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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-13395
Sonic Automotive, Inc.
(Exact name of registrant as specified in its charter)
Delaware 5511 56-2010790
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
5401 East Independence Boulevard
P.O. Box 18747
Charlotte, North Carolina 28212
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (704) 532-3320
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Securities registered pursuant to Section 12(d) of the Act:
Name of each exchange
Title of each class on which registered
$.01 Par Value Class A Common Stock New York Stock Exchange
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 23, 1998, the aggregate market value of the voting stock held by
non-affiliates was $80,937,500.
FORM 10-K TABLE OF CONTENTS
Part I Page
Item 1. Business ............................................................................ 3
Item 2. Properties .......................................................................... 10
Item 3. Legal Proceedings ................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders ................................. 12
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ........... 12
Item 6. Selected Financial Data ............................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data ......................................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19
Part III
Item 10. Directors and Executive Officers of the Registrant .................................. 20
Item 11. Executive Compensation .............................................................. 22
Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 26
Item 13. Certain Relationships and Related Transactions ...................................... 26
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................... 29
Index to Financial Statements ................................................................ F-1
Signatures ...................................................................................
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements (including the Notes thereto) appearing
elsewhere herein. Statements in this Annual Report on Form 10-K that reflect
projections or expectations of future financial or economic performance of the
Company, and statements of the Company's plans and objectives for future
operations, including those contained in the following "Management's Discussion
and Analysis of Financial Condition and Results of Operations" or relating to
the Company's future acquisitions, are "forward looking" statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). No assurance can be given
that actual results or events will not differ materially from those projected,
estimated, assumed or anticipated in any such forward looking statements.
Important factors that could result in such differences, in addition to the
other factors noted with such forward looking statements, include: general
economic conditions in the Company's markets, including inflation, recession,
interest rates and other economic factors; the ability of the Company to finance
its acquisition efforts on acceptable terms; and other factors that generally
effect the business of automobile retail companies.
2
PART I
Item 1. Business
Sonic Automotive, Inc. (together with its subsidiaries, the "Company" or
"Sonic") is one of the leading automotive retailers in the United States,
operating 23 dealership franchises, four standalone used vehicle facilities and
seven collision repair centers in the southeastern and southwestern United
States. Sonic sells new and used cars and light trucks, sells replacement parts,
provides vehicle maintenance, warranty, paint and repair services and arranges
related finance and insurance (or "F&I") for its automotive customers. The
Company's business is geographically diverse, with dealership operations in the
Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta
markets.
Growth Strategy
The Company's objective is to capitalize on the consolidation of the
automotive retailing industry. Key elements of the Company's strategy to achieve
this objective include the acquisition of additional dealerships and the
leveraging of the Company's new vehicle franchises to increase sales of higher
margin products and services.
The Company has implemented a "hub and spoke" acquisition program by
pursuing (i) well-managed dealerships in metropolitan and growing suburban
geographic markets, and (ii) dealerships that will allow the Company to
capitalize on regional economies of scale, offer a greater breadth of products
and services or increase brand diversity. The growth generated through
acquisitions creates opportunities for economies of scale, including more
favorable financing terms from lenders and cost savings from the consolidation
of administrative functions such as employee benefits, risk management and
employee training.
In March 1998, the Company completed its previously announced acquisition
of Clearwater Toyota, Clearwater Mitsubishi and Clearwater Collision Center,
Inc. located in Clearwater, Florida, for a total purchase price of approximately
$15 million, subject to adjustment based on the net book value of the purchased
assets and assumed liabilities as of the closing date. The acquisition was
financed with $11 million in cash borrowed under the Revolving Facility (defined
herein), and $4.0 million in convertible preferred stock. In addition, by April
30, 1999 the Company will be required to pay an additional amount equal
to 50% of the combined pre-tax earnings of the entities acquired, such amount
not to exceed $1.7 million.
In March 1998, the Company signed a definitive agreement to purchase the
Hatfield dealership group located in Columbus, Ohio and Capital Chevrolet and
Imports located in Montgomery, Alabama for a total purchase price of $54
million, with up to an additional $3 million contingent on future performance.
Convertible preferred stock will be issued for $18 million of the purchase
price. The remainder of the purchase price will be payable in cash. The
acquisitions will be financed with proceeds to be obtained from the Revolving
Facility. Closing of these acquisitions is expected in the second quarter of
1998 or early in the third quarter of 1998.
Dealership Operations
The Company, as of December 31, 1997, owns eight dealership franchises
in the Charlotte market, twelve dealership franchises in the
Nashville-Chattanooga market, one dealership franchise each in the Houston,
Tampa-Clearwater and Atlanta markets.
The following table sets forth, for each of those areas, information
relating to the Company's sales performance for the year ended December 31,
1997:
Nashville/ Tampa/
Charlotte Chattanooga Houston Clearwater Atlanta
Market Market Market Market Market Total
------ ------ ------ ------ ------ -----
(dollars in thousands)
Year ended December 31, 1997 sales:
New vehicles ................................... $194,216 $ 14,700 $109,338 $ 20,211 $ 5,476 $343,941
Used vehicles .................................. 75,790 7,550 31,238 6,698 2,641 123,917
Parts, service and collision repair ............ 29,355 2,407 21,159 2,749 1,867 57,537
Finance and insurance .......................... 5,469 664 3,940 412 121 10,606
-------- -------- -------- -------- -------- --------
Total ........................................ $304,830 $ 25,321 $165,675 $ 30,070 $ 10,105 $536,001
======== ======== ======== ======== ======== =======
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Dealership Management
Operations of the dealerships are overseen by Regional Vice Presidents, who
report to the Company's Chief Operating Officer. Each of the Company's
dealerships is managed by an Executive Manager who is responsible for the
operations of the dealership and the dealership's financial and customer
satisfaction performance. The Executive Manager is also responsible for
selecting, training and retaining dealership personnel. All Executive Managers
report to the Company's senior management on a regular basis and prepare a
comprehensive monthly financial and operating statement of their dealership.
New Vehicle Sales
The Company sells 15 brands of cars, light trucks and sport utility
vehicles. The products have a broad range of prices from lower priced, or
economy vehicles, to luxury vehicles. The Company believes that its brand,
product and price diversity reduces the risk of changes in customer preferences,
product supply shortages and aging products.
Substantially all of the Company's new vehicles are acquired from foreign
and domestic automobile manufacturers ("Manufacturers"). Allocation of vehicle
inventory from manufacturers is based primarily on sales volume and input from
dealers. Vehicle purchases are financed through revolving credit facilities
known in the industry as floor plan lending.
The following table presents information with respect to the Company's new
vehicle sales:
New Vehicle Sales
--------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------
(dollars in thousands)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Unit sales 9,429 9,686 10,273 11,693 15,715
Sales revenue $152,525 $164,361 $186,859 $233,979 $343,941
Gross profit $ 10,474 $ 11,494 $ 13,926 $ 18,001 $ 26,427
Gross profit margin 6.9% 7.0% 7.5% 7.7% 7.7%
New vehicle sales include retail lease transactions and lease-type
transactions, both of which are arranged by the Company. New vehicle leases
generally have short terms. Lease customers, therefore, return to the new
vehicle market more frequently. Leases also provide a source of late-model,
generally low mileage, vehicles for its used vehicle inventory. Generally,
leased vehicles are under warranty for the entire lease term, which allows the
Company to provide repair service to the lessee throughout the term of the
lease.
Used Vehicle Sales
The Company sells a broad variety of makes and models of used cars, vans,
trucks and sport utility vehicles. Used vehicles are obtained by the Company
through customer trade-ins, at "closed" auctions which may be attended only by
new vehicle dealers and which offer off-lease, rental and fleet vehicles, and at
"open" auctions which offer repossessed vehicles and vehicles sold by other
dealers. The Company sells its used vehicles to retail customers and, in the
case of vehicles in poor condition or vehicles which remain unsold for a
specified period of time, to other dealers or wholesalers. Sales to other
dealers or wholesalers are frequently close to or below cost and therefore
negatively affect the Company's gross margin on used vehicle sales.
4
The following table sets forth information on the Company's used vehicle sales:
Used Car Sales
----------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------
(dollars in thousands)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Retail unit sales 4,104 4,374 5,172 5,488 6,712
Retail sales revenue $ 37,742 $ 47,537 $ 60,766 $ 68,054 $ 85,132
Retail gross profit 3,964 5,182 5,792 5,748 7,294
Retail gross margin 10.5% 10.9% 9.5% 8.4% 8.6%
Wholesale unit sales 4,189 4,656 5,009 5,344 7,287
Wholesale sales revenue $ 13,363 $ 16,062 $ 20,025 $ 25,642 $ 38,785
Wholesale gross profit 27 43 (45) (23) (599)
Wholesale gross margin 0.2% 0.3% (0.2)% (0.1)% (1.5)%
Total unit sales 8,293 9,030 10,181 10,832 13,999
Total revenue $ 51,105 $ 63,599 $ 80,791 $ 93,696 $ 123,917
Total gross profit 3,991 5,225 5,747 5,725 6,695
Total gross margin 7.8% 8.2% 7.1% 6.1% 5.5%
Service and Part Sales
The Company provides service and parts at each of its franchised
dealerships. The Company provides maintenance and repair services at its 19 new
vehicle dealership facilities and three used vehicle facilities. The
Company utilizes approximately 400 service bays in providing both
warranty and non-warranty services. Service and parts sales provide higher
gross margins than vehicle sales.
The following table sets forth information regarding the Company's service
and parts sales:
Service and Parts Sales
--------------------------------------------------
Year Ended December 31,
--------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(dollars in thousands)
Sales revenue ........... $27,243 $30,298 $31,958 $37,132 $51,033
Gross profit ............ 9,540 10,344 11,003 12,593 18,118
Gross profit margin ..... 35.0% 34.1% 34.4% 33.9% 35.5%
Collision Repair
The Company operates collision repair centers, or body shops, at seven of
its dealership locations. The Company's collision repair business provides
favorable margins and, similar to service and parts, is not significantly
affected by business cycles or consumer preferences. In addition, because of the
higher cost of used vehicles, insurance adjusters are more hesitant to declare a
vehicle a total loss, resulting in more significant, and higher cost, repair
jobs.
The following table sets forth information regarding the Company's
collision repair operations:
Collision Repair Sales
-----------------------------------------------
Year Ended December 31,
-----------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(dollars in thousands)
Sales revenue $3,094 $3,686 $3,903 $4,942 $6,504
Gross profit 1,516 1,870 1,956 2,452 3,092
Gross profit margin 49.0% 50.7% 50.1% 49.6% 47.5%
5
Finance and Insurance
The Company offers its customers a wide range of financing and leasing
alternatives for the purchase of vehicles. In addition, as part of each sale,
the Company additionally offers customers credit life, accident and health and
disability insurance to cover the financing cost of their vehicle, as well as
warranty or extended service contracts. The Company's revenue from financing,
insurance and extended warranty transactions ("F&I") was $7.8 million, $7.1
million and $10.6 million in 1995, 1996 and 1997, respectively.
The Company assigns its vehicle financing contracts and leases to other
parties, instead of directly financing sales, which reduces the Company's
exposure to loss from financing activities. The Company receives a commission
from the lender for originating and assigning the loan or lease but is assessed
a chargeback fee by the lender if a loan is canceled, in most cases, within 120
days of making the loan. Early cancellation can result from early repayment
because of refinancing of the loan, the sale or trade-in of the vehicle, or
default on the loan. The Company establishes an allowance to absorb estimated
chargebacks and refunds.
Sales and Marketing
The Company's marketing and advertising activities vary among its
dealerships and among its markets. The Company advertises primarily through
television, newspapers, radio and direct mail and regularly conducts special
promotions designed to focus vehicle buyers on its product offerings. The
Company also utilizes computer technology to aid sales people in prospecting
for customers. Under arrangements with certain Manufacturers, the Company
receives a subsidy for a portion of its advertising expenses incurred in
connection with a manufacturer's vehicles.
Relationships with Manufacturers
Each of the Company's dealerships operates under a separate franchise or
dealer agreement (a "Dealer Agreement") which governs the relationship between
the dealership and the Manufacturer. In general, each Dealer Agreement specifies
the location of the dealership for the sale of vehicles and for the performance
of certain approved services in a specified market area. The designation of such
areas generally does not guarantee exclusivity within a specified territory. In
addition, most Manufacturers allocate vehicles on a "turn and earn" basis, which
rewards high volume. A Dealer Agreement requires the dealer to meet specified
standards regarding showrooms, the facilities and equipment for servicing
vehicles, inventories, minimum net working capital, personnel training, and
other aspects of the business. The Dealer Agreement with each dealership also
gives each Manufacturer the right to approve the dealership's general manager
and any material change in management or ownership of the dealership. Each
Manufacturer may terminate a Dealer Agreement under certain circumstances, such
as a change in control of the dealership without Manufacturer approval, the
impairment of the reputation or financial condition of the dealership, the
death, removal or withdrawal of the dealership's general manager, the conviction
of the dealership or the dealership's owner or general manager of certain
crimes, a failure to adequately operate the dealership or maintain wholesale
financing arrangements, insolvency or bankruptcy of the dealership or a material
breach of other provisions of the Dealer Agreement.
Many automobile manufacturers are still developing their policies regarding
public ownership of dealerships. The Company believes that these policies will
continue to change as more dealership groups sell their stock to the public, and
as the established, publicly owned dealership groups acquire more franchises. To
the extent that new or amended manufacturer policies restrict the number of
dealerships which may be owned by a dealership group, or the transferability of
the Company's Common Stock, such policies could have a material adverse effect
on the Company.
The Company has not entered into any agreement with respect to the approval
by Jaguar of the proposed acquisition of the assets of the Jaguar of Chattanooga
dealership (the "Jaguar Dealership") by the Company as a part of the November
1997 acquisition of several dealerships from Nelson E. Bowers, II and his
affiliates (the "Bowers Acquisition"). The Company and Jaguar are continuing to
negotiate with respect to this matter, although no assurance can be given that
such negotiations will result in an arrangement that is favorable to the
Company. If Jaguar refuses to give its approval to the Company, the Company may
not be able to acquire the Jaguar Dealership. The Jaguar Dealership accounts for
less than 1.5% of the Company's 1997 revenues and profits, respectively.
The Company's Dealer Agreement with Ford requires the Company to deliver to
Ford all Securities and Exchange Commission filings made by the Company or third
parties with respect to the Company, including Schedules 13D and 13G. If any
such filing shows that (a) any person or entity would acquire 15% or more of
Sonic's voting securities, (b) any person or entity that owns or controls 15% or
more of Sonic's voting securities (or other securities convertible into such
voting securities) intends or may intend to acquire additional voting securities
of Sonic, (c) an extraordinary corporate transaction, such as a merger or
liquidation, involving Sonic or any of its subsidiaries is anticipated, (d) a
material asset sale involving Sonic or any of its subsidiaries is
6
anticipated, (e) a change in Sonic's Board of Directors or management is planned
or has occurred, or (f) any other material change in Sonic's business or
corporate structure is planned or has occurred, then the Company must give Ford
notice of such event. If Ford reasonably determines that such an event is not in
its interest, the Company may be required to sell or resign from one or more of
its Ford franchises. Should Sonic or any of its Ford franchisee subsidiaries
enter into an agreement to transfer the assets of a Ford franchisee subsidiary
to a third party, the right of first refusal described in the Ford Dealer
Agreement will apply.
Under the Company'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 the
Company's Honda franchise if any person or entity, other than O. Bruton Smith,
Bryan Scott Smith, Sonic Financial Corporation, William Egan and Affilitates
(the "Smith Group"), acquires 5% or greater of the Class A Common Stock (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 in the
initial public offering (the "IPO"), and any future changes in ownership or
transfers among the Company'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 the
Company. Moreover, Honda's approval is subject to the Smith Group plus Nelson
Bowers owning 51% of the shares of Common Stock on a fully diluted basis.
Approximately 49% of the Common Stock (on a fully-diluted basis after giving
effect to the options to be issued at the time of the Offering under the Stock
Option Plan), is owned by persons other than the Smith Group or Nelson Bowers
(assuming full exercise of the Underwriters' over-allotment option).
Under the Company's Dealer Agreement with General Motors ("GM"), the
Company has agreed, among other things, to disclose the following provisions:
Sonic will deliver to GM copies of all Schedules 13D and 13G, and all
amendments thereto and terminations thereof, received by Sonic, within five
days of receipt of such Schedules. If Sonic is aware of any ownership of
its stock that should have been reported to it on Schedule 13D but that is
not reported in a timely manner, it will promptly give GM written notice of
such ownership, with any relevant information about the owner that Sonic
possesses.
If Sonic, through its Board of Directors or through shareholder action,
proposes or if any person, entity or group sends Sonic a Schedule 13D, or
any amendments thereto, disclosing (a) an agreement to acquire or the
acquisition of aggregate ownership of more than 20% of the voting stock of
Sonic and (b) Sonic, through its Board of Directors or through shareholder
action, proposes or if any plans or proposals which relate to or would
result in the following: (i) the acquisition by any person of more than 20%
of the voting stock of Sonic other than for the purposes of ordinary
passive investment; (ii) an extraordinary corporate transaction, such as a
material merger, reorganization or liquidation, involving Sonic or a sale
or transfer of a material amount of assets of Sonic and its subsidiaries;
(iii) any change which, together with any changes made to the Board of
Directors within the preceding year, would result in a change in control of
the then current Board of Sonic; or (iv) in the case of an entity that
produces motor vehicles or controls or is controlled by or is under common
control with an entity that either produces motor vehicles or is a motor
vehicle franchiser, the acquisition by any person, entity or group of more
than 20% of the voting stock of Sonic and any proposal by any such person,
entity or group, through the Sonic Board of Directors or shareholders
action, to change the Board of Directors of Sonic, then, if such actions in
GM's business judgment could have a material or adverse effect on its image
or reputation in the GM dealerships operated by Sonic or be materially
incompatible with GM's interests (and upon notice of GM's reasons for such
judgment), Sonic has agreed that it will take one of the remedial actions
set forth in the next paragraph within 90 days of receiving such Schedule
13D or such amendment.
If Sonic is obligated under the previous paragraph to take remedial action,
it will (a) transfer to GM or its designee, and GM or its designee will
acquire the assets, properties or business associated with any GM
dealership operated by Sonic at fair market value as determined in
accordance with GM's Dealership Agreement with the Company, 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.
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
7
the dealer's markets, and state regulators may deny applications to establish
new dealerships for a number of reasons, including a determination that the
manufacturer is adequately represented in the area. Manufacturers must have
"good cause" for any termination or failure to renew a dealer agreement, and an
automaker's license to distribute vehicles in Florida may be revoked if, among
other things, the automaker has forced or attempted to force an automobile
dealer to accept delivery of motor vehicles not ordered by that dealer.
Under Texas law, despite the terms of contracts between manufacturers and
dealers, manufacturers may not unreasonably withhold approval of a transfer of a
dealership. It is unreasonable under Texas law for a manufacturer to reject a
prospective transferee of a dealership who is of good moral character and who
otherwise meets the manufacturer's written, reasonable and uniformly applied
standards or qualifications relating to the prospective transferee's business
experience and financial qualifications. In addition, under Texas law,
franchised dealerships may challenge manufacturers' attempts to establish new
franchises in the franchised dealers' markets, and state regulators may deny
applications to establish new dealerships for a number of reasons, including a
determination that the manufacturer is adequately represented in the region.
Texas law limits the ability of manufacturers to terminate or fail to renew
franchises. In addition, other laws in Texas limit the ability of manufacturers
to withhold their approval for the relocation of a franchise or require that
disputes be arbitrated. In addition, a manufacturer's license to distribute
vehicles in Texas may be revoked if, among other things, the manufacturer has
forced or attempted to force an automobile dealer to accept delivery of motor
vehicles not ordered by that dealer.
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.
Competition
The retail automotive industry is highly competitive. Depending on the
geographic market, the Company competes with both dealers offering the same
brands and product line as the Company and dealers offering other automakers'
vehicles. The Company also competes for vehicle sales with auto brokers and
leasing companies. The Company competes with small, local dealerships and with
large multi-franchise auto dealerships. Many of the Company's principal
competitors are larger and have greater financial and marketing resources and
are more widely known than the Company. Some of the Company's competitors also
may utilize marketing techniques, such as Internet visibility or "no
negotiation" sales methods, not currently used by the Company.
The Company also competes with regional and national car rental companies,
which sell their used rental cars, and used automobile "superstores," such as
AutoNation and CarMax. In the future, new competitors may enter the automotive
retailing market, including automobile manufacturers (such as Ford) that may
decide to open additional retail outlets or acquire other dealerships. In
addition, the used vehicle superstores generally offer a greater and more varied
selection of vehicles than the Company's dealerships. As the Company seeks to
acquire dealerships in new markets, it may face significant competition
(including competition from other publicly owned dealer groups) as it strives to
gain market share.
The Company believes that the principal competitive factors in vehicle
sales are the marketing campaigns conducted by automakers, the ability of
dealerships to offer a wide selection of the most popular vehicles, the location
of dealerships and the quality of customer service. Other competitive factors
include customer preference for makes of automobiles, pricing (including
manufacturer rebates and other special offers) and warranties.
In addition to competition for vehicle sales, the Company also competes
with other auto dealers, service stores, auto parts retailers and independent
mechanics in providing parts and service. The Company believes that the
principal competitive factors in parts and service sales are price, the use of
factory-approved replacement parts, the familiarity with a dealer's makes and
models and the quality of customer service. A number of regional and national
chains offer selected parts and service at prices that may be lower than the
Company's prices.
8
In arranging or providing financing for its customers' vehicle purchases,
the Company competes with a broad range of financial institutions. The Company
believes that the principal competitive factors in providing financing are
convenience, interest rates and contract terms.
The Company's success depends, in part, on national and regional
automobile-buying trends, local and regional economic factors and other regional
competitive pressures. The Company sells its vehicles in the Charlotte,
Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta markets.
Conditions and competitive pressures affecting these markets, such as
price-cutting by dealers in these areas, or in any new markets the Company
enters, could adversely affect the Company, although the retail automobile
industry as a whole might not be affected.
Governmental Regulations and Environmental Matters
A number of regulations affect the Company's business of marketing,
selling, financing and servicing automobiles. The Company also is subject to
laws and regulations relating to business corporations generally.
Under North Carolina, South Carolina, Tennessee, Florida, Georgia and Texas
law as well as the laws of other states into which the Company may expand, the
Company must obtain a license in order to establish, operate or relocate a
dealership or operate an automotive repair service. These laws also regulate the
Company's conduct of business, including its advertising and sales practices.
Other states may have similar requirements.
The Company's operations are also subject to laws governing consumer
protection. Automobile dealers and manufacturers are subject to so-called "Lemon
Laws" that require a manufacturer or the dealer to replace a new vehicle or
accept it for a full refund within one year after initial purchase if the
vehicle does not conform to the manufacturer's express warranties and the dealer
or manufacturer, after a reasonable number of attempts, is unable to correct or
repair the defect. Federal laws require certain written disclosures to be
provided on new vehicles, including mileage and pricing information.
The imported automobiles purchased by the Company are subject to United
States customs duties and, in the ordinary course of its business, the Company
may, from time to time, be subject to claims for duties, penalties, liquidated
damages, or other charges. Currently, United States customs duties are generally
assessed at 2.5% of the customs value of the automobiles imported, as classified
pursuant to the Harmonized Tariff Schedule of the United States.
The Company's financing activities with its customers are subject to
federal truth-in-lending, consumer leasing and equal credit opportunity
regulations as well as state and local motor vehicle finance laws, installment
finance laws, usury laws and other installment sales laws. Some states regulate
finance fees that may be paid as a result of vehicle sales. State and federal
environmental regulations, including regulations governing air and water quality
and the storage and disposal of gasoline, oil and other materials, also apply to
the Company.
The Company believes that it complies in all material respects with the
laws affecting its business. Possible penalties for violation of any of these
laws include revocation of the Company's licenses and fines. In addition, many
laws may give customers a private cause of action.
As with automobile dealerships generally, and service parts and body shop
operations in particular, the Company's business involves the use, storage,
handling and contracting for recycling or disposal of hazardous or toxic
substances or wastes, including environmentally sensitive materials such as
motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon,
waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing
agents, gasoline and diesel fuels. The Company's business also involves the past
and current operation and/or removal of aboveground and underground storage
tanks containing such substances or wastes. Accordingly, the Company is subject
to regulation by federal, state and local authorities establishing health and
environmental quality standards, and liability related thereto, and providing
penalties for violations of those standards. The Company is also subject to
laws, ordinances and regulations governing remediation of contamination at
facilities it operates or to which it sends hazardous or toxic substances or
wastes for treatment, recycling or disposal.
The Company believes that it does not have any material environmental
liabilities and that compliance with environmental laws and regulations will
not, individually or in the aggregate, have a material adverse effect on the
Company's results of operations, cash flows or financial condition. However,
soil and groundwater contamination is known to exist at certain properties used
by the Company. Furthermore, environmental laws and regulations are complex and
subject to frequent change. There can be no assurance that compliance with
amended, new or more stringent laws or regulations, stricter interpretations of
existing laws or the future discovery of environmental conditions will not
require additional expenditures by the Company, or that such expenditures will
not be material.
9
Employees
The Company has approximately 1,800 employees. The Company believes that
many dealerships in the retail automobile industry have difficulty in attracting
and retaining qualified personnel for a number of reasons, including the
historical inability of dealerships to provide employees with an equity interest
in the profitability of the dealerships. The Company provides certain executive
officers, managers and other employees with stock options and all employees with
a stock purchase plan and believes this type of equity incentive is attractive
to existing and prospective employees of the Company. The Company believes that
its relationship with its employees is good. None of the Company's employees is
represented by a labor union.
Item 2: Properties
The Company's principal executive offices are located at 5401 East Independence
Boulevard, Charlotte, North Carolina, and its telephone number is (704)
532-3301. The Company's preferred mailing address is P.O. Box 18747, Charlotte,
North Carolina, 28218. These executive offices are located on the premises of
Town & Country Ford. The following table identifies, for each of the properties
to be utilized by the Company's dealership operations, the location, the
owner/lessor, and the term and rental rate of the Company's lease for such
property, if applicable:
1997
Ownership Monthly Expiration
Dealership Status Owner/Lessor Rent(2) Date Facility Sq. Ft. Acres
- ---------- ------ ------------ ---- ---- -------- ------- -----
Town & Country Ford Lease STC Properties(1) $34,100 2000 Main Bldg. 85,013 12.48
5401 East Independence Blvd., Body Shop 24,768
Charlotte
NC
Lone Star Ford Lease Viking Investments(1) $30,000 2005 Main Bldg. 79,725 24.76
8477 North Freeway, Houston Used Car Bldg. 2,125
TX Body Shop 26,450
Fleet Bldg 1,500
Fort Mill Ford Own -- -- -- Main Bldg. 34,162 10.00
788 Gold Hill Rd., Fort Mill Body Shop 11,275
SC
Fort Mill Chrysler-Plymouth-Dodge Lease Jeffery Boyd $16,866 2002 Main Bldg. 9,809 5.50
3310 Hwy. 51, Fort Mill, SC Used Car Bldg. 1,470
Town & Country Toyota Own -- -- -- Main Bldg. 50,800 5.70
9101 South Blvd., Charlotte Body Shop 17,840
NC
Frontier Oldsmobile-Cadillac Lease Landers Oldsmobile- $17,000 1998(3) Main Bldg. 14,825 7.08
2501 Roosevelt Blvd., Monroe Cadillac Body Shop 11,250
NC Used Car Bldg 2,200
Ken Marks Ford Lease Marks Holding Company(1)$95,000 2007(3) Main Bldg. 79,100 22.00
24825 US Hwy. 19 North, Clearwater
&
3925 Tampa Rd., Oldsmar, FL
Dyer Volvo Lease D&R Investments(1) $50,000 2009(3) Main Bldg. 60,000 6.00
5260 Peachtree Industrial
Blvd., Atlanta
GA
Lake Norman Chrysler-Plymouth-Jeep Lease Phil M. and Quinton M. $40,000 2007(3) Main Bldg. 26,000 6.00
Chartwell Center Dr., Gandy and Affiliates
Cornelius, NC
Lake Norman Dodge Lease Phil M. and Quinton M. $40,000 2007(3) Main Bldg. 25,000 6.00
I-77 & Torrence Chapel Rd., Gandy and Affiliates Truck Center 5,000
Cornelius
NC
KIA/VW of Chattanooga Lease KIA Land Development $11,070 2007(3) Main Bldg. 8,445 3.75
6015 International Dr.,
Chattanooga
TN
10
1997
Ownership Monthly Expiration
Dealership Status Owner/Lessor Rent Date Facility Sq. Ft. Acres
- ---------- ------ ------------ ---- ---- -------- ------- -----
BMW/VW of Nashville Lease Third National Bank, $21,070 1998(3) Main Bldg.(6) 49,385 4.00
630 Murfreeboro Pike, Nashville David P'Pool and
TN Stella P'Pool
BMW/Volvo of Chattanooga Lease Nelson Bowers(1) $23,320 2007(3) Main Bldg. 40,295 12.24
5949 Brainerd Rd., Chattanooga
TN
Jaguar of Chattanooga Lease JAG Properties LLC, $27,852 2017(3) Main Bldg. 34,850 3.57
5915 Brainerd Rd., Chattanooga Thomas Green, Jr. and
TN Nelson Bowers (1)
Town & Country Ford of Cleveland Lease Robert G. Card, Jr. $12,500 Month to Main Bldg. 19,725 1.40
2496 South Lee Hwy., Cleveland Month(3)
TN
Dodge of Chattanooga Lease Edward & Barbara Wright $16,800 2001(3) Main Bldg. 30,000 4.88
402 West Martin Luther King Blvd.
Chattanooga, TN
Cleveland Village Imports Lease Thomas Green, Jr. and $18,858 2002(3) Main Bldg. 15,760 2.05
2490 & 2492 South Lee Hwy. Nelson Bowers (1)
Cleveland, TN
Cleveland Chrysler-Plymouth-Jeep Lease Cleveland Properties $23,452 2011(3) Main Bldg. 17,750 5.60
717 South Lee Hwy., Cleveland LLC (1)
TN
Town & Country Lease J.T. Williams $14,000 1998(4) Main Bldg. 15,000(6) 3.0(6)
Chrysler-Plymouth-Jeep
of Rock Hill, 803 North Anderson
Rd., Rock Hill, NC
(1) These lessors are affiliates of the Company's stockholders and/or executive
officers.
(2) All of the Company's leases are "triple net" leases and require the Company
to pay all real estate taxes, maintenance and insurance costs for the
property.
(3) Each of these leases provides for two renewal terms of five years each, at
the option of the Company.
(4) This lease provides for four renewal terms of one year each, at the option
of the Company.
(5) BMW/VW of Nashville has entered into a 20-year lease with H.G. Hill Realty
Company, an entity unaffiliated with the Company, regarding a new BMW
facility to be constructed at a site separate from its existing facility.
The monthly rent payments under this lease are not presently fixed and will
depend upon the final construction costs of the new facility. The lease
term will begin when the Company occupies these premises.
(6) Estimated size.
The Company's dealerships are generally located along major U.S. or
interstate highways. One of the principal factors considered by the Company in
evaluating an acquisition candidate is its location. The Company prefers to
acquire dealerships located along major thoroughfares, primarily interstate
highways which can be easily visited by prospective customers.
The Company owns certain of the real estate associated with Town & Country
Toyota and Fort Mill Ford. The remainder of the properties utilized by the
Company's dealership operations are leased as set forth in the foregoing table.
The Company believes
11
that its facilities are adequate for its current needs. In connection with its
acquisition strategy, the Company intends to lease the real estate associated
with a particular dealership whenever practicable.
Under the terms of its franchise agreements, the Company must maintain an
appropriate appearance and design of its facilities and is restricted in its
ability to relocate its dealerships.
12
Item 3: Legal Proceedings and Insurance
From time to time, the Company is named in claims involving the manufacture
of automobiles, contractual disputes and other matters arising in the ordinary
course of the Company's business. Currently, no legal proceedings are pending
against or involve the Company that, in the opinion of management, could
reasonably be expected to have a material adverse effect on the business,
financial condition or results of operations or cash flows of the Company.
Item 4: Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1997, no matters were submitted to a vote of
security holders.
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder
Matters
The Class A Common Stock of the Company, $.01 per share (the "Class A
Common Stock"), is currently traded on the New York Stock Exchange ("NYSE")
under the symbol "SAH."
As of December 31, 1997, 5,000,000 shares of Class A Common Stock and
6,250,000 shares of the Company's Class B Common Stock, par value $.01 per share
(the "Class B Common Stock" and together with the Class A Common Stock, the
"Common Stock") were outstanding. As of March 23, 1998, there were 1,057 record
holders of the Class A Common Stock and four record holders of the Class B
Common Stock. As of March 30, 1998, the closing stock price for the Class A
Common Stock was $16.5625.
The Company intends to retain future earnings to provide funds for
operations and future acquisitions. As a holding company, the Company will
depend on dividends and other payments from its subsidiary dealership operations
to pay cash dividends to stockholders, as well as to meet debt service and
operating expense requirements.
The Company does not anticipate paying any dividends in the foreseeable
future. Under the credit agreement between the Company and Ford Motor Credit no
dividends may be paid by the Company. Any decision concerning the payment of
dividends on the Common Stock will depend upon the results of operations,
financial condition and capital expenditure plans of the Company, as well as
other factors as the Board of Directors, in its sole discretion, may consider
relevant.
The following table sets forth the high and low closing sales prices for
the Company's Class A Common Stock, during the fourth quarter as reported by the
NYSE Composite Tape. Prior to November 10, 1997, the Company was privately held
and there was no public market for the Class A Common Stock.
1997 High Low
---- ---- ---
Fourth Quarter (from November 10, 1997 through 12.375 9.50
December 31, 1997)
On November 10, 1997, the Company's Registration Statement on Form S-1
(SEC File No. 333-33295) was declared effective. The Company commenced the
offering of its Class A Common Stock as of November 10, 1997. On November 17,
1997 the Company received $53.8 million in actual net proceeds (after payment of
the underwriters' discount and other expenses) from the initial public offering
(the "IPO") of 5,000,000 shares of its Class A Common Stock, which was sold at
an aggregate price to the public of $60.0 million. On December 10, 1997, an
over-allotment option for an aggregate of 750,000 shares of Class A Common Stock
(the "Over-Allotment Option") granted by the Company to the underwriters expired
unexercised.
13
From the aggregate price to the public $4.2 million has been applied as the
underwriters' discount and $2.0 million has been applied to the total actual
other expenses of the IPO and paid directly to entities unaffiliated with the
Company. As of December 31, 1997, net proceeds from the IPO were applied as
follows:
Acquisitions of Other Businesses
(Dyer Acquisition (as defined herein) and
Bowers Acquisition)................................. $38.2 million
Repayment of Indebtedness:
NationsBank, N.A..................................... $12.0 million
O. Bruton Smith...................................... 3.5 million
-----------
Total Net Proceeds.................................... $53.7 million
=============
As of January 30, 1997, as part of the original organization of the
Company, the Company issued to Sonic Financial Corporation ("Sonic Financial")
100 shares of common stock of the Company (the "Original Shares") in exchange
for $500 in cash. As of June 30, 1997, as part of the restructuring of the
Company in connection with its IPO (the "Reorganization"), the Company issued to
(i) its Chief Executive Officer, O. Bruton Smith, 1,035,625 shares of Class B
Common Stock in exchange for all his interests in Town & Country Toyota and Fort
Mill Ford, (ii) Sonic Financial 4,440,625 shares of Class B Common Stock in
exchange for all its interests in the original shares, Town & Country Ford, Fort
Mill Ford, Lone Star Ford and Frontier Plymouth-Oldsmobile-Cadillac, (iii)
William S. Egan 295,625 shares of Class B Common Stock in exchange for all his
interests in Town & Country Toyota, and (iv) Bryan Scott Smith 478,125 shares of
Class B Common Stock in exchange for all his interests in Town & Country Ford
and Fort Mill Ford. Also, in connection with the acquisition of the Dyer Volvo
dealership, the Company issued on January 15, 1998 a warrant to purchase 44,391
shares of Class A Common Stock at $12.00 per share, which is currently
exercisable and expires on January 15, 2003. In each such transaction, the
securities were not registered under the Securities Act of 1933, as amended (the
"Act") in reliance upon the exemption from registration provided by Section 4(2)
of the Act in view of the sophistication of the foregoing purchasers, their
access to material information, the disclosures actually made to them by the
Company and the absence of any general solicitation or advertising.
On November 17, 1997, the Company issued to nine of its officers and
employees, pursuant to the Stock Option Plan, options to purchase 587,500 shares
of Class A Common Stock in the aggregate. On March 20, 1998, the Company
issued to twenty-eight of its officers and employees, pursuant to the Stock
Option Plan, options to purchase 167,500 shares of Class A Common Stock in the
aggregate. Such securities were not registered under the Securities Act
because such grants and dividends were without consideration to the Company
and, consequently, did not constitute offers or sales within the meaning of
Section 5 of the Act.
Effective March 20, 1998, the Board of Directors authorized 300,000 shares
of preferred stock designated as Class A Convertible Preferred Stock, par value
$0.01 per share, which shall be divided into 100,000 shares of Series I
Convertible Preferred Stock, par value $0.01 per share (the "Series I Preferred
Stock"), 100,000 shares of Series II Convertible Preferred Stock, par value
$0.01 per share (the "Series II Preferred Stock"), and 100,000 shares of Series
III Convertible Preferred Stock, par value $0.01 per share (the "Series
III Preferred Stock" and, together with the Series I Preferred Stock and Series
II Preferred Stock, collectively, the "Class A Preferred Stock"). In
such transaction, the securities were not registered under the Securities
Act of 1933, as amended (the "Act") in reliance upon the exemption from
registration provided by Section 4(2) of the Act in view of the
sophistication of the foregoing purchasers, their access to material
information, the disclosures actually made to them by the Company and the
absence of any general solicitation or advertising. On March 24, 1998 the
Company issued 3,960 shares of Series III Preferred Stock to certain
shareholders in connection with the acquisition of substantially all the
assets of Clearwater Toyota, Clearwater Mitsubishi and Clearwater Collision
Center, Inc. Each share of Series III 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 Series III preferred stock, subject to a collar adjustment
that has 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 the Series III Preferred Stock. On the second anniversary of
the date of issuance of shares of the Series III Preferred Stock, the Company at
its option, may convert such shares into Class A Common Stock according to
the foregoing conversion provision. At anytime, the Company may redeem shares of
the Series III Preferred Stock for cash equal to the value of the Class A Common
Stock that would have been received if a conversion had occurred on the same
date.
14
Item 6: Selected Financial Data
The selected consolidated statement of operations data for the years ended
December 31, 1994, 1995, 1996 and 1997 and the selected consolidated balance
sheet data as of December 31, 1996 and 1997 are derived from the Company's
audited financial statements. The selected consolidated statement of operations
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 the Company's
unaudited financial statements. 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. This selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related notes included elsewhere herein.
Year Ended December 31,
1993 1994 1995 1996(1) 1997(1)
---- ---- ---- ---- ----
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues:
Vehicle sales ............................... $ 203,630 $ 227,960 $ 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 revenues ................................ 237,678 267,125 311,323 376,867 536,001
Cost of sales ................................. 208,445 233,011 270,878 331,047 471,253
----------- ----------- ----------- ----------- -----------
Gross profit .................................. 29,233 34,114 40,445 45,820 64,748
Selling, general and administrative
expenses .................................... 22,738 24,632 29,343 33,677 48,520
Depreciation and amortization ................. 788 838 832 1,076 1,322
----------- ----------- ----------- ----------- ----------
Operating income .............................. 5,707 8,644 10,270 11,067 14,906
Interest expense, floor plan .................. 2,743 3,001 4,505 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
=========== =========== =========== =========== =============
Income from continuing operations applicable to
Common Stock .............................. $ 3,702
Diluted Income per share from continuing
operations applicable to Common Stock ..... $ .53
Weighted average shares outstanding ........... 6,948,630
Consolidated Balance Sheet Data:
Working capital ............................... $ 9,629 $ 13,246 $ 18,140 $ 19,780 $ 44,097
Total assets .................................. 54,917 69,061 79,462 110,976 291,450
Long-term debt ................................ 4,142 3,773 3,561 5,286 38,640
Total liabilities ............................. 46,822 57,274 62,956 84,367 207,085
Minority interest ............................. 161 177 200 314 --
Stockholders' equity .......................... 7,934 11,610 16,306 26,295 84,365
- --------------
(1) The Company acquired Fort Mill Ford, Inc. in February 1996, Fort Mill
Chrysler-Plymouth-Dodge in June 1997, Lake Norman Chrysler/Plymouth/Jeep
and Lake Norman Dodge and Williams Motors in September 1997, Ken Marks Ford
in October 1997, Bowers Acquisition and Dyer & Dyer Volvo (the "Dyer
Acquisition") in November 1997. These acquisitions (the "Acquisitions")
were accounted for using the purchase method of accounting. As a result,
the Selected Financial Data does not include the results of operations of
these dealerships prior to the date they were acquired by the Company.
Accordingly, the actual financial data for periods after the acquisition
may not be comparable to data presented for periods prior to the
acquisitions.
15
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the results of operations and financial
condition should be read in conjunction with the Sonic Automotive, Inc. and
Subsidiaries Consolidated Financial Statements and the related notes thereto
included elsewhere herein.
Overview
Sonic Automotive, Inc. is one of the leading automotive retailers in the
United States, operating 23 dealership franchises, four standalone used vehicle
facilities and seven collision repair centers in the southeastern and
southwestern United States. Sonic sells new and used cars and light trucks,
sells replacement parts, provides vehicle maintenance, warranty, paint and
repair services and arranges related F&I for its automotive customers. The
Company's business is geographically diverse, with dealership operations in the
Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta
markets. Sonic sells 15 domestic and foreign brands, which consist of BMW,
Cadillac, Chrysler, Dodge, Ford, Honda, Infiniti, Jaguar, Jeep, KIA, Oldsmobile,
Plymouth, 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 (collectively, "F&I transactions"). In
connection with vehicle financing contracts, the Company receives a fee (a
"finance fee") from the lender for originating the loan. If, within 90 days of
origination, the customer pays off the loans through refinancing or
selling/trading in the vehicle or defaults on the loan, the finance company will
assess a charge (a "chargeback") for a portion of the original commission. The
amount of the chargeback depends on how long the related loan was outstanding.
As a result, the Company has established reserves based on its historical
chargeback experience. The Company also sells warranties provided by third-party
vendors, and recognizes a commission at the time of sale.
While the automotive retailing business is cyclical, Sonic sells several
products and services that are not closely tied to the sale of new and used
vehicles. Such products and services include the Company's parts and service and
collision repair businesses, both of which are not dependent upon near-term new
vehicle sales volume. One measure of cyclical exposure in the automotive
retailing business is based on the dealerships' ability to cover fixed costs
with gross profit from revenues independent of vehicle sales. According to this
measurement of "fixed coverage," a higher percentage of non-vehicle sales
revenue to fixed costs indicates a lower exposure to economic cycles. Each
manufacturer requires its dealerships to report fixed coverage according to a
specific method, and the methods used vary widely among the manufacturers and
are not comparable.
The Company's cost of sales and profitability are also affected by the
allocations of new vehicles which its dealerships receive from manufacturers.
When the Company does not receive allocations of new vehicle models adequate to
meet customer demand, it purchases additional vehicles from other dealers at a
premium to the Manufacturer's invoice, reducing the gross margin realized on the
sales of such vehicles. In addition, the Company follows a disciplined approach
in selling vehicles to other dealers and wholesalers when the vehicles have been
in the Company's inventory longer than the guidelines set by the Company. Such
sales are frequently at or below cost and, therefore, reduce the Company's
overall gross margin on vehicle sales. The Company's salary expense, employee
benefits costs and advertising expenses comprise the majority of its selling,
general and administrative ("SG&A") expenses. The Company's interest expense
fluctuates based primarily on the level of the inventory of new vehicles held at
its dealerships, substantially all of which is financed (such financing being
called "floor plan financing").
The Company has accounted for all of its dealership acquisitions using the
purchase method of accounting and, as a result, does not include in its
financial statements the results of operations of these dealerships prior to the
date they were acquired by the Company. The Consolidated Financial Statements of
the Company discussed below reflect the results of operations, financial
position and cash flows of each of the Company's dealerships acquired prior to
December 31, 1997. 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 the Company 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.
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 the Company in the future or the results of
operations, financial
16
position and cash flows which would have resulted had the Reorganization, the
Acquisitions and the IPO occurred at the beginning of the periods
presented in the Consolidated Financial Statements.
The automobile industry is cyclical and historically has experienced
periodic downturns, characterized by oversupply and weak demand. Many factors
affect the industry including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
available credit.
Results of Operations
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in the Company's
statement of operations.
Percentage of Total Revenues for
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
Revenues:
New vehicle sales........................................................ 60.0 % 62.0 % 64.2 %
Used vehicle sales....................................................... 26.0 % 24.9 % 23.1 %
Parts, service and collision repair...................................... 11.5 % 11.2 % 10.7 %
Finance and insurance.................................................... 2.5 % 1.9 % 2.0 %
Total revenues........................................................... 100.0 % 100.0 % 100.0 %
Cost of sales............................................................ 87.1 % 87.9 % 87.9 %
Gross profit............................................................. 13.0 % 12.1 % 12.1 %
Selling, general and administrative...................................... 9.4 % 8.9 % 9.3 %
Operating income......................................................... 3.2 % 2.9 % 2.8 %
Interest expense......................................................... 1.6 % 1.7 % 1.7 %
Income before income taxes............................................... 1.7 % 1.3 % 1.5 %
Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended December
31, 1996
Revenues. Revenues grew in each of the Company's primary revenue areas for
1997 as compared with 1996, causing total revenues to increase 42.2% to $536.0
million. New vehicle sales revenue increased 47.0% to $343.9 million, compared
with $233.9 million. New vehicle unit sales increased from 11,693 to 15,715,
accounting for 34.4% of the increase in vehicle sales revenues. The remainder of
the increase was primarily due to a 9.4% increase in the average selling price
resulting from changes in vehicle prices, particularly a shift in customer
preference to higher cost light trucks and sport utility vehicles, and
additional revenues from the Acquisitions.
Used vehicle revenues from retail sales increased 25.1% from $68.0 million
in 1996 to $85.1 million in 1997. The increase in used vehicle revenues was due
principally to additional revenues contributed from the Acquisitions in the
fourth quarter of 1997.
The Company'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 the Company's Lone
Star Ford and Fort Mill Ford locations and additional revenues from the
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 41.3% in 1997 to $64.7 million from
$45.8 million in 1996 due to increases in new vehicle sales revenues principally
at the Company's Lone Star Ford and Fort Mill Ford locations and additional
revenues from the Acquisitions in the third and fourth quarter of 1997. Parts
and service revenue increases also contributed to the increase in gross profit.
Selling, General and Administrative Expenses. SG&A expenses, including
depreciation and amortization, increased 43.4% from $34.7 million to $49.8
million. These expenses increased due to increases in sales volume as well as
expenses associated with the Acquisitions and the IPO.
Interest Expense. The Company's interest expense increased 43.8% from $6.4
million to $9.2 million. The increase in interest expense was due to additional
expense related to the Acquisitions and funding of the Acquisitions in the
fourth quarter.
Net Income. As a result of the factors noted above, the Company's net
income increased by $0.7 million in 1997 compared to 1996.
17
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. The Company's total revenue increased 21.2% to $376.9 million in
1996 from $311.3 million in 1995. New vehicle sales increased 25.2% to $234.0
million in 1996 from $186.9 million in 1995, primarily because of the
acquisition in February 1996 of the Company's Fort Mill Ford dealership. The
inclusion of the results of the Fort Mill Ford dealership accounted for 69.0% of
the Company's overall increase in new vehicle sales in 1996. Of the increase in
sales, 60.7% was attributable to increases in unit sales from 1995 to 1996. The
remainder of the increase in new vehicle sales in 1996 was largely attributable
to an increase in average unit sales prices of 10.0% which the Company believes
was primarily due to changes in inventory mix (in response to shifting customer
preferences to light trucks and sport utility vehicles) and general increases in
new vehicle sales prices.
Used vehicle revenues from retail sales increased 12.0% to $68.0 million in
1996 from $60.8 million in 1995. The inclusion of the results of the Company's
Fort Mill Ford dealership accounted for substantially all of this increase in
used vehicle sales. The Company attributes the remainder of the increase in its
used vehicle sales in 1996 to increases of approximately 5.6% in the average
retail-selling price per vehicle sold. Increases in average retail selling
prices were due to changes in product mix and general price increases.
The Company's parts, service and collision repair revenue increased 17.3%
to $42.1 million for 1996, compared to $35.9 million in 1995. Of this increase,
$4.4 million or 64.5% was due to the inclusion of the Company's Fort Mill Ford
dealership in the 1996 results of operations. The remainder of the increase was
principally the result of improved service operations and wholesale parts
distribution at the Company's Town and Country Ford dealership. F&I revenues
declined $0.7 million, or 8.9%, due principally to reductions in sales of
finance and insurance products at Town and Country Ford.
Gross Profit. Gross profit increased 13.3% in 1996 to $45.8 million from
$40.4 million in 1995 primarily due to the addition of the Fort Mill Ford
dealership. Gross profit decreased from 13.0% to 12.2% as a percentage of sales
due principally to declines in F&I income and declines in gross profit margins
on the sale of used vehicles. Gross margins on new vehicles increased primarily
due to increases in the average selling price per unit due to a change in mix of
new vehicles sold, particularly higher margin light trucks and sport utility
vehicles.
Selling, General and Administrative Expenses. The Company's SG&A expenses
increased $4.3 million, or 14.8%, from $29.3 million in 1995 to $33.7 million in
1996. However, as a percentage of revenue, SG&A expenses decreased from 9.4% to
8.9%. Expenses associated with the Fort Mill Ford dealership acquired by the
Company in 1996 accounted for approximately 91.4% of this increase. The Company
attributes the remainder of the increase in selling, general and administrative
expenses primarily to higher compensation levels in 1996 and to an increase in
advertising expenses.
Interest Expense. The Company's interest expense in 1996 increased 29.6% to
$6.4 million from $4.9 million in 1995. Of this increase, $1.0 million or 70.4%
was attributable to floor plan financing at the Company's Fort Mill Ford
dealership acquired in February 1996. The remainder of the increase primarily
reflects interest expense on the debt assumed in the acquisition of Fort Mill
Ford and an increase in floor plan interest rates during 1996.
Net Income. The Company's net income in 1996 decreased 6.3% to $3.0 million
from $3.2 million in 1995. This decrease was principally caused by increased
interest costs related to floor plan financing and debt assumed in the
acquisition of Fort Mill Ford.
Liquidity and Capital Resources
The Company's principal needs for capital resources are to finance
acquisitions, debt service and fund working capital requirements. Historically,
the Company has relied primarily upon internally generated cash flows from
operations, borrowing under its various credit facilities, borrowings and
capital contributions from its stockholders to finance its operations and
expansion. On November 10, 1997, the Company completed its IPO providing
additional capital resources for the consummation of the Acquisitions.
The Company currently has a global floor plan credit facility with Ford
Motor Credit for all its dealership subsidiaries (the "Floor Plan Facility"). As
of December 31, 1997 there was an aggregate of $133.2 million outstanding under
the Floor Plan Facility. The Floor Plan Facility at December 31, 1997 had an
effective rate of prime less .9%, subject to certain incentives, etc. Typically
new vehicle floor plan indebtedness exceeds the related inventory balances. The
inventory balance is generally reduced by the
18
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 the Company by the Manufacturer on a quarterly basis. The
related floor plan liability becomes due as vehicles are sold.
The Company 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 Company. The Floor Plan Facility contains a number of covenants,
including among others, covenants restricting the Company with respect to the
creation of liens and changes in ownership, officers and key management
personnel.
The Company generated net cash of $2.1 million and $7.7 million from
operating activities in 1996 and 1997, respectively. The 1997 increase was
attributable principally to a decrease in receivables, inventory levels and
increased net income.
Cash used for investing activities, excluding amounts paid in acquisitions,
was approximately $1.2 million for year ended December 31, 1997 and related
primarily to acquisitions of property and equipment. Cash used in investing
activities was $1.5 million, $6.7 million and $86.6 million in 1995, 1996 and
1997 respectively, including $1.5 million, $1.9 million and $2.0 million of
capital expenditures during such periods.
In 1996, cash provided by financing activities of $2.3 million primarily
reflected the purchase of capital stock by a stockholder of the Company, the
proceeds of which were used to fund the acquisition of Fort Mill Ford and the
purchase of stock by a stockholder of Town & Country Ford. Cash provided by
financing activities for the year ended December 31, 1997 was $90.7 million
principally due to proceeds of the IPO and debt incurred for certain
acquisitions.
In August 1997, the Company obtained a $20 million loan from NationsBank,
N.A. (the "NationsBank Facility"). The proceeds from the NationsBank Facility
were used in the consummation of the acquisition of the two Lake Norman
dealerships and of the Williams dealership. The NationsBank Facility was
guaranteed by Mr. O. Bruton Smith personally and matured in February 1998 and
repaid with proceeds of the IPO and the revolving line of credit (the "Revolving
Facility"). In October 1997, the Company obtained a secured Revolving Facility
from Ford Motor Credit in the principal amount of $26.0 million. In January 1998
the Company increased the aggregate amount available to borrow under this
facility to $75.0 million pursuant to the Revolving Facility's terms. The
Revolving Facility will mature in two years, unless the Company requests that
such term be extended, at the option of Ford Motor Credit, for additional one
year terms. No assurance can be given that such extensions will be granted. The
proceeds from the Revolving Facility were used in the consummation of the
acquisition of Ken Marks Ford and the repayment in February 1998 of $8.2 million
of the amount borrowed under the NationsBank Facility. Amounts to be drawn under
the Revolving Facility are anticipated by the Company to be used for the
acquisition of additional dealership subsidiaries and to provide general working
capital needs of the Company not to exceed $10 million. At December 31, 1997 the
balance outstanding on the NationsBank Facility was $8.2 million.
The Company 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 the Company's dealership subsidiaries that are subject to
previous pledges or liens). The Revolving Facility also contains certain
negative covenants made by the Company, 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 (i) debt to tangible equity (as defined in
the Revolving Facility), (ii) current assets to current liabilities, (iii)
earnings before interest, taxes, depreciation and amortization (EBITDA) to fixed
charges, (iv) EBITDA to interest expense, (v) EBITDA to total debt and (vi)
EBITDA to total floor plan debt. Moreover, the loss of voting control over the
Company by the Smith Group or the failure by the Company, 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.
Capital expenditures, excluding amounts paid in acquisitions, were $1.5
million, $1.9 million and $2.0 million in 1995, 1996 and 1997, respectively. The
Company's principal capital expenditure typically include building improvements
and equipment for use in the Company's dealerships. Capital expenditures in 1995
and 1996 were primarily attributable to expenditures for the addition of a
standalone used car lot in 1996 and other capital improvements at the Lone Star
Ford dealership. During 1997, the Company completed its previously announced
acquisitions of Fort Mill Chrysler-Plymouth-Dodge, Williams Motors, Dyer Volvo,
Bowers Dealerships and Affiliated Companies and Ken Marks Ford, Inc. with an
aggregate purchase price, net of cash purchased, of $85.6 million.
In March 1998, the Company completed its previously announced acquisition
of Clearwater Toyota, Clearwater Mitsubishi and Clearwater Collision Center,
Inc. located in Clearwater, Florida, for a total purchase price of $15 million,
subject to adjustment based on the net book value of the purchased assets and
assumed liabilities as of the closing date. The acquisition was financed with
$11 million in cash borrowed under a revolving credit facility and $4.0 million
in convertible preferred stock. In addition, by April
19
30, 1999 the Company will be required to pay an additional amount equal to 50%
of the combined pre-tax earnings of the entities acquired, such amount not to
exceed $1.8 million.
In March 1998, the Company signed a definitive agreement to purchase the
Hatfield dealership group located in Columbus, Ohio and Capital Chevrolet and
Imports located in Montgomery, Alabama for a total purchase price of $54
million, with up to an additional $3 million contingent on future performance.
Convertible preferred stock will be issued for $18 million of the purchase
price, with the remainder of the purchase price payable in cash. The
acquisitions will be financed with proceeds to be obtained from the Revolving
Credit Facility. Closing of these acquisitions is expected in the second quarter
of 1998 or early in the third quarter of 1998.
The Company believes that funds generated through future operations and
availability of borrowings under its floor plan financing (or any replacements
thereof) and its other credit arrangements will be sufficient to fund its debt
service and working capital requirements and any seasonal operating
requirements, including its currently anticipated internal growth, for the
foreseeable future. The Company estimates that it will incur a tax liability of
approximately $5.5 million in connection with the change in its tax basis of
accounting for inventory from LIFO to FIFO. The Company believes that it will be
required to pay this liability over a six-year period, beginning in January
1998, and believes that it will be able to pay such obligation with cash
provided by operations. The Company expects to fund any future acquisitions from
its future cash flow from operations, additional debt financing (including the
Revolving Facility) or the issuance of Class A Common Stock or issuance of other
convertible instruments.
Seasonality
The Company's operations are subject to seasonal variations. The first
quarter generally contributes less revenue and operating profits than the
second, third and fourth quarters. Seasonality is principally caused by weather
conditions and the timing of manufacturer incentive programs and model
changeovers.
Effects of Inflation
Due to the relatively low levels of inflation in 1995, 1996 and 1997,
inflation did not have a significant effect on the Company's results of
operations for those periods.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
standard establishes standards of reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. This
Statement will be effective for the Company's fiscal year ending December 31,
1998, and the Company does not intend to adopt this statement prior to the
effective date. Had the Company adopted this Statement as of January 1, 1994, it
would have reported comprehensive income of $2.4, $2.8 million and $3.8 million
for the years ended December 31, 1995, 1996 and 1997, respectively.
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 the Company's fiscal year ending December 31, 1998, and
the Company does not intend to adopt this statement prior to the effective date.
The Company has not yet completed its analysis of which operating segments it
will report on, if any.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements which appears on page F-1 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
20
Part III
Item 10. Directors and Executive Officers of the Registrant
The Board of Directors of the Company is divided into three classes, each
of which, after a transitional period, will serve for three years, with one
class being elected each year. The executive officers are elected annually by,
and serve at the discretion of, the Company's Board of Directors. The term of
Bryan Scott Smith will expire in 1998; Messrs. Wright and Bowers will expire in
1999; and the terms of Messrs. O. Bruton Smith, Brooks and Benton will expire in
2000. The Company's Board of Directors currently consists of six members. The
following table sets forth certain information with respect to the directors and
executive officers of the Company:
Name Age Position(s) with the Company
- ---- --- ----------------------------
O. Bruton Smith..................... 71 Chairman, Chief Executive Officer and Director*
Bryan Scott Smith................... 30 President, Chief Operating Officer and Director*
Nelson E. Bowers, II................ 53 Executive Vice President and Director Nominee*
Theodore M. Wright.................. 35 Chief Financial Officer, Vice President-Finance, Treasurer, Secretary and Director*
William P. Benton................... 74 Director
William R. Brooks................... 47 Director
William I. Belk..................... 49 Director
- ---------------
* Executive Officer
O. Bruton Smith has been the Chairman, Chief Executive Officer and a
director of the Company since its organization in 1997 and presently is the
controlling stockholder of the Company through his direct and indirect ownership
of Class B Common Stock. Mr. Smith has been the president and controlling
stockholder of Sonic Financial Corporation, a privately-held company ("Sonic
Financial") since its formation, which prior to the Reorganization owned a
controlling interest in all of the Company's dealerships except Town & Country
Toyota and presently owns a controlling interest in the Company's Common Stock.
Mr. Smith, prior to the Reorganization, owned a controlling interest in Town &
Country Toyota directly. Mr. Smith currently is, and since their acquisition by
the Company has been, a director and the president of each of the Company's
dealerships. Mr. Smith has worked in the retail automobile industry since 1966.
Mr. Smith is also the chairman and chief executive officer, a director and
controlling shareholder, either directly or through Sonic Financial, of Speedway
Motorsports, Inc. ("SMI")(NYSE: symbol TRK) and is also the executive officer
and a director of each of SMI's operating subsidiaries. Among other things, SMI
owns and operates the following NASCAR racetracks: Atlanta Motor Speedway,
Bristol Motor Speedway, Charlotte Motor Speedway, Sears Point Raceway and Texas
Motor Speedway. Under his employment agreement with the Company, Mr. Smith is
required to devote approximately 50% of his business time to the Company's
business.
Bryan Scott Smith has been the President and Chief Operating Officer of the
Company since April 1997, and a director of the Company since its organization
in 1997. Mr. Smith also serves as the executive officer and a director or
manager, as the case may be, of each of the Company's subsidiaries. Mr. Smith,
who is the son of Bruton Smith, has been the Vice President since 1993 and,
prior to the Reorganization, the minority owner of Town & Country Ford. Mr.
Smith joined the Company's predecessor in January 1991 on a full-time basis as
an assistant used car manager. In August of 1991, Mr. Smith became the used car
manager at Town & Country Ford. Mr. Smith was promoted to General Manager of
Town & Country Ford in November 1992 where he remained until his appointment to
the Company in April of 1997.
Nelson E. Bowers, II became the Executive Vice President and a director of
the Company in December 1997. Mr. Bowers also serves as an executive officer and
a director of certain of the Company's subsidiaries. Mr. Bowers owned a
controlling interest in the dealerships that are the subject of the Bowers
Acquisition and has worked in the retail automobile industry since 1974. Mr.
Bowers has served on national dealer councils for BMW and Volvo and has owned
and operated dealerships since 1979. Several of the dealerships previously owned
by Mr. Bowers have been awarded the highest awards available from manufacturers
for customer satisfaction.
Theodore M. Wright has been the Chief Financial Officer, Vice
President-Finance, Treasurer and Secretary of the Company since April 1997, and
a director of the Company since June 1997. Mr. Wright also serves as an
executive officer and a director, or in a similar capacity, of each of the
Company's subsidiaries. Before joining the Company, Mr. Wright was a Senior
Manager and in charge of the Columbia, South Carolina office of Deloitte &
Touche LLP. Prior to joining the Columbia office, Mr. Wright was a Senior
Manager in Deloitte & Touche LLP's National Office Accounting Research and SEC
Services Departments from 1994 to 1995. From 1992 to 1994 Mr. Wright was an
audit manager with Deloitte & Touche LLP.
21
William Benton became a director of the Company in December 1997. Since
January 1997, Mr. Benton has been the Executive Director of Ogilvy & Mather, a
world-wide advertising agency. He is also a consultant to the Chairman and Chief
Executive Officers of TI Group and Allied Holdings, Inc. Prior to 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.
William R. Brooks has been a director of the Company since its formation.
Mr. Brooks also served as the Company's 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 from
Price Waterhouse in 1983. At Sonic Financial, he was promoted from Manager to
Controller in 1985 and again to Chief Financial Officer in 1989.
William I. Belk became a director of the Company in March 1998. Mr. Belk is
currently the Vice President and Director for Monroe Hardware Company, Director
for Piedmont Ventures, Inc., and Treasurer and Director for Old Well Water, Inc.
Mr. Belk previously held the position of Chairman and Director for certain Belk
stores (a privately held retail department store chain).
Committees of the Board of Directors
There are two standing committees of the Board of Directors of the Company,
the Audit Committee and the Compensation Committee. The Audit Committee was
appointed on March 20, 1998, consists of Messrs. Benton, Belk and Brooks. The
Compensation Committee currently has no members and its functions are being
performed by the full Board of Directos. The Board of Directors intends to
select members for its Compensation Committee at the annual Board of Directors
meeting to occur after the 1998 annual meeting of the Company's stockholders.
Set forth below is a summary of the principal functions of each committee. There
were no meetings held for either of the committees during 1997.
Audit Committee. The Audit Committee recommends the appointment of the
Company'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 the Company's auditors, the
adequacy of the Company's system of internal control and procedures and the role
of management in connection therewith, reviews transactions between the Company
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 the Company, 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 the Company. The Compensation Committee administers the Stock Option
Plan and the Employee Stock Purchase Plan, and periodically reviews the
Company's executive compensation programs and takes action to modify programs
that yield payments or benefits not closely related to the Company or executive
performance. The policy of the Compensation Committee's program for executive
officers is to link pay to business strategy and performance in a manner which
is effective in attracting, retaining and rewarding key executives while also
providing performance incentives and awarding equity-based compensation to align
the long-term interests of executive officers with those of Company
stockholders. It is the Compensation Committee's objective to offer salaries and
incentive performance pay opportunities that are competitive in the marketplace.
The Company currently has no standing nominating committee.
During 1997, there was one meeting of the Board of Directors of the
Company, with each director attending the meeting.
Section 16(a) Beneficial Ownership Reporting Compliance.
To the Company's knowledge, based solely on review of reports furnished to
it, all Section 16 (a) filing requirements applicable to its executive officers,
directors and more than 10% beneficial owners were complied with, except that
Messrs. Bruton Smith, Scott Smith, Wright and Brooks inadvertently filed late
their Form 3 initial statements of beneficial ownership of securities after the
IPO and Mr. Benton inadvertently filed late his Form 3 after his appointment as
a director.
22
Item 11. Executive Compensation
Board of Directors Report on Executive Compensation
1997 Officer Compensation Program
The executive officer compensation for the Company for 1997 was based on
compensation established in each individuals employment agreements, as discussed
herein. Additionally, the executive employees were granted stock options made
under the Company's Stock Option Plan. Executive officers (including the Chief
Executive Officer) were also eligible in 1997 to participate in various benefit
plans similar to those provided to other employees of the Company. Such benefit
plans are intended to provide a safety net of coverage against various events,
such as death, disability and retirement.
The employment agreements for the executive officers (including that of the
Chief Executive Officer) were established on the basis of non-qualitative
factors such as positions of responsibility and authority, years of service and
annual performance evaluations. They were targeted to be competitive principally
in relation to other automotive retailing companies (such as those included in
the Peer Group Index in the performance graph elsewhere herein), although the
Compensation Committee also considered the base salaries of certain companies
not included in the Peer Group Index because the Compensation Committee
considered those to be relatively comparable industries.
Awards of stock options under the Company's Stock Option Plan are based on
a number of factors in the discretion of the Compensation Committee, including
various subjective factors primarily relating to the responsibilities of the
individual officers for and contribution to the Company's operating results (in
relation to the Company's other optionees), their expected future contributions
and the levels of stock options currently held by the executive officers
individually and in the aggregate. Stock option awards to executive officers
have been at then-current market prices in order to align a portion of an
executive's net worth with the returns to the Company's stockholders. For detail
concerning the grant options to the executive officers named in the Summary
Compensation Table below, see "Executive Compensation - Fiscal Year-End Option
Values."
As noted above, the Company's compensation policy is primarily based upon
the practice of pay-for-performance. Section 162(m) of the Internal Revenue Code
imposes a limitation on the deductibility of nonperformance-based compensation
in excess of $1 million paid to named executive officers. The Stock Option Plan
was created with the intention that all compensation attributable to stock
option exercises should qualify as deductible performance-based compensation.
The Committee currently believes that, generally, the Company should be able to
continue to manage its executive compensation program to preserve federal income
tax deductions.
Chief Executive Officer Compensation
The Committee's members annually review and approve the compensation of Mr.
Smith, the Company's Chief Executive Officer. Mr. Smith's salary has been
established through an employment agreement, as discussed herein. The Committee
believes that Mr. Smith is paid a reasonable salary. Mr. Smith is the only
employee of the Company not eligible for stock options. Since he is a
significant stockholder in the Company, his rewards as Chief Executive Officer
reflect increases in value enjoyed by all other stockholders.
O. Bruton Smith, Chairman
Bryan Scott Smith
Theodore M. Wright
Nelson E. Bowers, II
William P. Benton
William I. Belk
William R. Brooks
23
The following table sets forth compensation paid by or on behalf of the
Company to the Chief Executive Officer of the Company and to its other executive
officers for services rendered during the Company's fiscal years ended December
31, 1995, 1996 and 1997:
Summary Compensation Table
Long-Term
Compensation Awards
Annual Compenation Other Number of Shares
Annual Underlying All Other
Name and Principal Position(s) Year Salary (1) Bonus(2) Compensation(3) Options (4) Compensation (5)
- ------------------------------ ---- ---------- -------- --------------- ----------- ----------------
O. Bruton Smith 1997 $326,704 -- $ 15,000 -- --
Chairman, Chief 1996 164,750 -- 33,350 -- --
Executive
Officer and Director 1995 142,200 -- 41,350 -- --
Bryan Scott Smith 1997 273,767 $ 18,331 (5) 99,875 --
President, Chief 1996 48,000 230,714 (5) -- --
Operating
Officer and Director 1995 48,000 168,670 (5) -- --
1) Does not include the dollar value of perquisites and other personal
benefits.
(2) The amounts shown are cash bonuses earned in the specified year and paid in
the first quarter of the following year.
(3) The Company provides Mr. Smith with the use of automobiles for personal
use, the annual cost of which is reflected as Other Annual Compensation.
(4) The Company's Stock Option Plan was adopted in September 1997. Therefore,
no options were granted to any of the Company's executive officers in 1996
or 1995.
(5) The aggregate amount of perquisites and other personal benefits received
did not exceed the lesser of $50,000 or 10% of the total annual salary and
bonus reported for such executive officer.
Employment Agreements
The Company has entered into employment agreements with Messrs. Bruton
Smith, Scott Smith, Bowers and Wright, (the "Employment Agreements") which
provide for an annual base salary and certain other benefits. Pursuant to the
Employment Agreements, the 1997 base salaries of Messrs. Bruton Smith, Scott
Smith, Bowers and Wright will be $350,000, $300,000, $400,000 and $180,000,
respectively. The executives will also receive such additional increases as may
be determined by the Compensation Committee. The Employment Agreements provide
for the payment of annual performance-based bonuses equal to a percentage of the
executive's base salary, upon achievement by the Company (or relevant region) of
certain performance objectives, based on the Company's pre-tax income, to be
established by the Compensation Committee. Under the terms of the Employment
Agreements, the Company will employ Mr. Bruton Smith through November 2000.
Under the terms of their respective Employment Agreements, the Company will
employ Messrs. Scott Smith, Bowers and Wright for five years or until their
respective Employment Agreements are terminated by the Company or the executive.
Messrs. Scott Smith, Bowers and Wright also receive under their Employment
Agreements, options pursuant to the Company's Stock Option Plan, for 99,875
shares, 79,313 shares and 38,188 shares, of the Class A Common Stock,
respectively, exercisable at the initial public offering price, vesting in three
equal annual installments beginning October 1998 and expiring in October 2007.
Each of the Employment Agreements contain similar noncompetition
provisions. These provisions, during the term of the Employment Agreement, (i)
prohibit the disclosure or use of confidential Company information, and (ii)
prohibit competition with the Company for the Company's employees and its
customers, interference with the Company's relationships with its vendors, and
employment with any competitor of the Company in specified territories. The
provisions referred to in (ii) above shall also apply for a
24
period of two years following the expiration or termination of an Employment
Agreement. With respect to Messrs. Bruton Smith, Scott Smith and Wright, the
geographic restrictions apply in any Standard Metropolitan Statistical Area
("SMSA") or county in which the Company has a place of business at the time
their employment ends. With respect to Mr. Bowers, the restrictions apply only
in the SMSA's for Houston, Charlotte, Chattanooga, and Nashville.
Fiscal Year-End Option Values
The following table sets forth information concerning outstanding options to
purchase Common Stock held by executive officers of the Company at December 31,
1997:
Number of Securities
Underlying Unexercised % of Total Options Grant Date
Options at Fiscal Year End (#) Granted to Employees Exercise Price Expiration Present
Name Exercisable/Unexercisable In Fiscal Year ($/Share) Date Value (1)
- ---- ------------------------- -------------- --------- ---- ---------
Bryan Scott Smith 0/99,875 17.0% $ 12.00 October, 2007 $1,198,500
Nelson E. Bowers, II 0/79,313 13.4% 12.00 October, 2007 951,756
Theodore M. Wright 0/38,188 6.5% 12.00 October, 2007 458,256
- ---------------
(1) Grant date value based on market price at date of grant.
Stock Option Plans
The Company currently has in place one stock option plan (the "Stock Option
Plan") with respect to Class A Common Stock in order to attract and retain key
personnel. The Stock Option Plan, adopted in October 1997, provides for options
to be purchased up to an aggregate of 1,125,000 shares of Class A Common Stock
may be granted to key employees of the Company and its subsidiaries and to
officers, directors, consultants and other individuals providing services to the
Company. In November 1997, the Company granted options to purchase 587,509
shares of Class A Common Stock. Messrs. Scott Smith, Nelson E. Bowers, II and
Theodore M. Wright were granted non-statutory stock options (NSO's) and
Incentive Stock Options (ISO's) 99,875, 79,313 and 38,188 shares, respectively
at an exercise price equal to the IPO price of $12.00 per share. See Note 9 to
the Consolidated Financial Statements for additional information on stock
options and stock plans.
In October 1997, the Board of Directors and stockholders of the Company
adopted the Employee Stock Purchase Plan (the "ESPP"). The ESPP provides
employees of the Company the opportunity to purchase Class A Common Stock. Under
the terms of the ESPP, on January 1 of each year all eligible employees electing
to participate will be granted an option to purchase shares of Class A Common
Stock. The Company's Compensation Committee will annually determine the number
of shares of Class A Common Stock available for purchase under each option. The
purchase price at which Class A Common Stock will be purchased through the ESPP
will be 85% of the lesser of (i) the fair market value of the Class A Common
Stock on the applicable Grant Date and (ii) the fair market value of the Class A
Common Stock on the applicable Exercise Date. Options will expire on the last
exercise date of the calendar year in which granted. No options under the ESPP
were issued in 1997.
On March 20, 1998, the Board of Directors, pursuant to the Company's ESPP,
increased the authorized shares from 150,000 to 300,000 and issued options
exercisable for 150,000 shares of Class A Common Stock granting 310 shares per
participant participating in the ESPP.
In March, 1998, the Board of Directors adopted the Formula Stock Option
Plan for the benefit of the Company's outside directors. The plan
authorized options to purchase up to an aggregate of 300,000 shares of Class A
Common Stock. Under the plan, each outside director shall be awarded on or
before March 31st of each year an option to purchase 10,000 shares at an
exercise price equal to the fair market value of common stock at the date of the
award.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
Since the Company's organization in February 1997 and through March 20,
1998, all matters concerning executive officer compensation have been addressed
by the entire Board of Directors. The Compensation Committee was appointed March
20, 1998.
25
Mr. Bruton Smith serves as the Chief Executive Officer of the Company and serves
as an officer for each of the Company's subsidiaries. Mr. Scott Smith serves as
the Company's President and Chief Operating Officer and serves as an officer for
each of the Company's subsidiaries. Mr. Bowers serves as the Executive Vice
President of the Company and serves as an officer for certain of the Company's
subsidiaries. Mr. Wright serves as the Company's Chief Financial Officer, Vice
President-Finance, Treasurer and Secretary and serves as an officer for each of
the Company's subsidiaries. Mr. Brooks served from February to April 1997 as the
Company's Treasurer, Vice President and Secretary.
Mr. Bruton Smith is the only executive officer to have served on the
Compensation Committee of another entity during 1997. He served as Chairman,
Chief Executive Officer, a Director and a member of the Compensation Committee
of SMI. Mr. Brooks is also an Executive Officer of SMI.
Mr. Bruton Smith received aggregate salary, bonus and other compensation of
$1,497,313 during 1997 from SMI.
Director Compensation
Members of the Board of Directors who are not employees of the Company will
be compensated for their services under the Formula Plan. The Company will also
reimburse all directors for their expenses incurred in connection with their
activities as directors of the Company. Directors who are also employees of the
Company receive no compensation for serving on the Board of Directors.
Stockholder Performance Graph
Set forth below is a line graph comparing the cumulative stockholder return
on the Company's Common Stock against the cumulative total return of each of the
Standard and Poor's 500 Stock Index and a Peer Group Index for the time period
commencing November 10, 1997 and ending December 31, 1997. The companies used in
the Peer Group Index include Republic Industries, Group 1 Automotive, United
Auto Group, Car Max, Cross-Continent, Lithia Motors, Rush Enterprises and Smart
Choice, which are all publicly traded companies known by the Company to be
involved in the automobile industry. The graph assumes that $100 was invested on
November 10, 1997 in each of the Company's Common Stock, the Standard & Poor's
500 Stock Index and the Peer Group Index companies that all dividends were
reinvested.
[THE FOLLOWING WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Comparison of Cumulative Total Return
STARTING
BASIS
DESCRIPTION 11/97 12/97
----------- ----- -----
SONIC AUTOMOTIVE $100.00 $80.21
S & P 500 $100.00 $106.43
PEER GROUP $100.00 $79.30
26
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997 by (i) each
stockholder who is known by the Company to own beneficially more than five
percent of the outstanding Common Stock, (ii) each director of the Company,
(iii) each executive officer of the Company, and (iv) all directors and
executive officers of the Company as a group. Holders of Class A Common Stock
are entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company. Holders of Class B Common Stock are entitled to ten
votes per share on all matters submitted to a vote of the stockholders, except
that the Class B Common Stock is entitled to only one vote per share with
respect to any transaction proposed or approved by the Board of Directors of the
Company or proposed by all the holders of the Class B Common Stock or as to
which any member of the Smith Group or any affiliate thereof has a material
financial interest other than as a then existing stockholder of the Company
constituting a (a) "going private" transaction (as defined herein), (b)
disposition of substantially all of the Company's assets, (c) transfer resulting
in a change in the nature of the Company's business, or (d) merger or
consolidation in which current holders of Common Stock would own less than 50%
of the Common Stock following such transaction. In the event of any transfer
outside of the Smith Group or the Smith Group holds less than 15% of the total
number of shares of Common Stock outstanding, such transferred shares or all
shares, respectively, of Class B Common Stock will automatically convert into an
equal number of shares of Class A Common Stock.
Number of Shares Number of Shares Percentage of all
of Class A Common of Class B Common Common Stock
Name (1) Stock Owned Stock Owned Outstanding
- -------- ----------- ----------- -----------
O. Bruton Smith (2)(3)....................................... -- 5,476,250 48.7%
Sonic Financial Corporation (2).............................. -- 4,440,625 39.5%
Bryan Scott Smith (2)(4)..................................... -- 478,125 4.3%
William R. Brooks (2)........................................ -- -- --
Theodore M. Wright (2)(4).................................... -- -- --
Nelson E. Bowers, II (2)(4).................................. -- -- --
William Benton (2).......................................... -- -- --
All directors and executive officers as a group (10 persons). -- 5,954,375 52.9%
(1) Unless otherwise noted, each person has sole voting and investment power
over the shares listed opposite his name subject to community property laws
where applicable.
(2) The address of such person is care of the Company at 5401 East Independence
Boulevard, Charlotte, North Carolina 28218.
(3) The shares of Common Stock shown as owned by such person or groups include
all of the shares owned by Sonic Financial as indicated elsewhere in the
table. Mr. Smith owns the substantial majority of Sonic Financial's
outstanding capital stock.
(4) Does not give effect to options granted under the Company's Stock Option
Plan to purchase shares of Class A Common Stock at the public offering
price since none of such options become exercisable prior to October 1998.
Item 13. Certain Relationships and Related Transactions
Registration Rights Agreement
As part of the Reorganization, the Company entered into a Registration
Rights Agreement dated as of June 30, 1997 (the "Registration Rights
Agreements") with Sonic Financial, Bruton Smith, Scott Smith and William S.
Egan. Sonic Financial, Bruton Smith, Scott Smith and Egan Group, LLC, an
assignee of Mr. Egan (the "Egan Group") currently are the owners of record of
4,440,625, 1,035,625, 478,125 and 295,625 shares of Class B Common Stock,
respectively. Upon the registration of any of their shares or as otherwise
provided in the Certificate, such shares will automatically be converted into a
like number of shares of Class A Common Stock. Subject to certain limitations,
the Registration Rights Agreements provide Sonic Financial, Bruton Smith, Scott
27
Smith and the Egan Group with certain piggyback registration rights that permit
them to have their shares of Common Stock, as selling security holders, included
in any registration statement pertaining to the registration of Class A Common
Stock for issuance by the Company or for resale by other selling security
holders, with the exception of registration statements on Forms S-4 and S-8
relating to exchange offers (and certain other transactions) and employee stock
compensation plans, respectively. These registration rights will be limited or
restricted to the extent an underwriter of an offering, if an underwritten
offering, or the Company's Board of Directors, if not an underwritten offering,
determines that the amount to be registered by Sonic Financial, Bruton Smith,
Scott Smith or the Egan Group would not permit the sale of Class A Common Stock
in the quantity and at the price originally sought by the Company or the
original selling security holders, as the case may be. The Registration Rights
Agreement expires on the tenth anniversary of the closing of the Initial Public
Offering. Sonic Financial is controlled by the Company's Chairman and Chief
Executive Officer, Bruton Smith.
Certain Dealership Leases
Certain of the properties leased by the Company's dealership subsidiaries
are owned by officers, directors or holders of 5% or more of the Common Stock of
the Company or their affiliates. These leases contain terms comparable to, or
more favorable to the Company than, terms that would be obtained from
unaffiliated third parties. Town & Country Ford operates at facilities leased
from STC Properties, a North Carolina joint venture ("STC"). Town & Country Ford
maintains a 5% undivided interest in STC and Sonic Financial owns the remaining
95% of STC. The STC lease on the Town & Country Ford facilities will expire in
October 2000. Annual payments under the STC lease were $510,085 for each of
1994, 1995 and 1996. Current minimum rent payments are $409,000 annually
($34,083 monthly) through 1999, and will be decreased to $340,833 in 2000, such
rents being below market. When this lease expires, the Company anticipates
obtaining a long-term lease on the Town & Country Ford facility at fair market
rent.
Lone Star Ford operates, in part, at facilities leased from Viking
Investments Associates, a Texas association ("Viking"), which is controlled by
Mr. Bruton Smith. The Viking lease on the Lone Star Ford property expires in
2005. Annual payments under the Viking lease were $351,420, $331,302 and
$360,000 for 1994, 1995 and 1996, respectively. Minimum annual rents under this
lease are $360,000 ($30,000 monthly), such amount being below market. When this
lease expires, the Company anticipates obtaining a long-term lease on the Lone
Star Ford facility at fair market rent.
KIA of Chattanooga operates at facilities leased from KIA Land Development,
a company in which Nelson Bowers, the Company's Executive Vice President,
maintains an ownership interest. The Company negotiated this lease in connection
with the Bowers Acquisition. This triple net lease expires in 2007 and the
monthly rent is $11,070 per month. The Company may renew this lease at its
option for two additional five-year terms. At each renewal, the lessor may
adjust lease rents to reflect fair market rents for the property.
European Motors operates at its Chattanooga facilities under a triple net
lease from Mr. Bowers. The Company negotiated this lease in connection with the
Bowers Acquisition. The European Motors lease expires in 2007 and provides for
monthly rent of $23,320. This lease also provides for renewals on terms
identical to the KIA of Chattanooga lease.
Jaguar of Chattanooga operates at facilities leased from JAG Properties, a
company in which Mr. Bowers maintains an ownership interest. The Company
negotiated this lease in connection with the Bowers Acquisition. This triple net
lease expires in 2017 and provides for monthly rent of $27,852. The Company may
renew this lease on terms identical to the KIA of Chattanooga renewal options.
Cleveland Chrysler-Plymouth-Jeep-Eagle leases its facilities from Cleveland
Properties LLC, a limited liability company in which Mr. Bowers maintains an
ownership interest. The Company negotiated this lease in connection with the
Bowers Acquisition. This triple net lease expires in 2011, provides for monthly
rent of $23,452 and may be renewed on terms identical to the KIA of Chattanooga
lease.
Cleveland Village Imports operates at facilities leased from Nelson Bowers
and another individual. Nelson Bowers, the Company's Executive Vice-President
and a director, owns a 75% undivided interest in the land and buildings leased
by Cleveland Village Imports, with the remaining interests owned by an unrelated
party. Such land and buildings are leased under two leases: one is a triple net
fixed lease expiring on October, 2000 with rent of $15,858 per month and the
other, pertaining to a used car lot, is a month-to-month lease with rent of
$3,000 per month.
Dyer Volvo operates at facilities leased from D&R Investments, an entity in
which Richard Dyer, the Company's Executive Manager for Dyer Volvo, maintains an
ownership interest. This triple net lease, negotiated by the Company in
connection with the Dyer Acquisition, expires in 2009 and provides for monthly
rent of $50,000. The Dyer Volvo lease also provides the Company with two
optional renewals of five years each with rent at each renewal being adjusted to
fair market rent.
28
Ken Marks Ford ("KMF") operates at facilities leased from Marks Holding
Company, a corporation that is owned by Ken Marks, the Company's Regional Vice
President-Florida. In connection with the Ken Marks Acquisition, the lessor has
agreed to enter into a triple net lease with the Company as lessee at a
negotiated rental rate of $95,000 per month for an initial term expiring 2007
with two five-year renewals at the option of the Company.
Chartown Transactions
Chartown is a general partnership engaged in real estate development and
management. Before the Reorganization, Town & Country Ford maintained a 49%
partnership interest in Chartown with the remaining 51% held by SMDA Properties,
LLC, a North Carolina limited liability company ("SMDA"). Mr. Smith owns an 80%
direct membership interest in SMDA with the remaining 20% owned indirectly
through Sonic Financial. In addition, Sonic Financial 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 the
Reorganization, the Chartown Note was canceled and Town & Country Ford
transferred its partnership interest in Chartown to Sonic Financial for nominal
consideration. In connection with that transfer, Sonic Financial agreed to
indemnify Town & Country Ford for any and all obligations and liabilities,
whether known or unknown, relating to Chartown and Town & Country Ford's
ownership thereof.
The Bowers Volvo Note
In connection with Volvo's approval of the Company's acquisition of a Volvo
franchise in the Bowers Acquisition, Volvo, among other things, conditioned its
approval upon Nelson Bowers, the Company's Executive Vice President and a
director nominee, acquiring and maintaining a 20% interest in the Company's
Sonic Automotive of Chattanooga, LLC ("Chattanooga Volvo") subsidiary that will
operate the Volvo franchise. Mr. Bowers will finance 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. ("Sonic Nevada"), the wholly-owned
subsidiary of the Company that controls a majority interest in Chattanooga
Volvo. The Bowers Volvo Note will be secured by Mr. Bowers' interest in
Chattanooga Volvo.
The Bowers Volvo Note will be in a principal amount of $900,000 (subject to
adjustment following the closing of the Bowers Acquisition) and bear interest at
the lowest applicable federal rate as published by the U.S. Treasury Department
in effect on the date Mr. Bowers purchases his interest in Chattanooga Volvo.
Accrued interest will be payable annually. The operating agreement of
Chattanooga Volvo will provide that profits and distributions are to be
allocated first to Mr. Bowers to the extent of interest to be paid on the Bowers
Volvo Note and next to the other members of Chattanooga Volvo according to their
percentages of ownership. No other profits or any losses of Chattanooga Volvo
will be allocated to Mr. Bowers under this arrangement. 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.
Other Transactions
Beginning in early 1997, certain of the Sonic Dealerships have entered into
arrangements to sell to their customers credit life insurance policies
underwritten by American Heritage Life Insurance Company, an insurer
unaffiliated with Sonic ("American Heritage"). American Heritage in turn
reinsures all of these policies with Provident American Insurance Company, a
Texas insurance company ("Provident American"). Under these arrangements, the
Sonic Dealerships paid an aggregate of $576,000 to American Heritage in premiums
for these policies for the year ended December 31, 1997. The Company terminated
this arrangement with American Heritage in 1997. Provident American is a wholly
owned subsidiary of Sonic Financial.
Town & Country Ford and Lone Star Ford had each made several non-interest
bearing advances to Sonic Financial Corporation, a company controlled by Mr. O.
Bruton Smith. In preparation for the Reorganization, a demand promissory note by
Sonic Financial Corporation evidencing $2.1 million of these advances was
canceled in June 1997 in exchange for the redemption of certain shares of the
capital stock of Town & Country Ford held by Sonic Financial Corporation. In
addition, a demand promissory note by Sonic Financial Corporation evidencing
$0.5 million of these advances were canceled in June 1997 pursuant to a
dividend.
Certain subsidiaries of the Company (such subsidiaries together with the
Company and Sonic Financial being hereinafter referred to as the "Sonic Group")
have joined with Sonic Financial in filing consolidated federal income tax
returns for several years. Such subsidiaries will join with Sonic Financial in
filing for 1996 and for the period ending on June 30, 1997. Under applicable
federal tax law, each corporation included in Sonic Financial's consolidated
return is jointly and severally liable for any resultant tax. Under a tax
allocation agreement dated as of June 30, 1997, however, the Company agreed to
pay to Sonic Financial, in the event that additional federal income tax is
determined to be due, an amount equal to the Company's separate federal income
tax liability computed for all periods in which any member of the Sonic Group
has been a member of Sonic Financial's consolidated group less
29
amounts previously recorded by the Company. Also pursuant to such agreement,
Sonic Financial agreed to indemnify the Company for any additional amount
determined to be due from Sonic Financial's consolidated group in excess of the
federal income tax liability of the Sonic Group for such periods. The tax
allocation agreement establishes procedures with respect to tax adjustments, tax
claims, tax refunds, tax credits and other tax attributes relating to periods
ending prior to the time that the Sonic Group shall leave Sonic Financial's
consolidated group.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The exhibits and other documents filed as a part of this Annual Report on Form
10-K, including those exhibits which are incorporated by reference herein are:
(a)(1) Financial Statements:
See the Index to Financial Statements which appears on page F-1 hereof.
(2) Financial Statement Schedules:
No financial statement schedules are required to be filed as part of this
Annual Report on Form 10-K.
(3) Exhibits:
Exhibits required in connection with this Annual Report on Form 10-K are listed
below. Certain of such exhibits, indicated by an asterisk, are hereby
incorporated by reference to other documents on file with the Securities and
Exchange Commission with which they are physically filed, to be a part hereof as
of their respective dates.
Exhibit No. Description
- ----------- -----------
3.1* Amended and Restated Certificate of Incorporation of the
Company(incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 (File No. 333-33295) of the Company (the "Form
S-1"))
3.2* Bylaws of the Company(incorporated by reference to Exhibit 3.2 to the
Form S-1).
4.1* Form of Class A Common Stock Certificate(incorporated by reference to
Exhibit 4.1 to the Form S-1).
4.2* Registration Rights Agreement dated as of June 30, 1997 among the
Company, O. Bruton Smith, Bryan Scott Smith, William S. Egan and Sonic
Financial Corporation(incorporated by reference to Exhibit 4.2 to the
Form S-1).
10.1* Form of Lease Agreement to be entered into between the Company (or its
subsidiaries) and Nelson E. Bowers, II or his affiliates(incorporated
by reference to Exhibit 10.1 to the Form S-1).
10.2* Form of Lease Agreement to be entered into between the Company (or its
subsidiaries) and Marks Holding Company, Inc. (incorporated by
reference to Exhibit 10.2 to the Form S-1).
10.3* Lease Agreement dated as of January 1, 1995 between Lone Star Ford,
Inc. and Viking Investment Associates (incorporated by reference to
Exhibit 10.3 to the Form S-1).
10.4* Lease Agreement dated as of October 23, 1979 between O. Bruton Smith,
Bonnie Smith and Town and Country Ford, Inc. (incorporated by
reference to Exhibit 10.4 to the Form S-1).
10.5* North Carolina Warranty Deed dated as of April 24, 1987 between O.
Bruton Smith and Bonnie Smith, as Grantors and STC Properties, as
Grantee(incorporated by reference to Exhibit 10.5 to the Form S-1).
10.6* Lease dated January 13, 1995 between JAG Properties LLC and Jaguar of
Chattanooga LLC (incorporated by reference to Exhibit 10.6 to the Form
S-1).
10.7* Lease dated October 18, 1991 by and between Nelson E. Bowers II,
Thomas M. Green, Jr., and Infiniti of Chattanooga, Inc. (incorporated
by reference to Exhibit 10.7 to the Form S-1).
10.8* Amendment to Lease Agreement dated as of January 13, 1995 among Nelson
E. Bowers II, Thomas M. Green, Jr., JAG Properties LLC and Infiniti of
Chattanooga, Inc. (incorporated by reference to Exhibit 10.8 to the
Form S-1).
10.9* Lease dated March 15, 1996 between Cleveland Properties LLC and
Cleveland Chrysler-Plymouth-Jeep-Eagle LLC (incorporated by reference
to Exhibit 10.9 to the Form S-1).
z
Exhibit No. Description
- ----------- -----------
10.10* Lease Agreement dated January 2, 1993 among Nelson E. Bowers II,
Thomas M. Green, Jr. and Cleveland Village Imports, Inc. (incorporated
by reference to Exhibit 10.10 to the Form S-1).
30
10.11* Ford Motor Credit Company Automotive Wholesale Plan Application for
Wholesale Financing dated August 10, 1972 by Lone Star Ford, Inc.
(incorporated by reference to Exhibit 10.11 to the Form S-1).
10.12* Ford Motor Credit Company Automotive Wholesale Plan Application for
Wholesale Financing and Security Agreement dated August 22, 1984 by
Town and Country Ford, Inc. (incorporated by reference to Exhibit
10.12 to the Form S-1).
10.13* Wholesale Floor Plan Security Agreement dated October 5, 1990 between
Marcus David Corporation (d/b/a Town & Country Toyota) and World Omni
Financial Corp. (incorporated by reference to Exhibit 10.13 to the
Form S-1).
10.14* Demand Promissory Note dated October 5, 1990 of Marcus David
Corporation (d/b/a Town & Country Toyota) in favor of World Omni
Financial Corp. (incorporated by reference to Exhibit 10.14 to the
Form S-1).
10.15* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation
Dealer) dated April 21, 1995 between Cleveland
Chrysler-Plymouth-Jeep-Eagle LLC and Chrysler Credit
Corporation(incorporated by reference to Exhibit 10.15 to the Form
S-1).
10.15a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit
Corporation by Cleveland Chrysler Plymouth Jeep Eagle,
LLC(incorporated by reference to Exhibit 10.15a to the Form S-1).
10.16* Promissory Note dated April 21, 1995 in favor of Chrysler Credit
Corporation by Saturn of Chattanooga, Inc. (incorporated by reference
to Exhibit 10.16a to the Form S-1).
10.17* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation
Dealer) dated April 24, 1995 between Nelson Bowers Ford, L.P. and
Chrysler Credit Corporation(incorporated by reference to Exhibit 10.17
to the Form S-1).
10.17a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit
Corporation by Nelson Bowers Ford L.P. (incorporated by reference to
Exhibit 10.17a to the Form S-1).
10.18* Floor Plan Agreement dated May 6, 1996 between European Motors, LLC
and NationsBank, N.A. (incorporated by reference to Exhibit 10.18 to
the Form S-1).
10.19* Floor Plan Agreement dated April 11, 1996 between KIA of Chattanooga,
LLC and NationsBank, N.A. (incorporated by reference to Exhibit 10.19
to the Form S-1).
10.19a* Security Agreement dated April 11, 1996 between KIA of Chattanooga,
LLC and NationsBank, N.A. (incorporated by reference to Exhibit 10.19a
to the Form S-1).
10.20* Floor Plan Agreement dated October 17, 1996 between European Motors of
Nashville, LLC and NationsBank, N.A. (incorporated by reference to
Exhibit 10.20 to the Form S-1).
10.20a* Security Agreement dated October 17, 1996 between European Motors of
Nashville, LLC and NationsBank, N.A. (incorporated by reference to
Exhibit 10.20a to the Form S-1).
10.21* Floor Plan Agreement dated March 5, 1997 between Nelson Bowers Dodge,
LLC (d/b/a Dodge of Chattanooga) and NationsBank, N.A. (incorporated
by reference to Exhibit 10.21 to the Form S-1).
10.22* Security Agreement and Master Credit Agreement dated May 15, 1996
between Lake Norman Chrysler Plymouth Jeep Eagle, LLC and Chrysler
Financial Corporation(incorporated by reference to Exhibit 10.22 to
the Form S-1).
10.22a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial
Corporation by Lake Norman Chrysler Plymouth Jeep Eagle,
LLC(incorporated by reference to Exhibit 10.22a to the Form S-1).
10.23* Security Agreement & Capital Loan Agreement dated May 15, 1996 between
Lake Norman Dodge, Inc and Chrysler Financial Corp. (incorporated by
reference to Exhibit 10.23 to the Form S-1).
10.23a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial
Corporation by Lake Norman Dodge, Inc. (incorporated by reference to
Exhibit 10.23a to the Form S-1).
10.23b* Promissory Note dated May 15, 1996 in favor of Chrysler Financial
Corporation by Lake Norman Dodge, Inc. (incorporated by reference to
Exhibit 10.23b to the Form S-1).
10.24* Security Agreement and Master Credit Agreement (Non-Chrysler
Corporation Dealer) dated May 15, 1996 between Lake Norman Chrysler
Plymouth Jeep Eagle, LLC and Chrysler Financial
Corporation(incorporated by reference to Exhibit 10.24 to the Form
S-1).
10.24a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial
Corporation by Lake Norman Chrysler Plymouth Jeep Eagle,
LLC(incorporated by reference to Exhibit 10.24a to the Form S-1).
10.25* Floor Plan Agreement dated September 1, 1996 between NationsBank, N.A.
and Dyer & Dyer, Inc. (incorporated by reference to Exhibit 10.25 to
the Form S-1).
10.25a* Security Agreement dated September 1, 1996 between NationsBank, N.A.
and Dyer & Dyer, Inc. (incorporated by reference to Exhibit 10.25a to
the Form S-1).
Exhibit No. Description
- ----------- -----------
10.26* Security Agreement and Master Credit Agreement (Non-Chrysler
Corporation Dealer) dated April 21, 1995 between Cleveland Village
Imports, Inc. (d/b/a Cleveland Village Honda, Inc.) and Chrysler
Credit Corporation(incorporated by reference to Exhibit 10.26 to the
Form S-1).
31
10.27* Jaguar Credit Corporation Automotive Wholesale Plan Application for
Wholesale Financing and Security Agreement dated March 14, 1995 by
Jaguar of Chattanooga LLC(incorporated by reference to Exhibit 10.27
to the Form S-1).
10.28* Assignment of Joint Venture Interest in Chartown dated as of June 30,
1997 among Town and Country Ford, Inc., SMDA LLC and Sonic Financial
Corporation(incorporated by reference to Exhibit 10.28 to the Form
S-1).
10.29* Form of Employment Agreement between the Company and O. Bruton
Smith(incorporated by reference to Exhibit 10.29 to the Form S-1).
10.30* Form of Employment Agreement between the Company and Bryan Scott
Smith(incorporated by reference to Exhibit 10.30 to the Form S-1).
10.31* Form of Employment Agreement between the Company and Theodore M.
Wright(incorporated by reference to Exhibit 10.31 to the Form S-1).
10.32* Form of Employment Agreement between the Company and Nelson E. Bowers,
II(incorporated by reference to Exhibit 10.32 to the Form S-1).
10.33* Tax Allocation Agreement dated as of June 30, 1997 between the Company
and Sonic Financial Corporation(incorporated by reference to Exhibit
10.33 to the Form S-1).
10.34* Form of Sonic Automotive, Inc. Stock Option Plan(incorporated by
reference to Exhibit 10.34 to the Form S-1).
10.35* Form of Sonic Automotive, Inc. Employee Stock Purchase
Plan(incorporated by reference to Exhibit 10.35 to the Form S-1).
10.36* Subscription Agreement dated as of June 30, 1997 between O. Bruton
Smith and the Company(incorporated by reference to Exhibit 10.36 to
the Form S-1).
10.37* Subscription Agreement dated as of June 30, 1997 between Sonic
Financial Corporation and the Company(incorporated by reference to
Exhibit 10.37 to the Form S-1).
10.38* Subscription Agreement dated as of June 30, 1997 between Bryan Scott
Smith and the Company(incorporated by reference to Exhibit 10.38 to
the Form S-1).
10.39* Subscription Agreement dated as of June 30, 1997 between William S.
Egan and the Company(incorporated by reference to Exhibit 10.39 to the
Form S-1).
10.40* Asset Purchase Agreement dated as of May 27, 1997 by and among Sonic
Auto World, Inc., Lake Norman Dodge, Inc., Lake Norman
Chrysler-Plymouth-Jeep-Eagle LLC, Quinton M. Gandy and Phil M. Gandy,
Jr. (confidential portions omitted and filed separately with the SEC)
(incorporated by reference to Exhibit 10.40 to the Form S-1).
10.41* Asset Purchase Agreement dated as of June 24, 1997 by and among Sonic
Auto World, Inc., Kia of Chattanooga, LLC, European Motors of
Nashville, LLC, European Motors, LLC, Jaguar of Chattanooga LLC,
Cleveland Chrysler-Plymouth-Jeep-Eagle LLC, Nelson Bowers Dodge, LLC,
Cleveland Village Imports, Inc., Saturn of Chattanooga, Inc., Nelson
Bowers Ford, L.P., Nelson E. Bowers II, Jeffrey C. Rachor, and the
other shareholders named herein (confidential portions omitted and
filed separately with the SEC) (incorporated by reference to Exhibit
10.41 to the Form S-1).
10.41a* Amendment to Asset Purchase Agreement dated October 16, 1997 re:
Bowers Acquisition(incorporated by reference to Exhibit 10.41a to the
Form S-1).
10.42* Stock Purchase Agreement dated as of July 29, 1997 between Sonic Auto
World, Inc. and Ken Marks, Jr., O.K. Marks, Sr. and Michael J. Marks
(confidential portions omitted and filed separately with the SEC)
(incorporated by reference to Exhibit 10.42 to the Form S-1).
10.43* Asset Purchase Agreement dated as of August 1997 by and among Sonic
Automotive, Inc., Dyer & Dyer, Inc. and Richard Dyer (confidential
portions omitted and filed separately with the SEC) (incorporated by
reference to Exhibit 10.43 to the Form S-1).
10.43a* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Dyer
Acquisition(incorporated by reference to Exhibit 10.43a to the Form
S-1).
10.44* Security Agreement and Master Credit Agreement dated April 21, 1995
between Cleveland Chrysler Plymouth Jeep Eagle and Chrysler Credit
Corporation(incorporated by reference to Exhibit 10.44 to the Form
S-1).
10.45* Promissory Note dated as of August 28, 1997 by Sonic Automotive, Inc.
in favor of NationsBank, N.A. (incorporated by reference to Exhibit
10.45 to the Form S-1).
10.46* Credit Agreement dated October 15, 1997 by and between Sonic
Automotive, Inc. and Ford Motor Credit Company(incorporated by
reference to Exhibit 10.46 to the Form S-1).
10.47* Automotive Wholesale Plan Application For Wholesale Financing And
Security Agreement dated June 29, 1982 between Ford Motor Credit
Company and O.K. Marks Ford, Inc. (incorporated by reference to
Exhibit 10.47 to the Form S-1).
10.48* Supplemental Agreement between the Company and Ford Motor
Company(incorporated by reference to Exhibit 10.48 to the Form S-1).
10.49* Agreement between Toyota Motors Sales USA and the Company(incorporated
by reference to Exhibit 10.49 to the Form S-1).
32
10.50* Ford Sales and Service Agreement with Town and Country
Ford(incorporated by reference to Exhibit 10.50 to the Form S-1).
10.51* Ford Sales and Service Agreement with Lone Star Ford(incorporated by
reference to Exhibit 10.51 to the Form S-1).
10.52* Ford Sales and Service Agreement with Fort Mill Ford(incorporated by
reference to Exhibit 10.52 to the Form S-1).
10.53* Ford Sales and Service Agreement with Ken Marks Ford(incorporated by
reference to Exhibit 10.53 to the Form S-1).
Exhibit No. Description
- ----------- -----------
10.54* Ford Sales and Service Agreement with Nelson Bowers Ford(incorporated
by reference to Exhibit 10.54 to the Form S-1).
10.55* Chrysler Sales and Service Agreement with Fort Mill
Chrysler-Plymouth-Dodge(incorporated by reference to Exhibit 10.55 to
the Form S-1).
10.56* Plymouth Sales and Service Agreement with Fort Mill
Chrysler-Plymouth-Dodge(incorporated by reference to Exhibit 10.56 to
the Form S-1).
10.57* Dodge Sales and Service Agreement with Fort Mill
Chrysler-Plymouth-Dodge(incorporated by reference to Exhibit 10.57 to
the Form S-1).
10.58* Dodge Sales and Service Agreement with Sonic Dodge, LLC d/b/a Lake
Norman Dodge(incorporated by reference to Exhibit 10.58 to the Form
S-1).
10.59* Chrysler Sales and Service Agreement with Sonic
Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.59 to the Form S-1).
10.60* Plymouth Sales and Service Agreement with Sonic
Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.60 to the Form S-1).
10.61* Jeep Sales and Service Agreement with Sonic
Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.61 to the Form S-1).
10.62* Chrysler Sales and Service Agreement with Cleveland
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.62 to the Form S-1).
10.63* Plymouth Sales and Service Agreement with Cleveland
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.63 to the Form S-1).
10.64* Jeep Sales and Service Agreement with Cleveland
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.64 to the Form S-1).
10.65* Dodge Sales and Service Agreement with Nelson Bowers
Dodge(incorporated by reference to Exhibit 10.65 to the Form S-1).
10.66* Volvo Authorized Retailer Agreement with European Motors, LLC d/b/a
Volvo of Chattanooga(incorporated by reference to Exhibit 10.66 to the
Form S-1).
10.67* Volvo Sales Agreement with Dyer & Dyer, Inc. (incorporated by
reference to Exhibit 10.67 to the Form S-1).
10.68* Toyota Dealer Agreement with Marcus David Corporation d/b/a Town &
Country Toyota(incorporated by reference to Exhibit 10.68 to the Form
S-1).
10.69 Form of Sonic Automotive, Inc. Formula Stock Option Plan
10.70 Amended and Restated Credit Agreement (the "Credit Agreement") between
the Borrower and the Lender in the amount of $75 million.
10.71 Promissory Note in the amount of $75 million issued by the Borrower
under the Credit Agreement.
10.72 Subordinated promissory note from the Borrower to O. Bruton Smith,
pursuant to which O. Bruton Smith lends an amount equal to difference
between Net Cash Proceeds of the Public Offering and $58,000,000.
10.73 Subordination Agreement between O. Bruton Smith and the Lender,
acknowledged by the Borrower.
10.74 Asset Purchase Agreement dated December 30, 1997 between Sonic
Automotive, Inc., as buyer, and M & S Resources, Inc., Clearwater Auto
Resources, Inc., and Clearwater Collision Center, Inc., as sellers and
Scott Fink, Michael Cohen, Jeffrey Schumon, and Timothy McCabe as
shareholders of the sellers (incorporated by reference to Exhibit 99.1
to the Company's Current Report on Form 8-K dated March 30, 1998 (the
"March 1998 Form 8-K")).
10.75 Amendment No. 1 and Supplement to Asset Purchase Agreement dated
December 30, 1997 between Sonic Automotive, Inc., as buyer, and M & S
Resources, Inc., Clearwater Auto Resources, Inc., and Clearwater
Collision Center, Inc., as sellers and Scott Fink, Michael Cohen,
Jeffrey Schumon, and Timothy McCabe as shareholders of the sellers
(incorporated by reference to Exhibit 99.2 to the March 1998 Form
8-K).
21.1* Subsidiaries of the Company(incorporated by reference to Exhibit 21.1
to the Form S-1).
24* Power of Attorney (included on the signature page to this Registration
Statement) (incorporated by reference to Exhibit 24 to the Form S-1).
27 Financial Data Schedule
* Filed previously
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during 1997.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SONIC AUTOMOTIVE, INC.
By: /s/ O. Bruton Smith
--------------------------------
O. Bruton Smith
Chief Executive Officer and Chairman
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on its behalf by the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ O. Bruton Smith Chief Executive Officer (principle executive officer) and Chairman March 31, 1998
- -------------------------------
O. Bruton Smith
/s/ B. Scott Smith President, Chief Operating Officer and Director March 31, 1998
- -------------------------------
B. Scott Smith
/s/ Theodore M. Wright Chief Financial Office, Vice President-Finance, Treasurer, Secretary March 31, 1998
- ------------------------------- (Principle Financial and Accounting Officer) and Director
Theodore M. Wright
/s/ Nelson E. Bowers Executive Vice President and Director March 31, 1998
- -------------------------------
Nelson E. Bowers
/s/ William R. Brooks Director March 31, 1998
- -------------------------------
William R. Brooks
/s/ William P. Benton Director March 31, 1998
- -------------------------------
William P. Benton
/s/ William I. Belk Director March 31, 1998
- -------------------------------
William I. Belk
INDEX TO FINANCIAL STATEMENTS
Page
----
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT........................................................................................... F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1996 and 1997.............................................................. F-3
Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997................................. F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997............................. F-7
Notes to Consolidated Financial Statements............................................................................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
SONIC AUTOMOTIVE, INC.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of Sonic
Automotive, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 2, 1998 (March 24, 1998 as to Notes 2 and 8)
F-2
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
(Dollars in thousands)
December 31,
1996 1997
----------- ----------
ASSETS (Note 5)
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 6,679 $ 18,304
Marketable equity securities 639 270
Receivables (net of allowance for doubtful accounts of $225
and $523 at December 31, 1996 and 1997, respectively) 11,908 19,784
Inventories (Notes 1 and 3) 71,550 156,514
Deferred income taxes (Note 6) 280 405
Due from affiliates (Note 7) -- 1,047
Other current assets 332 1,048
-------- --------
Total current assets 91,388 197,372
PROPERTY AND EQUIPMENT, NET (Note 4) 12,467 19,081
GOODWILL, NET (Note 1) 4,266 74,362
DUE FROM AFFILIATE (Note 7) 2,466 --
OTHER ASSETS 389 635
-------- --------
TOTAL ASSETS $110,976 $291,450
======== ========
See notes to consolidated financial statements.
F-3
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
(Dollars and shares in thousands)
December 31,
1996 1997
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - floor plan (Note 3) $ 63,893 $ 133,236
Trade accounts payable 3,643 6,612
Accrued interest 521 1,071
Other accrued liabilities (Note 6) 3,032 10,748
Payable to affiliates (Note 7) -- 445
Current maturities of long-term debt (Note 5) 519 584
--------- ---------
Total current liabilities 71,608 152,696
LONG-TERM DEBT (NOTE 5) 5,286 38,640
PAYABLE TO THE COMPANY'S CHAIRMAN (Notes 2 and 7) -- 5,500
PAYABLE TO AFFILIATES (Note 7) 914 4,394
DEFERRED INCOME TAXES (Note 6) 1,059 1,079
INCOME TAX PAYABLE (Note 6) 5,500 4,776
MINORITY INTEREST (Note 1) 314 --
COMMITMENTS AND CONTINGENCIES (Notes 7 and 10)
STOCKHOLDERS' EQUITY (Notes 1, 8 and 9):
Preferred Stock, $.01 par, 3,000 shares authorized and unissued -- --
Class A Common Stock, $.01 par, 50,000 shares authorized;
5,000 shares issued and outstanding in 1997 -- 50
Class B Common Stock, $.01 par, 15,000 shares authorized;
6,250 shares issued and outstanding 63 63
Paid-in capital 13,333 68,045
Retained earnings 12,993 16,186
Unrealized gain (loss) on marketable equity securities (94) 21
--------- ---------
Total stockholders' equity 26,295 84,365
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,976 $ 291,450
========= =========
See notes to consolidated financial statements.
F-4
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1996 and 1997
(Dollars and shares in thousands, except per share amounts)
Years ended December 31,
1995 1996 1997
-------------- ------------- -----------
REVENUES:
Vehicle sales $267,650 $327,674 $467,858
Parts, service and collision repair 35,860 42,075 57,537
Finance and insurance 7,813 7,118 10,606
-------- -------- --------
Total revenues 311,323 376,867 536,001
COST OF SALES 270,878 331,047 471,253
-------- -------- --------
GROSS PROFIT 40,445 45,820 64,748
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 29,343 33,677 48,520
DEPRECIATION AND AMORTIZATION 832 1,076 1,322
-------- -------- --------
OPERATING INCOME 10,270 11,067 14,906
OTHER INCOME AND EXPENSE:
Interest expense, floor plan (Note 3) 4,504 5,968 8,007
Interest expense, other 436 433 1,199
Gain on sale of marketable equity securities 106 355 298
-------- -------- --------
Total other expense 4,834 6,046 8,908
-------- -------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 5,436 5,021 5,998
PROVISION FOR INCOME TAXES (Note 6) 2,176 1,924 2,249
-------- -------- --------
INCOME BEFORE MINORITY INTEREST 3,260 3,097 3,749
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (Note 1) 22 114 47
-------- -------- --------
NET INCOME $ 3,238 $ 2,983 $ 3,702
======== ======== ========
BASIC NET INCOME PER SHARE (Notes 1 and 8) $ 0.53
========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 6,949
========
DILUTED NET INCOME PER SHARE (Notes 1 and 8) $ 0.53
========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 6,949
========
See notes to consolidated financial statements.
F-5
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1995, 1996 and 1997
(Dollars and shares in thousands)
Class A Class B
Common Stock Common Stock Paid-In Retained
Shares Amount Shares Amount Capital Earnings
------- ------- ------- ------- -------- --------
BALANCE AT DECEMBER 31, 1994 -- $-- 6,250 $ 63 $ 4,775 $ 6,772
Capital contributions -- -- -- -- 1,494 --
Net unrealized loss on marketable equity securities -- -- -- -- -- --
Net income -- -- -- -- -- 3,238
-------- ----- ------- -------- -------- --------
BALANCE AT DECEMBER 31, 1995 -- -- 6,250 63 6,269 10,010
Capital contributions -- -- -- -- 7,064 --
Net unrealized loss on marketable equity securities -- -- -- -- -- --
Net income -- -- -- -- -- 2,983
-------- ------ -------- -------- -------- --------
BALANCE AT DECEMBER 31,1996 -- -- 6,250 63 13,333 12,993
Capital contribution (Note 1) -- -- -- -- 3,208 --
Public offering of common stock (Note 8) 5,000 50 -- -- 53,627 --
Stock redemption (Note 7) -- -- -- -- (2,123) --
Dividend (Note 7) -- -- -- -- -- (509)
Net unrealized gain on marketable equity securities -- -- -- -- -- --
Net income -- -- -- -- -- 3,702
-------- -------- -------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1997 5,000 $50 6,250 $ 63 $ 68,045 $ 16,186
======== ======== ======== ========== ========== ==========
Unrealized
Gain/(Loss) on
Marketable Total
Equity Stockholders'
Securities Equity
-------- --------
BALANCE AT DECEMBER 31, 1994 $ -- $ 11,610
Capital contributions -- 1,494
Net unrealized loss on marketable equity securities (35) (35)
Net income -- 3,238
-------- --------
BALANCE AT DECEMBER 31, 1995 (35) 16,307
Capital contributions -- 7,064
Net unrealized loss on marketable equity securities (59) (59)
Net income -- 2,983
-------- --------
BALANCE AT DECEMBER 31,1996 (94) 26,295
Capital contribution (Note 1) -- 3,208
Public offering of common stock (Note 8) -- 53,677
Stock redemption (Note 7) -- (2,123)
Dividend (Note 7) -- (509)
Net unrealized gain on marketable equity securities 115 115
Net income -- 3,702
-------- --------
BALANCE AT DECEMBER 31, 1997 $ 21 $84,365
======== ========
See notes to consolidated financial statements.
F-6
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997
(Dollars in thousands)
Years ended December 31,
1995 1996 1997
-------------- --------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,238 $ 2,983 $ 3,702
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 832 1,076 1,322
Minority interest 22 114 47
(Gain) loss on disposal of property and equipment (39) 80 110
Gain on sale of marketable equity securities (106) (355) (298)
Change in deferred income taxes 450 (241) (27)
Changes in assets and liabilities that relate to operations:
Receivables (229) (2,421) (594)
Inventories (5,025) (14,013) 1,430
Other current assets 21 (10) (584)
Other non-current assets (14) (70) (204)
Notes payable - floor plan 3,431 12,985 1,632
Accounts payable and other current liabilities (42) 1,439 1,694
Income tax payable 501 524 (504)
-------------- --------------- --------------
Total adjustments (198) (892) 4,024
-------------- --------------- --------------
Net cash provided by operating activities 3,040 2,091 7,726
-------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired - (5,127) (85,650)
Purchases of property and equipment (1,509) (1,907) (2,007)
Proceeds from sales of property and equipment 557 4 43
Purchase of marketable equity securities (1,623) (207) -
Proceeds from sales of marketable equity securities 1,074 515 784
-------------- --------------- --------------
Net cash used in investing activities (1,501) (6,722) (86,830)
-------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions 1,494 7,064 -
Public offering of common stock - - 53,677
Proceeds from long-term debt 3 599 45,892
Payments of long-term debt (269) (576) (13,353)
Receipts from (advances to) affiliate companies 1,772 (4,771) (987)
Advances from the Company's Chairman (Note 7) - - 5,500
-------------- --------------- --------------
Net cash provided by financing activities 3,000 2,316 90,729
-------------- --------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,539 (2,315) 11,625
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,455 8,994 6,679
-------------- --------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,994 $ 6,679 $ 18,304
============== =============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - Cash paid during the year for:
Interest $ 4,777 $ 6,489 $ 8,761
Income taxes $ 1,522 $ 2,042 $ 1,392
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Purchase of minority interest through exchange of common stock (Note 1) - - $ 3,208
Cancellation of notes payable from affiliates in exchange for common stock (Note 7) - - $ 2,123
Cancellation of notes payable from affiliates pursuant to dividend (Note 7) - - $ 509
See notes to consolidated financial statements.
F-7
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands except per share amounts)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business -- Sonic Automotive, Inc ("Sonic" or the
"Company") was incorporated in the State of Delaware in February 1997 in order
to effect a reorganization of certain affiliated companies (the
"Reorganization") and to undertake an initial public offering of the Company's
common stock (the "Offering"). The Company owns and operates automobile
dealerships in Florida, Georgia, North Carolina, South Carolina, Tennessee, and
Texas and is in the business of selling new and used cars and light trucks,
selling replacement parts, providing vehicle maintenance, warranty, paint, and
repair services and arranging related financing and insurance.
Pursuant to the Reorganization on June 30, 1997, certain companies
affiliated through common ownership and control became wholly-owned subsidiaries
of the Company through the exchange of their common stock or membership
interests for 6.3 million shares of the Company's Class B common stock having a
par value of $.01 per share. The financial statements for the periods through
the effective date of the Reorganization represent the combined data for these
companies, which include the following:
Town and Country Ford, Inc................... Charlotte, North Carolina
Lone Star Ford, Inc.......................... Houston, Texas
FMF Management, Inc. (d/b/a Fort Mill Ford).. Charlotte, North Carolina
Town and Country Toyota, Inc................. Charlotte, North Carolina
Frontier Oldsmobile-Cadillac, Inc............ Charlotte, North Carolina
The Reorganization was accounted for at historical cost in a manner similar
to a pooling-of-interests as the entities were under the common management and
control of Mr. O. Bruton Smith, the Company's Chairman and Chief Executive
Officer.
Prior to the Reorganization, Town and Country Toyota, Inc. was 69% owned by
Mr. O. Bruton Smith. Lone Star Ford, Inc. and Frontier Oldsmobile - Cadillac,
Inc. were 100% owned by Sonic Financial Corporation ("SFC"), which in turn is
100% owned by Mr. O. Bruton Smith and related family trusts. Town and Country
Ford, Inc. was owned 80% by SFC and 20% by Mr. Scott Smith (O. Bruton Smith's
son). FMF Management, Inc. was owned 50% by SFC and 50% by Mr. O. Bruton Smith.
In connection with the Reorganization, the Company purchased the remaining 31%
minority interest in Town and Country Toyota, Inc. for $3.2 million in a
transaction accounted for using purchase accounting. On a pro forma basis for
the years ended December 31, 1996 and 1997, revenues would have been unchanged
and net income and net income per share would not be materially different had
the acquisition of this minority interest occurred on January 1, 1996 and
January 1, 1997, respectively.
The 1997 consolidated financial statements include the accounts of the
above five companies and also include the accounts and results of operations of
certain dealerships and dealership groups acquired during the year from the
respective dates of acquisition (see Note 2).
Principles of Consolidation -- All material intercompany transactions have
been eliminated in the consolidated financial statements.
Revenue Recognition -- The Company records revenue when vehicles are
delivered to customers, and when vehicle service work is performed. Finance and
insurance commission revenue is recognized principally at the time the contract
is placed with the financial institution.
Dealer Agreements -- The Company purchases substantially all of its new
vehicles from manufacturers at the prevailing prices charged by the manufacturer
to its franchised dealers. The Company's sales could be unfavorably impacted by
the manufacturer's unwillingness or inability to supply the dealership with an
adequate supply of new vehicle inventory.
Each dealership operates under a dealer agreement with the manufacturer
which generally restricts the location, management and ownership of the
respective dealership. The ability of the Company to acquire additional
franchises from a particular manufacturer may be limited due to certain
restrictions imposed by manufacturers. Additionally, the Company's ability to
enter into other significant acquisitions may be restricted and the acquisition
of the Company's stock by third parties may be limited by the terms of the
franchise agreements.
F-8
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Continued
Cash and Cash Equivalents -- The Company considers contracts in transit and
all highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
the Company from finance companies related to vehicle purchases, and was $5.2
million and $12.1 million at December 31, 1996 and 1997, respectively.
Inventories -- In connection with the Offering, the Company changed its
method of accounting for inventories of new vehicles from the last-in-first-out
method ("LIFO") to the first-in-first-out method ("FIFO"). In accordance with
Accounting Principles Board Opinion No. 20, "Accounting Changes", the
accompanying financial statements and related notes have been retroactively
restated to reflect that change. Accordingly, inventories of new vehicles,
including demonstrators, and parts and accessories are stated at the lower of
FIFO cost or market. Inventories of used vehicles are stated at the lower of
specific cost or market.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using straight-line methods over the estimated useful
lives of the assets. The range of estimated useful lives is as follows:
Useful Lives
----------------
Building and improvements 5-40
Office equipment and fixtures 5-15
Parts and service equipment 15
Company vehicles 5
Goodwill -- Goodwill represents the excess of purchase price over the
estimated fair value of the net assets acquired and is being amortized over a 40
year period. The cumulative amount of goodwill amortization at December 31, 1996
and 1997 was $98,000 and $643,000 respectively. The Company periodically reviews
goodwill to assess recoverability. The Company's policy is to compare the
carrying value of goodwill with the expected undiscounted cash flows from
operations of the acquired business.
Income Taxes -- Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to the capitalization of additional
inventory costs for income tax purposes, the recording of chargebacks and
repossession losses on the direct write-off method for income tax purposes, the
direct write-off of uncollectible accounts for income tax purposes, and the
accelerated depreciation method used for income tax purposes. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. In addition, deferred tax assets are
recognized for state operating losses that are available to offset future
taxable income.
Stock-Based Compensation -- The Company measures the compensation cost of
its stock-based compensation plans under the provisions of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as
permitted under Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Under the provisions of APB No. 25,
compensation cost is measured based on the intrinsic value of the equity
instrument awarded. Under the provisions of SFAS No. 123, compensation cost is
measured based on the fair value of the equity instrument awarded.
Concentrations of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
on deposit with financial institutions. At times, amounts invested with
financial institutions may exceed FDIC insurance limits. Concentrations of
credit risk with respect to receivables are limited primarily to automobile
manufacturers and financial institutions. Credit risk arising from trade
receivables from commercial customers is reduced by the large number of
customers comprising the trade receivables balances.
Fair Value of Financial Instruments -- As of December 31, 1996 and 1997 the
fair values of the Company's financial instruments including receivables, due
from affiliates, notes payable-floor plan, trade accounts payable, payables to
affiliated companies and the Company's Chairman and long-term debt approximate
their carrying values due either to length of maturity or the existence of
variable interest rates that approximate prevailing market rates.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-9
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(All tables in thousands except per share amounts)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Continued
Advertising -- The Company expenses advertising costs in the period
incurred. Advertising expense amounted to $4.5 million, $5.0 million and $7.0
million for 1995, 1996 and 1997, respectively.
Impairment of Long-Lived Assets -- Effective January 1, 1996, the Company
adopted the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Adoption of SFAS No. 121 did not have a material impact on the
Company's results of operations, financial position, or cash flows.
Net Income per Share -- Effective December 31, 1997, the Company adopted
the provisions of SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for basic and diluted
earnings per share. The impact of adoption of SFAS No. 128 and required
disclosures are discussed in Note 8.
Impact of New Accounting Standards -- In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." This Standard establishes standards
of reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. This Statement will be effective
for the Company's fiscal year ending December 31, 1998, and the Company does not
intend to adopt this Statement prior to the effective date. Had the Company
early adopted this Statement, it would have reported comprehensive income of
$2.4 million, $2.8 million and $3.8 million for the years ended December 31,
1995, 1996 and 1997, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Standard redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. This Statement
will be effective for the Company's fiscal year ending December 31, 1998, and
the Company does not intend to adopt this statement prior to the effective date.
The Company has not yet completed its analysis of which operating segments it
will report on, if any.
Reclassification -- Certain prior year amounts have been reclassified to
conform with current year presentation.
2. BUSINESS ACQUISITIONS
Pending Acquisitions
In March 1998, the Company signed a definitive agreement to purchase the
Hatfield dealership group located in Columbus, Ohio and Capital Chevrolet and
Imports located in Montgomery, Alabama for a total purchase price of $54
million, with up to an additional $3 million contingent on future performance.
Convertible preferred stock will be issued for $18 million of the purchase
price. The remainder of the purchase price will be payable in cash. The cash
portion of the acquisitions will be financed with proceeds to be obtained from
the Revolving Credit Facility (see Note 5). Closing of these acquisitions is
expected in the second quarter of 1998 or early in the third quarter of 1998.
Acquisitions Completed Subsequent to December 31, 1997
On March 24, 1998, the Company completed its previously announced
acquisitions of Clearwater Toyota, Clearwater Mitsubishi and Clearwater
Collision Center, Inc. located in Clearwater, Florida (the "Clearwater
Acquisition"), for a total purchase price of $15.0 million, subject to
adjustment based on the net book value of the purchased assets and assumed
liabilities as of the closing date. This acquisition will be accounted for using
the purchase method of accounting. The acquisition was financed with $11.0
million in cash borrowed under a revolving credit facility (see Note 5), and
$4.0 million in convertible preferred stock. In addition, by April 30, 1999 the
Company will be required to pay an additional amount equal to 50% of the
combined pre-tax earnings of the entities acquired, such amount not to exceed
$1.8 million. The amount paid will be accounted for as additional goodwill.
F-10
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
2. BUSINESS ACQUISITIONS -- Continued
Acquisitions Completed During Year Ended December 31, 1997
In November 1997, the Company completed its previously announced
acquisition of Dyer Volvo (the "Dyer Acquisition") located in Atlanta, Georgia
for a total purchase price of $18.7 million. Also in November, the Company
completed its previously announced acquisitions of the Bowers Dealerships and
Affiliated Companies (the "Bowers Acquisition") located primarily in Chattanooga
and Nashville, Tennessee, for a total purchase price of $30.8 million. In
October, 1997, the Company completed its previously announced acquisition of Ken
Marks Ford, Inc. (the "Ken Marks Acquisition") located in Clearwater, Florida
for a total purchase price of $25.8 million. The Dyer Acquisition and the Bowers
Acquisition were financed primarily with $45.5 million in cash obtained from
proceeds of the Company's public offering and from operations, and with a $4
million promissory note that is payable in 28 equal quarterly installments to
Nelson Bowers, former owner of the Bowers Dealerships, bearing interest at prime
less 0.5%. The Ken Marks Acquisition was financed with $25 million in amounts
borrowed under a revolving credit facility (see Note 5) and with cash obtained
from operations.
In October 1997, the Company completed its previously announced acquisition
of Williams Motors, Inc., now Town and Country Chrysler, Plymouth, Jeep of Rock
Hill, located in Rock Hill, South Carolina, for a total purchase price of $1.9
million. In September, 1997, the Company completed its previously announced
acquisition of Lake Norman Dodge and Affiliates for a total purchase price of
$17.9 million. These acquisitions were financed with amounts borrowed under a
short-term line of credit maturing on February 15, 1998 (see Note 5).
In June 1997, the Company, through its wholly-owned subsidiary, Fort Mill
Chrysler-Plymouth-Dodge, acquired certain dealership assets and liabilities of
Jeff Boyd Chrysler-Plymouth-Dodge for a total purchase price of $3.7 million.
The acquisition was financed primarily with a $3.5 million note payable to Mr.
O. Bruton Smith (see Note 7).
All of the above acquisitions have been accounted for using the purchase
method of accounting, and the results of operations of each of the above
dealerships have been included in the accompanying consolidated financial
statements from their effective dates of acquisition. The purchase price of the
above acquisitions has been allocated to the assets and liabilities acquired
based on their estimated fair market value at the respective acquisition dates
as follows:
Working capital $ 28,247
Property and equipment 3,969
Goodwill 69,528
Non-current liabilities assumed (2,940)
---------------
Total purchase price $ 98,804
===============
The following unaudited pro forma financial information presents a summary
of consolidated results of operations as if the above transactions had occurred
as of January 1, 1996 after giving effect to certain adjustments, including
amortization of goodwill, interest expense on acquisition debt and related
income tax effects. The pro forma financial information does not give effect to
adjustments relating to net reductions in floorplan interest expense resulting
from re-negotiated floorplan financing agreements or to reductions in salaries
and fringe benefits of former owners or officers of acquired dealerships who
have not been retained by the Company or whose salaries have been reduced
pursuant to employment agreements with the Company. Pro forma results for Town
and Country Chrysler, Plymouth, Jeep of Rock Hill and Fort Mill
Chrysler-Plymouth-Dodge are not included because Company management believes
that the pro forma results of operations would not have been materially affected
assuming these acquisitions had occurred on January 1, 1996. The pro forma
results have been prepared for comparative purposes only and are not necessarily
indicative of the results of operations that would have occurred had the
acquisitions been completed on January 1, 1996. These results are also not
necessarily indicative of the results of future operations.
December 31,
--------------------
1996 1997
-------- --------
Total revenues $899,901 $949,081
Gross profit $113,772 $117,389
Net income $ 4,027 $ 5,439
Basic net income per share $ 0.64 $ 0.78
F-11
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
2. BUSINESS ACQUISITIONS -- Continued
Acquisitions Completed During the Year Ended December 31, 1996
On February 1, 1996, the Company acquired Fort Mill Ford for a total
purchase price of $5.7 million. The acquisition has been accounted for using the
purchase method of accounting and the results of operations of Fort Mill Ford
have been included in the accompanying consolidated financial statements from
the date of acquisition. The purchase price has been allocated to the assets and
liabilities acquired based on their estimated fair market value at the
acquisition date as follows:
Working capital $ 822
Property and equipment 3,022
Goodwill 4,364
Non-current liabilities assumed (2,467)
---------------
Total purchase price $ 5,741
===============
The following unaudited pro forma financial data is presented as if Fort
Mill Ford had been acquired at January 1, 1995. Pro forma results of operations
for 1996 are not presented because the acquisition occurred in February 1996,
and the pro forma results for the year ended December 31, 1996 would not be
materially different from the historical results presented:
December 31,
1995
--------
Total revenues $345,199
Net income $ 2,875
Basic net income per share $ 0.46
The pro forma information presented above is not necessarily indicative of
the operating results that would have occurred had Fort Mill Ford been acquired
on January 1, 1995. These results are also not necessarily indicative of the
results of future operations.
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
December 31,
---------------------------
1996 1997
-------- --------
New vehicles $ 51,798 $118,751
Used vehicles 14,372 27,990
Parts and accessories 4,940 9,085
Other 440 688
-------- --------
Total $ 71,550 $156,514
======== ========
The inventory balance is generally reduced by manufacturer's purchase
discounts, and such reduction is not reflected in the related floor plan
liability.
All new and certain used vehicles are pledged to collateralize floor plan
notes payable to financial institutions in the amount of $63.9 million and
$133.2 million at December 31, 1996 and 1997, respectively. The floor plan notes
bear interest, payable monthly on the outstanding balance, at an effective rate
of prime less 0.9% (7.60% at December 31, 1997), subject to incentives, etc.
Total floor plan interest expense amounted to $4.5 million, $6.0 million and
$8.0 million in 1995, 1996 and 1997, respectively. The notes payable are due
when the related vehicle is sold. As such, these floor plan notes payable are
shown as a current liability in the accompanying consolidated balance sheets.
F-12
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
December 31,
---------------------------
1996 1997
-------- --------
Land $ 2,678 $ 4,330
Building and improvements 10,081 11,904
Office equipment and fixtures 2,037 4,102
Parts and service equipment 2,866 4,229
Company vehicles 437 727
-------- --------
Total, at cost 18,099 25,292
Less accumulated depreciation (5,632) (6,211)
-------- --------
Property and equipment, net $ 12,467 $ 19,081
======== ========
5. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
---------------------------------
1996 1997
------------- ------------
Amounts outstanding under $26.0 million revolving credit facility with Ford Motor Credit
bearing interest at prime plus 1% (9.5% at December 31, 1997) and maturing in October 1999,
collateralized by all assets of the Company $ - $ 25,070
Amounts outstanding under $20.0 million line of credit from NationsBank bearing interest
at 7.75% and maturing February 15, 1998 - 8,200
Mortgage note payable in monthly installments of $27,000, including interest at prime plus
1/2% (9.0% at December 31, 1997) through April 2001, at which time remaining principal
balance is due, collateralized by building 3,063 2,999
Mortgage note payable in monthly installments of $12,000, plus interest at prime plus 3/4%,
(9.25% at December 31, 1997) through May 2004, collateralized by building 1,088 940
Other notes payable 1,654 2,015
------------- ------------
5,805 39,224
Less current maturities (519) (584)
------------- ------------
Long-term debt $ 5,286 $ 38,640
============= ============
Future maturities of debt at December 31, 1997 are as follows:
Year ending December 31,
1998 $ 584
1999 33,880
2000 632
2001 592
2002 419
Thereafter 3,117
-------
Total $39,224
=======
F-13
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
5. LONG-TERM DEBT - Continued
On October 15, 1997, the Company obtained a secured, revolving acquisition
line of credit (the "Revolving Facility") from Ford Motor Credit with available
principle of $26 million. In January 1998 the Company increased the aggregate
amount available to borrow under this facility to $75 million pursuant to the
agreement with Ford Motor Credit. The Revolving Facility will mature in two
years, unless the Company requests that such term be extended, at the option of
Ford Motor Credit, for a number of additional one year terms to be negotiated by
the parties. No assurance can be given that such extensions will be granted. The
proceeds from the Revolving facility were used in the consummation of the Ken
Marks Acquisition in October 1997 and for the repayment in February 1998 of
amounts borrowed under the Six-Month Facility (as defined below). Additional
amounts to be drawn under the Revolving Facility are to be used for the
acquisition of additional dealerships and to provide general working capital
needs of the Company not to exceed $10 million.
The Revolving Facility currently contains certain negative covenants made
by the Company, 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 (i) debt to tangible equity (as defined in the Revolving Facility),
(ii) current assets to current liabilities, (iii) earnings before interest,
taxes, depreciation and amortization (EBITDA) to fixed charges, (iv) EBITDA to
interest expense, (v) EBITDA to total debt and (vi) EBITDA to total floor plan
debt. Moreover, the loss of voting control over the Company by the Smith Group
or the failure by the Company, 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.
The Company did not meet the specified debt to tangible equity ratio at December
31, 1997 and has obtained a waiver with regard to such requirement from Ford
Motor Credit.
The Company also agreed not to pledge any of its assets to any third party
(with the exception of currently encumbered real estate and assets of the
Company's dealership subsidiaries that are subject to previous pledges or
liens).
On August 28, 1997, the Company obtained from NationsBank, N.A. a
short-term line of credit in an aggregate principal amount of up to $20 million
( the "Six-Month Facility"). Under the terms of the Six-Month Facility, amounts
outstanding bore interest at 7.75% and matured on February 15, 1998. Proceeds
from the Six-Month Facility were used to consummate the acquisitions of Lake
Norman Dodge and Affiliates and Williams Motors, Inc. Amounts outstanding at
December 31, 1997 have been classified as long-term as such amounts have been
subsequently refinanced with funds obtained from the Revolving Facility.
On February 16, 1998, the Company refinanced the $3 million mortgage note
payable. The mortgage note now matures February 2003 and is payable in 59
consecutive monthly installments of $26,000 each with a final balloon
installment for the unpaid balance due at maturity. The mortgage note bears
interest at the prime interest rate and is collateralized by a building.
6. INCOME TAXES
The provision for income taxes consists of the following components:
1995 1996 1997
--------- --------- ----------
Current:
Federal $ 1,608 $ 1,856 $ 1,890
State 117 308 391
------- ------- -------
1,725 2,164 2,281
Deferred 427 (190) (27)
Change in valuation allowance 24 (51) (5)
------- ------- --------
Total $ 2,176 $ 1,923 $ 2,249
======= ======= =======
F-14
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
6. INCOME TAXES - Continued
The reconciliation of the statutory federal income tax rate with the
Company's federal and state overall effective income tax rate is as follows:
1995 1996 1997
-------- -------- -------
Statutory federal rate 34.00% 34.00% 34.00%
State income taxes 3.84 3.60 3.70
Miscellaneous 2.19 0.71 (0.21)
----- ----- ------
Effective tax rates 40.03% 38.31% 37.49%
===== ===== ======
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31 are as
follows:
1996 1997
------- -------
Deferred tax assets:
Allowance for bad debts $ 86 $ 81
Inventory reserves 161 40
Net operating loss carryforwards 75 120
Other 76 151
------- -------
Total deferred tax assets 398 392
Valuation allowance (75) (70)
------- -------
Deferred tax assets, net 323 322
------- -------
Deferred tax liabilities:
Basis difference in property and equipment (556) (799)
Basis difference in goodwill -- (172)
Other (546) (25)
------- -------
Total deferred tax liability (1,102) (996)
------- -------
Net deferred tax liability $ (779) $ (674)
======= =======
The net changes in the valuation allowance against deferred tax assets were
a decrease of $51,000 for the year ended December 31, 1996 and a decrease of
$5,000 for the year ended December 31, 1997. The decrease was related primarily
to the expiration of state net operating loss carryforwards. At December 31,
1997, the Company had state net operating loss carryforwards of $2.0 million
which will expire primarily between 1998 and 2002.
Certain of the Company's dealerships changed their method of accounting
for inventories of new vehicles for income tax purposes from LIFO to PIFO (see
Note 1) which resulted in an additional income tax liability. At December 31,
1996 and 1997, this liability was recorded as $5.5 million and $7.1 million,
respectively. The liability is payable over a six year period beginning in
January, 1998. The current portion of the liability as of December 31, 1997 was
$2.3 million and is included in other accrued liabilities.
Certain subsidiaries of Sonic (such subsidiaries together with the Company
and SFC being hereinafter referred to as the "Sonic Group") have joined with SFC
in filing consolidated federal income tax returns for several years. Such
subsidiaries have also joined with SFC in filing for 1996 and for the six months
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, the Company agreed to pay to SFC, in the event that additional federal
income tax is determined to be due, an amount equal to the Company'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 the Company. Also pursuant to such agreement, SFC agreed
to indemnify the Company for any additional amount determined to be due from
SFC's consolidated group in excess of the federal income tax liability of the
Sonic Group for such periods. The tax allocation agreement establishes
procedures with respect to tax adjustments, tax claims, tax refunds, tax credits
and other tax attributes relating to periods ending prior to the time that the
Sonic Group shall leave SFC's consolidated group.
F-15
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
7. RELATED PARTIES
Prior to June 30, 1997, Town & Country Ford and Lone Star Ford had each
made several non-interest bearing advances to SFC ($2.5 million as of
December 31, 1996). In preparation for the Reorganization, a demand
promissory note by SFC evidencing $2.1 million of these advances was canceled in
June 1997 in exchange for 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 $509,000 of these advances was canceled in June 1997 pursuant to a
dividend.
The Company had amounts receivable from affiliates of $1.0 million at
December 31, 1997. Of this amount, $622,000 relates to advances made by the
Company to SFC. The remaining $425,000 relates to receivables from executives of
the Company who were former owners of Ken Marks Ford and the Bowers Dealerships.
The receivables resulted from differences in the negotiated and actual net book
value of the dealerships at the date of acquisitions. The amounts receivable
from affiliates are non-interest bearing and are classified as current based on
the expected repayment dates.
The Company had amounts payable to affiliates of $914,000 and $4.8 million,
at December 31, 1996 and 1997, respectively. At December 31, 1997, the Company
had a $4 million note payable to the Company's Executive Vice-President and
former owner of the Bowers Dealerships resulting from the acquisition of the
Bowers Dealerships (Note 2). The note is payable in 28 equal quarterly
installments bearing interest at prime less 0.5%. The current portion of this
note amounted to $445,000 at December 31, 1997. The remaining portion of the
amount payable to affiliates consisted of loans from affiliates, the majority of
which bear interest at 8.75%, and is classified as noncurrent based upon the
expected repayment dates.
The Company had an unsecured note payable to the Company's Chairman of $5.5
million, at December 31, 1997. The subordinated note bears interest at prime
plus 0.5% and is payable November 30, 2000. Of the note payable, $3.5 million
was used in the acquisition of Fort Mill Chrysler-Plymouth-Dodge (Note 2),
and the remaining amount was used for operations.
During the years ended December 31, 1995 and December 31, 1996, Town &
Country Ford paid $48,000 to SFC as a management fee. SFC's services to Town &
Country Ford have included performance of the following functions, among others:
maintenance of lender and creditor relationships; tax planning; preparation of
tax returns and representation in tax examinations; record maintenance; internal
audits and special audits; assistance to independent public accountants; and
litigation support to company counsel. Payments of fees to and receipt of
services from SFC ceased in 1997.
Beginning in early 1997, certain of Sonic's dealerships have entered into
arrangements to sell to their customers credit life insurance policies
underwritten by American Heritage Life Insurance Company, an insurer
unaffiliated with Sonic ("American Heritage"). American Heritage in turn
reinsures all of these policies with Provident American Insurance Company, a
Texas insurance company and a wholly-owned subsidiary of SFC. Under these
arrangements, the dealerships paid an aggregate of $576,000 to American Heritage
in premiums for these policies for the twelve months ended December 31, 1997.
The Company anticipates terminating this arrangement with American Heritage
during 1998.
Chartown is a general partnership engaged in real estate development and
management. Before the Reorganization, Town & Country Ford maintained a 49%
partnership interest in Chartown with the remaining 51% held by SMDA Properties,
LLC, a North Carolina limited liability company ("SMDA"). The Company's Chairman
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
$1.6 million issued by Chartown (the "Chartown Note"), which was uncollectible
due to insufficient funds. As a part of the Reorganization, the Chartown Note
was canceled and Town & Country Ford transferred its partnership interest in
Chartown to SFC for nominal consideration. In connection with that transfer, SFC
agreed to indemnify Town & Country Ford for any and all obligations and
liabilities, whether known or unknown, relating to Chartown and Town & Country
Ford's ownership thereof. Town & Country Ford's recorded investment in Chartown
was nominal for all periods presented in the accompanying financial statements.
8. CAPITAL STRUCTURE, PUBLIC OFFERING OF COMMON STOCK, AND PER SHARE DATA
Preferred Stock - In 1997, the Company authorized 3 million shares of
"blank check" preferred stock with such designations, rights and preferences as
may be determined from time to time by the Board of Directors. No preferred
share were issued and outstanding as of December 31, 1997.
F-16
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
8. CAPITAL STRUCTURE, PUBLIC OFFERING OF COMMON STOCK, AND PER SHARE DATA -
Continued
Effective March 20, 1998, the Board of Directors designated 300,000 shares
of preferred stock as Class A Convertible Preferred Stock, par value
$0.01 per share, which shall be divided into 100,000 of Series I Convertible
Preferred Stock, par value $0.01 per share (the "Series I Preferred Stock"),
100,000 shares of Series II Convertible Preferred Stock, par value $0.01 per
share (the "Series II Preferred Stock"), and 100,000 shares of Series III
Convertible Preferred Stock, par value $0.01 per share (the "Series III
Preferred Stock" and together with the Series I Preferred Stock and the Series
II Preferred Stock, collectively, the "Class A Preferred Stock"). In such
transaction, the securities were not registered under the Securities Act of
1933, as amended (the "Act") in reliance upon the exemption from registration
provided by Section 4(2) of the Act in view of the sophistication of the
foregoing purchasers, their access to material information, the disclosures
actually made to them by the Company and the absence of any general solicitation
or advertising. On March 24, 1998 the Company issued 3,960 shares of Series III
Preferred Stock to certain shareholders in connection with the Clearwater
Acquisition. Each share of Series III 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 Series III Preferred Stock, subject to a collar adjustment that has
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 III Preferred Stock. On the second anniversary of the date of
issuance of shares of the Series III Preferred Stock, the Company, at its
option, may convert such shares into Class A Common Stock according to the
foregoing conversion provision. At anytime, the Company may redeem shares of the
Series III Preferred Stock for cash equal to the value of the Class A Common
Stock that would have been received if a conversion had occurred on the same
date.
Stock Split -- All share and per share amounts included in the accompanying
financial statements for all periods presented have been adjusted to reflect a
625 for 1 stock split of the Class B Common Stock effective as of October 16,
1997.
Public Offering of Common Stock - The Company completed an initial public
offering (the "Offering") of 5 million shares of its Class A Common Stock on
November 12, 1997 at a price of $12 per share. Net proceeds of the Offering of
$53.7 million were used to finance acquisitions (see Note 2) and to repay
amounts borrowed under lines of credit related to the acquisitions. Class A
Common Stock entitles its holder to one vote per share, while Class B Common
Stock entitles its holder to ten votes per share, except in certain
circumstances.
Warrants - In connection with the Dyer Acquisition, the Company issued on
January 15, 1998 a warrant to purchase 44,391 shares of Class A Common Stock
at $12 per share, which is currently exercisable and expires on January 15,
2003.
Per Share Data - The calculation of diluted net income per share considers
the potential dilutive effect of options to purchase 588,000 shares of common
stock at $12 per share which were outstanding in November and December of 1997.
These options have not been included in the calculation of diluted net income
per share because the options are anti-dilutive.
9. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of the Company are eligible to
participate in a 401(k) plan maintained by SFC. Contributions by the Company to
the plan were not significant in any period presented.
Formula Stock Option Plan
In March 1998, the Board of Directors adopted the Formula Stock
Option Plan for the benefit of the Company's outside directors. The plan
authorized options to purchase up to an aggregate of 300,000 shares of Class A
Common Stock. Under the plan, each outside director shall be awarded on or
before March 31st of each year an option to purchase 10,000 shares at an
exercise price equal to the fair market value of common stock at the date of the
award.
F-17
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
9. EMPLOYEE BENEFIT PLANS - Continued
Employee Stock Purchase Plan
Effective January 1, 1998, the Board of Directors and stockholders of the
Company adopted the Employee Stock Purchase Plan (the "ESPP"). Under the terms
of the ESPP, on January 1 of each year all eligible employees electing to
participate will be granted an option to purchase shares of Class A Common
Stock. The Company's Compensation Committee will annually determine the number
of shares of Class A Common Stock available for purchase under each option. The
purchase price at which Class A Common Stock will be purchased through the ESPP
will be 85% of the lesser of (i) the fair market value of the Class A Common
Stock on the applicable Grant Date and (ii) the fair market value of the Class A
Common Stock on the applicable Exercise Date. Options will expire on the last
exercise date of the calendar year in which granted.
On March 20, 1998, the Board of Directors, pursuant to the Company's ESPP,
increased the authorized shares from 150,000 to 300,000 and issued options
exercisable for 150,000 shares of Class A Common Stock granting 310 shares per
participant participating in the ESPP.
Stock Option Plan
In October 1997, the Board of Directors and stockholders of the Company
adopted the Company's 1997 Stock Option Plan (the "Stock Option Plan") with
respect to Common Stock in order to attract and retain key personnel. Under the
Stock Option Plan, options to purchase up to an aggregate of 1.1 million shares
of Class A Common Stock may be granted to key employees of the Company and its
subsidiaries and to officers, directors, consultants and other individuals
providing services to the Company. In November 1997, the Company granted options
to purchase 588,000 shares of Class A Common Stock at an exercise price equal to
the initial public offering price of $12.00 per share. All of these options will
become exercisable in three equal annual installments beginning in October 1998
with the last installment vesting in October 2000, and all these options will
expire in October 2007.
The Company has adopted the disclosure-only provisions of SFAS No. 123. The
Company granted 588,000 options in 1997 with weighted average grant-date fair
values of $5.66. No compensation cost has been recognized for the stock option
plan. Had compensation cost for the stock options been determined based on their
fair value method as prescribed by SFAS No. 123, the Company's pro forma net
income and basic net income per share would have been $3.6 million and $0.51,
respectively, for 1997.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: expected
volatility of 50% in 1997; risk-free interest rate of 5.6% in 1997; and expected
lives of 5 years in 1997. The model reflects that no dividends were declared in
1997 and assumes that no dividends will be declared in the future.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases:
The Company leases certain of its dealership facilities under noncancelable
operating leases with terms ranging from one to twelve years, with renewal
options of up to ten years. A majority of the dealership facilities are owned by
shareholders, directors, or officers of the Company or its affiliates. Minimum
future rental payments required under noncancelable operating leases are as
follows:
F-18
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
Related
Year ending December 31, Parties Third Parties Total
--------------- --------------- ---------------
1998 $ 3,849 $ 2,023 $ 5,872
1999 3,852 1,452 5,304
2000 3,786 1,400 5,186
2001 3,448 1,380 4,828
2002 3,338 1,050 4,388
Thereafter 16,146 4,480 20,626
---------------- --------------- ---------------
Total $ 34,419 $ 11,785 $ 46,204
================ ================ ===============
Total rent expense for the years ended December 31, 1995, 1996, and 1997
was approximately $841,000, $870,000, and $2.4 million, respectively. Of these
amounts, $841,000, $870,000 and $1.3 million, respectively, were paid to related
parties.
Other Contingencies:
The Company is contingently liable for customer contracts placed with
financial institutions of approximately $741,000 and $302,000 at December 31,
1996 and 1997, respectively. However, the Company's potential loss is limited to
the difference between the present value of the installment contract at the date
of the repossession and the market value of the vehicle at the date of sale.
Other accrued liabilities include a provision for repossession losses. The
Company provides a reserve for repossession losses based on the ratio that
historical loss experience bears to the amount of outstanding customer
contracts.
The Company has available $1.5 million under draft-clearing credit lines
with a bank in order to immediately fund the Company's checking account for sold
vehicle contracts from other financial institutions. The Company is contingently
liable to the bank until the contracts are approved by the financial
institutions. Amounts outstanding under these lines at December 31, 1996 and
1997 were $151,000 and $432,000 respectively.
The Company is involved in various legal proceedings. Management believes
that the outcome of such proceedings will not have a materially adverse effect
on the Company's financial position or future results of operations and cash
flows.
The Company has not entered into any agreement with respect to the approval
by Jaguar of the proposed acquisition of the assets of the Jaguar of Chattanooga
dealership (the "Jaguar Dealership") by the Company as part of the Bowers
Acquisition. The Company and Jaguar are continuing to negotiate with respect to
this matter, although no assurance can be given that such negotiations will
result in an arrangement that is favorable to the Company. If Jaguar refuses to
give its approval to the Company, the Company may not be able to acquire the
Jaguar Dealership. The Jaguar Dealership accounts for less than 1.5% of the
Company's 1997 revenues and profits, respectively.
11. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's results of operations as
presented in the Consolidated Statements of Income by quarter for 1996 and 1997.
Amounts below reflect reclassifications of previously reported amounts to
conform with current year presentation and exclude net income per share for
those periods prior to the completion of the Offering.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year Ended December 31, 1996:
Total revenues $ 85,684 $104,021 $ 93,910 $ 93,252
Gross profit $ 10,654 $ 11,860 $ 11,581 $ 11,725
Operating income $ 2,644 $ 2,920 $ 2,530 $ 2,973
Income before taxes and minority interest $ 1,604 $ 1,254 $ 1,121 $ 1,042
F-19
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(All tables in thousands except per share amounts)
11. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Year Ended December 31, 1997:
Total revenues $ 98,785 $114,101 $127,356 $195,759
Gross profit $ 11,228 $ 13,236 $ 15,105 $ 25,179
Operating income $ 2,262 $ 3,393 $ 3,469 $ 5,782
Income before taxes and minority interest $ 926 $ 1,577 $ 1,526 $ 1,969
Net income $ 541 $ 999 $ 911 $ 1,251
Diluted net income per share $ 0.15 $ 0.14
F-20
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Pages
- ----------- ----------- -------------
3.1* Amended and Restated Certificate of Incorporation of the
Company(incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 (File No. 333-33295) of the Company (the "Form
S-1"))
3.2* Bylaws of the Company(incorporated by reference to Exhibit 3.2 to the
Form S-1).
4.1* Form of Class A Common Stock Certificate(incorporated by reference to
Exhibit 4.1 to the Form S-1).
4.2* Registration Rights Agreement dated as of June 30, 1997 among the
Company, O. Bruton Smith, Bryan Scott Smith, William S. Egan and Sonic
Financial Corporation(incorporated by reference to Exhibit 4.2 to the
Form S-1).
10.1* Form of Lease Agreement to be entered into between the Company (or its
subsidiaries) and Nelson E. Bowers, II or his affiliates(incorporated
by reference to Exhibit 10.1 to the Form S-1).
10.2* Form of Lease Agreement to be entered into between the Company (or its
subsidiaries) and Marks Holding Company, Inc. (incorporated by
reference to Exhibit 10.2 to the Form S-1).
10.3* Lease Agreement dated as of January 1, 1995 between Lone Star Ford,
Inc. and Viking Investment Associates (incorporated by reference to
Exhibit 10.3 to the Form S-1).
10.4* Lease Agreement dated as of October 23, 1979 between O. Bruton Smith,
Bonnie Smith and Town and Country Ford, Inc. (incorporated by
reference to Exhibit 10.4 to the Form S-1).
10.5* North Carolina Warranty Deed dated as of April 24, 1987 between O.
Bruton Smith and Bonnie Smith, as Grantors and STC Properties, as
Grantee(incorporated by reference to Exhibit 10.5 to the Form S-1).
10.6* Lease dated January 13, 1995 between JAG Properties LLC and Jaguar of
Chattanooga LLC (incorporated by reference to Exhibit 10.6 to the Form
S-1).
10.7* Lease dated October 18, 1991 by and between Nelson E. Bowers II,
Thomas M. Green, Jr., and Infiniti of Chattanooga, Inc. (incorporated
by reference to Exhibit 10.7 to the Form S-1).
10.8* Amendment to Lease Agreement dated as of January 13, 1995 among Nelson
E. Bowers II, Thomas M. Green, Jr., JAG Properties LLC and Infiniti of
Chattanooga, Inc. (incorporated by reference to Exhibit 10.8 to the
Form S-1).
10.9* Lease dated March 15, 1996 between Cleveland Properties LLC and
Cleveland Chrysler-Plymouth-Jeep-Eagle LLC (incorporated by reference
to Exhibit 10.9 to the Form S-1).
Exhibit No. Description
- ----------- -----------
10.10* Lease Agreement dated January 2, 1993 among Nelson E. Bowers II,
Thomas M. Green, Jr. and Cleveland Village Imports, Inc. (incorporated
by reference to Exhibit 10.10 to the Form S-1).
10.11* Ford Motor Credit Company Automotive Wholesale Plan Application for
Wholesale Financing dated August 10, 1972 by Lone Star Ford, Inc.
(incorporated by reference to Exhibit 10.11 to the Form S-1).
10.12* Ford Motor Credit Company Automotive Wholesale Plan Application for
Wholesale Financing and Security Agreement dated August 22, 1984 by
Town and Country Ford, Inc. (incorporated by reference to Exhibit
10.12 to the Form S-1).
10.13* Wholesale Floor Plan Security Agreement dated October 5, 1990 between
Marcus David Corporation (d/b/a Town & Country Toyota) and World Omni
Financial Corp. (incorporated by reference to Exhibit 10.13 to the
Form S-1).
10.14* Demand Promissory Note dated October 5, 1990 of Marcus David
Corporation (d/b/a Town & Country Toyota) in favor of World Omni
Financial Corp. (incorporated by reference to Exhibit 10.14 to the
Form S-1).
10.15* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation
Dealer) dated April 21, 1995 between Cleveland
Chrysler-Plymouth-Jeep-Eagle LLC and Chrysler Credit
Corporation(incorporated by reference to Exhibit 10.15 to the Form
S-1).
10.15a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit
Corporation by Cleveland Chrysler Plymouth Jeep Eagle,
LLC(incorporated by reference to Exhibit 10.15a to the Form S-1).
10.16* Promissory Note dated April 21, 1995 in favor of Chrysler Credit
Corporation by Saturn of Chattanooga, Inc. (incorporated by reference
to Exhibit 10.16a to the Form S-1).
10.17* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation
Dealer) dated April 24, 1995 between Nelson Bowers Ford, L.P. and
Chrysler Credit Corporation(incorporated by reference to Exhibit 10.17
to the Form S-1).
10.17a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit
Corporation by Nelson Bowers Ford L.P. (incorporated by reference to
Exhibit 10.17a to the Form S-1).
10.18* Floor Plan Agreement dated May 6, 1996 between European Motors, LLC
and NationsBank, N.A. (incorporated by reference to Exhibit 10.18 to
the Form S-1).
10.19* Floor Plan Agreement dated April 11, 1996 between KIA of Chattanooga,
LLC and NationsBank, N.A. (incorporated by reference to Exhibit 10.19
to the Form S-1).
10.19a* Security Agreement dated April 11, 1996 between KIA of Chattanooga,
LLC and NationsBank, N.A. (incorporated by reference to Exhibit 10.19a
to the Form S-1).
10.20* Floor Plan Agreement dated October 17, 1996 between European Motors of
Nashville, LLC and NationsBank, N.A. (incorporated by reference to
Exhibit 10.20 to the Form S-1).
10.20a* Security Agreement dated October 17, 1996 between European Motors of
Nashville, LLC and NationsBank, N.A. (incorporated by reference to
Exhibit 10.20a to the Form S-1).
10.21* Floor Plan Agreement dated March 5, 1997 between Nelson Bowers Dodge,
LLC (d/b/a Dodge of Chattanooga) and NationsBank, N.A. (incorporated
by reference to Exhibit 10.21 to the Form S-1).
10.22* Security Agreement and Master Credit Agreement dated May 15, 1996
between Lake Norman Chrysler Plymouth Jeep Eagle, LLC and Chrysler
Financial Corporation(incorporated by reference to Exhibit 10.22 to
the Form S-1).
10.22a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial
Corporation by Lake Norman Chrysler Plymouth Jeep Eagle,
LLC(incorporated by reference to Exhibit 10.22a to the Form S-1).
10.23* Security Agreement & Capital Loan Agreement dated May 15, 1996 between
Lake Norman Dodge, Inc and Chrysler Financial Corp. (incorporated by
reference to Exhibit 10.23 to the Form S-1).
10.23a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial
Corporation by Lake Norman Dodge, Inc. (incorporated by reference to
Exhibit 10.23a to the Form S-1).
10.23b* Promissory Note dated May 15, 1996 in favor of Chrysler Financial
Corporation by Lake Norman Dodge, Inc. (incorporated by reference to
Exhibit 10.23b to the Form S-1).
10.24* Security Agreement and Master Credit Agreement (Non-Chrysler
Corporation Dealer) dated May 15, 1996 between Lake Norman Chrysler
Plymouth Jeep Eagle, LLC and Chrysler Financial
Corporation(incorporated by reference to Exhibit 10.24 to the Form
S-1).
10.24a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial
Corporation by Lake Norman Chrysler Plymouth Jeep Eagle,
LLC(incorporated by reference to Exhibit 10.24a to the Form S-1).
10.25* Floor Plan Agreement dated September 1, 1996 between NationsBank, N.A.
and Dyer & Dyer, Inc. (incorporated by reference to Exhibit 10.25 to
the Form S-1).
10.25a* Security Agreement dated September 1, 1996 between NationsBank, N.A.
and Dyer & Dyer, Inc. (incorporated by reference to Exhibit 10.25a to
the Form S-1).
Sequentially
Numbered
Exhibit No. Description Pages
- ----------- ----------- -------------
10.26* Security Agreement and Master Credit Agreement (Non-Chrysler
Corporation Dealer) dated April 21, 1995 between Cleveland Village
Imports, Inc. (d/b/a Cleveland Village Honda, Inc.) and Chrysler
Credit Corporation(incorporated by reference to Exhibit 10.26 to the
Form S-1).
10.27* Jaguar Credit Corporation Automotive Wholesale Plan Application for
Wholesale Financing and Security Agreement dated March 14, 1995 by
Jaguar of Chattanooga LLC(incorporated by reference to Exhibit 10.27
to the Form S-1).
10.28* Assignment of Joint Venture Interest in Chartown dated as of June 30,
1997 among Town and Country Ford, Inc., SMDA LLC and Sonic Financial
Corporation(incorporated by reference to Exhibit 10.28 to the Form
S-1).
10.29* Form of Employment Agreement between the Company and O. Bruton
Smith(incorporated by reference to Exhibit 10.29 to the Form S-1).
10.30* Form of Employment Agreement between the Company and Bryan Scott
Smith(incorporated by reference to Exhibit 10.30 to the Form S-1).
10.31* Form of Employment Agreement between the Company and Theodore M.
Wright(incorporated by reference to Exhibit 10.31 to the Form S-1).
10.32* Form of Employment Agreement between the Company and Nelson E. Bowers,
II(incorporated by reference to Exhibit 10.32 to the Form S-1).
10.33* Tax Allocation Agreement dated as of June 30, 1997 between the Company
and Sonic Financial Corporation(incorporated by reference to Exhibit
10.33 to the Form S-1).
10.34* Form of Sonic Automotive, Inc. Stock Option Plan(incorporated by
reference to Exhibit 10.34 to the Form S-1).
10.35* Form of Sonic Automotive, Inc. Employee Stock Purchase
Plan(incorporated by reference to Exhibit 10.35 to the Form S-1).
10.36* Subscription Agreement dated as of June 30, 1997 between O. Bruton
Smith and the Company(incorporated by reference to Exhibit 10.36 to
the Form S-1).
10.37* Subscription Agreement dated as of June 30, 1997 between Sonic
Financial Corporation and the Company(incorporated by reference to
Exhibit 10.37 to the Form S-1).
10.38* Subscription Agreement dated as of June 30, 1997 between Bryan Scott
Smith and the Company(incorporated by reference to Exhibit 10.38 to
the Form S-1).
10.39* Subscription Agreement dated as of June 30, 1997 between William S.
Egan and the Company(incorporated by reference to Exhibit 10.39 to the
Form S-1).
10.40* Asset Purchase Agreement dated as of May 27, 1997 by and among Sonic
Auto World, Inc., Lake Norman Dodge, Inc., Lake Norman
Chrysler-Plymouth-Jeep-Eagle LLC, Quinton M. Gandy and Phil M. Gandy,
Jr. (confidential portions omitted and filed separately with the SEC)
(incorporated by reference to Exhibit 10.40 to the Form S-1).
10.41* Asset Purchase Agreement dated as of June 24, 1997 by and among Sonic
Auto World, Inc., Kia of Chattanooga, LLC, European Motors of
Nashville, LLC, European Motors, LLC, Jaguar of Chattanooga LLC,
Cleveland Chrysler-Plymouth-Jeep-Eagle LLC, Nelson Bowers Dodge, LLC,
Cleveland Village Imports, Inc., Saturn of Chattanooga, Inc., Nelson
Bowers Ford, L.P., Nelson E. Bowers II, Jeffrey C. Rachor, and the
other shareholders named herein (confidential portions omitted and
filed separately with the SEC) (incorporated by reference to Exhibit
10.41 to the Form S-1).
10.41a* Amendment to Asset Purchase Agreement dated October 16, 1997 re:
Bowers Acquisition(incorporated by reference to Exhibit 10.41a to the
Form S-1).
10.42* Stock Purchase Agreement dated as of July 29, 1997 between Sonic Auto
World, Inc. and Ken Marks, Jr., O.K. Marks, Sr. and Michael J. Marks
(confidential portions omitted and filed separately with the SEC)
(incorporated by reference to Exhibit 10.42 to the Form S-1).
10.43* Asset Purchase Agreement dated as of August 1997 by and among Sonic
Automotive, Inc., Dyer & Dyer, Inc. and Richard Dyer (confidential
portions omitted and filed separately with the SEC) (incorporated by
reference to Exhibit 10.43 to the Form S-1).
10.43a* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Dyer
Acquisition(incorporated by reference to Exhibit 10.43a to the Form
S-1).
10.44* Security Agreement and Master Credit Agreement dated April 21, 1995
between Cleveland Chrysler Plymouth Jeep Eagle and Chrysler Credit
Corporation(incorporated by reference to Exhibit 10.44 to the Form
S-1).
10.45* Promissory Note dated as of August 28, 1997 by Sonic Automotive, Inc.
in favor of NationsBank, N.A. (incorporated by reference to Exhibit
10.45 to the Form S-1).
10.46* Credit Agreement dated October 15, 1997 by and between Sonic
Automotive, Inc. and Ford Motor Credit Company(incorporated by
reference to Exhibit 10.46 to the Form S-1).
10.47* Automotive Wholesale Plan Application For Wholesale Financing And
Security Agreement dated June 29, 1982 between Ford Motor Credit
Company and O.K. Marks Ford, Inc. (incorporated by reference to
Exhibit 10.47 to the Form S-1).
10.48* Supplemental Agreement between the Company and Ford Motor
Company(incorporated by reference to Exhibit 10.48 to the Form S-1).
10.49* Agreement between Toyota Motors Sales USA and the Company(incorporated
by reference to Exhibit 10.49 to the Form S-1).
10.50* Ford Sales and Service Agreement with Town and Country
Ford(incorporated by reference to Exhibit 10.50 to the Form S-1).
10.51* Ford Sales and Service Agreement with Lone Star Ford(incorporated by
reference to Exhibit 10.51 to the Form S-1).
10.52* Ford Sales and Service Agreement with Fort Mill Ford(incorporated by
reference to Exhibit 10.52 to the Form S-1).
10.53* Ford Sales and Service Agreement with Ken Marks Ford(incorporated by
reference to Exhibit 10.53 to the Form S-1).
Sequentially
Numbered
Exhibit No. Description Pages
- ----------- ----------- -------------
10.54* Ford Sales and Service Agreement with Nelson Bowers Ford(incorporated
by reference to Exhibit 10.54 to the Form S-1).
10.55* Chrysler Sales and Service Agreement with Fort Mill
Chrysler-Plymouth-Dodge(incorporated by reference to Exhibit 10.55 to
the Form S-1).
10.56* Plymouth Sales and Service Agreement with Fort Mill
Chrysler-Plymouth-Dodge(incorporated by reference to Exhibit 10.56 to
the Form S-1).
10.57* Dodge Sales and Service Agreement with Fort Mill
Chrysler-Plymouth-Dodge(incorporated by reference to Exhibit 10.57 to
the Form S-1).
10.58* Dodge Sales and Service Agreement with Sonic Dodge, LLC d/b/a Lake
Norman Dodge(incorporated by reference to Exhibit 10.58 to the Form
S-1).
10.59* Chrysler Sales and Service Agreement with Sonic
Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.59 to the Form S-1).
10.60* Plymouth Sales and Service Agreement with Sonic
Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.60 to the Form S-1).
10.61* Jeep Sales and Service Agreement with Sonic
Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.61 to the Form S-1).
10.62* Chrysler Sales and Service Agreement with Cleveland
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.62 to the Form S-1).
10.63* Plymouth Sales and Service Agreement with Cleveland
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.63 to the Form S-1).
10.64* Jeep Sales and Service Agreement with Cleveland
Chrysler-Plymouth-Jeep-Eagle(incorporated by reference to Exhibit
10.64 to the Form S-1).
10.65* Dodge Sales and Service Agreement with Nelson Bowers
Dodge(incorporated by reference to Exhibit 10.65 to the Form S-1).
10.66* Volvo Authorized Retailer Agreement with European Motors, LLC d/b/a
Volvo of Chattanooga(incorporated by reference to Exhibit 10.66 to the
Form S-1).
10.67* Volvo Sales Agreement with Dyer & Dyer, Inc. (incorporated by
reference to Exhibit 10.67 to the Form S-1).
10.68* Toyota Dealer Agreement with Marcus David Corporation d/b/a Town &
Country Toyota(incorporated by reference to Exhibit 10.68 to the Form
S-1).
10.69 Form of Sonic Automotive, Inc. Formula Stock Option Plan
10.70 Amended and Restated Credit Agreement (the "Credit Agreement") between
the Borrower and the Lender in the amount of $75 million.
10.71 Promissory Note in the amount of $75 million issued by the Borrower
under the Credit Agreement.
10.72 Subordinated promissory note from the Borrower to O. Bruton Smith,
pursuant to which O. Bruton Smith lends an amount equal to difference
between Net Cash Proceeds of the Public Offering and $58,000,000.
10.73 Subordination Agreement between O. Bruton Smith and the Lender,
acknowledged by the Borrower.
10.74 Asset Purchase Agreement dated December 31, 1997 between Sonic
Automotive, Inc., as buyer, and M & S Resources, Inc., Clearwater Auto
Resources, Inc., and Clearwater Collision Center, Inc., as sellers and
Scott Fink, Michael Cohen, Jeffrey Schumon, and Timothy McCabe as
shareholders of the sellers (incorporated by reference to Exhibit 99.1
to the Company's Current Report on Form 8-K dated March 30, 1998 (the
"March 1998 Form 8-K")).
10.75 Amendment No. 1 and Supplement to Asset Purchase Agreement dated
December 31, 1997 between Sonic Automotive, Inc., as buyer, and M & S
Resources, Inc., Clearwater Auto Resources, Inc., and Clearwater
Collision Center, Inc., as sellers and Scott Fink, Michael Cohen,
Jeffrey Schumon, and Timothy McCabe as shareholders of the sellers
(incorporated by reference to Exhibit 99.2 to the March 1998 Form
8-K).
21.1* Subsidiaries of the Company(incorporated by reference to Exhibit 21.1
to the Form S-1).
24* Power of Attorney (included on the signature page to this Registration
Statement) (incorporated by reference to Exhibit 24 to the Form S-1).
27 Financial Data Schedule
* Filed previously