
Atlanta and Tampa where we operate significant "hub" operations which can
benefit from our scale. As we acquire more dealerships in a particular market,
we benefit from the following additional economies of scale:
o Improved terms on bank and floor plan financing and inventory
management. Our floor plan expense, as a percentage of sales, has been
reduced from 1.5% in the first nine months of 1997 to 1.0% in the first
nine months of 1998 as a result of negotiating with a single provider
and improved inventory management.
o Reduced advertising costs as a percentage of sales. We have reduced our
advertising costs from 1.4% of sales in the first nine months of 1997 to
1.1% of sales in the first nine months of 1998. More specifically, we
were able to reduce our print advertising costs in both Charlotte and
Houston by over 40%.
o Improved commissions on sales of finance and insurance products.
Sonic's large and increasing volume of sales of F&I products has allowed
us to renegotiate more favorable commissions on the sales of these
products. These renegotiated commission rates resulted in incremental
commissions of $1.1 million for the first nine months of 1998.
o Lower costs for property and casualty and workers' compensation
insurance. Annual premiums under these policies have decreased from
approximately $3.5 million to $2.6 million.
o Consistent Record of Internal Growth. In addition to identifying,
consummating and integrating attractive acquisitions, Sonic continually focuses
on improving the operations of its existing dealerships. As a result, we have a
history of internal growth as demonstrated by same store sales growth of 16.3%
in 1995, 6.4% in 1996, 10.1% in 1997 and 5.4% for the nine months ended
September 30, 1998. Sonic believes that its historical level of internal growth
exceeds the industry average.
% OF GROSS PROFIT
[Pie Chart Appears Here]
USED NEW SERVICE, PARTS AND
VEHICLES F&I VEHICLES COLLISION REPAIR
15% 14% 37% 34%
o Diverse Offering of Automotive Brands, Products and Services. We sell a
wide variety of 23 domestic and international brands of new automotive vehicles
in 10 metropolitan areas. We believe this product and geographic diversity (1)
reduces our reliance on any single manufacturer and (2) mitigates the effect of
regional economic conditions and changing consumer preference.
In addition to selling a broad range of new vehicles, Sonic has a balanced
portfolio of other automotive products and services including F&I, used
vehicles, and service, parts and collision repair. The graphic to the right
shows the breakdown of these products and services, represented as a percentage
of Sonic's total gross profit for the nine months ended September 30, 1998.
Sales of higher margin products and services offset in part sales of lower
margin new vehicles. In addition, sales of parts, service and collision repair
services are less cyclical than vehicle and F&I sales.
o Experienced Management Team with Extensive Automotive Retailing
Background. Sonic's senior management team, which consists of O. Bruton Smith,
Chairman and Chief Executive Officer; B. Scott Smith, President and Chief
Operating Officer; Dennis Higginbotham, President of Retail Operations;
Theodore Wright, Chief Financial Officer; and Jeff Rachor, Vice President of
Retail Operations, has, on average, 20 years of experience working in the
automotive industry. During the course of their individual careers, Messrs.
Bruton Smith, Scott Smith, Higginbotham and Rachor have each owned and/or
operated individual dealerships. We believe that this first-hand operating
experience among our senior management will enable us to continue to acquire
and integrate dealerships into the Sonic platform quickly and effectively.
45
Strategy
o Acquire Selected Dealerships. We believe that attractive acquisition
opportunities exist for dealership groups with significant equity capital and
experience in identifying, acquiring and professionally managing dealerships.
The automotive retailing industry is highly fragmented, with the largest 100
dealer groups generating approximately 10% of the industry's $673 billion of
total sales in 1997 and controlling less than 5% of all new vehicle dealerships
in the United States. We believe that these factors, together with the
increasing capital costs of operating automobile dealerships, the lack of
alternative exit strategies (especially for larger dealerships) and the aging
of many dealership owners provide attractive consolidation opportunities. We
believe our "hub and spoke" acquisition strategy will allow us to capitalize on
economies of scale, offer a greater breadth of products and services and
increase brand diversity. Generally, we retain the management of a well-run
dealership in order to benefit from its market knowledge, name recognition and
local reputation. In addition, we selectively acquire dealerships that have
underperformed the industry average but which carry attractive product lines or
have attractive locations and which would benefit from our existing
infrastructure.
o Increase Sales of Higher Margin Products and Services. Sonic intends to
pursue opportunities to increase its sales of higher-margin products and
services by, for instance, expanding its collision repair business and
increasing sales of used vehicles. Our collision repair business provides
favorable margins and is not significantly affected by economic cycles or
consumer spending habits. Our strategy is to acquire and develop collision
repair businesses near our dealerships in order to capitalize on relationships
with existing customers and insurance companies.
We also believe that significant opportunities exist to improve our used
vehicle departments, which historically have generated higher margins on sales
than our new vehicle departments, by (1) increasing the number of used vehicles
sold and (2) increasing gross profit margins on sales of used vehicles. For
example, our ability to manage inventory levels more effectively created
increased gross profit margins on sales of used vehicles to 9.8% for the first
nine months of 1998 from 8.3% for the first nine months of 1997.
o Control Costs. We are focused on controlling expenses and expanding
margins at the dealerships we acquire and integrate into our organization.
Approximately 73% of our operating costs for the first nine months of 1998 were
variable. We are able to adjust these expenses as the operating or economic
environment impacting our dealerships changes. We manage these variable costs,
such as floor plan (9%), advertising (10%) and compensation (50%) expenses, so
that they are generally related to vehicle sales and can be adjusted in
response to changes in vehicle sales volume. In addition, management
compensation is tied to individual dealership profitability and stock price
appreciation through stock options. This incentive compensation focuses all
levels of our organization on cost reduction. We also focus on controlling
components of fixed cost. For example, Sonic has reduced its property and
casualty and workers' compensation insurance costs due to the benefits of
economies of scale.
o Enhance Profit Opportunities in Finance and Insurance. Sonic offers a
wide range of financing and leasing alternatives for the purchase of vehicles,
as well as credit life, accident and health and disability insurance and
extended service contracts. As a result of our size and scale, we have
negotiated increased commissions on the origination of customer vehicle
financing and insurance policies, which resulted in incremental F&I commissions
of $1.1 million for the first nine months of 1998.
o Train, Develop and Motivate Qualified Management. We believe that our
well trained dealership personnel is key to our long-term prospects. We require
all of our employees, from service technicians to regional vice presidents, to
participate in in-house training programs. We believe that our comprehensive
training of all employees and the institution of a decentralized, multi-tiered
management structure to supervise effectively our dealership operations provide
us with a competitive advantage over other dealership groups. This training and
organizational structure enables high-level supervision over the dealerships,
accurate financial reporting and the ability to maintain good controls as Sonic
expands. In order to motivate management, we employ an incentive compensation
program for each officer, vice president and executive manager, a portion of
which is provided in the form of Sonic stock options with additional incentives
based on the performance of individual profit centers. We believe that this
organizational structure, together with the opportunity for promotion and for
equity participation, serve as a strong motivation for our employees.
o Achieve High Levels of Customer Satisfaction. We focus on maintaining
high levels of customer satisfaction. Our personalized sales process is
designed to satisfy customers by providing high-quality vehicles in a positive,
"consumer friendly" buying environment. Some manufacturers offer specific
performance incentives, on a per vehicle basis, if certain customer
satisfaction index ("CSI") levels (which vary by manufacturer) are achieved by
a dealer. Manufacturers consider CSI scores in approving acquisitions. In order
to keep management focused on customer satisfaction, we include CSI results as
a component of our incentive compensation program.
46
Industry Overview
With more than $670 billion in 1997 sales, automotive retailing is the
largest retail trade sector in the United States. The industry is highly
fragmented and largely privately held with approximately 22,000 automobile
dealership locations representing more than 49,000 franchised dealerships. In
1997, U.S. franchised automobile dealers sold approximately 15.0 million new
vehicles for sales of approximately $303 billion, and approximately 16.1
million used vehicles for sales of approximately $195 billion. It is estimated
that sales by franchised automobile dealers account for one-fifth of the
nation's total retail sales of all products and merchandise. Since 1993, new
vehicle revenues have grown at a 3.4% compound annual rate. Over the same
period, used vehicle revenues by franchised dealers have grown at a 7.5%
compound annual rate. Slower unit volume growth over this time period has been
offset by the rising prices associated with new vehicles and, on average, the
higher prices paid for later model high quality used vehicles which now
comprise a significant part of the used vehicle market. Automobile sales are
affected by many factors, including rates of employment, income growth,
interest rates, weather patterns and other national and local economic
conditions, automotive innovations and general consumer sentiment.
The following table sets forth new and used vehicle sales by franchised
automotive dealers in the United States for each of the five years ended
December 31, 1997. New vehicles can only be sold at retail by franchised
dealerships. The following table excludes sales of used vehicles by
non-franchised dealerships and casual sales by individuals.
United States Franchised Dealers' Vehicle Sales
-------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(Units in millions; Dollars in billions)
New vehicle unit sales. .................... 13.9 15.1 14.8 15.2 15.0
New vehicle sales .......................... $ 265 $ 292 $ 293 $ 299 $ 303
Used vehicle unit sales .................... 14.8 15.1 15.7 15.7 16.1
Used vehicle sales ......................... $ 146 $ 168 $ 182 $ 193 $ 195
Total vehicle sales ........................ $ 411 $ 460 $ 475 $ 492 $ 498
Annual growth in total vehicle sales ....... -- 11.9% 3.3% 3.6% 1.2%
Source: ADT Automotive.
In addition to new and used vehicles, dealerships offer a wide range of
other products and services, including repair and warranty work, replacement
parts, extended warranty coverage, financing and credit insurance. In 1997, the
average dealership's revenue consisted of 58.6% new vehicles sales, 29.0% used
vehicle sales, and 12.4% other products and services. As a result of intense
competition for new vehicle sales, the average dealership generates the
majority of its profits from the sale of used vehicles and other products and
services, including finance and insurance, mechanical and collision repair, and
parts and services. In 1997, for example, a used vehicle earned an average
gross margin of 10.8% as compared to a new vehicle's average gross margin of
6.4%, in each case for sales by new vehicle dealerships. As is typical in the
retailing industry, dealership profitability varies widely across different
stores and, ultimately, profitability depends on effective management of
inventory, competition, marketing, quality control and, most importantly,
responsiveness to the customer.
New Vehicle Sales. Franchised dealerships were originally established by
automobile manufacturers for the distribution of their new vehicles. In return
for exclusive distribution rights within specified territories, manufacturers
exerted significant influence over their dealers by limiting the
transferability of ownership in dealerships, designating the dealership's
location, and managing the supply and composition of the dealership's
inventory. These arrangements resulted in the proliferation of small,
single-owner operations that, at their peak in the late 1940's, totaled almost
50,000. As a result of competitive, economic and political pressures during the
1970's and 1980's, significant changes and consolidation occurred in the
automotive retail industry. One of the most significant changes was the
increased penetration by foreign manufacturers and the resulting loss of market
share by domestic car makers, which forced many dealerships to close or sell to
better-capitalized dealership groups. According to industry data, the number of
franchised dealerships has declined from approximately 25,000 dealerships in
1990 to approximately 22,000 in 1997. Although significant consolidation has
taken place since the automotive retailing industry's inception, the industry
today remains highly fragmented, with the largest 100 dealer groups generating
approximately 10% of total sales revenues and controlling less than 5% of all
franchised dealerships.
Used Vehicle Sales. Sales of used vehicles have increased over the past
five years, primarily as a result of the substantial increase in new vehicle
prices and the greater availability of newer used vehicles due to the increased
popularity of short-term leases. Like the new vehicle market, the used vehicle
market is highly fragmented, with approximately
47
22,000 new vehicle dealers accounting for approximately $195 billion in 1997
sales. In addition, an even greater number of independent used car dealers
accounted for approximately $130 billion in 1997 sales. Privately negotiated
transactions accounted for the remaining 1997 sales, estimated at $45 billion.
In addition, an increasing number of used vehicles are being sold by
"superstore" outlets, which market only used vehicles and offer a wide
selection of low mileage, popular models. In 1997, the top 100 new vehicle
dealer groups accounted for less than 10% of used vehicle sales.
Industry Consolidation. We believe that further consolidation is likely
due to increased capital requirements of dealerships, the limited number of
viable alternative exit strategies for dealership owners, the desire of certain
manufacturers to strengthen their brand identity by consolidating their
franchised dealerships. We also believe that an opportunity exists for
dealership groups with significant equity capital, and experience in
identifying, acquiring and professionally managing dealerships, to acquire
additional dealerships for cash, stock, debt or a combination thereof. Publicly
owned dealer groups, such as Sonic, are able to offer prospective sellers tax
advantaged transactions through the use of publicly traded stock which may, in
certain circumstances, make them more attractive to prospective sellers.
Cyclicality. While the automotive manufacturing industry tends to be very
sensitive to economic cycles, the automotive retailing industry has shown
relatively low volatility. The chart set forth below shows the historical
relationship between the profitability margins of the automotive retailing and
automotive manufacturing industries:
AUTOMOTIVE RETAILING VS. MANUFACTURING HISTORICAL PRETAX MARGINS
[Line Chart Appears Here]
Automotive Retailing Big Three
Pretax Margins Pretax Margin
----------------------- ---------------
1979 1.48 0.65
1980 0.94 -8.48
1981 1.52 -2.30
1982 1.77 -0.20
1983 2.00 6.06
1984 2.10 9.38
1985 2.10 7.96
1986 2.05 6.98
1987 2.00 7.34
1988 1.71 6.44
1989 1.00 4.32
1990 1.00 0.08
1991 1.00 -3.54
1992 1.39 -0.02
1993 1.60 4.89
1994 1.80 7.94
1995 1.40 5.85
1996 1.53 6.35
1997 1.37 6.49
Auto retailers' pre-tax profit margins have remained relatively stable
from 1979 to 1997 even during recessionary periods. Conversely, average pre-tax
profit margins of the three largest U.S. automotive manufacturers have
fluctuated drastically during the comparable period. We believe that the
relative insensitivity to recessionary markets that the automotive retailing
industry has shown relative to the automotive manufacturing industry is due to
a number of factors including:
(a) approximately 90% of the automotive retailing sector's profits are
derived from the sale of used cars, parts and service and finance and
insurance;
(b) 60%-65% of the automotive retailing sector's costs are variable,
relating to personnel, advertising and inventory finance costs;
(c) sales and service employees are typically compensated on production
levels;
(d) manufacturers typically increase dealer incentives when sales slow,
offsetting volume declines; and
(e) the diversity in offering import and domestic brands tends to lessen
the impact of a decline in one brand.
48
Dealership Operations
After giving effect to our pending acquisitions, Sonic will own ten
dealerships in the Charlotte market, eight dealerships in the Chattanooga
market, four dealerships in the Birmingham market, four dealerships in the
Tampa/Clearwater market, six dealerships in the Columbus market, five
dealerships in the Houston market, three dealerships in the Columbia market,
four dealerships in the Daytona Beach market, two dealerships in the Atlanta
market, two dealerships in the Nashville market, four dealerships in the
Montgomery market and two dealerships in the Greenville/ Spartanburg market.
Since 1990, Sonic has grown significantly as a result of the acquisition
and integration of new vehicle dealerships and an increase in revenues at its
existing dealerships. The following table sets forth the name, brands, year of
acquisition and location of the dealerships acquired by or awarded to Sonic or
its predecessors since 1990 and the dealerships to be acquired by Sonic
pursuant to its pending acquisitions:
Year
Acquired Location
Dealerships and Brands ---------- ---------------------
Town & Country Toyota .............................. 1990 Charlotte, NC
Fort Mill Ford ..................................... 1996 Charlotte, NC
Fort Mill Chrysler-Plymouth-Dodge .................. 1997 Charlotte, NC
Lake Norman Dodge .................................. 1997 Charlotte, NC
Lake Norman Chrysler-Plymouth-Jeep ................. 1997 Charlotte, NC
Town & Country Chrysler-Plymouth-Jeep of Rock Hill . 1997 Charlotte, NC
Freedom Ford ....................................... 1997 Tampa/Clearwater, FL
Infiniti of Chattanooga ............................ 1997 Chattanooga, TN
Town & Country Ford of Cleveland ................... 1997 Chattanooga, TN
Cleveland Chrysler-Plymouth-Jeep ................... 1997 Chattanooga, TN
European Motors of Nashville
"BMW, Volkswagen" ................................. 1997 Nashville, TN
European Motors
"BMW, Volvo" ...................................... 1997 Chattanooga, TN
Dodge of Chattanooga ............................... 1997 Chattanooga, TN
KIA - VW of Chattanooga ............................ 1997 Chattanooga, TN
Cleveland Village Honda(1) ......................... 1997 Chattanooga, TN
Dyer & Dyer Volvo .................................. 1997 Atlanta, GA
Hatfield Volkswagen-Jeep ........................... 1998 Columbus, OH
Trader Bud's Westside Chrysler Plymouth
"KIA" ............................................. 1998 Columbus, OH
Hatfield Lincoln Mercury ........................... 1998 Columbus, OH
Trader Bud's Westside Dodge ........................ 1998 Columbus, OH
Toyota West ........................................ 1998 Columbus, OH
Hatfield Hyundai-Isuzu-Subaru ...................... 1998 Columbus, OH
Century BMW ........................................ 1998 Greenville/
Spartanburg, SC
Heritage Lincoln Mercury ........................... 1998 Greenville/
Spartanburg, SC
Capitol Chevrolet
"KIA" ............................................. 1998 Montgomery, AL
Capitol Imports
"Hyundai, Mitsubishi" ............................. 1998 Montgomery, AL
Casa Ford .......................................... 1998 Houston, TX
Clearwater Mitsubishi .............................. 1998 Tampa/Clearwater, FL
Clearwater Toyota .................................. 1998 Tampa/Clearwater, FL
Higginbotham Automobiles
"Acura, Mercedes" ................................. 1998 Daytona Beach, FL
Higginbotham Chevy-Olds
"Chevrolet, Oldsmobile" ........................... 1998 Daytona Beach, FL
Halifax Ford-Mercury ............................... 1998 Daytona Beach, FL
Tampa Volvo ........................................ 1998 Tampa/Clearwater, FL
Ron Craft Chevrolet-Cadillac-Oldsmobile ............ 1998 Houston, TX
49
Year
Acquired Location
Dealerships and Brands ---------- ----------------
Economy Honda(1)(2) ............................ 1999 Chattanooga, TN
Infiniti of Charlotte .......................... 1999 Charlotte, NC
Ron Craft Chrysler Plymouth Jeep ............... 1999 Houston, TX
Rally Mitsubishi(2) ............................ 1999 Nashville, TN
Tom Williams Buick(2) .......................... 1999 Birmingham, AL
Tom Williams Cadillac(2) ....................... 1999 Birmingham, AL
Tom Williams Lexus(2) .......................... 1999 Birmingham, AL
Tom Williams Imports(2) ........................ 1999 Birmingham, AL
Newsome Automotive(2)
"Mercedes, Chevrolet" ......................... 1999 Florence, SC
Newsome Chevrolet World(2) ..................... 1999 Columbia, SC
Imports of Florence(2)
"BMW, Isuzu" .................................. 1999 Florence, SC
Global Imports(2)
"BMW" ......................................... 1999 Atlanta, GA
Bondesen Chevrolet Oldsmobile Cadillac ......... 1999 DeLand, FL
Fitzgerald Chevrolet ........................... 1999 Charlotte, NC
Superior Oldsmobile-Cadillac-GMC ............... 1999 Chattanooga, TN
Lloyd Mercedes-Nissan .......................... 1999 Panama City, FL
Lloyd Pontiac-Cadillac-GMC ..................... 1999 Panama City, FL
Sam White Motor City
"Nissan, Oldsmobile"(2)(3) .................... 1999 Houston, TX
- ---------
(1) We have not obtained the consent of Honda to the acquisition of the Economy
Honda dealership. Honda informed us that we must sell our Cleveland
Village Honda dealership before it will consent to our acquisition of
Economy Honda. See "Risk Factors -- Honda Has Not Consented to the Economy
Honda Acquisition."
(2) Pending acquisition.
(3) This acquisition is subject to approval by a bankruptcy court presiding
over the dealership's pending bankruptcy proceeding. Consequently, the
date of acquisition is currently unknown.
Dealership Management
Operations of the dealerships are overseen by Regional Vice Presidents,
who report to Sonic's Chief Operating Officer. Each of our dealerships is
managed by an Executive Manager who is responsible for the operations of the
dealership and the dealership's financial and customer satisfaction
performance. The Executive Manager is responsible for selecting, training and
retaining dealership personnel. All Executive Managers report to Sonic's
Regional Vice Presidents, who in turn report to Sonic's senior management on a
regular basis and prepare a comprehensive monthly financial and operating
statement of their dealership. In addition, Sonic's senior management meets on
a monthly basis with our Executive Managers to address changing customer
preferences, operational concerns and to share best practices, such as
maintaining a customer-friendly buying environment, maximizing potential
revenues per new vehicle sale through increased F&I penetration, using customer
calling and coupon programs to attract and retain service customers, and
continued training of dealership personnel.
Each Executive Manager is complemented by a team which includes two senior
managers who aid in the operation of the dealership. The General Sales Manager
is primarily responsible for the operations, personnel, financial performance
and customer satisfaction performance of the new vehicle sales, used vehicle
sales, and finance and insurance departments. The Parts and Service Director is
primarily responsible for the operations, personnel, financial and customer
satisfaction performance of the service, parts and collision repair departments
(if applicable). Each of the departments of the dealership typically has a
manager who reports to the General Sales Manager or Parts and Service Director.
New Vehicle Sales
As of September 30, 1998, Sonic sold 23 brands of cars and light trucks.
The products have a broad range of prices from lower priced, or economy
vehicles, to luxury vehicles. We believe that our brand, product and price
diversity reduces the risk of changes in customer preferences, product supply
shortages and aging products. Approximately 4.4% of
50
new vehicle sales in 1997 were luxury brands (for example, BMW, Cadillac,
Infiniti and Volvo). See "Risk Factors -- Automobile Manufacturers Exercise
Significant Control Over Sonic's Operations and Sonic is Dependent on Them to
Operate its Business."
The following table presents information with respect to Sonic's new
vehicle sales:
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------------------------------------------- ---------------------------
1993 1994 1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- ------------- ------------- -------------
(dollars in thousands)
Unit sales ............ 9,429 9,686 10,273 11,693 15,715 10,348 29,262
Sales revenue ......... $ 153,138 $ 164,970 $ 186,859 $ 233,979 $ 343,941 $ 217,963 $ 698,189
Gross profit .......... 11,087 12,103 13,926 18,001 26,427 14,854 53,442
Gross margin .......... 7.2% 7.3% 7.5% 7.7% 7.7% 6.8% 7.7%
New vehicle sales include retail lease transactions and lease-type
transactions, both of which are arranged by Sonic. New vehicle leases generally
have short terms. Lease customers, therefore, return to the new vehicle market
more frequently. Leases also provide a source of late-model, generally low
mileage, vehicles for our used vehicle inventory. Generally, leased vehicles
are under warranty for the entire lease term, which allows us to provide repair
service to the lessee throughout the term of the lease.
Used Vehicle Sales
Sonic sells a broad variety of makes and models of used cars, vans, trucks
and sport utility vehicles. Used vehicles are obtained by us through customer
trade-ins, at "closed" auctions which may be attended only by new vehicle
dealers and which offer off-lease, rental and fleet vehicles, and at "open"
auctions which offer repossessed vehicles and vehicles sold by other dealers.
We sell our used vehicles to retail customers and, in the case of vehicles in
poor condition or vehicles which remain unsold for a specified period of time,
to other dealers or wholesalers. Sales to other dealers or wholesalers are
frequently close to or below cost and therefore negatively affect our gross
margin on used vehicle sales.
The following table sets forth information on Sonic's used vehicle sales:
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------------------------------- --------------------------
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------ ------------ -------------
(dollars in thousands)
Retail unit sales ........... 4,104 4,374 5,172 5,488 6,712 4,245 17,211
Retail sales revenue ........ $ 37,742 $ 47,537 $60,766 $68,054 $85,132 $52,745 $232,060
Retail gross profit ......... 3,964 5,182 5,792 5,748 7,294 4,321 23,308
Retail gross margin ......... 10.5% 10.9% 9.5% 8.4% 8.6% 8.2% 10.0%
Wholesale unit sales ........ 4,189 4,656 5,009 5,344 7,287 4,685 15,695
Wholesale sales revenue ..... $ 13,363 $ 16,062 $20,025 $25,642 $38,785 $25,171 $ 84,752
Wholesale gross profit ...... 27 43 (45) (23) (599) (463) (497)
Wholesale gross margin ...... 0.2% 0.3% (0.2)% (0.1)% (1.5)% (1.8)% (0.6)%
Total unit sales ............ 8,293 9,030 10,181 10,832 13,999 8,930 32,906
Total revenue ............... $ 51,105 $ 63,599 $80,791 $93,696 $123,917 $77,916 $316,812
Total gross profit .......... 3,991 5,225 5,747 5,725 6,695 3,858 22,811
Total gross margin .......... 7.8% 8.2% 7.1% 6.1% 5.5% 5.0% 7.4%
Service and Parts Sales
As of September 30, 1998, Sonic provided service and parts at each of our
franchised dealerships. We also provided maintenance and repair services at our
35 new vehicle dealership facilities, offering both warranty and non-warranty
services. Service and parts sales provide higher gross margins than vehicle
sales.
51
The following table sets forth information regarding Sonic's service and parts
sales:
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------------------------------- --------------------------
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------ ------------ -------------
(dollars in thousands)
Sales revenue ......... $ 27,243 $ 30,298 $ 31,958 $ 37,132 $ 51,033 $ 32,139 $ 105,924
Gross profit .......... 9,540 10,344 11,003 12,593 18,118 10,957 42,711
Gross margin .......... 35.0% 34.1% 34.4% 33.9% 35.5% 34.1% 40.3%
Collision Repair
As of September 30, 1998, Sonic operated collision repair centers, or body
shops, at twelve of its dealership locations. Our collision repair business
provides favorable margins and, similar to service and parts, is not
significantly affected by business cycles or consumer preferences. In addition,
because of the higher cost of used vehicles, insurance adjusters are more
hesitant to declare a vehicle a total loss, resulting in more significant, and
higher cost, repair jobs.
The following table sets forth information regarding Sonic's collision
repair operations:
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- ------------
(dollars in thousands)
Sales revenue ......... $ 3,094 $ 3,686 $ 3,903 $ 4,942 $ 6,504 $ 4,178 $ 12,993
Gross profit .......... 1,516 1,870 1,956 2,452 3,092 2,024 6,617
Gross margin .......... 49.0% 50.7% 50.1% 49.6% 47.5% 48.4% 50.9%
Finance and Insurance
Sonic offers its customers a wide range of financing and leasing
alternatives for the purchase of vehicles. In addition, as part of each sale,
we also offer customers credit life, accident and health and disability
insurance to cover the financing cost of their vehicle, as well as warranty or
extended service contracts.
We assign our vehicle financing contracts and leases to other parties,
instead of directly financing sales, which reduces our exposure to loss from
financing activities. Sonic receives a commission from the lender for
originating and assigning the loan or lease but is assessed a chargeback fee by
the lender if a loan is canceled, in most cases, within 90 days of making the
loan. Early cancellation can result from early repayment because of refinancing
of the loan, the sale or trade-in of the vehicle, or default on the loan. We
establish an allowance to absorb estimated chargebacks and refunds. Finance and
insurance commission revenue is recorded net of such chargebacks. Commission
expense related to finance and insurance commission revenue is charged to cost
of sales upon recognition of such revenue.
The following table sets forth information regarding Sonic's finance and
insurance operations:
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------------------ ------------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- ------------ ----------- ------------
(dollars in thousands)
Commission revenue ......... $ 3,711 $ 5,181 $ 7,813 $ 7,118 $ 10,606 $ 8,046 $ 24,587
Gross profit ............... 3,043 4,359 6,561 6,043 8,856 6,693 20,492
Gross margin ............... 82.0% 84.1% 84.0% 84.9% 83.5% 83.2% 83.3%
Sales and Marketing
Sonic's marketing and advertising activities vary among our dealerships
and among our markets. We advertise primarily through television, newspapers,
radio and direct mail and regularly conduct special promotions designed to
focus vehicle buyers on our product offerings. We also utilize computer
technology to aid sales people in prospecting for customers. Under arrangements
with certain manufacturers, we receive a subsidy for a portion of our
advertising expenses incurred in connection with a manufacturer's vehicles.
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Relationships with Manufacturers
Each of Sonic's dealerships operates under a separate franchise or dealer
agreement which governs the relationship between the dealership and the
manufacturer. In general, each dealer agreement specifies the location of the
dealership for the sale of vehicles and for the performance of certain approved
services in a specified market area. The designation of such areas generally
does not guarantee exclusivity within a specified territory. In addition, most
manufacturers allocate vehicles on a "turn and earn" basis which rewards high
volume. A dealer agreement requires the dealer to meet specified standards
regarding showrooms, the facilities and equipment for servicing vehicles,
inventories, minimum net working capital, personnel training, and other aspects
of the business. The dealer agreement with each dealership also gives the
related manufacturer the right to approve the dealership's general manager and
any material change in management or ownership of the dealership. Each
manufacturer may terminate a dealer agreement under certain circumstances, such
as a change in control of the dealership without manufacturer approval, the
impairment of the reputation or financial condition of the dealership, the
death, removal or withdrawal of the dealership's general manager, the
conviction of the dealership or the dealership's owner or general manager of
certain crimes, the failure to adequately operate the dealership or maintain
wholesale financing arrangements, insolvency or bankruptcy of the dealership or
a material breach of other provisions of the dealer agreement.
Many automobile manufacturers are still developing their policies
regarding public ownership of dealerships. We believe that these policies will
continue to change as more dealership groups sell their stock to the public,
and as the established, publicly-owned dealership groups acquire more
franchises. To the extent that new or amended manufacturer policies restrict
the number of dealerships which may be owned by a dealership group, or the
transferability of Sonic's common stock, such policies could have a material
adverse effect on us. See "Risk Factors -- Automobile Manufacturers
Exercise Significant Control Over Sonic's Operations and Sonic is Dependent on
Them to Operate its Business," " -- Manufacturer Stock Ownership/Issuance
Limits Limit Sonic's Ability to Issue Additional Equity to Meet Its Financing
Needs" and " -- Manufacturers' Restrictions on Acquisitions Could Limit Sonic's
Future Growth."
In the course of acquiring Jaguar franchises in Chattanooga and
Greenville, Jaguar declined to consent to our proposed acquisitions of these
franchises. In settling legal actions brought against Jaguar by the seller of
the Chattanooga Jaguar franchise, Sonic agreed with Jaguar not to acquire any
Jaguar franchise until August 3, 2001. See "Risk Factors -- Jaguar Has Not
Consented to Two Acquisitions."
Sonic has received notice from Honda that its approval of our acquisition
of the Economy Honda Dealership is contingent upon Sonic divesting its
ownership of the Cleveland Village Honda dealership. Honda's stated reason for
this condition is that our ownership of the Economy Honda Dealership and the
Cleveland Village Honda dealership would violate Honda's policy against the
ownership of contiguous dealerships, and we agreed to comply with this policy
pursuant to our agreement with Honda. We are is currently negotiating with
potential buyers for the sale of the Cleveland Village Honda dealership. There
can be no assurance that we will be able to sell the Cleveland Village Honda
dealership or that the approval of Honda to the Economy Honda Acquisition will
be obtained. On a pro forma basis, the Cleveland Village Honda dealership
accounted for, and the Economy Honda Dealership would have accounted for,
approximately 1.9% and 2.7% of Sonic's 1997 revenues and approximately 2.1% and
3.0% of gross profits, respectively. See "Risk Factors -- Honda Has Not
Consented to the Economy Honda Acquisition."
Under Sonic's Dealer Agreements with Toyota and Infiniti, Toyota and
Infiniti have the right to approve any ownership or voting rights of Sonic of
20% or greater by any individual or entity. Honda may force the sale of Sonic's
Honda franchise if any person or entity, other than members of the Smith Group,
acquires 5% or greater of the Common Stock (10% or greater if such entity is an
institutional investor), and Honda deems such person or entity to be
unsatisfactory. Volkswagen has approved the sale of no more than 25% of the
voting control of Sonic, and any future changes in ownership or transfers among
Sonic's current stockholders that could effect the voting or managerial control
of Sonic's Volkswagen franchisee subsidiaries requires the prior approval of
Volkswagen. Similarly, Chrysler has approved of the public sale of only 50% of
the Common Stock and requires prior approval of any future sales that would
result in a change in voting or managerial control of Sonic.
Certain state statutes in Florida and other states limit manufacturers'
control over dealerships. Under Florida law, notwithstanding any contrary terms
in a dealer agreement, manufacturers may not unreasonably withhold approval for
the sale of a dealership. Acceptable grounds for disapproval include material
shortcomings in the character, financial condition or business experience of
the proposed transferee. In addition, dealerships may challenge manufacturers'
attempts to establish new dealerships in the dealer's markets, and state
regulators may deny applications to establish new dealerships
53
for a number of reasons, including a determination that the manufacturer is
adequately represented in the area. Manufacturers must have "good cause" for
any termination or failure to renew a dealer agreement, and an automaker's
license to distribute vehicles in Florida may be revoked if, among other
things, the automaker has forced or attempted to force an automobile dealer to
accept delivery of motor vehicles not ordered by that dealer.
Under Texas law, despite the terms of contracts between manufacturers and
dealers, manufacturers may not unreasonably withhold approval of a transfer of
a dealership. It is unreasonable under Texas law for a manufacturer to reject a
prospective transferee of a dealership who is of good moral character and who
otherwise meets the manufacturer's written, reasonable and uniformly applied
standards or qualifications relating to the prospective transferee's business
experience and financial qualifications. In addition, under Texas law and the
laws of other states, franchised dealerships may challenge manufacturers'
attempts to establish new franchises in the franchised dealers' markets, and
state regulators may deny applications to establish new dealerships for a
number of reasons, including a determination that the manufacturer is
adequately represented in the region. Texas law limits the ability of
manufacturers to terminate or fail to renew franchises. In addition, other laws
in Texas and elsewhere limit the ability of manufacturers to withhold their
approval for the relocation of a franchise or require that disputes be
arbitrated. In addition, a manufacturer's license to distribute vehicles in
Texas may be revoked if, among other things, the manufacturer has forced or
attempted to force an automobile dealer to accept delivery of motor vehicles
not ordered by that dealer.
Georgia law provides that no manufacturer may arbitrarily reject a
proposed change of control or sale of an automobile dealership, and any
manufacturer challenging such a transfer of a dealership must provide written
reasons for its rejection to the dealer. Manufacturers bear the burden of proof
to show that any disapproval of a proposed transfer of a dealership is not
arbitrary. If a manufacturer terminates a franchise agreement due to a proposed
transfer of the dealership or for any other reason not considered to constitute
good cause under Georgia law, such termination will be ineffective. As an
alternative to rejecting or accepting a proposed transfer of a dealership or
terminating the franchise agreement, Georgia law provides that a manufacturer
may offer to purchase the dealership on the same terms and conditions offered
to the prospective transferee.
Under Tennessee law, a manufacturer may not modify, terminate or refuse to
renew a franchise agreement with a dealer except for good cause, as defined in
the governing Tennessee statutes. Further, a manufacturer may be denied a
Tennessee license, or have an existing license revoked or suspended if the
manufacturer modifies, terminates, or suspends a franchise agreement due to an
event not constituting good cause. Good cause includes material shortcomings in
the character, financial condition or business experience of the dealer. A
manufacturer's Tennessee license may also be revoked if the manufacturer
prevents or attempts to prevent the sale or transfer of the dealership by
unreasonably withholding consent to the transfer.
Alabama law prohibits manufacturers from terminating or refusing to
continue or renew a franchise agreement except for "good cause." "Good cause"
to discontinue a relationship may exist if, for example, a dealer violates a
material term of, or fails to perform its duties under, a franchise agreement.
In addition, a manufacturer is prohibited from interfering with the transfer of
a dealership unless the transfer is to a person who would not qualify for a
dealer's license under Alabama law. Finally, a manufacturer may not
unreasonably establish a new dealership within the market area of an existing
dealer. A manufacturer who violates Alabama law may be required to pay the
dealer for the damages incurred, as well as the costs of suing the manufacturer
for damages including attorneys fees.
Under Ohio law, a dealer must obtain manufacturer approval before it can
sell or transfer an interest in a dealership. The manufacturer may only
prohibit the sale or transfer, however, for "good cause" after considering,
among other things, the proposed new owner's business experience and financing.
Similarly, a manufacturer may terminate or refuse to continue or renew a
franchise agreement only for "good cause" considering, for example, the
dealership's sales, the dealer's investment in the business, and the dealer's
satisfaction of its warranty obligations. Finally, a manufacturer may not site
a new dealership in a relevant market area without either the consent of the
local dealers or by showing "good cause." Dealers may protest a manufacturer's
actions to the Ohio Motor Vehicle Dealers Board, and eventually the courts, if
there is no "good cause" for the transfer restriction or termination or siting
of a new dealership. If the manufacturer violates Ohio's automobile franchise
law, a dealer may be entitled to double its actual damages, as well as court
costs and attorneys fees, from a manufacturer.
South Carolina law forbids a manufacturer from imposing unreasonable
restrictions on a dealer's rights to transfer, sell, or renew a franchise
agreement unless the dealer is compensated. A manufacturer may not terminate or
refuse to renew a franchise agreement without due cause. Further, although a
dealer must obtain the manufacturer's consent to transfer a dealership, the
manufacturer may not unreasonably withhold its consent. Finally, manufacturers
are generally
54
prohibited from acting in bad faith or engaging in arbitrary or unconscionable
conduct. Manufacturers who violate South Carolina's law may be liable for
double the actual damages incurred by the dealer and/or punitive damages in
limited circumstances.
Competition
The retail automotive industry is highly competitive. Depending on the
geographic market, Sonic competes with both dealers offering the same brands
and product lines as Sonic and dealers offering other automakers' vehicles. We
also compete for vehicle sales with auto brokers and leasing companies. We
compete with small, local dealerships and with large multi-franchise auto
dealerships. Some of our competitors are larger and have greater financial and
marketing resources and are more widely known than us. Some of our competitors
also may utilize marketing techniques, such as the Internet or "no negotiation"
sales methods, not currently used by us.
We also compete with regional and national car rental companies, which
sell their used rental cars, and used automobile "superstores," such as
AutoNation and CarMax. The used vehicle superstores generally offer a greater
and more varied selection of vehicles than our dealerships. In addition, Ford
and GM have announced that they are entering into joint ventures to acquire
dealerships in various cities in the United States, and Saturn is seeking to
acquire its dealerships. In addition, other manufacturers may directly enter
the retail market in the future, which could have a material adverse effect on
us. As we seek to acquire dealerships in new markets, we may face significant
competition (including competition from other publicly-owned dealer groups) as
we strive to gain market share. See "Risk Factors -- High Competition in
Automobile Retailing Reduces Sonic's Profit Margins on Vehicle Sales."
We believe that the principal competitive factors in vehicle sales are the
marketing campaigns conducted by automakers, the ability of dealerships to
offer a wide selection of the most popular vehicles, the location of
dealerships and the quality of customer service. Other competitive factors
include customer preference for makes of automobiles, pricing (including
manufacturer rebates and other special offers) and warranties.
In addition to competition for vehicle sales, we also compete with other
auto dealers, service stores, auto parts retailers and independent mechanics in
providing parts and service. We believe that the principal competitive factors
in parts and service sales are price, the use of factory-approved replacement
parts, the familiarity with a dealer's makes and models and the quality of
customer service. A number of regional and national chains offer selected parts
and service at prices that may be lower than our prices.
In arranging or providing financing for our customers' vehicle purchases,
we compete with a broad range of financial institutions. We believe that the
principal competitive factors in providing financing are convenience, interest
rates and contract terms.
Our success depends, in part, on national and regional automobile-buying
trends, local and regional economic factors and other regional competitive
pressures. We sell our vehicles in the Atlanta, Charlotte, Chattanooga,
Columbus, Daytona Beach, Greenville/Spartanburg, Houston, Montgomery, Nashville
and Tampa/Clearwater markets. Conditions and competitive pressures affecting
these markets, such as price-cutting by dealers in these areas, or in any new
markets we enter, could adversely affect us, although the retail automobile
industry as a whole might not be affected. See "Risk Factors -- High Competition
in Automobile Retailing Reduces Sonic's Profit Margin on Vehicle Sales."
Governmental Regulations and Environmental Matters
A number of regulations affect Sonic's business of marketing, selling,
financing and servicing automobiles. Sonic also is subject to laws and
regulations relating to business corporations generally.
Under North Carolina, South Carolina, Tennessee, Florida, Georgia, Texas,
Ohio and Alabama law as well as the laws of other states into which we may
expand, we must obtain a license in order to establish, operate or relocate a
dealership or operate an automotive repair service. These laws also regulate
our conduct of business, including our advertising and sales practices. Other
states may have similar requirements.
Our operations are also subject to certain consumer protection laws known
as "Lemon Laws." These laws typically require a manufacturer or dealer to
replace a new vehicle or accept it for a full refund within one year after
initial purchase if the vehicle does not conform to the manufacturer's express
warranties and the dealer or manufacturer, after a reasonable number of
attempts, is unable to correct or repair the defect. Federal laws require
certain written disclosures to be provided on new vehicles, including mileage
and pricing information.
55
The imported automobiles purchased by us are subject to United States
customs duties and, in the ordinary course of our business, we may, from time
to time, be subject to claims for duties, penalties, liquidated damages, or
other charges. Currently, United States customs duties are generally assessed
at 2.5% of the customs value of the automobiles imported, as classified
pursuant to the Harmonized Tariff Schedule of the United States. See "Risk
Factors -- Imported Product Restrictions and Foreign Trade Risk May Impair
Sonic's Ability to Sell Foreign Vehicles Profitably."
Our financing activities with customers are subject to federal
truth-in-lending, consumer leasing and equal credit opportunity regulations as
well as state and local motor vehicle finance laws, installment finance laws,
usury laws and other installment sales laws. Some states regulate finance fees
that may be paid as a result of vehicle sales. Federal, state and local
environmental regulations, including regulations governing air and water
quality, the clean-up of contaminated property and the storage and disposal of
gasoline, oil and other materials, also apply to us and our dealership
properties.
We believe that we comply in all material respects with the laws affecting
our business. Possible penalties for violation of any of these laws include
revocation of our licenses and fines. In addition, many laws may give customers
a private cause of action.
As with automobile dealerships generally, and service parts and body shop
operations in particular, our business involves the use, storage, handling and
contracting for recycling or disposal of hazardous or toxic substances or
wastes and other environmentally sensitive materials. Our business also
involves the past and current operation and/or removal of aboveground and
underground storage tanks containing such substances or wastes. Accordingly, we
are subject to regulation by federal, state and local authorities which
establish health and environmental quality standards, provide for liability
related to those standards, and in certain circumstances provide penalties for
violations of those standards. We are also subject to laws, ordinances and
regulations governing remediation of contamination at facilities we operate or
to which we send hazardous or toxic substances or wastes for treatment,
recycling or disposal.
We believe that we do not have any material environmental liabilities and
that compliance with environmental laws and regulations will not, individually
or in the aggregate, have a material adverse effect on our results of
operations or financial condition. However, soil and groundwater contamination
is known to exist at certain properties used by us. Further, environmental laws
and regulations are complex and subject to frequent change. In addition, in
connection with our acquisitions, it is possible that we will assume or become
subject to new or unforeseen environmental costs or liabilities, some of which
may be material. We cannot assure you that compliance with current or amended,
or new or more stringent, laws or regulations, stricter interpretations of
existing laws or the future discovery of environmental conditions will not
require additional expenditures by Sonic, or that such expenditures will not be
material. See "Risk Factors -- Governmental Regulation and Environmental
Regulation Compliance Costs May Adversely Affect Sonic's Profitability."
Facilities
Sonic's principal executive offices are located at 5401 East Independence
Boulevard, Charlotte, North Carolina 28212, and our telephone number is (704)
532-3320. These executive offices are located on the premises owned by Town &
Country Ford. The following table identifies each of the properties to be
utilized by Sonic's operations and their respective locations, after giving
effect to Sonic's pending acquisitions:
Atlanta Market
o Dyer & Dyer Volvo, 5260 Peachtree Industrial Blvd., Atlanta, GA
o Global Imports, 500 & 550 Interstate North Parkway, N.W., Atlanta, GA (1)
Birmingham Market
o Tom Williams Buick, 401 S. 20th Street, Birmingham, AL (1)
o Tom Williams Cadillac, 325 S. 20th Street, Birmingham, AL (1)
o Tom Williams Imports, 2200 3rd Avenue South, Birmingham, AL (1)
o Tom Williams Lexus, 300 S. 22nd Street, Birmingham, AL (1)
Charlotte Market
o Fitzgerald Chevrolet, 3112 W. Roosevelt Blvd., Monroe, NC & 6201 E.
Independence Blvd., Charlotte, NC (1)
o Fort Mill Chrysler-Plymouth-Dodge, 3310 Hwy. 51, Fort Mill, SC
o Fort Mill Ford, 788 Gold Hill Rd., Fort Mill, SC
o Frontier Oldsmobile-Cadillac, 2501 Roosevelt Blvd., Monroe, NC
o Infiniti of Charlotte, 9103 E. Independence Ave., Charlotte, NC
o Lake Norman Chrysler-Plymouth-Jeep, Chartwell Center Dr., Cornelius, NC
o Lake Norman Dodge, I-77 & Torrence Chapel Rd., Cornelius, NC
o Town & Country Chrysler-Plymouth-Jeep of Rock Hill, 803 North Anderson Rd.,
Rock Hill, SC
56
o Town & Country Ford, 5401 East Independence Blvd., Charlotte, NC
o Town & Country Toyota, 9101 South Blvd., Charlotte, NC
Chattanooga Market
o BMW/Volvo of Chattanooga, 5949 Brainard Rd., Chattanooga, TN
o Cleveland Chrysler-Plymouth-Jeep, 717 South Lee Hwy., Cleveland, TN
o Cleveland Village Imports, 2490 & 2492 South Lee Hwy., Cleveland, TN (2)
o Dodge of Chattanooga, 402 West Martin Luther King Blvd., Chattanooga, TN
o Economy Honda, Hwy. 153 at Shallowford Rd., Chattanooga, TN (1)(2)
o Infiniti of Chattanooga, 5915 Brainard Rd., Chattanooga, TN
o KIA/VW of Chattanooga, 6015 International Dr., Chattanooga, TN
o Superior-Oldsmobile-Cadillac-GMC, 875 Keith St., N.W., Cleveland, TN
o Town & Country Ford of Cleveland, 2496 South Lee Hwy., Cleveland, TN
Columbia Market
o Imports of Florence, 2199 David McLeod Blvd., Florence, SC (1)
o Newsome Automotive, 2199 David McLeod Blvd., Florence, SC (1)
o Newsome Chevrolet World, 4013 W. Beltline Blvd. & 6217 Monticello Rd.,
Columbia, SC (1)
Columbus Market
o Hatfield Hyundai & Hatfield Isuzu & Hatfield Subaru, 1400 Automall Dr.,
Columbus, OH
o Hatfield KIA & Trader Bud's Westside Chrysler-Plymouth, 3700 West Broad St.,
Columbus, OH
o Hatfield Lincoln Mercury, 1495 Automall Dr., Columbus, OH
o Toyota West, 1500 Automall Dr., Columbus, OH
o Trader Bud's Westside Dodge, 4000 West Broad St., Columbus, OH
o Volkswagen West & Jeep Eagle West, 1455 Automall Dr., Columbus, OH
Daytona Beach Market
o Bondesen Chevrolet Oldsmobile Cadillac, 2800 South Highway 17-92, DeLand, FL
(1)
o Halifax Ford-Mercury, 1307 N. Dixie Hwy., New Smyrna Beach, FL
o Higginbotham Automobiles, 1720 Mason Ave., Daytona Beach, FL
o Higginbotham Chevy-Olds, 1919 N. Dixie Hwy., New Smyrna Beach, FL
o HMC Finance, 3741 S. Nova Rd., Port Orange, FL
o Sunrise Auto World, 241 Ridgewood Ave., Holly Hill, FL
Greenville/Spartanburg Market
o Century BMW, 2752 Laurens Rd., Greenville, SC
o Heritage Lincoln Mercury, 2424 Laurens Rd., Greenville, SC
Houston Market
o Casa Ford, 4701 I-10 East, Baytown, TX
o Lone Star Ford, 8477 North Freeway, Houston, TX
o Ron Craft Chevrolet-Cadillac-Oldsmobile-Geo, 3401 N. Main, Baytown, TX
o Ron Craft Chrysler Plymouth Jeep, 5221 I-10 East, Baytown, TX
o Sam White Motor City, 12230 Southwest Freeway, Stafford, TX (1)(3)
Montgomery Market
o Capitol Chevrolet, 711 Eastern Blvd., Montgomery, AL
o Capitol Hyundai & Capitol Mitsubishi, 190 Eastern Blvd., Montgomery, AL
o Capitol KIA, 845 Eastern Blvd., Montgomery, AL
o Lloyd Mercedes-Nissan, 120 E. 23rd St., Panama City, FL (1)
o Lloyd Pontiac-Cadillac-GMC, 100 E. 23rd St., Panama City, FL (1)
Nashville Market
o BMW/VW of Nashville, 630 Murfreesboro Pike, Nashville, TN
o Rally Mitsubishi, 1620 West End Ave., Nashville, TN (1)
Tampa/Clearwater Market
o Clearwater Collision Center, 2300 Drew Street, Clearwater, FL
o Clearwater Mitsubishi, 21699 US Hwy 19N, Clearwater, FL
o Clearwater Toyota, 21799 US Hwy 19N, Clearwater, FL
o Freedom Ford, 24825 US Hwy. 19 North, Clearwater & 3925 Tampa Rd., Oldsmar,
FL
o Tampa Volvo, 6008 N. Dale Mabry, Tampa, FL
57
- ---------
(1) Pending acquisition.
(2) We have not obtained the consent of Honda to the acquisition of the Economy
Honda dealership. Honda informed us that we must sell our Cleveland
Village Honda dealership before it will consent to our acquisition of
Economy Honda. See "Risk Factors -- Honda Has Not Consented to the Economy
Honda Acquisition."
(3) This acquisition is subject to approval by a bankruptcy court presiding
over the dealership's pending bankruptcy proceeding.
Our dealerships are generally located along major U.S. or interstate
highways. One of the principal factors considered by Sonic in evaluating an
acquisition candidate is its location. We prefer to acquire dealerships located
along major thoroughfares, primarily interstate highways with ease of access,
which can be easily visited by prospective customers.
We lease all of the properties utilized by our dealership operations. We
believe that our facilities are adequate for our current needs.
On July 9, 1998, Sonic entered into a strategic alliance agreement with
MMRT. MMRT owns or will own certain real estate associated with various
automobile dealerships, automotive aftermarket retailers and other automotive
related businesses and leases such properties to the business operators located
thereon. Mr. Smith, Sonic's Chairman and Chief Executive Officer, serves as the
chairman of MMRT's board of trustees. See "Certain Transactions -- Transactions
with MMRT."
Under the terms of our franchise agreements, Sonic must maintain an
appropriate appearance and design of its facilities and is restricted in its
ability to relocate its dealerships. See " -- Relationships with
Manufacturers."
Employees
As of September 30, 1998, Sonic employed approximately 3,040 people, of
whom approximately 430 were employed in managerial positions, 980 were employed
in non-managerial sales positions, 1,170 were employed in non-managerial parts
and service positions and 460 were employed in administrative support
positions.
We believe that many dealerships in the retail automobile industry have
difficulty in attracting and retaining qualified personnel for a number of
reasons, including the historical inability of dealerships to provide employees
with an equity interest in the profitability of the dealerships. We provide
certain executive officers, managers and other employees with stock options and
all employees with a stock purchase plan and we believe this type of equity
incentive is attractive to our existing and prospective employees. See "Risk
Factors -- The Loss of Key Personnel and the Limited Management and Personnel
Resources of Sonic Could Adversely Affect Sonic's Operations and Growth."
We believe that our relationship with our employees is good. None of our
employees is represented by a labor union. Because of our dependence on the
Manufacturers, however, we may be affected by labor strikes, work slowdowns and
walkouts at the Manufacturer's manufacturing facilities. See "Risk Factors --
Automobile Manufacturers Exercise Significant Control Over Sonic's Operations
and Sonic Is Dependent on Them to Operate its Business."
Legal Proceedings and Insurance
From time to time, Sonic is named in claims involving the manufacture of
automobiles, contractual disputes and other matters arising in the ordinary
course of our business. Currently, no legal proceedings are pending against or
involve Sonic that, in the opinion of management, could reasonably be expected
to have a material adverse effect on our business, financial condition or
results of operations.
Because of their vehicle inventory and nature of business, automobile
retail dealerships generally require significant levels of insurance covering a
broad variety of risks. Sonic's insurance includes an umbrella policy as well
as insurance on our real property, comprehensive coverage for our vehicle
inventory, general liability insurance, employee dishonesty coverage and errors
and omissions insurance in connection with our vehicle sales and financing
activities.
58
MANAGEMENT
Executive Officers and Directors; Key Personnel
Sonic's executive officers, directors and key personnel, and their ages as
of the date of this prospectus, are as follows:
Name Age Position(s) with Sonic
- ------------------------------ ----- ---------------------------------------------------------------
O. Bruton Smith ......... 71 Chairman, Chief Executive Officer and Director*
Bryan Scott Smith ....... 31 President, Chief Operating Officer and Director*
Dennis D. Higginbotham .. 47 President of Retail Operations and Director*
Theodore M. Wright ...... 36 Chief Financial Officer, Vice President -- Finance, Treasurer,
Secretary and Director*
William R. Brooks ....... 48 Director
William P. Benton ....... 74 Director
William I. Belk ......... 49 Director
Jeffrey C. Rachor ....... 36 Vice President of Retail Operations
- ---------
* Executive Officer
O. Bruton Smith has been the Chairman, Chief Executive Officer and a
director of Sonic since its organization in 1997, and he currently is a
director and executive officer of each of Sonic's dealerships. Mr. Smith has
worked in the retail automobile industry since 1966. Mr. Smith's initial term
as a director of Sonic will expire at the 2000 annual stockholders meeting. Mr.
Smith is also the chairman and chief executive officer, a director and
controlling shareholder of Speedway Motorsports, Inc. ("SMI"). SMI is a public
company traded on the NYSE. Among other things, it owns and operates the
following NASCAR racetracks: Atlanta Motor Speedway, Bristol Motor Speedway,
Charlotte Motor Speedway, Las Vegas Motor Speedway, Sears Point Raceway and
Texas Motor Speedway. He is also the executive officer and a director of each
of SMI's operating subsidiaries. Additionally, Mr. Smith serves as chairman of
the board of trustees of MMRT. Under his employment agreement with Sonic, Mr.
Smith is required to devote approximately 50% of his business time to Sonic's
business.
Bryan Scott Smith has been the President and Chief Operating Officer of
Sonic since April 1997 and a Sonic director since its organization in 1997. Mr.
Smith also serves as a director and executive officer of many of Sonic's
subsidiaries. Mr. Smith, who is the son of Bruton Smith, has been an executive
officer of Town and Country Ford since 1993, and was a minority owner of both
Town and Country Ford and Fort Mill Ford before Sonic's acquisition of those
dealerships in 1997. Mr. Smith became the General Manager of Town & Country
Ford in November 1992 where he remained until his appointment to President and
Chief Operating Officer of Sonic in April 1997. Mr. Smith's term as a director
of Sonic will expire at the 2001 annual stockholders meeting.
Dennis D. Higginbotham has been the President of Retail Operations of
Sonic since September 1998 and a Sonic director since his appointment in
December 1998. Before joining Sonic, Mr. Higginbotham owned and was the
president of, Higginbotham Chevrolet-Oldsmobile (from 1976), Halifax
Ford-Mercury (from 1987) and Higginbotham Automobiles (from 1995), each of
which Sonic acquired in September 1998. Mr. Higginbotham has worked in the
automobile industry since 1965. Mr. Higginbotham's term as a Sonic director
will expire at the 1999 annual stockholders meeting.
Theodore M. Wright has been the Chief Financial Officer, Vice
President-Finance, Treasurer and Secretary of Sonic since April 1997, and a
Sonic director since June 1997. Mr. Wright also serves as a director and
executive officer of many of Sonic's subsidiaries. Before joining Sonic, Mr.
Wright was a Senior Manager and in charge of the Columbia, South Carolina
office of Deloitte & Touche LLP. Before joining the Columbia office, Mr. Wright
was a Senior Manager in Deloitte & Touche LLP's National Office Accounting
Research and SEC Services Departments from 1994, to 1995. From 1992 to 1994,
Mr. Wright was an audit manager with Deloitte & Touche LLP. Mr. Wright's term
as a Sonic director will expire at the 1999 annual stockholders meeting.
William R. Brooks has been a director of Sonic since its formation. Mr.
Brooks also served as Sonic's initial Treasurer, Vice President and Secretary
from its organization in February 1997 to April 1997 when Mr. Wright was
appointed to those positions. Since December 1994, Mr. Brooks has been the vice
president, treasurer, chief financial officer and a director of SMI. Mr. Brooks
also serves as an executive officer and a director for various operating
subsidiaries of SMI. Before the formation of SMI in December 1994, Mr. Brooks
was the vice president of the Charlotte Motor Speedway and a vice president and
a director of Atlanta Motor Speedway. Mr. Brooks joined Sonic Financial
Corporation, an entity controlled by Bruton Smith, from Price Waterhouse in
1983. At Sonic Financial Corporation, he was promoted from manager to
controller in 1985 and again to chief financial officer in 1989. Mr. Brooks'
term as a Sonic director will expire at the 2000 annual stockholders meeting.
59
William P. Benton became a director of Sonic in December 1997. Since
January 1997, Mr. Benton has been the executive director of Ogilvy & Mather, a
world-wide advertising agency. Mr. Benton has been a director of SMI since
February 1995 and a director of Allied Holdings, Inc. since February 1998. He
is also a consultant to the chairman and chief executive officer of TI Group.
Before his appointment at Ogilvy & Mather, Mr. Benton served as vice chairman
of Wells, Rich, Greene/BDDP, Inc., an advertising agency with offices in New
York and Detroit. Mr. Benton retired from Ford Motor Company as its vice
president of marketing worldwide in 1984 after a 37-year career with that
company. Mr. Benton's term as a Sonic director will expire at the 2001 annual
stockholders meeting.
William I. Belk became a director of Sonic in March 1998. Mr. Belk is
currently the vice president and a director for Monroe Hardware Company, a
director for Piedmont Ventures, Inc., and treasurer and a director for Old Well
Water, Inc. For more than the previous five years, Mr. Belk previously held the
position of chairman and director for certain Belk stores (a privately held
retail department store chain). Mr. Belk's term as a Sonic director will expire
at the 2001 annual stockholders meeting.
Jeffrey C. Rachor is Sonic's Vice President of Retail Operations and has
held this position since September 1998. He originally joined Sonic as its
Regional Vice President -- Mid-South region upon Sonic's 1997 acquisition of
certain dealerships in Chattanooga Tennessee. Mr. Rachor has over 13 years
experience in automobile retailing and was the chief operating officer of the
Chattanooga dealerships from 1989 until their acquisition by Sonic in 1997.
During this period, Mr. Rachor has also served at various times as the general
manager of Toyota, Saturn and Chrysler-Plymouth-Jeep-Eagle dealerships. Before
then, Mr. Rachor was an assistant regional manager with American Suzuki Motor
Corporation from 1987 to 1989 and a metro sales manager and a district sales
manager with GM's Buick Motor Division from 1983 to 1987.
Sonic's Board of Directors is divided into three classes, each of which,
after a transitional period, will serve for three years, with one class being
elected at Sonic's annual stockholders meeting each year. Messrs. Bruton Smith
and Brooks belong to the class of directors whose term expires in 2000, Messrs.
Wright and Higginbotham belong to the class whose term expires in 1999, and
Messrs. Scott Smith, Benton and Belk belong to the class whose term expires in
2001. The executive officers are elected annually by, and serve at the
discretion of, Sonic's Board of Directors.
Committees of the Board
There are two standing committees of the Sonic Board of Directors, the
Audit Committee and the Compensation Committee. The Audit Committee was
appointed on March 20, 1998 and consists of Messrs. Benton, Belk and Brooks.
The Compensation Committee was appointed on October 3, 1998 and consists of
Messrs. Bruton Smith, Benton and Belk. Set forth below is a summary of the
principal functions of each committee. There was one meeting held by the Audit
Committee and one meeting held by the Compensation Committee in 1998.
Audit Committee. The Audit Committee recommends the appointment of Sonic's
independent auditors, determines the scope of the annual audit to be made,
reviews the conclusions of the auditors and reports the findings and
recommendations thereof to the Board, reviews Sonic's auditors, the adequacy of
Sonic's system of internal control and procedures and the role of management in
connection therewith, reviews transactions between Sonic and its officers,
directors and principal stockholders, and performs such other functions and
exercises such other powers as the Board from time to time may determine.
Compensation Committee. The Compensation Committee administers certain
compensation and employee benefit plans of Sonic, annually reviews and
determines executive officer compensation, including annual salaries, bonus
performance goals, bonus plan allocations, stock option grants and other
benefits, direct and indirect, of all executive officers and other senior
officers of Sonic. The Compensation Committee administers Sonic's 1997 Stock
Option Plan, Employee Stock Purchase Plan and Nonqualified Employee Stock
Purchase Plan, makes recommendations for individual stock option grants to the
full Board of Directors under the plans it administers, and periodically
reviews Sonic's executive compensation programs and takes action to modify
programs that yield payments or benefits not closely related to Sonic or
executive performance. The policy of the Compensation Committee's program for
executive officers is to link pay to business strategy and performance to
attract, retain and reward key executives while also providing performance
incentives and awarding equity-based compensation to align the long-term
interests of executive officers with those of Sonic's stockholders. The
Compensation Committee's objective is to offer salaries and incentive
performance pay opportunities that are competitive in the marketplace.
Sonic currently has no standing nominating committee.
During 1998, there were three meetings of the Board of Directors of Sonic,
with each director attending each of the meetings.
60
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, immediately before the offering and
immediately after the offering, the ownership of Sonic's voting stock,
including optioned shares, taking into account Sonic's January 25, 1999 common
stock split, by (i) each stockholder who is known to Sonic to own beneficially
five percent or more of each class of our outstanding voting stock, (ii) each
director of Sonic, (iii) each executive officer of Sonic (including the Chief
Executive Officer), (iv) all directors and executive officers of Sonic as a
group, and (v) each selling stockholder.
Before Offering
-------------------------------------------
Number of Number of Number of
Shares of Shares of Number of Shares
Class A Class B Shares of of Class A
Common Common Preferred Common
Stock Stock Stock Stock
Beneficial Owner Owned Owned Owned Offered
- ------------------------------ ------------------ ------------ ----------- ---------------
O. Bruton Smith(2)(3) ....... 25,400 10,952,500 -- --
Bryan Scott Smith(2) ........ 66,584(4) 956,250 -- --
Dennis D.
Higginbotham(5) ........... 970,588 -- -- 97,058(5)
Theodore M. Wright .......... 25,458(6) -- -- --
William R. Brooks ........... 20,000(7) -- -- --
William P. Benton ........... 20,000(7) -- -- --
William I. Belk ............. 5,000 -- -- --
Sonic Financial
Corporation(2) ............ -- 8,881,250 -- --
Citicorp(8)(9) .............. 1,000,000 -- -- --
Citibank, N.A.(9)(10) ....... 1,000,000 -- -- --
Wellington Management
Company,
LLP(11)(12) ............... 994,000 -- -- --
Wellington Trust
Company,
N.A.(12)(13) .............. 616,600 -- -- --
Scott Fink(14) .............. -- -- 1,980 84,700
Michael S. Cohen(15) ........ -- -- 1,980 84,700
Dan E. Hatfield(16) ......... -- -- 3,750 147,917
Bud C. Hatfield(16) ......... -- -- 8,971 353,856
Frank McGough(17) ........... -- -- 4,194.3 --
Nelson E. Bowers, II(18)..... 158,626 -- -- 158,626
William S. Egan ............. 115,667(19) 491,250 -- 80,000
Dan E. Hatfield, as
Trustee of the Bud C.
Hatfield, Sr. Special
Irrevocable Trust(16) ..... -- -- 1,304 51,436
All directors and
executive officers as a
group (7 persons) ......... 1,133,030 11,908,750 -- 97,058
After Offering
---------------------------------------------------------------------------
Number of Number of
Shares of Shares of Number of
Class A Percentage of Class B Shares of Percentage of
Common Class A Common Preferred all Outstanding
Stock Common Stock Stock Voting
Beneficial Owner Owned Stock Owned Owned Stock (1)
- ------------------------------ ----------------- --------------- ------------ ----------- ----------------
O. Bruton Smith(2)(3) ....... 25,400 * 10,952,500 -- 34.0%
Bryan Scott Smith(2) ........ 66,584(4) * 956,250 -- 3.2
Dennis D.
Higginbotham(5) ........... 873,530 4.4% -- -- 2.7
Theodore M. Wright .......... 25,458(6) * -- -- *
William R. Brooks ........... 20,000(7) * -- -- *
William P. Benton ........... 20,000(7) * -- -- *
William I. Belk ............. 5,000 * -- -- *
Sonic Financial
Corporation(2) ............ -- * 8,881,250 -- 27.5
Citicorp(8)(9) .............. 1,000,000 5.0 -- -- 3.1
Citibank, N.A.(9)(10) ....... 1,000,000 5.0 -- -- 3.1
Wellington Management
Company,
LLP(11)(12) ............... 994,000 5.0 -- -- 3.1
Wellington Trust
Company,
N.A.(12)(13) .............. 616,600 3.1 -- -- 2.0
Scott Fink(14) .............. -- -- -- 594 *
Michael S. Cohen(15) ........ -- -- -- 594 *
Dan E. Hatfield(16) ......... -- -- -- 1,076 *
Bud C. Hatfield(16) ......... -- -- -- 2,578 *
Frank McGough(17) ........... -- -- -- 4,194.3 *
Nelson E. Bowers, II(18)..... -- -- -- -- --
William S. Egan ............. 35,667(19) * 491,250 -- 1.6
Dan E. Hatfield, as
Trustee of the Bud C.
Hatfield, Sr. Special
Irrevocable Trust(16) ..... -- -- -- 374 *
All directors and
executive officers as a
group (7 persons) ......... 1,035,972 5.2% 11,908,750 -- 40.0
- ---------
* Less than one percent
(1) The percentage of total voting power after the offering will be as follows:
O. Bruton Smith, 75.8%, Sonic Financial Corporation, 61.5%, Bryan Scott
Smith, 6.7%, and less than 1% for all other stockholders shown.
(2) The address of such person or group is 5401 East Independence Boulevard,
Charlotte, North Carolina 28212.
(3) The Schedule 13D filed by the beneficial owner indicates that the shares of
common stock shown as owned by such person or group include all of the
shares shown as owned by Sonic Financial Corporation ("Sonic Financial")
elsewhere in the table. Bruton Smith owns the substantial majority Sonic
Financial's outstanding capital stock.
(4) Represents one-third of 199,750 shares that underlie options to purchase
shares of Class A common stock granted by Sonic pursuant to Sonic's 1997
Stock Option Plan, which became exercisable in three equal installments
beginning in October 1998.
(5) The address of such person is 104 South Riverside Dr., New Smyrna Beach,
Florida 32168. Mr. Higginbotham received his shares of Class A common
stock in connection with Sonic's acquisition of the Higginbotham
Automotive Group in September 1998. An additional 145,588 shares of Mr.
Higginbotham's shares of Class A common stock are subject to the
Underwriters' over-allotment option.
(6) Represents one-third of 76,376 shares that underlie options to purchase
shares of Class A common stock granted by Sonic pursuant to Sonic's 1997
Stock Option Plan, which became exercisable in three equal installments
beginning in October 1998.
(footnotes continued on following page)
61
(7) Represents 20,000 shares that underlie options to purchase shares of Class
A common stock granted by Sonic pursuant to the Directors Plan, which
became exercisable in December 1998 subject to shareholder approval of the
Director's Plan.
(8) The Schedule 13D filed by the beneficial owner indicates that the shares of
common stock shown as owned by such entity or group include all the shares
shown as owned by Citibank, N.A. elsewhere in the table. Citicorp owns all
of the outstanding capital stock of Citibank, N.A.
(9) The address of such entity is 399 Park Avenue, New York, New York 10043.
(10) The Schedule 13D filed by the beneficial owner indicates that Citibank,
N.A. has sole voting power as to 144,000 shares of the 1,000,000 shares
shown with no voting power as to the remainder and has shared dispositive
power over all 1,000,000 shares.
(11) The Schedule 13D filed by the beneficial owner indicates that Wellington
Management Company has shared voting power as to 447,400 shares of the
994,000 shares shown with no voting power as to the remainder and has
shared dispositive power over all 994,000 shares.
(12) The address of such entity is 75 State Street, Boston, Massachusetts
02109.
(13) The Schedule 13D filed by the beneficial owner indicates that Wellington
Trust Company, N.A. has shared voting power as to 169,200 shares of the
616,600 shares shown with no voting power as to the remainder and has
shared dispositive power over all 616,600 shares.
(14) The address of such person is 3030 Turtle Brooke, Clearwater, Florida
33761.
(15) The address of such person is 49 Rolling Hill Lane, Old Westbury, New York
11568.
(16) The address of such person is 1500 Automall Drive, Columbus, Ohio 43228.
(17) The address of such person is 711 Eastern Blvd., Montgomery, Alabama
36117.
(18) Represents 158,626 shares that underlie options to purchase shares of
Class A common stock granted by Sonic pursuant to Sonic's 1997 Stock
Option Plan, which will be exercisable at the time of the offering under
an agreement between Sonic and Mr. Bowers.
(19) Includes 4,667 shares underlying currently exercisable options granted by
Sonic under its 1997 Stock Option Plan. An additional 31,333 shares of
Class A common stock underlie options that are presently unexercisable.
62
CERTAIN TRANSACTIONS
Registration Rights Agreement
When Sonic acquired Town & Country Ford, Lone Star Ford, Fort Mill Ford,
Town & Country Toyota and Frontier Oldsmobile-Cadillac in 1997, Sonic signed a
Registration Rights Agreement dated as of June 30, 1997 with Sonic Financial
Corporation ("SFC"), Bruton Smith, Scott Smith and William S. Egan
(collectively, the "Class B Registration Rights Holders"). SFC currently owns
8,881,250 shares of Class B common stock; Bruton Smith, 2,071,250 shares; Scott
Smith, 956,250 shares; and Egan Group, LLC, an assignee of Mr. Egan (the "Egan
Group"), 491,250 shares, all of which are covered by the Registration Rights
Agreement. The Egan Group also owns 100,000 shares of Class A common stock to
which the Registration Rights Agreement applies. If, among other things
provided in Sonic's charter, offers and sales of shares Class B common stock
are registered with the Commission, then such shares will automatically convert
into a like number of shares of Class A common stock.
The Class B Registration Rights Holders have certain limited piggyback
registration rights under the Registration Rights Agreement. These rights
permit them to have their shares of Sonic's common stock included in any Sonic
registration statement registering Class A common stock, except for
registrations on Form S-4, relating to exchange offers and certain other
transactions, and Form S-8, relating to employee stock compensation plans. The
Registration Rights Agreement expires in November 2007. SFC is controlled by
Bruton Smith. The Class B Registration Rights Holders have agreed to waive
their registration rights in this offering.
Advance From Bruton Smith
When Sonic acquired Fort Mill Chrysler-Plymouth-Dodge in mid-1997, Bruton
Smith advanced approximately $3.5 million to Sonic to pay a portion of the cash
consideration for this acquisition at closing. This loan bore interest at the
minimum statutory rate of 3.83% per annum. Sonic repaid in full the principal
of and interest on this loan from the proceeds of its November 1997 initial
public offering.
The Smith Guarantees, Pledges and Subordinated Loan
Under the NationsBank Facility, Bruton Smith guaranteed the obligations of
Sonic and secured his guarantee with a pledge of Speedway Motorsports common
stock owned directly by him. In February 1998, Sonic repaid in full the amounts
owed under the NationsBank Facility, and Mr. Smith's guarantee and pledge were
released.
Mr. Smith initially guaranteed the obligations of Sonic under the
Revolving Facility. Such obligations were further secured with the Revolving
Pledge of approximately $50.0 million in Speedway Motorsports stock owned by
SFC, a corporation controlled by Mr. Smith.
When the Revolving Facility's borrowing limit was increased to $75.0
million in December 1997, Mr. Smith's personal guarantee of Sonic's obligations
under the Revolving Facility was released, although the Revolving Pledge
remained in place. In August 1998, the Revolving Pledge was released by Ford
Motor Credit.
In December 1997, Mr. Smith was also required by Ford Motor Credit to lend
the $5.5 million Subordinated Smith Loan to Sonic to increase Sonic's
capitalization. Ford Motor Credit required the Subordinated Smith Loan as a
condition to increasing the Revolving Facility borrowing limit because the net
offering proceeds from Sonic's November 1997 initial public offering were
significantly less than expected by Sonic and Ford Motor Credit. The
Subordinated Smith Loan bears interest at NationsBank's announced prime rate
plus 0.5% and matures on November 30, 2000. All amounts owed by Sonic to Mr.
Smith under the Subordinated Smith Loan are to be paid after all amounts owed
by Sonic under the Ford Credit Facilities and Sonic's senior subordinated notes
are paid. For further discussion of these lending arrangements, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Transactions with MMRT
In 1998, Sonic entered into the Alliance Agreement with MMRT. Bruton Smith
serves as the chairman of MMRT's board of trustees. Under the Alliance
Agreement, Sonic agreed to refer to MMRT real estate acquisition opportunities
arising with Sonic's dealership acquisitions. In exchange, MMRT agreed to refer
to Sonic dealership acquisition opportunities and to provide certain real
estate development and maintenance services to Sonic. MMRT will also arrange
for property inspections and environmental reports for prospective dealership
properties at Sonic's cost.
63
In addition, the Alliance Agreement provides for a form of lease to be
used when MMRT leases to Sonic real estate MMRT acquires in the future. Under
terms substantially similar to those of this form lease, Sonic leases or will
lease certain properties from MMR Holdings, LLC ("MMR Holdings"), which is a
limited liability company currently owned by Bruton Smith and SFC that Sonic
expects to be acquired by MMRT. See " -- Certain Dealership Leases."
Sonic entered into the Alliance Agreement with MMRT rather than with an
unaffiliated third party for purposes consistent with Sonic's acquisition
strategy. Sonic is familiar with MMRT's growth and operating strategy and
believes that MMRT is well-positioned to identify and refer attractive
dealership acquisition opportunities for Sonic in the course of MMRT's
acquisitions of real property. In addition, Sonic's relationship with MMRT will
assist Sonic in negotiating transactions with sellers of dealerships that Sonic
has identified for acquisition. Many dealership sellers who own their
dealership's real property wish to sell the dealership real property as well as
dealership businesses. Inclusion of real estate in a transaction may allow
Sonic to negotiate an acquisition on more favorable terms. Finally, MMRT will
provide development assistance to Sonic which will enable Sonic to avoid
additional costs associated with hiring employees with real estate development
expertise. For these reasons, Sonic feels that MMRT's growth and operating
strategies are closely-aligned with Sonic's dealership acquisition strategy and
that the Alliance Agreement will provide significant future benefits to Sonic.
For acquisitions identified by Sonic, the Alliance Agreement is intended
to operate in two different contexts, depending on whether the dealership
seller owns the dealership real property or leases the dealership real property
from an unaffiliated third party. For acquisitions where the dealership seller
owns the dealership real property, Sonic will negotiate acquisition of the real
property from the seller on an arms'-length basis and will assign its
negotiated purchase rights to MMRT. MMRT will then acquire the real property
from the seller. Sonic and MMRT will subsequently enter into a lease agreement
regarding the dealership real property using the lease form attached to the
Alliance Agreement to satisfy all non-economic terms of the lease agreement.
The economic terms of the lease will be negotiated between Sonic and MMRT and
will depend on several factors, including:
o the projected earnings capacity of the dealership,
o the quality, age and condition of the dealership structure(s),
o the location of the dealership property, and
o the rent paid for comparable commercial properties.
As required by Sonic's charter, the terms of any lease agreement with MMRT
involving total payments of more than $500,000 will be subject to the approval
of Sonic's Board of Directors and of Sonic's independent directors to ensure
that such terms are no less favorable to Sonic than would be available to Sonic
in a transaction with an unrelated third party. When necessary, Sonic will also
obtain independent appraisals to determine the fairness of lease terms to
Sonic.
For acquisitions where the dealership real property is owned by an
unaffiliated third party and is leased to the dealership seller, MMRT will
negotiate with the unaffiliated third party to acquire the dealership real
property. If MMRT is successful in acquiring the dealership real property and
Sonic completes its acquisition of the dealership business, then Sonic and MMRT
will enter into a lease agreement regarding the dealership real property using
the Alliance Agreement's lease form and will determine the economic terms of
the lease according to the principles described in the paragraph above.
Sonic has sold to MMR Holdings the Town and Country Toyota real estate for
approximately $5.7 million and the Fort Mill Ford real estate for approximately
$4.6 million. The sales price for each of these parcels of real property was
determined in negotiations between Sonic and MMRT based on the projected
earnings capacity of the dealership, from which a monthly lease payment was
calculated. Using this rent calculation, Sonic and MMRT agreed to a
capitalization rate for the lease payments in order to determine a purchase
price for the properties themselves. This capitalization rate was based on
several factors, including:
o the quality, age and condition of the dealership structure(s),
o the location of the dealership property,
o the value of the properties for alternative uses,
o the availability of similar properties in the area, and
o recent sales prices for comparable commercial properties in the area.
64
An additional factor in determining Sonic's sales price for each of the
properties were independent appraisals obtained by Sonic for the Town and
Country Toyota property in December 1997 and Fort Mill Ford property in
February 1996. These appraisals, after giving effect to the passage of time,
indicate that the sales price payable to Sonic by MMRT for each of the
properties exceeds the appraised fair value of such properties determined in
the independent appraisals.
Bruton Smith determined the sales price for each of these two properties,
and such determination was approved by Sonic's Board of Directors and Sonic's
independent directors. In giving their approval for these sales, Sonic's
directors evaluated the earning capacities of the dealerships and the
capitalization rates for the related leases through an analysis of the factors
stated above as well as the previously mentioned independent appraisals.
Certain Dealership Leases
Certain properties leased by Sonic's dealerships are, or since the
beginning of the last fiscal year were, owned by Sonic's officers or directors
or their affiliates. These leases contain terms comparable to, or more
favorable to Sonic than, terms that would be obtained from unaffiliated third
parties. Many of these properties as well as others are now owned or are under
contract to be acquired by MMR Holdings, which Sonic expects will become a
subsidiary of MMRT.
Sonic leases or will lease 36 properties for 27 of its dealerships,
described in the following table, from MMR Holdings. Sonic's directors have
approved these "triple net leases," which require Sonic to pay all costs of
operating the properties, as well as all taxes, utilities, insurance, repairs,
maintenance and other property related expenses. These leases generally provide
Sonic with options to renew the lease for two additional five year terms after
the expiration of the initial lease term. The rental rates indicated below
reflect minimum or "base" annual rents payable by Sonic in the first year of
the applicable leases. Such rental rates generally are subject to increases
either at renewal or every five years based on factors such as increases in the
consumer price index or an evaluation of fair market rents.
Initial Initial Lease
Property Location Base Rent Term Expiration
- --------------------------------------------------------- ---------------------- ---------------------- ----------------
Higginbotham Acura-Mercedes ........................... Daytona Beach, FL $ 221,288 2008
Halifax Ford-Mercury .................................. New Smyrna Beach, FL 536,675(1) 2008
Halifax Ford Used Cars ................................ Edgewater, FL 72,875 2008
Higginbotham Chevy-Olds ............................... New Smyrna Beach, FL 775,131(2) 2009
Infiniti of Charlotte ................................. Charlotte, NC 432,000 2008
Town & Country Ford (Parcel #1) ....................... Charlotte, NC 409,200(3) 2009(3)
Town & Country Ford (Parcel #2) ....................... Charlotte, NC 108,513(4) 2008
Town & Country Toyota ................................. Charlotte, NC 600,000 2008
Lake Norman Chrysler-Plymouth-Jeep .................... Cornelius, NC 480,000 2007
Lake Norman Chrysler-Plymouth-Jeep (Parcel #2) ........ Cornelius, NC 110,250 2008
Lake Norman Dodge ..................................... Cornelius, NC 480,000(1) 2007
Westside Dodge ........................................ Columbus, OH 600,000 2009
Toyota West ........................................... Columbus, OH 480,000 2009
Hatfield Hyundai ...................................... Columbus, OH 480,000 2009
Hatfield Lincoln-Mercury .............................. Columbus, OH 300,000 2009
VW & Jeep-Eagle West .................................. Columbus, OH 300,000 2009
Westside Chrysler-Plymouth ............................ Columbus, OH 300,000 2009
Fort Mill Ford ........................................ Fort Mill, SC 480,000 2008
Century BMW ........................................... Greenville, SC 420,000(5) 2008
Heritage Lincoln-Mercury .............................. Greenville, SC 313,898(5) 2008
Century BMW ........................................... Spartanburg, SC 112,805(5) 2008
Infiniti of Chattanooga ............................... Chattanooga, TN 344,224(1)(6) 2007
BMW/Volvo of Chattanooga .............................. Chattanooga, TN 279,840(1)(6) 2007
KIA/Volkswagon of Chattanooga ......................... Chattanooga, TN 132,840(6) 2007
Town & Country Ford of Cleveland ...................... Cleveland, TN 281,424(1)(6) 2007
Cleveland Honda ....................................... Cleveland, TN 154,296(6) 2007
Volkswagen of Nashville ............................... Nashville, TN 147,000 2008
Ron Craft Chrysler Plymouth Jeep ...................... Baytown, TX 210,000 2008
Lone Star Ford ........................................ Houston, TX 360,000(7) 2009(7)
-------------
Total Initial Base Rent Payabale to MMR Holdings ..... $ 9,922,259
=============
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- ---------
(1) Initial base rent indicated is the total rent payable on more than one
property parcel utilized by the dealership.
(2) The Higginbotham Chevy-Olds dealership is presently under construction and
is expected to be completed and available for leasing in January 1999. MMR
Holdings will acquire this property after the completion of construction.
(3) The rent on Town & Country Ford (Parcel #1) is currently below market
rates, as supported by independent appraisal. This lease will terminate by
December 31, 1999. As a condition to MMRT's ultimate acquisition of this
property, Sonic and MMRT have signed a new lease taking effect on January
1, 2000, providing for fair market annual rent of $1,140,000 and expiring
on December 31, 2009.
Town & Country Ford (Parcel #2) was owned by STC Properties ("STC"), which
was a joint venture in which Town & Country Ford maintained a 5% undivided
interest and SFC owned the remaining 95%. In October 1998, MMR Holdings
acquired this property by issuing its membership interests to SFC and paying
$425,000 to Town & Country Ford. STC leased this property in 1998 to Sonic
at the annual rent indicated.
(4) Until its acquisition by MMR Holdings in October 1998, Town & Country Ford
(Parcel #2) was owned by Bruton Smith and, in 1998, was leased to Sonic at
the annual base rent indicated.
(5) In July 1998, Chartown, a general partnership controlled by Bruton Smith
("Chartown"), acquired the real property on which this dealership
operated. Chartown then leased the property to the Sonic subsidiary that
acquired the assets of the dealership at the annual rental rate indicated.
In December 1998, MMR Holdings acquired this property from Chartown
subject to the existing lease.
(6) This dealership previously leased its property from Nelson Bowers, Sonic's
former Executive Vice President and a former director, or his affiliates.
In November 1998, MMR Holdings acquired this property subject to the
existing lease. Sonic negotiated this lease in connection with acquisition
of the dealership from Nelson Bowers in 1997 and paid 1998 rent to Mr.
Bowers or his affiliates at the indicated rate.
(7) The rent on Lone Star Ford is currently below market rates, as supported by
independent appraisal This lease will terminate by December 31, 1999. As a
condition to MMRT's ultimate acquisition of this property, Sonic and MMRT
have signed a new lease taking effect on January 1, 2000, providing for
fair market annual rent of $1,140,000 and expiring on December 31, 2009.
The Lone Star Ford property was owned by Viking Investments Associates, a
Texas association controlled by Bruton Smith ("Viking"). In October 1998,
MMR Holdings acquired the Lone Star Ford property. Viking leased this
property in 1998 to Sonic at the annual rent indicated.
Chartown Transactions
Chartown is a general partnership engaged in real estate development and
management. Before Sonic's reorganization before its initial public offering,
Town & Country Ford maintained a 49% partnership interest in Chartown with the
remaining 51% held by SMDA Properties, LLC, a North Carolina limited liability
company ("SMDA"). Bruton Smith owns an 80% direct membership interest in SMDA
with the remaining 20% owned indirectly through SFC. In addition, SFC also held
a demand promissory note for approximately $1.6 million issued by Chartown (the
"Chartown Note"), which was uncollectible due to insufficient funds. As part of
our reorganization, the Chartown Note was canceled and Town & Country Ford
transferred its partnership interest in Chartown to SFC for nominal
consideration. SFC then agreed to indemnify Town & Country Ford for any and all
obligations and liabilities, whether known or unknown, relating to Chartown and
Town & Country Ford's ownership of Chartown.
The Bowers Volvo Note
In connection with Volvo's approval of Sonic's acquisition of a Volvo
franchise from Nelson Bowers in 1997, Volvo, among other things, conditioned
its approval upon Nelson Bowers acquiring and maintaining a 20% interest in
Sonic's Chattanooga Volvo subsidiary operating the Volvo franchise. Mr. Bowers
financed all of the purchase price for this 20% interest by issuing a
promissory note (the "Bowers Volvo Note") in favor of Sonic Automotive of
Nevada, Inc., the wholly owned subsidiary of Sonic that controls a majority
interest in Chattanooga Volvo. The Bowers Volvo Note is secured by Mr. Bowers'
interest in Chattanooga Volvo.
The Bowers Volvo Note is for a principal amount of $900,000 and bears
interest at the lowest applicable federal rate as published by the U.S.
Treasury Department in effect on November 17, 1997. Accrued interest is payable
annually. The operating agreement of Chattanooga Volvo provides that profits
and distributions are to be allocated first to Mr. Bowers to
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the extent of interest to be paid on the Bowers Volvo Note and next to the
other members of Chattanooga Volvo according to their percentages of ownership.
No other profits or any losses of Chattanooga Volvo will be allocated to Mr.
Bowers under this arrangement. Sonic anticipates that Mr. Bowers' interest in
Chattanooga Volvo will be redeemed and the Bowers Volvo Note will be due and
payable in full when Volvo no longer requires Mr. Bowers to maintain his
interest in Chattanooga Volvo, which Sonic expects will occur in the near
future.
Other Transactions
o Beginning in early 1997, certain of the Sonic dealerships entered into
arrangements to sell to their customers credit life insurance policies
underwritten by American Heritage Life Insurance Company, an insurer
unaffiliated with the Company. American Heritage in turn reinsured all of
these policies with Provident American Insurance Company, a Texas
insurance company. Under these arrangements, the Sonic dealerships paid an
aggregate of $576,000 to American Heritage in premiums for these policies
for the year ended December 31, 1997. Sonic terminated this arrangement
with American Heritage in 1997. Provident American is a wholly owned
subsidiary of SFC.
o Town & Country Ford and Lone Star Ford had each made several non-interest
bearing advances to SFC, a company controlled by Bruton Smith. In
preparation for our 1997 reorganization, a demand promissory note by SFC
evidencing $2.1 million of these advances was canceled in June 1997 in
exchange tor the redemption of certain shares of the capital stock of Town
& Country Ford held by SFC. In addition, a demand promissory note by SFC
evidencing of $0.5 million of these advances was canceled in June 1997
pursuant to a dividend. Approximately $0.5 million remain outstanding
under these arrangements at December 31, 1997.
o As part of the purchase price in connection with Sonic's acquisition of
the Bowers Automotive Group in November 1997, Sonic issued its promissory
note in the principal amount of $4.0 million in favor of Nelson Bowers
(the "Bowers Acquisition Note"). The Bowers Acquisition Note is payable in
28 equal quarterly installments and bears interest at the prime rate less
0.5%.
o Sonic made certain advances to SFC in 1997, which amounts are currently
outstanding. As of December 31, 1997, the amounts receivable from SFC with
respect to such advances totaled $622,000.
o Town and Country Toyota has an amount payable to Bruton Smith, which
payable totals approximately $0.8 million as of December 31, 1997. This
loan bears interest at 8.75% per annum.
o Certain subsidiaries of Sonic (such subsidiaries together with Sonic and
SFC are referred to as the "Sonic Group") filed consolidated federal
income tax returns with SFC for several years before our reorganization.
These joint filings were for 1996 and for the period ending on June 30,
1997. Under applicable federal tax law, each corporation included in SFC's
consolidated return is jointly and severally liable for any resultant tax.
Under a tax allocation agreement dated as of June 30, 1997, however, Sonic
agreed to pay to SFC, in the event that additional federal income tax is
determined to be due, an amount equal to Sonic's separate federal income
tax liability computed for all periods in which any member of the Sonic
Group has been a member of SFC's consolidated group less amounts
previously recorded by Sonic. Also pursuant to such agreement, SFC agreed
to indemnify Sonic for any additional amount determined to be due from
SFC's consolidated group in excess of the federal income tax liability of
the Sonic Group for such periods. The tax allocation agreement establishes
procedures with respect to tax adjustments, tax claims, tax refunds, tax
credits and other tax attributes relating to periods ending prior to the
time that the Sonic Group shall leave SFC's consolidated group.
Sonic acquired Town & Country Ford, Lone Star Ford, Town & Country Toyota,
Fort Mill Ford and Frontier Oldsmobile-Cadillac in its 1997 reorganization
pursuant to four separate stock subscription agreements. These subscription
agreements allowed the acquisition of 100% of the capital stock or membership
interests, as the case may be, of each of the five dealerships from Sonic
Financial, Bruton Smith, the Egan Group (an assignee of Mr. Egan) and Bryan
Scott Smith in exchange for certain amounts of Sonic's Class B Common Stock.
See "Principal and Selling Stockholders."
For additional information concerning related party transactions of Sonic,
see Note 7 to the financial statements of Sonic in this prospectus.
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DESCRIPTION OF CAPITAL STOCK
Sonic's authorized capital stock consists of (a) 50,000,000 shares of
Class A common stock, $.01 par value, (b) 15,000,000 shares of Class B common
stock, $.01 par value, and (c) 3,000,000 shares of Preferred Stock, $.10 par
value (of which 300,000 shares have been designated as Class A convertible
Preferred Stock). As of February 3, 1999, Sonic had 12,031,170 outstanding
shares of Class A common stock, 12,400,000 outstanding shares of Class B common
stock and 22,179.3 outstanding shares of Class A convertible preferred stock.
The following summary description of Sonic's capital stock does not
purport to be complete and is qualified in its entirety by reference to Sonic's
charter amendment (which was filed as an exhibit to Sonic's Registration
Statement on Form S-1 (File No. 333-33295)), Sonic's Certificate of
Designations relating to the Preferred Stock (the "Designation") (which was
filed as an exhibit to Sonic's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998), and to Delaware law. Reference is made to such exhibits
and to Delaware law for a detailed description of the provisions thereof
summarized below.
Common Stock
Sonic's Class A common stock and Class B common stock are equal in all
respects except for voting rights, conversion rights of the Class B common
stock and as required by law, as discussed more fully below.
Voting Rights; Conversion of Class B Common Stock to Class A Common Stock
The voting powers, preferences and relative rights of the Class A common
stock and the Class B common stock are subject to the following provisions.
Holders of Class A common stock have one vote per share on all matters
submitted to a vote of the stockholders of Sonic. Holders of Class B common
stock are entitled to ten votes per share except as described below. Holders of
all classes of common stock entitled to vote will vote together as a single
class on all matters presented to the stockholders for their vote or approval
except as otherwise required by Delaware Law. There is no cumulative voting
with respect to the election of directors.
In the event any shares of Class B common stock held by a member of the
Smith Group are transferred outside of the Smith Group, such shares will
automatically be converted into shares of Class A common stock. In addition, if
the total number of shares of common stock held by members of the Smith Group
is less than 15% of the total number of shares of common stock outstanding, all
of the outstanding shares of Class B common stock automatically will be
reclassified as Class A common stock. In any merger, consolidation or business
combination, the consideration to be received per share by holders of Class A
common stock must be identical to that received by holders of Class B common
stock, except that in any such transaction in which shares of common stock are
distributed, such shares may differ as to voting rights to the extent that
voting rights now differ between the classes of common stock.
Notwithstanding the foregoing, the holders of Class A common stock and
Class B common stock vote as a single class, with each share of each class
entitled to one vote per share, with respect to any transaction proposed or
approved by the Board of Directors of Sonic or proposed by or on behalf of
holders of the Class B common stock or as to which any member of the Smith
Group or any affiliate thereof has a material financial interest other than as
a then existing stockholder of Sonic constituting a
o "going private" transaction,
o sale or other disposition of all or substantially all of Sonic's assets,
o sale or transfer which would cause the nature of Sonic's business to be
no longer primarily oriented toward automobile dealership operations and
related activities, or
o merger or consolidation of Sonic in which the holders of the common stock
will own less than 50% of the common stock following such transaction.
A "going private" transaction is defined as any "Rule 13e-3 Transaction,"
as such term is defined in Rule 13e-3 promulgated under the Securities Exchange
Act of 1934. An "affiliate" is defined as (a) any individual or entity who or
that, directly or indirectly, controls, is controlled by, or is under common
control with any member of the Smith Group, (b) any corporation or organization
(other than Sonic or a majority-owned subsidiary of Sonic) of which any member
of the Smith Group is an officer, partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of 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
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stock held by or subject to such trust or arrangement, (d) any other trust or
estate in which any member of the Smith Group has a substantial beneficial
interest or as to which any member of the Smith Group serves as trustee or in a
similar fiduciary capacity, or (e) any relative or spouse of any member of the
Smith Group or any relative of such spouse, who has the same residence as any
member of the Smith Group.
As used in this prospectus, the term the "Smith Group" consists of the
following persons:
o Mr. Smith and his guardian, conservator, committee, or attorney-in-fact;
o William S. Egan and his guardian, conservator, committee, or
attorney-in-fact;
o each lineal descendant of Messrs. Smith and Egan (a "Descendant") and
their respective guardians, conservators, committees or attorneys-in-
fact; and
o each "Family Controlled Entity."
The term "Family Controlled Entity" means (a) any not-for-profit
corporation if at least 80% of its board of directors is composed of Mr. Smith,
Mr. Egan and/or Descendants; (b) any other corporation if at least 80% of the
value of its outstanding equity is owned by members of the Smith Group; (c) any
partnership if at least 80% of the value of the partnership interests are owned
by members of the Smith Group; and (d) any limited liability or similar company
if at least 80% of the value of the company is owned by members of the Smith
Group. For a discussion of the effects of the disproportionate voting rights of
the common stock, see "Risk Factors -- Concentration of Voting Power and
Antitakeover Provisions of our Charter May Reduce Stockholder Value in Any
Potential Change of Control of Sonic."
Under Sonic's charter and Delaware law, the holders of Class A common
stock and/or Class B common stock are each entitled to vote as a separate
class, as applicable, with respect to any amendment to Sonic's Certificate that
would increase or decrease the aggregate number of authorized shares of such
class, increase or decrease the par value of the shares of such class, or
modify or change the powers, preferences or special rights of the shares of
such class so as to affect such class adversely.
Dividends
Holders of the Class A common stock and the Class B common stock are
entitled to receive ratably such dividends, if any, as are declared by our
Board of Directors out of funds legally available for that purpose. An
additional requirement is that dividends paid in shares of Class A common stock
shall be paid only to holders of Class A common stock, and dividends paid in
shares of Class B common stock shall be paid only to holders of Class B common
stock. Sonic's charter provides that if there is any dividend, subdivision,
combination or reclassification of either class of common stock, a
proportionate dividend, subdivision, combination or reclassification of the
other class of common stock must be made at the same time.
Other Rights
Stockholders of Sonic have no preemptive or other rights to subscribe for
additional shares. In the event of the liquidation, dissolution or winding up
of Sonic, holders of Class A common stock and Class B common stock are entitled
to share ratably in all assets available for distribution to holders of common
stock after payment in full of creditors. No shares of any class of common
stock are subject to a redemption or a sinking fund.
Transfer Agent and Registrar
First Union National Bank is the transfer agent and registrar for the
common stock.
Preferred Stock
Dividends. The preferred stock has no preferential dividends. Rather,
holders of preferred stock are entitled to participate in dividends payable on
the Class A common stock on an "as-if-converted" basis.
Voting Rights. Each share of preferred stock entitles its holder to a
number of votes equal to that number of shares of Class A Common Stock into
which it could be converted as of the record date for the vote.
Liquidation Rights. The preferred stock has a liquidation preference of
$1,000 per share.
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
69
which have not been converted are subject to mandatory conversion to Class A
common stock at the option of Sonic. No fractional shares of Class A common
stock will be issued upon conversion of any shares of preferred stock. Instead,
Sonic will pay cash equal to the value of such fractional share.
Generally, each share of preferred stock is convertible into that number
of shares of Class A common stock that has an aggregate Market Price at the
time of conversion equal to $1,000 (with certain adjustments for the Series II
and Series III preferred stock). "Market Price" is defined as the average
closing price per share of Class A common stock on the New York Stock Exchange
for the twenty trading days immediately preceding the date of conversion. If
the Class A common stock is no longer listed on the New York Stock Exchange,
then the Market Price will be determined on the basis of prices reported on the
principal exchange on which the Class A common stock is listed, or if not so
listed, prices furnished by NASDAQ. If the Class A common stock is not listed
on an exchange or reported on by NASDAQ, then the Market Price will be
determined by Sonic's Board of Directors.
Before the first anniversary of the date of issuance of preferred stock,
each holder of preferred stock is unable to convert without first giving Sonic
ten business days' notice and an opportunity to redeem such preferred stock at
the then applicable redemption price.
Redemption. The preferred stock is redeemable at Sonic's option at any
time after the date of issuance. The redemption price for the Series I
preferred stock is $1,000 per share. The redemption price for the Series II
preferred stock and the Series III preferred stock is as follows: (a) prior to
the second anniversary of the date of issuance, the redemption price is the
greater of $1,000 per share or the aggregate Market Price of the Class A common
stock into which it could be converted at the time of redemption, and (b) after
the second anniversary of the date of issuance, the redemption price is the
aggregate Market Price of the Class A common stock into which it could be
converted at the time of redemption. There is no restriction on Sonic's ability
to redeem the preferred stock while there is an arrearage in payment of
dividends on such preferred stock.
Delaware Law, Certain Charter and Bylaw Provisions and Certain Franchise
Agreement Provisions
Certain provisions of Delaware Law and of Sonic's Charter and Bylaws,
summarized in the following paragraphs, may be considered to have an
antitakeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.
Delaware Antitakeover Law. Sonic is subject to the provisions of Delaware
law, including Section 203. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which such person became an interested stockholder unless: (a) prior to such
date, the Board of Directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; or (b) upon becoming an interested stockholder, the stockholder
then owned at least 85% of the voting stock, as defined in Section 203; or (c)
subsequent to such date, the business combination is approved by both the Board
of Directors and by holders of at least 66 2/3% of the corporation's
outstanding voting stock, excluding shares owned by the interested stockholder.
For these purposes, the term "business combination" includes mergers, asset
sales and other similar transactions with an "interested stockholder." An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of the
corporation's voting stock. Although Section 203 permits a corporation to elect
not to be governed by its provisions, Sonic to date has not made this election.
Classified Board of Directors. Sonic's Bylaws provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of
Directors will be elected each year. Classification of the Board of Directors
expands the time required to change the composition of a majority of directors
and may tend to discourage a takeover bid for Sonic. Moreover, under Delaware
law, in the case of a corporation having a classified board of directors, the
stockholders may remove a director only for cause. This provision, when coupled
with the provision of the Bylaws authorizing only the board of directors to
fill vacant directorships, will preclude stockholders of Sonic from removing
incumbent directors without cause, simultaneously gaining control of the Board
of Directors by filing the vacancies with their own nominees.
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
70
meeting, to the taking of any action is specifically denied. These provisions
may make it more difficult for stockholders to take action opposed by the Board
of Directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Sonic's Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual or a special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the principal executive office
of Sonic, (a) in the case of an annual meeting that is called for a date that
is within 30 days before or after the anniversary date of the immediately
preceding annual meeting of stockholders, not less than 60 days nor more than
90 days prior to such anniversary date, and, (b) in the case of an annual
meeting that is called for a date that is not within 30 days before or after
the anniversary date of the immediately preceding annual meeting, or in the
case of a special meeting of stockholders called for the purpose of electing
directors, not later than the close of business on the tenth day following the
day on which notice of the date of the meeting was mailed or public disclosure
of the date of the meeting was made, whichever occurs first. The Bylaws also
specify certain requirements for a stockholder's notice to be in proper written
form. These provisions may preclude some stockholders from bringing matters
before the stockholders at an annual or special meeting or from making
nominations for directors at an annual or special meeting.
Conflict of Interest Procedures. Sonic's charter contains provisions
providing that transactions between Sonic and its affiliates must be no less
favorable to Sonic than would be available in transactions involving
arms'-length dealing with unrelated third parties. Moreover, any such
transaction involving aggregate payments in excess of $500,000 must be approved
by a majority of Sonic's directors and a majority of Sonic's independent
directors. Otherwise, Sonic must obtain an opinion as to the financial fairness
of the transactions to be issued by an investment banking or appraisal firm of
national standing.
Restrictions under Franchise Agreements. Sonic's franchise agreements
impose restrictions on the transfer of the common stock. A number of
Manufacturers prohibit transactions which affect changes in management control
of Sonic. For instance, Ford may cause Sonic to sell or resign from its Ford
franchises if any person or entity acquires 15% or more of Sonic's voting
securities. Likewise, General Motors, Toyota and Infiniti may force the sale of
their respective franchises if 20% or more of Sonic's voting securities are so
acquired. Honda may force the sale of Sonic's Honda franchise if any person or
entity, other than members of the Smith Group, acquires 5% of the Common Stock
(10% if such entity is an institutional investor), and Honda deems such person
or entity to be unsatisfactory. Volkswagen has approved of the public sale of
only 25% of the voting control of Sonic and requires prior approval of any
change in control or management of Sonic that would affect Sonic's control or
management of its Volkswagen franchisee subsidiaries. Chrysler also has
approved of the public sale of only 50% of the Common Stock and requires prior
approval of any future sales that would result in a change in voting or
managerial control of Sonic. Such restrictions may prevent or deter prospective
acquirers from obtaining control of Sonic. See "Risk Factors -- Manufacturer
Stock Ownership/Issuance Limits Limit Sonic's Ability to Issue Additional
Equity to Meet Its Financing Needs."
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Revolving Facility
In October 1997, Sonic obtained the Revolving Facility from Ford Motor
Credit in the principal amount of $26.0 million. Sonic and Ford Motor Credit
increased the aggregate amount available to borrow under this facility to a
maximum $75.0 million in December 1997, and Ford Motor Credit has committed to
increase this amount to a maximum $100 million effective November 1998,
pursuant to the Revolving Facility's terms. The Revolving Facility bears
interest at the Revolving Facility Prime Rate and matures in December 1999,
unless we request that such term be extended, at the option of Ford Motor
Credit, for up to three (3) additional one year terms. However, if the amount
of debt exceeds the sum of the scaled assets (as defined in the Revolving
Facility), then the interest rate will be the prime rate plus 1.0%. No
assurance can be given that such extensions will be granted. As of September
30, 1998, there were no amounts outstanding under the Revolving Facility. We
anticipate amounts to be drawn under the Revolving Facility to be used to repay
certain existing indebtedness, for paying a portion of the cash purchase price
of our pending acquisitions, for the acquisition of additional dealership
subsidiaries in the future as approved by Ford Motor Credit and to provide
general working capital needs of Sonic not to exceed $10 million. Proceeds of
the offering will be used to temporarily repay these amounts.
Sonic agreed under the Revolving Facility not to pledge any of its assets
to any third party (with the exception of currently encumbered real estate and
assets of its dealership subsidiaries that are subject to previous pledges or
liens as
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approved by Ford Motor Credit). The Revolving Facility also contains certain
negative covenants made by Sonic, including covenants restricting or
prohibiting the payment of dividends, capital expenditures and material
dispositions of assets as well as other customary covenants. Moreover, the loss
of voting control over Sonic by O. Bruton Smith, B. Scott Smith and their
spouses or immediate family members or the failure by Sonic, with certain
exceptions, to own all the outstanding equity, membership or partnership
interests in its dealership subsidiaries will constitute an event of default
under the Revolving Facility. Sonic did not meet the total base capital ratio
and the adjusted total base capital ratio covenants at December 31, 1997, at
March 31, 1998 and at June 30, 1998 and has obtained waivers with regard to
such requirement from Ford Motor Credit. The waivers are subject to the
requirement that Sonic meet a Total Base Capital Ratio and Adjusted Total Base
Capital Ratio of 16 to 1 and 4 to 1, respectively, after June 30, 1998 and 8 to
1 and 2.5 to 1, respectively, after December 31, 1998. Sonic and Ford Motor
Credit have amended the Revolving Credit Facility to provide that Sonic's
senior subordinated notes (which are subordinated to the Revolving Facility)
will be treated as equity capital for purposes of these ratios and,
accordingly, Sonic is in compliance with these covenants after giving effect to
the issuance of Sonic's senior subordinated notes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Revolving Facility contains certain covenants which limit, among other
things, our ability to pay dividends, make certain capital expenditures and
make dispositions of material assets. Additional covenants require us to
maintain certain ratios with respect to:
o total debt to tangible base capital
o total adjusted debt to base capital
o current assets to current liablilities
o earnings before interest, taxes, depreciation, amortization and rent
expense less capital expenditures to fixed charges
o earnings before interest, taxes, depreciation and amortization to
interest expense
o earnings before interest, taxes, depreciation and total adjusted debt to
amortization
o current lending commitment under the Revolving Facility to scaled
assets.
The indebtedness under the Revolving Facility and the Floor Plan Facility
is secured by (1) a pledge by Sonic of all the capital stock, membership
interests and partnership interests of all of its subsidiaries, (2) guaranties
by all of Sonic's subsidiaries that are, in turn, secured by a lien on all of
the assets of such subsidiaries (with the exception of the liens on the assets
of Sonic's Ford dealership subsidiaries, which liens only secure such Ford
subsidiaries' obligations under the Floor Plan Facility) and (3) a lien on all
of Sonic's other assets, except for real estate owned by it or its
subsidiaries. In addition, the Revolving Facility is partially secured by a
pledge of shares of Speedway Motorsports, Inc. common stock owned by Sonic
Financial Corporation, a corporation controlled by Bruton Smith. See "Certain
Transactions -- The Smith Guarantees, Pledges and Subordinated Loan."
The Floor Plan Facility
Sonic currently has in place the Floor Plan Facility, a standardized floor
plan credit facility with Ford Motor Credit for each of its dealership
subsidiaries. Each dealership subsidiary has its own agreement with Ford Motor
Credit for its inventory financing needs. As of September 30, 1998, there was
an aggregate of $174.0 million outstanding under the Floor Plan Facility. The
Floor Plan Facility at September 30, 1998 had an effective rate of prime less
0.9%, subject to certain incentives and other adjustments. Typically new
vehicle floor plan indebtedness exceeds the related inventory balances. The
inventory balance is generally reduced by the Manufacturer's purchase
discounts, and such reduction is not reflected in the related floor plan
liability. These Manufacturer purchase discounts are standard in the industry,
typically occur on all new vehicle purchases, and are not used to offset the
related floor plan liability. These discounts are aggregated and generally paid
to Sonic by the Manufacturer on a quarterly basis. The related floor plan
liability becomes due as vehicles are sold.
Sonic makes monthly interest payments on the amount financed under the
Floor Plan Facility but is not required to make loan principal repayments prior
to the sale of the vehicles. The underlying notes are due when the related
vehicles are sold and are collateralized by vehicle inventories and other
assets of the applicable dealership subsidiary. For a description of the
security for repayment of the indebtedness of Sonic and its subsidiaries under
the Floor Plan Facility, see " -- The Revolving Facility."
72
The Senior Subordinated Notes
Pursuant to an indenture dated as of July 1, 1998, we issued $125 million
of our senior subordinated notes to finance certain acquisitions we completed
in 1998 and to repay amounts outstanding under the Revolving Facility. On
December 7, 1998, we completed an exchange offer to exchange the senior
subordinated notes for identical senior subordinated notes registered under the
Securities Act of 1933. A copy of the indenture is attached as an exhibit to
our Registration Statement on Form S-4 (Registration Nos. 333-64397 and
333-64397-001 through 333-64397-044), filed on November 5, 1998. We encourage
you to read a copy of this indenture.
Our senior subordinated notes bear interest at a rate of 11% per year,
payable semiannually on February 1 and August 1. They are general unsecured
obligations of Sonic. They rank behind all of our and our subsidiaries' current
and future senior debt.
All of our subsidiaries guaranteed the payment of the senior subordinated
notes. If we default in payment of any principal, premium or interest payments
due on the senior subordinated notes, each of our subsidiary guarantors are
liable for any such payments.
We cannot redeem our senior subordinated notes until August 1, 2003. On or
after that date, we can redeem some or all of the senior subordinated notes at
any time at the prices specified below, expressed as percentages of the
principal amount, plus accrued and unpaid interest through the applicable
redemption date, if redeemed during the 12 month period beginning August 1 of
the years indicated below:
Year Percentage
- ------------------------------ -------------
2003 ....................... 105.500%
2004 ....................... 103.667%
2005 ....................... 101.833%
2005 and thereafter ........ 100.000%
If we go through a change of control, we must give holders of the senior
subordinated notes the opportunity to sell their senior subordinated notes to
us at 101% of their face amount, plus accrued and unpaid interest. We might not
be able to pay the required price for our senior subordinated notes presented
to us at the time of a change of control, because we might not have enough
funds at that time, or the terms of our senior debt may prevent us from paying.
We may also have to use cash proceeds from a sale of our assets to offer
to buy back senior subordinated notes at their face amounts, plus accrued
interest.
The indenture governing our senior subordinated notes limits what we and
our subsidiaries may do. The provisions of the indenture limit, among other
things, our ability to:
o incur more debt
o pay dividends and make distributions
o issue guarantees and pledges for indebtedness
o make certain restricted payments
o make certain investments
o transfer and sell assets
o incur debt that is senior to our senior subordinated notes but junior to
any other senior debt
o create or incur liens
o enter in transactions with affiliates
o merge or consolidate
These covenants are subject to a number of important exceptions set forth
in the indenture.
The indenture also contains standard events of default, including (in
certain cases subject to customary grace periods) (1) defaults in payment of
principal, premium or interest, (2) defaults in compliance with covenants in
the indenture, (3) failure to pay more than $20 million of judgments and (4)
certain events of bankruptcy by us and certain of our subsidiaries.
73
CERTAIN MANUFACTURER RESTRICTIONS
Under agreements between Sonic and certain manufacturers, Sonic has agreed
to provide the statements provided below.
Sonic's agreements with Honda and Mercedes require that it provide the
following statement in this prospectus:
No automobile manufacturer has been involved, directly or indirectly, in
the preparation of this prospectus or in the offering being made hereby. No
automobile manufacturer has made any statements or representations in
connection with the offering or has provided any information or materials that
were used in connection with the offering, and no automobile manufacturer has
any responsibility for the accuracy or completeness of this prospectus.
Under Sonic's Dealer Agreement with General Motors ("GM"), Sonic has
agreed, among other things, to disclose the following provisions:
Sonic will deliver to GM copies of all Schedules 13D and 13G, and all
amendments thereto and terminations thereof, received by Sonic, within five
days of receipt of such Schedules. If Sonic is aware of any ownership of its
stock that should have been reported to it on Schedule 13D but that is not
reported in a timely manner, it will promptly give GM written notice of such
ownership, with any relevant information about the owner that Sonic possesses.
If Sonic, through its Board of Directors or through shareholder action,
proposes or if any person, entity or group sends Sonic a Schedule 13D, or any
amendments thereto, disclosing (a) an agreement to acquire or the acquisition
of aggregate ownership of more than 20% of the voting stock of Sonic and (b)
Sonic, through its Board of Directors or through shareholder action, proposes
or if any plans or proposals which relate to or would result in the following:
(i) the acquisition by any person of more than 20% of the voting stock of Sonic
other than for the purposes of ordinary passive investment; (ii) an
extraordinary corporate transaction, such as a material merger, reorganization
or liquidation, involving Sonic or a sale or transfer of a material amount of
assets of Sonic and its subsidiaries; (iii) any change which, together with any
changes made to the Board of Directors within the preceding year, would result
in a change in control of the then current Board of Sonic; or (iv) in the case
of an entity that produces motor vehicles or controls or is controlled by or is
under common control with an entity that either produces motor vehicles or is a
motor vehicle franchisor, the acquisition by any person, entity or group of
more than 20% of the voting stock of Sonic and any proposal by any such person,
entity or group, through the Sonic Board of Directors or shareholders action,
to change the Board of Directors of Sonic, then, if such actions in GM's
business judgment could have a material or adverse effect on its image or
reputation in the GM dealerships operated by Sonic or be materially
incompatible with GM's interests (and upon notice of GM's reasons for such
judgment), Sonic has agreed that it will take one of the remedial actions set
forth in the next paragraph within 90 days of receiving such Schedule 13D or
such amendment.
If Sonic is obligated under the previous paragraph to take remedial
action, it will (a) transfer to GM or its designee, and GM or its designee will
acquire the assets, properties or business associated with any GM dealership
operated by Sonic at fair market value as determined in accordance with GM's
Dealership Agreement with Sonic, or (b) provide evidence to GM that such
person, entity or group no longer has such threshold level of ownership
interest in Sonic or that the actions described in clause (b) of the previous
paragraph will not occur.
Should Sonic or its GM franchisee subsidiary enter into an agreement to
transfer the assets of the GM franchisee subsidiary to a third party, the right
of first refusal described in the GM Dealer Agreement shall apply to any such
transfer.
74
SHARES ELIGIBLE FOR FUTURE SALE
As of February 3, 1999, Sonic had outstanding 12,031,170 shares of Class A
common stock. All of these shares are freely transferable and may be resold
without further registration under the Securities Act, except for any shares
purchased by an "affiliate" of Sonic (as defined by Rule 144 under the
Securities Act), which shares will be subject to the resale limitations of Rule
144. In addition, the following shares of Class A common stock may be issued by
Sonic or become available for public resale:
Number of Shares of
Class A Common Stock Manner of Holding and/or Issuance
- ------------------------ -------------------------------------------------------------
Issuable on conversion of 12,400,000 shares of our Class B
12,400,000(1)
common stock owned by existing stockholders of Sonic.
These shares of Class A common stock are subject to
certain piggyback registration rights.
242,782(1) Issuable on exercise of warrants issued in our business
acquisitions.
1,445,374(1)(2) Issuable on conversion of outstanding shares of our Class
A convertible preferred stock that were issued in our
business acquisitions if such shares were converted to
shares of Class A common stock as of January 4, 1999.
1,602,832 Issued in our business acquisitions and currently registered
for sale under the Securities Act pursuant to a shelf
registration.
2,076,306 Issuable on exercise of options granted under our 1997
Stock Option Plan. All such shares are registered for sale
under the Securities Act.
719,270 Isssuable on exercise of options granted under our
employee stock purchase plans. All such shares are
registered for sale under the Securities Act.
60,000 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 Class A convertible preferred stock is an
estimate based on the average of the daily closing prices for the Class
A common stock on the NYSE for the 20 consecutive trading days ending
one trading day before January 4, 1999. 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 general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year may, under certain circumstances, resell within any
three-month period, such number of shares as does not exceed the greater of one
percent of the then-outstanding shares of Class A common stock or the average
weekly trading volume of Class A common stock during the four calendar weeks
prior to such resale. Rule 144 also permits, under certain circumstances, the
resale of shares without any quantity limitation by a person who has satisfied
a two-year holding period and who is not, and has not been for the preceding
three months, an affiliate of Sonic. In addition, holding periods of successive
non-affiliate owners are aggregated for purposes of determining compliance with
these one- and two-year holding period requirements.
All of the 12,400,000 shares of Class B common stock currently outstanding
have been held for at least one year. Any transfer of shares of the Class B
common stock to any person other than a member of the Smith Group will result
in a conversion of such shares to Class A common stock. Additionally, Sonic has
entered into a Registration Rights Agreement with Sonic Financial Corporation,
Bruton Smith, Scott Smith and William Egan. The Registration Rights Agreement
provides piggyback registration rights with respect to 12,500,000 shares of
Class A common stock in the aggregate. Sonic Financial Corporation, Bruton
Smith and Scott Smith have agreed to waive their registration rights in this
offering. Mr. Egan elected to register 80,000 of his shares of Class A common
stock in this offering and agreed to waive his registration rights in this
offering for his remaining shares of common stock with registration rights.
75
In connection with pending acquisitions, Sonic has agreed to issue $30.8
million in Class A common stock or securities convertible into Class A common
stock. All of these shares have registration rights. Sonic intends to issue
additional equity securities in future acquisitions. These shares may have
registration rights as well as being eligible for sale under Rule 144.
The availability of shares for sale or actual sales under Rule 144 and the
perception that such shares may be sold may have a material adverse effect on
the market price of the Class A common stock. Sales under Rule 144 also could
impair Sonic's ability to market additional equity securities.
76
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
BancBoston Robertson Stephens, Inc., Stephens Inc. and NationsBanc Montgomery
Securities LLC are acting as representatives (the "Representatives") of each of
the Underwriters named below (the "Underwriters"). Subject to the terms and
conditions set forth in a purchase agreement (the "Purchase Agreement") among
Sonic, the selling stockholders and the Underwriters, Sonic and the selling
stockholders have agreed to sell to the Underwriters, and each of the
Underwriters severally and not jointly has agreed to purchase from Sonic and
the selling stockholders, the number of shares of Class A common stock set
forth opposite its name below.
Number of
Underwriter Shares
- ----------------------------------------------------- ----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .................................
BancBoston Robertson Stephens, Inc. ...........
Stephens Inc. .................................
NationsBanc Montgomery Securities LLC .........
Total .........................................
In the Purchase Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares of
Class A common stock being sold pursuant to such agreement if any of the shares
of Class A common stock being sold pursuant to such agreement are purchased.
Under certain circumstances, under the Purchase Agreement, the commitments of
non-defaulting Underwriters may be increased.
The Representatives have advised Sonic and the selling stockholders that
the Underwriters propose initially to offer the shares of Class A common stock
to the public at the offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share of Class A common stock. The Underwriters may allow, and such
dealers may reallow, a discount not in excess of $ per share of Class A common
stock to certain other dealers. After the offering, the offering price,
concession and discount may be changed.
Sonic, all of the executive officers and directors of Sonic and each
selling stockholder have agreed, subject to certain exceptions, not to,
directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option to purchase, right or warrant to purchase, or otherwise transfer or
dispose of any Class A common stock or securities convertible into or
exchangeable or exercisable for Class A common stock, including shares of Class
B common stock, or file a registration statement under the Securities Act with
respect to the foregoing or (ii) enter into any swap or other agreement or
transaction that transfers, in whole or part, directly or indirectly, the
economic consequence of ownership of the Class A common stock, whether any such
swap or transaction described above is to be settled by delivery of Class A
common stock or such securities, in cash or otherwise, without the prior
written consent of Merrill Lynch on behalf of the Underwriters, for a period of
90 days after the date of this prospectus; provided that Sonic may sell shares
of Class A common stock to a third party as consideration for Sonic's
acquisition from such third party of an automobile dealership, provided that
such third party executes a lock-up agreement on substantially the same terms
described above for a period expiring 90 days after the date of this
prospectus.
Sonic and one of the selling stockholders have granted options to the
Underwriters, exercisable within 30 days after the date of this prospectus, to
purchase up to an aggregate of 1,063,156 and 145,588 additional shares of Class
A common stock, respectively, at the offering price set forth on the cover page
of this prospectus, less the underwriting discount.
77
The Underwriters may exercise these options only to cover over-allotments, if
any, made on the sale of the Class A common stock offered hereby. To the extent
that the Underwriters exercise these options, each Underwriter will be
obligated, subject to certain conditions, to purchase a number of additional
shares of Class A common stock proportionate to such Underwriter's initial
amount reflected in the foregoing table.
The following table shows the per share and total public offering price,
underwriting discount to be paid by Sonic and the selling stockholders to the
Underwriters and the proceeds before expenses to Sonic and the selling
stockholders. This information is presented assuming either no exercise or full
exercise by the Underwriters of their over-allotment options.
Without With
Per share Option Option
----------- --------- -------
Public Offering Price ................................... $ $ $
Underwriting Discount ................................... $ $ $
Proceeds, before expenses, to Sonic ..................... $ $ $
Proceeds, before expenses, to the selling stockholders .. $ $ $
The expenses of the offering (exclusive of the underwriting discount) are
estimated at $ and are payable by Sonic.
The shares of Class A Common Stock are being offered by the several
Underwriters, subject to prior sale, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part.
Sonic and the selling stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments which the Underwriters may be
required to make in respect thereof.
The Class A common stock is listed on the NYSE, under the symbol "SAH."
Until the distribution of the Class A common stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the
Underwriters and certain selling group members to bid for and purchase the
Class A common stock. As an exception to these rules, the Representatives are
permitted to engage in certain transactions that stabilize the price of Class A
common stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Class A common stock.
If the Underwriters create a short position in the Class A common stock in
connection with the offering, i.e., if they sell more shares of Class A common
stock than are set forth on the cover page of this prospectus, the
Representatives may reduce that short position by purchasing Class A common
stock in the open market. The Representatives may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither Sonic, the selling stockholders nor any of the Underwriters makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Class A
common stock. In addition, neither Sonic, the selling stockholders nor any of
the Underwriters makes any representation that the Representatives will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancBoston Robertson
Stephens, Inc. and NationsBanc Montgomery Securities LLC have acted as
underwriters and initial purchasers in connection with previous financings by
Sonic for which they received customary fees. Stephens Inc. has acted as a
financial advisor to Sonic in connection with various acquisitions over the
past several years for which it has received customary fees. Stephens Inc. may
act as such a financial advisor in the future.
78
LEGAL MATTERS
Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina, counsel
to Sonic, will render an opinion that the shares of Class A common stock
offered hereby, when issued and paid for in accordance with the terms of the
Underwriting Agreement, will be duly authorized, validly issued, fully paid and
nonassessable. Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York, has served as counsel
to the Underwriters in connection with this offering.
EXPERTS
The consolidated financial statements of Sonic Automotive, Inc. and
Subsidiaries, the combined financial statements of Clearwater Dealerships and
Affiliated Companies, the combined financial statements of Hatfield Automotive
Group, the financial statements of Economy Honda Cars, the financial statements
of Casa Ford of Houston, Inc., the combined financial statements of
Higginbotham Automotive Group, the financial statements of Dyer & Dyer, Inc.,
the combined financial statements of Bowers Dealerships and Affiliated
Companies, the combined financial statements of Lake Norman Dodge, Inc. and
Affiliated Companies, and the financial statements of Ken Marks Ford, Inc., all
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports, which are incorporated by reference herein, and have
been so incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT SONIC
Sonic files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and information relate to Sonic's business,
financial condition and other matters. You may read and copy these reports,
proxy statements and other information at the Public Reference Room of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may obtain information on the operation of the Commission's
Public Reference Room in Washington, D.C. by calling the Commission at
1-800-SEC-0330. Copies may be obtained from the Commission upon payment of the
prescribed fees. The Commission maintains an Internet Web site that contains
reports, proxy and information statements and other information regarding Sonic
and other registrants that file electronically with the Commission. The address
of such site is http://www.sec.gov. Such information may also be read and
copied at the offices of the New York Stock Exchange (the "NYSE") at 20 Broad
Street, New York, New York 10005.
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the Commission will automatically update and supercede this information.
We incorporate by reference the documents listed below and any future filings
made with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"):
1. Sonic's Annual Report on Form 10-K for its fiscal year ended December 31, 1997 (File No. 1-13395) (dated
March 31, 1998) and Form 10-K/A Amendment No. 1 (dated April 8, 1998).
2. Sonic's Quarterly Reports on Form 10-Q for its fiscal quarters ended March 31, 1998, June 30, 1998 and
September 30, 1998.
3. Sonic's Current Reports on Form 8-K, filed the following dates: March 30, 1998, July 9, 1998, and July 24,
1998.
4. Sonic's Amended Current Report on Form 8-K/A, filed on July 24, 1998, amending its Current Report on Form
8-K filed on March 30, 1998.
5. Sonic's Amended Current Report on Form 8-K/A, filed on August 20, 1998, amending its Current Report on
Form 8-K filed on July 24, 1998.
6. The consolidated financial statements of Sonic Automotive, Inc. and Subsidiaries, the combined financial
statements of Clearwater Dealerships and Affiliated Companies, the combined financial statements of Hatfield
Automotive Group, the financial statements of Economy Cars, Inc., the financial statements of Casa Ford of
Houston, Inc., the combined financial statements of the Higginbotham Automotive Group, the financial
statements of Dyer & Dyer, Inc., the combined financial statements of Bowers Dealerships and Affiliated
Companies, the combined financial statements of Lake Norman Dodge, Inc. and Affiliated Companies and the
financial statements of Ken Marks Ford, Inc. included in Sonic's Registration Statement on Form S-4
(Registration Nos. 333-64397 and 333-64397-001 through 333-64397-044) dated November 3, 1998.
79
Sonic will provide without charge to each person to whom this prospectus
is delivered, upon the written or oral request, a copy of any or all of the
documents incorporated by reference in this prospectus (excluding exhibits to
such documents unless such exhibits are specifically incorporated by
reference). Written or telephone requests should be directed to Mr. Todd
Atenhan, Director of Investor Relations, 5401 East Independence Blvd., P.O. Box
18747, Charlotte, North Carolina, 28212, Telephone (888) 766-4218.
This prospectus is a part of a Registration Statement on Form S-3 (the
"Registration Statement") filed with the Commission by Sonic. This prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto. Statements about the contents of contracts or other
documents contained in this prospectus or in any other filing to which we refer
you are not necessarily complete. You should review the actual copy of such
documents filed as an exhibit to the Registration Statement or such other
filing. Copies of the Registration Statement and these exhibits may be obtained
from the Commission as indicated above upon payment of the fees prescribed by
the Commission.
80
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8,058,293 Shares
[GRAPHIC OMITTED]
Class A Common Stock
---------------
P R O S P E C T U S
---------------
Merrill Lynch & Co.
BancBoston Robertson Stephens
Stephens Inc.
NationsBanc Montgomery Securities LLC
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses to be borne by the Registrant
in connection with the issuance and distribution of the securities being
registered hereby other than underwriting discounts and commissions. All
expenses other than the SEC registration fee, the NASD filing fee and the NYSE
listing fee are estimated.
SEC registration fee ........................... $39,050
NASD filing fee ................................ 14,545
NYSE listing fee ............................... *
Transfer agent's fees and expenses ............. *
Accounting fees and expenses ................... *
Legal fees and expenses ........................ *
"Blue Sky" fees and expenses (including legal fee) *
Costs of printing and engraving ................ *
Miscellaneous .................................. *
-----------
Total ................................................... $ *
===========
- ---------
* To be furnished by amendment
Item 15. Indemnification of Directors and Officers
Sonic's Bylaws effectively provide that Sonic shall, to the full extent
permitted by Section 145 of the General Corporation Law of the State of
Delaware, as amended from time to time ("Section 145"), indemnify all persons
whom it may indemnify pursuant thereto. In addition, Sonic's Certificate of
Incorporation eliminates personal liability of its directors to the full extent
permitted by Section 102(b)(7) of the General Corporation Law of the State of
Delaware, as amended from time to time ("Section 102(b)(7)").
Section 145 permits a corporation to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent
that the court in which the action or suit was brought shall determine upon
application that the defendant officers or directors are reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
Section 102(b)(7) provides that a corporation may eliminate or limit that
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith of which involve
intentional misconduct or a knowing violation of law, (iii) for willful or
negligent conduct in paying dividends or repurchasing stock out of other than
lawfully available funds or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or
limit the liability of a director for any act or omission occurring prior to
the date when such provision becomes effective.
Sonic maintains insurance against liabilities under the Securities Act of
1933 for the benefit of its officers and directors.
Section 6 of the Purchase Agreement between the Underwriters and Sonic
(filed as Exhibit 1.1 to this Registration Statement) provides that the
Underwriters severally and not jointly will indemnify and hold harmless Sonic
and each director, officer or controlling person of Sonic from and against any
liability caused by any statement or omission in the Registration Statement or
prospectus based upon information furnished to Sonic by the Underwriters for
use in the Registration Statement or prospectus. The Purchase Agreement also
provides for indemnification by Sonic of the Underwriters and each person, if
any, who controls any Underwriter against certain liabilities under the
Securities Act of 1933, as amended.
II-1
Item 16. Exhibits and Financial Statement Schedules
Exhibit No. Description
- ------------- ---------------------------------------------------------------------------------------------------------
1.1** Purchase Agreement by and among Sonic Automotive, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, BancBoston Robertson Stephens, Inc., Stephens Inc. and NationsBanc Montgomery
Securities LLC.
3.1* Amended and Restated Certificate of Incorporation of Sonic (incorporated by reference to Exhibit 3.1
to Sonic's Registration Statement on Form S-1 (File No. 333-33295) (the "Form S-1")).
3.2* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the Form S-1).
3.3* Certificate of Designation relating to Class A Convertible Preferred Stock (incorporated by reference to
Exhibit 4.1 to Sonic's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (the
"1998 First Quarter Form 10-Q")).
4.1* Form of Certificate for Class A Common Stock (incorporated by reference to Exhibit 4.1 to the Form
S-1).
4.2* Indenture dated as of July 1, 1998 between Sonic Automotive, Inc. and U.S. Bank Trust National
Association (incorporated by reference to Exhibit 4.2 to Sonic's Registration Statement on Form S-4
(File Nos. 333-64397 and 333-64397-001 through 333-64397-044) (the "Form S-4")).
5.1** Opinion of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities being
registered.
11.1* Statement regarding computation of per share earnings (incorporated by reference to Exhibit 11.1 to
the 1997 Form 10-K).
23.1 Consent of Deloitte & Touche LLP.
23.2** Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1).
24.1 Powers of Attorney (included on the signature pages of this Registration Statement).
27.1* Financial Data Schedule (incorporated by reference to Exhibit 27 to Sonic's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998).
- ---------
* Filed previously.
** To be filed by amendment.
Item 17. Undertakings
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of such
Registrant's annual report pursuant to section 13(a) or section 15 (d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement on Form S-3 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Charlotte, state
of North Carolina, on February 4, 1999.
SONIC AUTOMOTIVE, INC.
By: /s/ O. BRUTON SMITH
-------------------------------------
O. Bruton Smith
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Sonic Automotive, Inc., do
hereby constitute and appoint Messrs. O. Bruton Smith, Bryan Scott Smith, and
Theodore M. Wright, each with full power of substitution, our true and lawful
attorney-in-fact and agent to do any and all acts and things in our names and
in our behalf in our capacities stated below, which acts and things either of
them may deem necessary or advisable to enable Sonic Automotive, Inc. to comply
with the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Registration Statement, including specifically, but not limited to, power and
authority to sign for any and all of us in our names, in the capacities stated
below, any and all amendments (including post-effective amendments) hereto and
any subsequent registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission; and we do hereby ratify and confirm all that they shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
Signature Title Date
- ---------------------------------------------------- ---------------------------------------- -----------------
/s/ O. BRUTON SMITH Chairman, Chief Executive Officer and February 4, 1999
---------------------------------- Director (principal executive officer)
O. Bruton Smith
/s/ BRYAN SCOTT SMITH President, Chief Operating Officer and February 4, 1999
---------------------------------- Director
Bryan Scott Smith
/s/ DENNIS D. HIGGINBOTHAM President of Retail Operations and February 4, 1999
---------------------------------- Director
Dennis D. Higginbotham
/s/ THEODORE M. WRIGHT Chief FinancialOfficer (principal February 4, 1999
---------------------------------- financial and accounting officer),
Theodore M. Wright Vice President -- Finance, Treasurer,
Secretary and Director
/s/ WILLIAM P. BENTON Director February 4, 1999
----------------------------------
William P. Benton
/s/ WILLIAM R. BROOKS Director February 4, 1999
----------------------------------
William R. Brooks
/s/ WILLIAM I. BELK Director February 4, 1999
----------------------------------
William I. Belk
II-3
INDEX TO EXHIBITS
Sequential
Exhibit No. Description Page No.
- ------------- ------------------------------------------------------------------------------------- -----------
1.1** Purchase Agreement by and among Sonic Automotive, Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, BancBoston Robertson Stephens, Inc., Stephens Inc.
and NationsBanc Montgomery Securities LLC.
3.1* Amended and Restated Certificate of Incorporation of Sonic (incorporated by
reference to Exhibit 3.1 to Sonic's Registration Statement on Form S-1 (File
No. 333-33295) (the "Form S-1")).
3.2* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the Form S-1).
3.3* Certificate of Designation relating to Class A Convertible Preferred Stock
(incorporated by reference to Exhibit 4.1 to Sonic's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 (the "1998 First Quarter Form 10-Q")).
4.1* Form of Certificate for Class A Common Stock (incorporated by reference to
Exhibit 4.1 to the Form S-1).
4.2* Indenture dated as of July 1, 1998 between Sonic Automotive, Inc. and U.S. Bank
Trust National Association (incorporated by reference to Exhibit 4.2 to Sonic's
Registration Statement on Form S-4 (File Nos. 333-64397 and 333-64397-001
through 333-64397-044) (the "Form S-4")).
5.1** Opinion of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the
securities being registered.
11.1* Statement regarding computation of per share earnings (incorporated by reference to
Exhibit 11.1 to the 1997 Form 10-K).
23.1 Consent of Deloitte & Touche LLP.
23.2** Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1).
24.1 Powers of Attorney (included on the signature pages of this Registration Statement).
27.1* Financial Data Schedule (incorporated by reference to Exhibit 27 to Sonic's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
- ---------
* Filed previously.
** To be filed by amendment.