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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
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 56-2010790
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5401 EAST INDEPENDENCE BOULEVARD
P.O. BOX 18747
CHARLOTTE, NORTH CAROLINA
28212
(Address of Principle Executive Offices) (Zip Code)
(704) 532-3320
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Class A Common Stock, $.01 Par Value New York Stock Exchange
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting common stock held by
non-affiliates of the registrant was approximately $165,950,000 based upon the
closing sales price of the registrant's Class A common stock on March 29, 1999
of $14.25 per share. As of March 29, 1999, there were 12,155,963 shares of Class
A common stock, par value $.01 per share, and 12,400,000 shares of Class B
common stock, par value $.01 per share, outstanding. Unless otherwise indicated,
all other share and share price information contained herein takes into account
the effect of the two for one stock split effected as of January 25, 1999 in the
form of a 100% stock dividend payable to stockholders of record as of January 4,
1999 (the "Stock Split").
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FORM 10-K TABLE OF CONTENTS
PAGE
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PART I
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 ................. 13
Item 6. Selected Financial Data ................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 15
Item 7a. Quantitative and Qualitative Disclosures About Market Risk ................................ 24
Item 8. Financial Statements and Supplementary Data ............................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 24
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 25
Item 11. Executive Compensation .................................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 32
Item 13. Certain Relationships and Related Transactions ............................................ 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 39
SIGNATURES ....................................................................................... 42
INDEX TO FINANCIAL STATEMENTS .................................................................... F-1
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
Sonic Automotive, Inc., and statements of Sonic's plans and objectives for
future operations, including those contained in the "Business," "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" sections or relating to Sonic's future acquisitions,
are "forward-looking" statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Words such as
"expects," "anticipates," "believes," "intends," and "hopes," variations of such
words and similar expressions are intended to identify such forward-looking
statements. 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 Sonic's markets, including
inflation, recession, interest rates and other economic factors; the ability of
Sonic 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, "Sonic" or "we")
was incorporated in the State of Delaware in February 1997. Sonic originally
consisted of five automotive dealerships affiliated through the common
ownership and control of Mr. O. Bruton Smith, Sonic's Chairman and Chief
Executive Officer. These five dealerships became wholly-owned subsidiaries of
Sonic on June 30, 1997 pursuant to a reorganization in which Sonic exchanged
approximately 12.5 million shares of its Class B common stock, par value $.01
per share for the common stock or membership interests of the five dealerships.
On November 12, 1997, Sonic completed an initial public offering of 10.0
million shares of its Class A common stock, par value $.01 per share.
Sonic is one of the top five automotive retailers in the United States, as
measured by total revenue, operating 45 dealerships and 17 collision repair
centers in 11 metropolitan areas of the southeastern, southwestern and
midwestern United States. We sell new and used cars, light trucks and
replacement parts and provide vehicle maintenance, warranty, paint and repair
services. We also arrange related financing and insurance ("F&I") for our
automotive customers. As of March 30, 1999, Sonic operates dealerships in the
following metropolitan markets:
o Atlanta o Columbus o Montgomery
o Birmingham o Daytona Beach o Nashville
o Charlotte o Greenville/Spartanburg o Tampa/Clearwater
o Chattanooga o Houston
In several of our markets, our dealerships have a significant market share for
new cars and light trucks.
We sell the following 28 domestic and foreign brands:
o Acura o Chevrolet o Hyundai o KIA o Mitsubishi o Subaru
o Audi o Chrysler o Infiniti o Lexus o Oldsmobile o Toyota
o BMW o Dodge o Isuzu o Lincoln o Plymouth o Volkswagen
o Buick o Ford o Jeep o Mercedes o Porsche o Volvo
o Cadillac o Honda o Mercury o Range Rover
GROWTH STRATEGY
o ACQUIRE SELECTED DEALERSHIPS. We believe that attractive acquisition
opportunities exist for dealership groups with significant equity capital and
experience in identifying, acquiring and professionally managing dealerships.
The automotive retailing industry is highly fragmented, with the largest 100
dealer groups generating approximately 10% of the industry's $673 billion of
total sales in 1997 and controlling less than 5% of all new vehicle dealerships
in the United States. We believe that these factors, together with the
increasing capital costs of operating automobile dealerships, the lack of
alternative exit strategies (especially for larger dealerships) and the aging
of many dealership owners provide attractive consolidation opportunities. We
believe our "hub and spoke" acquisition strategy will allow us to capitalize on
economies of scale, offer a greater breadth of products and services and
increase brand diversity. Generally, we retain the management of a well-run
dealership in order to benefit from its market knowledge, name recognition and
local reputation. In addition, we selectively acquire dealerships that have
underperformed the industry average but which carry attractive product lines or
have attractive locations and which would benefit from our existing
infrastructure.
o INCREASE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. Sonic intends to
pursue opportunities to increase its sales of higher-margin products and
services by, for instance, expanding its collision repair business and
increasing sales of used vehicles. Our collision repair business provides
favorable margins and is not significantly affected by economic cycles or
consumer spending habits. Our strategy is to acquire and develop collision
repair businesses near our dealerships in order to capitalize on relationships
with existing customers and insurance companies.
We also believe that significant opportunities exist to improve our used
vehicle departments, which historically have generated higher margins on sales
than our new vehicle departments, by (1) increasing the number of used vehicles
sold and (2) increasing gross profit margins on sales of used vehicles. For
example, our ability to manage inventory levels more effectively created
increased gross profit margins on sales of used vehicles to 10.7% for the year
ended December 31, 1998 from 8.6% for the year ended December 31, 1997.
3
o CONTROL COSTS. We are focused on controlling expenses and expanding
margins at the dealerships we acquire and integrate into our organization.
Approximately 73% of our operating costs for the year ended December 31, 1998
were variable. We are able to adjust these expenses as the operating or
economic environment impacting our dealerships changes. We manage these
variable costs, such as floor plan (8%), advertising (10%) and compensation
(50%) expenses, so that they are generally related to vehicle sales and can be
adjusted in response to changes in vehicle sales volume. In addition,
management compensation is tied to individual dealership profitability and
stock price appreciation through stock options. This incentive compensation
focuses all levels of our organization on cost reduction. We also focus on
controlling components of fixed cost. For example, Sonic has reduced its
property and casualty and workers' compensation insurance costs due to the
benefits of economies of scale.
o ENHANCE PROFIT OPPORTUNITIES IN FINANCE AND INSURANCE. Sonic offers a
wide range of financing and leasing alternatives for the purchase of vehicles,
as well as credit life, accident and health and disability insurance and
extended service contracts. As a result of our size and scale, we have
negotiated increased commissions on the origination of customer vehicle
financing and insurance policies, which resulted in incremental F&I commissions
exclusive of acquisitions of $2.1 million for the year ended December 31, 1998.
o TRAIN, DEVELOP AND MOTIVATE QUALIFIED MANAGEMENT. We believe that our
well trained dealership personnel is key to our long-term prospects. We require
all of our employees, from service technicians to regional vice presidents, to
participate in in-house training programs. We believe that our comprehensive
training of all employees and the institution of a decentralized, multi-tiered
management structure to supervise effectively our dealership operations provide
us with a competitive advantage over other dealership groups. This training and
organizational structure enables high-level supervision over the dealerships,
accurate financial reporting and the ability to maintain good controls as Sonic
expands. In order to motivate management, we employ an incentive compensation
program for each officer, vice president and dealer/operators, a portion of
which is provided in the form of Sonic stock options with additional incentives
based on the performance of individual profit centers. We believe that this
organizational structure, together with the opportunity for promotion and for
equity participation, serve as a strong motivation for our employees.
o ACHIEVE HIGH LEVELS OF CUSTOMER SATISFACTION. We focus on maintaining
high levels of customer satisfaction. Our personalized sales process is
designed to satisfy customers by providing high-quality vehicles in a positive,
"consumer friendly" buying environment. Some manufacturers offer specific
performance incentives, on a per vehicle basis, if certain customer
satisfaction index ("CSI") levels (which vary by manufacturer) are achieved by
a dealer. Manufacturers consider CSI scores in approving acquisitions. In order
to keep management focused on customer satisfaction, we include CSI results as
a component of our incentive compensation program.
DEALERSHIP MANAGEMENT
Operations of the dealerships are overseen by Regional Vice Presidents,
who report to Sonic's Chief Operating Officer. Each of our dealerships is
managed by a dealer/operator who is responsible for the operations of the
dealership and the dealership's financial and customer satisfaction
performance. The dealer/operator is responsible for selecting, training and
retaining dealership personnel. All dealer/operators report to Sonic's Regional
Vice Presidents, who in turn report to Sonic's senior management on a regular
basis.
Each dealer/operator is generally complemented by a team which includes
two senior managers who aid in the operation of the dealership. The general
sales manager is primarily responsible for the operations, personnel, financial
performance and customer satisfaction performance of the new vehicle sales,
used vehicle sales, and finance and insurance departments. The parts and
service director is primarily responsible for the operations, personnel,
financial and customer satisfaction performance of the service, parts and
collision repair departments (if applicable). Each of the departments of the
dealership typically has a manager who reports to the general sales manager or
parts and service director.
NEW VEHICLE SALES
As of December 31, 1998, the Company sold 23 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. We believe that our
brand, product and price diversity reduces the risk of changes in customer
preferences, product supply shortages and aging products. Approximately 14.1%
of new vehicle sales in 1998 were luxury brands (for example, BMW, Cadillac,
Infiniti and Volvo).
4
The following table presents information with respect to Sonic's new
vehicle sales:
NEW VEHICLE SALES
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YEAR ENDED DECEMBER 31,
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(DOLLARS IN THOUSANDS)
1994 1995 1996 1997 1998
------------- -------------- -------------- -------------- -------------
Unit sales .............. 9,686 10,273 11,693 15,715 41,592
Sales revenue ........... $ 164,970 $ 186,859 $ 233,979 $ 343,941 $ 962,939
Gross profit ............ 12,103 13,926 18,001 26,427 75,494
Gross profit margin ..... 7.3% 7.5% 7.7% 7.7% 7.8%
New vehicle sales include retail lease transactions and lease-type
transactions, both of which are arranged by Sonic. New vehicle leases generally
have short terms. Lease customers, therefore, return to the new vehicle market
more frequently. Leases also provide a source of late-model, generally low
mileage, vehicles for our used vehicle inventory. Generally, leased vehicles
are under warranty for the entire lease term, which allows us to provide repair
service to the lessee throughout the term of the lease.
USED VEHICLE SALES
Sonic sells a broad variety of makes and models of used cars, vans, trucks
and sport utility vehicles. We obtain used vehicles through customer trade-ins,
at "closed" auctions which may be attended only by new vehicle dealers and
which offer off-lease, rental and fleet vehicles, and at "open" auctions which
offer repossessed vehicles and vehicles sold by other dealers. We sell our used
vehicles to retail customers and, in the case of vehicles in poor condition or
vehicles which remain unsold for a specified period of time, to other dealers
or wholesalers. Sales to other dealers or wholesalers are frequently close to
or below cost and therefore negatively affect our gross margin on used vehicle
sales.
The following table sets forth information on Sonic's used vehicle sales:
USED CAR SALES
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YEAR ENDED DECEMBER 31,
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(DOLLARS IN THOUSANDS)
1994 1995 1996 1997 1998
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Retail unit sales ........................ 4,374 5,172 5,488 6,712 24,591
Retail sales revenue ..................... $ 47,537 $ 60,766 $ 68,054 $ 85,132 $324,740
Retail gross profit ...................... 5,182 5,792 5,748 7,294 34,826
Retail gross profit margin ............... 10.9% 9.5% 8.4% 8.6% 10.7%
Wholesale unit sales ..................... 4,656 5,009 5,344 7,287 21,886
Wholesale sales revenue .................. $ 16,062 $ 20,025 $ 25,642 $ 38,785 $119,351
Wholesale gross profit/(loss) ............ 43 (45) (23) (599) (1,166)
Wholesale gross profit/(loss) margin ..... 0.3% (0.2)% (0.1)% (1.5)% (1.0)%
Total unit sales ......................... 9,030 10,181 10,832 13,999 46,477
Total sales revenue ...................... $ 63,599 $ 80,791 $ 93,696 $123,917 $444,091
Total gross profit ....................... 5,225 5,747 5,725 6,695 33,660
Total gross profit margin ................ 8.2% 7.1% 6.1% 5.5% 7.6%
SERVICE AND PART SALES
Sonic provides service and parts at each of our franchised dealerships. We
also provide maintenance and repair services at each of our franchised
dealerships, offering both warranty and non-warranty services. Service and
parts sales provide higher gross margins than vehicle sales.
5
The following table sets forth information regarding Sonic's service and
parts sales:
SERVICE AND PARTS
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YEAR ENDED DECEMBER 31,
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(DOLLARS IN THOUSANDS)
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ --------------
Sales revenue .............. $ 30,298 $ 31,958 $ 37,132 $ 51,033 $ 146,456
Gross profit ............... 10,344 11,033 12,593 18,118 62,152
Gross profit margin ........ 34.1% 34.4% 33.9% 35.5% 42.4%
COLLISION REPAIR
As of December 31, 1998, Sonic operated collision repair centers, or body
shops, at fourteen of our dealership locations. Our collision repair business
provides favorable margins and, similar to service and parts, is not
significantly affected by business cycles or consumer preferences. In addition,
because of the higher cost of used vehicles, insurance adjusters are more
hesitant to declare a vehicle a total loss, resulting in more significant, and
higher cost, repair jobs.
The following table sets forth information regarding Sonic's collision
repair operations:
COLLISION REPAIR SALES
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YEAR ENDED DECEMBER 31,
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(DOLLARS IN THOUSANDS)
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- ------------
Sales revenue ............... $ 3,686 $ 3,903 $ 4,942 $ 6,504 $ 16,204
Gross profit ................ 1,870 1,956 2,452 3,092 8,114
Gross profit margin ......... 50.7% 50.1% 49.6% 47.5% 50.0%
FINANCE AND INSURANCE
Sonic offers its customers a wide range of financing and leasing
alternatives for the purchase of vehicles. In addition, as part of each sale,
we also offer customers credit life, accident and health and disability
insurance to cover the financing cost of their vehicle, as well as extended
service contracts.
We assign our vehicle financing contracts and leases to other parties,
instead of directly financing sales, which reduces our exposure to loss from
financing activities. We receive a commission from the lender for originating
and assigning the loan or lease, but are 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. We
establish a reserve to absorb estimated chargebacks and refunds. Finance and
insurance commission revenue is recorded net of such chargebacks. Commission
expense related to finance and insurance commission revenue is charged to cost
of sales upon recognition of such revenue.
The following table sets forth information regarding Sonic's finance and
insurance operations:
FINANCE AND INSURANCE
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YEAR ENDED DECEMBER 31,
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(DOLLARS IN THOUSANDS)
1994 1995 1996 1997 1998
------------ ----------- ----------- ------------ ------------
Commission revenue .......... $ 5,181 $ 7,813 $ 7,118 $ 10,606 $ 34,011
Gross profit ................ 4,359 6,561 6,043 8,856 28,022
Gross profit margin ......... 84.1% 84.0% 84.9% 83.5% 82.4%
SALES AND MARKETING
Sonic's marketing and advertising activities vary among our dealerships
and among our markets. We advertise primarily through television, newspapers,
radio and direct mail and regularly conduct special promotions designed to
focus vehicle buyers on our product offerings. We also utilize computer
technology to aid sales people in prospecting for customers. Under arrangements
with certain manufacturers, we receive a subsidy for a portion of our
advertising expenses incurred in connection with a manufacturer's vehicles.
6
RELATIONSHIPS WITH MANUFACTURERS
Each of Sonic's dealerships operates under a separate franchise or dealer
agreement which governs the relationship between the dealership and the
manufacturer. In general, each dealer agreement specifies the location of the
dealership for the sale of vehicles and for the performance of certain approved
services in a specified market area. The designation of such areas generally
does not guarantee exclusivity within a specified territory. In addition, most
manufacturers allocate vehicles on a "turn and earn" basis which rewards high
volume. A dealer agreement requires the dealer to meet specified standards
regarding showrooms, the facilities and equipment for servicing vehicles,
inventories, minimum net working capital, personnel training, and other aspects
of the business. The dealer agreement with each dealership also gives the
related manufacturer the right to approve the dealership's general manager and
any material change in management or ownership of the dealership. Each
manufacturer may terminate a dealer agreement under certain circumstances, such
as a change in control of the dealership without manufacturer approval, the
impairment of the reputation or financial condition of the dealership, the
death, removal or withdrawal of the dealership's general manager, the
conviction of the dealership or the dealership's owner or general manager of
certain crimes, the failure to adequately operate the dealership or maintain
wholesale financing arrangements, insolvency or bankruptcy of the dealership or
a material breach of other provisions of the dealer agreement.
Many automobile manufacturers are still developing their policies
regarding public ownership of dealerships. We believe that these policies will
continue to change as more dealership groups sell their stock to the public,
and as the established, publicly-owned dealership groups acquire more
franchises. To the extent that new or amended manufacturer policies restrict
the number of dealerships which may be owned by a dealership group, or the
transferability of Sonic's common stock, such policies could have a material
adverse effect on us.
In the course of acquiring Jaguar franchises in Chattanooga and
Greenville, Jaguar declined to consent to our proposed acquisitions of these
franchises. In settling legal actions brought against Jaguar by the seller of
the Chattanooga Jaguar franchise, Sonic agreed with Jaguar not to acquire any
Jaguar franchise until August 3, 2001.
Under Sonic's agreement with Ford, Ford may force the sale of Sonic's Ford
franchises if any investor acquires 15% or more of Sonic's voting securities.
Under Sonic's Dealer Agreements with Toyota and Infiniti, Toyota and Infiniti
have the right to approve any ownership or voting rights of Sonic of 20% or
greater by any individual or entity. Honda may force the sale of Sonic's Honda
franchise if any person or entity, other than the current holders of our Class
B common stock and their lineal descendants and affiliates, acquires 5% or
greater Sonic's common stock (10% or greater if such entity is an institutional
investor), and Honda deems such person or entity to be unsatisfactory.
Volkswagen has approved the sale of no more than 25% of the voting control of
Sonic, and any future changes in ownership or transfers among Sonic's current
stockholders that could effect the voting or managerial control of Sonic's
Volkswagen franchisee subsidiaries requires the prior approval of Volkswagen.
Similarly, Chrysler has approved of the public sale of only 50% of Sonic's
common stock and requires prior approval of any future sales that would result
in a change in voting or managerial control of Sonic. Mercedes requires 60 days
advance notice to approve any acquisition of 20% or more of Sonic's voting
securities.
Certain state statutes in Florida and other states limit manufacturers'
control over dealerships. Under Florida law, notwithstanding any contrary terms
in a dealer agreement, manufacturers may not unreasonably withhold approval for
the sale of a dealership. Acceptable grounds for disapproval include material
shortcomings in the character, financial condition or business experience of
the proposed transferee. In addition, dealerships may challenge manufacturers'
attempts to establish new dealerships in the dealer's markets, and state
regulators may deny applications to establish new dealerships for a number of
reasons, including a determination that the manufacturer is adequately
represented in the area. Manufacturers must have "good cause" for any
termination or failure to renew a dealer agreement, and an automaker's license
to distribute vehicles in Florida may be revoked if, among other things, the
automaker has forced or attempted to force an automobile dealer to accept
delivery of motor vehicles not ordered by that dealer.
Under Texas law, despite the terms of contracts between manufacturers and
dealers, manufacturers may not unreasonably withhold approval of a transfer of
a dealership. It is unreasonable under Texas law for a manufacturer to reject a
prospective transferee of a dealership who is of good moral character and who
otherwise meets the manufacturer's written, reasonable and uniformly applied
standards or qualifications relating to the prospective transferee's business
experience and financial qualifications. In addition, under Texas law and the
laws of other states, franchised dealerships may challenge manufacturers'
attempts to establish new franchises in the franchised dealers' markets, and
state regulators may deny applications to establish new dealerships for a
number of reasons, including a determination that the manufacturer is
adequately represented in the region. Texas law limits the ability of
manufacturers
7
to terminate or fail to renew franchises. In addition, other laws in Texas and
elsewhere limit the ability of manufacturers to withhold their approval for the
relocation of a franchise or require that disputes be arbitrated. In addition,
a manufacturer's license to distribute vehicles in Texas may be revoked if,
among other things, the manufacturer has forced or attempted to force an
automobile dealer to accept delivery of motor vehicles not ordered by that
dealer.
Georgia law provides that no manufacturer may arbitrarily reject a
proposed change of control or sale of an automobile dealership, and any
manufacturer challenging such a transfer of a dealership must provide written
reasons for its rejection to the dealer. Manufacturers bear the burden of proof
to show that any disapproval of a proposed transfer of a dealership is not
arbitrary. If a manufacturer terminates a franchise agreement due to a proposed
transfer of the dealership or for any other reason not considered to constitute
good cause under Georgia law, such termination will be ineffective. As an
alternative to rejecting or accepting a proposed transfer of a dealership or
terminating the franchise agreement, Georgia law provides that a manufacturer
may offer to purchase the dealership on the same terms and conditions offered
to the prospective transferee.
Under Tennessee law, a manufacturer may not modify, terminate or refuse to
renew a franchise agreement with a dealer except for good cause, as defined in
the governing Tennessee statutes. Further, a manufacturer may be denied a
Tennessee license, or have an existing license revoked or suspended if the
manufacturer modifies, terminates, or suspends a franchise agreement due to an
event not constituting good cause. Good cause includes material shortcomings in
the character, financial condition or business experience of the dealer. A
manufacturer's Tennessee license may also be revoked if the manufacturer
prevents or attempts to prevent the sale or transfer of the dealership by
unreasonably withholding consent to the transfer.
Alabama law prohibits manufacturers from terminating or refusing to
continue or renew a franchise agreement except for "good cause." "Good cause"
to discontinue a relationship may exist if, for example, a dealer violates a
material term of, or fails to perform its duties under, a franchise agreement.
In addition, a manufacturer is prohibited from interfering with the transfer of
a dealership unless the transfer is to a person who would not qualify for a
dealer's license under Alabama law. Finally, a manufacturer may not
unreasonably establish a new dealership within the market area of an existing
dealer. A manufacturer who violates Alabama law may be required to pay the
dealer for the damages incurred, as well as the costs of suing the manufacturer
for damages including attorneys fees.
Under Ohio law, a dealer must obtain manufacturer approval before it can
sell or transfer an interest in a dealership. The manufacturer may only
prohibit the sale or transfer, however, for "good cause" after considering,
among other things, the proposed new owner's business experience and financing.
Similarly, a manufacturer may terminate or refuse to continue or renew a
franchise agreement only for "good cause" considering, for example, the
dealership's sales, the dealer's investment in the business, and the dealer's
satisfaction of its warranty obligations. Finally, a manufacturer may not site
a new dealership in a relevant market area without either the consent of the
local dealers or by showing "good cause." Dealers may protest a manufacturer's
actions to the Ohio Motor Vehicle Dealers Board, and eventually the courts, if
there is no "good cause" for the transfer restriction or termination or siting
of a new dealership. If the manufacturer violates Ohio's automobile franchise
law, a dealer may be entitled to double its actual damages, as well as court
costs and attorneys fees, from a manufacturer.
South Carolina law forbids a manufacturer from imposing unreasonable
restrictions on a dealer's rights to transfer, sell, or renew a franchise
agreement unless the dealer is compensated. A manufacturer may not terminate or
refuse to renew a franchise agreement without due cause. Further, although a
dealer must obtain the manufacturer's consent to transfer a dealership, the
manufacturer may not unreasonably withhold its consent. Finally, manufacturers
are generally prohibited from acting in bad faith or engaging in arbitrary or
unconscionable conduct. Manufacturers who violate South Carolina's law may be
liable for double the actual damages incurred by the dealer and/or punitive
damages in limited circumstances.
COMPETITION
The retail automotive industry is highly competitive. Depending on the
geographic market, Sonic competes with both dealers offering the same brands
and product lines as Sonic and dealers offering other automakers' vehicles. We
also compete for vehicle sales with auto brokers and leasing companies. We
compete with small, local dealerships and with large multi-franchise auto
dealerships. Some of our competitors are larger and have greater financial and
marketing resources and are more widely known than us. Some of our competitors
also may utilize various marketing techniques that are not currently used by
us.
8
We also compete with regional and national car rental companies, which
sell their used rental cars, and used automobile "superstores," such as
AutoNation and CarMax. In addition, Ford and GM have announced that they are
entering into joint ventures to acquire dealerships in various cities in the
United States, and Saturn is seeking to acquire its dealerships. In addition,
other manufacturers may directly enter the retail market in the future, which
could have a material adverse effect on us. As we seek to acquire dealerships
in new markets, we may face significant competition (including competition from
other publicly-owned dealer groups) as we strive to gain market share.
We believe that the principal competitive factors in vehicle sales are the
marketing campaigns conducted by automakers, the ability of dealerships to
offer a wide selection of the most popular vehicles, the location of
dealerships and the quality of customer service. Other competitive factors
include customer preference for makes of automobiles, pricing (including
manufacturer rebates and other special offers) and warranties.
In addition to competition for vehicle sales, we also compete with other
auto dealers, service stores, auto parts retailers and independent mechanics in
providing parts and service. We believe that the principal competitive factors
in parts and service sales are price, the use of factory-approved replacement
parts, the familiarity with a dealer's makes and models and the quality of
customer service. A number of regional and national chains offer selected parts
and service at prices that may be lower than our prices.
In arranging or providing financing for our customers' vehicle purchases,
we compete with a broad range of financial institutions. We believe that the
principal competitive factors in providing financing are convenience, interest
rates and contract terms.
Our success depends, in part, on national and regional automobile-buying
trends, local and regional economic factors and other regional competitive
pressures. We sell our vehicles in the Atlanta, Birmingham, Charlotte,
Chattanooga, Columbus, Daytona Beach, Greenville/Spartanburg, Houston,
Montgomery, Nashville and Tampa/Clearwater markets. Conditions and competitive
pressures affecting these markets, such as price-cutting by dealers in these
areas, or in any new markets we enter, could adversely affect us, although the
retail automobile industry as a whole might not be affected.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
A number of regulations affect Sonic's business of marketing, selling,
financing and servicing automobiles. Sonic also is subject to laws and
regulations relating to business corporations generally.
Under North Carolina, South Carolina, Tennessee, Florida, Georgia, Texas,
Ohio and Alabama law as well as the laws of other states into which we may
expand, we must obtain a license in order to establish, operate or relocate a
dealership or operate an automotive repair service. These laws also regulate
our conduct of business, including our advertising and sales practices. Other
states may have similar requirements.
Our operations are also subject to certain consumer protection laws known
as "Lemon Laws." These laws typically require a manufacturer or dealer to
replace a new vehicle or accept it for a full refund within one year after
initial purchase if the vehicle does not conform to the manufacturer's express
warranties and the dealer or manufacturer, after a reasonable number of
attempts, is unable to correct or repair the defect. Federal laws require
certain written disclosures to be provided on new vehicles, including mileage
and pricing information.
The imported automobiles purchased by us are subject to United States
customs duties and, in the ordinary course of our business, we may, from time
to time, be subject to claims for duties, penalties, liquidated damages, or
other charges. Currently, United States customs duties are generally assessed
at 2.5% of the customs value of the automobiles imported, as classified
pursuant to the Harmonized Tariff Schedule of the United States.
Our financing activities with customers are subject to federal
truth-in-lending, consumer leasing and equal credit opportunity regulations as
well as state and local motor vehicle finance laws, installment finance laws,
usury laws and other installment sales laws. Some states regulate finance fees
that may be paid as a result of vehicle sales. Federal, state and local
environmental regulations, including regulations governing air and water
quality, the clean-up of contaminated property and the storage and disposal of
gasoline, oil and other materials, also apply to us and our dealership
properties.
We believe that we comply in all material respects with the laws affecting
our business. Possible penalties for violation of any of these laws include
revocation of our licenses and fines. In addition, many laws may give customers
a private cause of action.
As with automobile dealerships generally, and service, parts and body shop
operations in particular, our business involves the use, storage, handling and
contracting for recycling or disposal of hazardous or toxic substances or
wastes and other environmentally sensitive materials. Our business also
involves the past and current operation and/or removal of
9
aboveground and underground storage tanks containing such substances or wastes.
Accordingly, we are subject to regulation by federal, state and local
authorities which establish health and environmental quality standards, provide
for liability related to those standards, and in certain circumstances provide
penalties for violations of those standards. We are also subject to laws,
ordinances and regulations governing remediation of contamination at facilities
we operate or to which we send hazardous or toxic substances or wastes for
treatment, recycling or disposal.
We believe that we do not have any material environmental liabilities and
that compliance with environmental laws and regulations will not, individually
or in the aggregate, have a material adverse effect on our results of
operations or financial condition. However, soil and groundwater contamination
is known to exist at certain properties used by us. Further, environmental laws
and regulations are complex and subject to frequent change. In addition, in
connection with our acquisitions, it is possible that we will assume or become
subject to new or unforeseen environmental costs or liabilities, some of which
may be material. We cannot assure you that compliance with current or amended,
or new or more stringent, laws or regulations, stricter interpretations of
existing laws or the future discovery of environmental conditions will not
require additional expenditures by Sonic, or that such expenditures will not be
material.
EMPLOYEES
As of December 31, 1998, Sonic employed approximately 3,040 people, of
whom approximately 430 were employed in managerial positions, 980 were employed
in non-managerial sales positions, 1,170 were employed in non-managerial parts
and service positions and 460 were employed in administrative support
positions.
We believe that many dealerships in the retail automobile industry have
difficulty in attracting and retaining qualified personnel for a number of
reasons, including the historical inability of dealerships to provide employees
with an equity interest in the profitability of the dealerships. We provide
certain executive officers, managers and other employees with stock options and
all employees with a stock purchase plan and we believe this type of equity
incentive is attractive to our existing and prospective employees.
We believe that our relationship with our employees is good. None of our
employees is represented by a labor union. Because of our dependence on the
manufacturers, however, we may be affected by labor strikes, work slowdowns and
walkouts at the manufacturer's manufacturing facilities.
ITEM 2: PROPERTIES
Sonic's principal executive offices are located at 5401 East Independence
Boulevard, Charlotte, North Carolina 28212, and our telephone number is (704)
532-3320. These executive offices are located on the premises leased by Town &
Country Ford. The following table identifies each of the properties utilized by
Sonic's operations and their respective locations:
ATLANTA MARKET
o Dyer & Dyer Volvo, 5260 Peachtree Industrial Blvd., Atlanta, GA
o Global Imports, 500 & 550 Interstate North Parkway, N.W., Atlanta, GA(1)
BIRMINGHAM MARKET
o Tom Williams Buick, 401 S. 20th Street, Birmingham, AL(1)
o Tom Williams Cadillac, 325 S. 20th Street, Birmingham, AL(1)
o Tom Williams Imports, 2200 34d Avenue South, Birmingham, AL(1)
o Tom Williams Lexus, 300 S. 22nd Street, Birmingham, AL(1)
CHARLOTTE MARKET
o Fort Mill Chrysler-Plymouth-Dodge, 3310 Hwy. 51, Fort Mill, SC
o Fort Mill Ford, 788 Gold Hill Rd., Fort Mill, SC
o Frontier Oldsmobile-Cadillac, 2501 Roosevelt Blvd., Monroe, NC
o Lake Norman Chrysler-Plymouth-Jeep, Chartwell Center Dr., Cornelius, NC
o Lake Norman Dodge, I-77 & Torrence Chapel Rd., Cornelius, NC
o Town & Country Chrysler-Plymouth-Jeep of Rock Hill, 803 North Anderson Rd.,
Rock Hill, SC
o Town & Country Ford, 5401 East Independence Blvd., Charlotte, NC
o Town & Country Toyota, 9101 South Blvd., Charlotte, NC
10
CHATTANOOGA MARKET
o BMW/Volvo of Chattanooga, 5949 Brainard Rd., Chattanooga, TN
o Cleveland Chrysler-Plymouth-Jeep, 717 South Lee Hwy., Cleveland, TN
o Dodge of Chattanooga, 402 West Martin Luther King Blvd., Chattanooga, TN
o Economy Honda, Hwy. 153 at Shallowford Rd., Chattanooga, TN(1)
o Infiniti of Chattanooga, 5915 Brainard Rd., Chattanooga, TN
o KIA/VW of Chattanooga, 6015 International Dr., Chattanooga, TN
o Town & Country Ford of Cleveland, 2496 South Lee Hwy., Cleveland, TN
COLUMBUS MARKET
o Hatfield Hyundai & Hatfield Isuzu & Hatfield Subaru, 1400 Automall Dr.,
Columbus, OH
o Trader Bud's Westside Chrysler-Plymouth-Jeep, 3700 West Broad St., Columbus,
OH
o Hatfield Lincoln Mercury, 1495 Automall Dr., Columbus, OH
o Toyota West, 1500 Automall Dr., Columbus, OH
o Trader Bud's Westside Dodge, 4000 West Broad St., Columbus, OH
o Hatfield KIA/Volkswagen West & Jeep Eagle West, 1455 Automall Dr., Columbus,
OH
DAYTONA BEACH MARKET
o Halifax Ford-Mercury, 1307 N. Dixie Hwy., New Smyrna Beach, FL
o Higginbotham Automobiles, 1720 Mason Ave., Daytona Beach, FL
o Higginbotham Chevy-Olds, 1919 N. Dixie Hwy., New Smyrna Beach, FL
o HMC Finance, 3741 S. Nova Rd., Port Orange, FL
o Sunrise Auto World, 241 Ridgewood Ave., Holly Hill, FL
GREENVILLE/SPARTANBURG MARKET
o Century BMW, 2752 Laurens Rd., Greenville, SC
o Heritage Lincoln Mercury, 2424 Laurens Rd., Greenville, SC
HOUSTON MARKET
o Casa Ford, 4701 I-10 East, Baytown, TX
o Lone Star Ford, 8477 North Freeway, Houston, TX
o Ron Craft Chevrolet-Cadillac-Oldsmobile-Geo, 3401 N. Main, Baytown, TX
o Ron Craft Chrysler Plymouth Jeep, 5221 I-10 East, Baytown, TX
MONTGOMERY MARKET
o Capitol Chevrolet, 711 Eastern Blvd., Montgomery, AL
o Capitol Hyundai & Capitol Mitsubishi, 190 Eastern Blvd., Montgomery, AL
o Capitol KIA, 845 Eastern Blvd., Montgomery, AL
NASHVILLE MARKET
o BMW of Nashville, 4040 Armory Oaks Drive, Nashville, TN
o VW of Nashville, 630 Murfreesboro Pike, Nashville, TN
o Rally Mitsubishi, 1620 West End Ave., Nashville, TN(1)
TAMPA/CLEARWATER MARKET
o Clearwater Collision Center, 2300 Drew Street, Clearwater, FL
o Clearwater Mitsubishi, 21699 US Hwy 19N, Clearwater, FL
o Clearwater Toyota, 21799 US Hwy 19N, Clearwater, FL
o Freedom Ford, 24825 US Hwy. 19 North, Clearwater & 3925 Tampa Rd., Oldsmar,
FL
o Tampa Volvo, 6008 N. Dale Mabry, Tampa, FL
- ---------
(1) Represents an acquisition that was completed in the first quarter of 1999.
Our dealerships are generally located along major U.S. or interstate
highways. One of the principal factors considered by Sonic in evaluating an
acquisition candidate is its location. We prefer to acquire dealerships located
along major thoroughfares, primarily interstate highways with ease of access,
which can be easily visited by prospective customers.
At December 31, 1998 we owned the properties of Fort Mill Ford and Town
and Country Toyota. All other properties utilized by our dealership operations
were leased. In January 1999, we sold the properties of Fort Mill Ford and Town
and Country Toyota to MMR Holdings, LLC, a limited liability company owned by
Bruton Smith ("MMR Holdings"), and are currently leasing these properties back
from MMR Holdings.
On July 9, 1998, Sonic entered into a strategic alliance agreement with
Mar Mar Realty Trust, a real estate investment trust ("MMRT"). MMRT owns or
will own, through its expected acquisition of MMR Holdings, certain real estate
11
associated with various automobile dealerships, automotive aftermarket
retailers and other automotive related businesses and leases such properties to
the business operators located thereon. Bruton Smith, Sonic's Chairman and
Chief Executive Officer, serves as the chairman of MMRT's board of trustees.
Under the terms of our franchise agreements, Sonic must maintain an
appropriate appearance and design of its facilities and is restricted in its
ability to relocate its dealerships.
ITEM 3: LEGAL PROCEEDINGS
On March 1, 1999, a civil complaint was filed in the Circuit Court of
Montgomery County, Alabama in a matter styled "FRANK E. MCGOUGH V. SONIC
AUTOMOTIVE, INC., CAPITOL CHEVROLET AND IMPORTS, INC., ET AL." (the "McGough
Complaint"). This action arises from Sonic's acquisition by merger of Capitol
Chevrolet and Imports, Inc. from plaintiff, who was its former stockholder. The
McGough Complaint alleges that Sonic untimely delivered an erroneous
post-closing balance sheet to settle outstanding accounts among the parties to
the merger and that Sonic made misrepresentations concerning the preparation of
this post-closing balance sheet. Plaintiff states that these allegations
entitle him to declaratory judgement allowing him to receive all funds escrowed
by Sonic for the resolution of post-merger accounts or, alternatively,
rescission of the merger. Sonic denies the allegations of the McGough Complaint
and will defend itself vigorously. Sonic believes that its post-closing balance
sheet was properly prepared and that plaintiff is not entitled to the relief
sought. Furthermore, the merger agreement at issue specifically provides for
the arbitration of disputes concerning the post-closing balance sheet, and,
consequently, Sonic believes that the McGough Complaint was improperly filed.
From time to time, Sonic is named in claims involving the manufacture of
automobiles, contractual disputes and other matters arising in the ordinary
course of our business. Currently, no legal proceedings, other than the
proceeding described above, are pending against or involve the Company that, in
the opinion of management, could reasonably be expected to have a material
adverse effect on our business, financial condition or results of operations.
Because of their vehicle inventory and nature of business, automobile
retail dealerships generally require significant levels of insurance covering a
broad variety of risks. Sonic's insurance includes an umbrella policy as well
as insurance on our real property, comprehensive coverage for our vehicle
inventory, general liability insurance, employee dishonesty coverage and errors
and omissions insurance in connection with our vehicle sales and financing
activities.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on December 3, 1998, William P.
Benton, William I. Belk and Bryan Scott Smith were elected directors by Sonic's
stockholders. Directors whose terms of office continued after the meeting were
O. Bruton Smith, Theodore M. Wright, Nelson E. Bowers, II and William R.
Brooks. In addition to the election of three directors, the stockholders
approved an amendment to increase the authorized number of shares of Class A
common stock issuable under the Sonic Employee Stock Purchase Plan from 300,000
to 600,000, approved the adoption of the Sonic Formula Stock Option Plan for
Independent Directors, approved and ratified the issuance of up to 600,000
shares of Sonic's Class A convertible preferred stock, par value $.10 per share
and ratified the appointment of Deloitte & Touche LLP as Sonic's independent
public accountant for the fiscal year ending December 31, 1998.
VOTES
VOTES FOR VOTES AGAINST ABSTAINED UNVOTED
------------ --------------- ----------- ------------
Election of William P. Benton ................................... 68,439,855 41,350 679,616
Election of William I. Belk ..................................... 68,439,855 41,350 679,616
Election of Bryan Scott Smith ................................... 68,439,855 41,350 679,616
Approval of amendment to Sonic Employee Stock Purchase Plan ..... 67,295,719 576,250 111,015 1,177,837
Approval of adoption of Sonic Formula Stock Option Plan ......... 67,514,644 357,400 110,940 1,177,837
Approval of issuance of Preferred Stock ......................... 67,946,611 33,635 2,738 1,177,837
Appointment of Deloitte & Touche LLP ............................ 68,479,530 750 925 679,616
12
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Sonic's Class A common stock is currently traded on the New York Stock
Exchange ("NYSE") under the symbol "SAH."
As of December 31, 1998, with giving effect to the Stock Split, 11,959,274
shares of Class A common stock and 12,400,000 shares of Sonic's Class B common
stock were outstanding. As of March 29, 1999, there were 30 record holders of
the Class A common stock and four record holders of the Class B common stock.
As of March 29, 1999, the closing stock price for the Class A common stock was
$14.25.
Sonic intends to retain future earnings to provide funds for operations
and future acquisitions. As a holding company, Sonic will depend on dividends
and other payments from its subsidiary dealership operations to pay cash
dividends to stockholders, as well as to meet debt service and operating
expense requirements.
We do not anticipate paying any dividends in the foreseeable future. Under
an Indenture dated as of July 1, 1998 (the "Indenture") among Sonic and U.S.
Bank Trust National Association, as trustee, and under the credit agreement
between Sonic and Ford Motor Credit Company ("Ford Motor Credit"), no dividends
may be paid by Sonic. Any decision concerning the payment of dividends on the
common stock will depend upon the results of operations, financial condition and
capital expenditure plans of Sonic, as well as other factors as the Board of
Directors, in its sole discretion, may consider relevant.
The following table sets forth the high and low closing sales prices for
Sonic's Class A common stock for each calendar quarter during the periods
indicated as reported by the NYSE Composite Tape, as adjusted to reflect the
Stock Split. Prior to November 10, 1997, Sonic was privately held and there was
no public market for the Class A common stock.
1998 HIGH LOW
- ------------------------------------------------ ----------- ----------
First Quarter ......................... 8 5/8 4 7/8
Second Quarter ........................ 9 3/8 7 11/16
Third Quarter ......................... 11 15/16 8 1/4
Fourth Quarter ........................ 17 9/16 6 11/32
1997 HIGH LOW
- ----------------------------------------------- ----------- ----------
Fourth Quarter (from November 10, 1997
through December 31, 1997) .......... 5 31/32 4 13/16
Set forth below is certain information as to all equity securities sold by
Sonic during the periods discussed that were not registered under the
Securities Act. As to all such transactions, an exemption was claimed under
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder ("Regulation D") as transactions not involving a public offering in
view of sophistication of the purchasers, their access to material information
about Sonic, the disclosures actually made to them by Sonic, the absence of any
general solicitation or advertising, the status of the purchasers as
"accredited investors" as that term is defined in Rule 501 (a) of Regulation D
and the filing by Sonic of the appropriate forms in connection therewith. All
such private sales of Sonic's equity securities were made to the owners of
assets associated with, or the capital stock of, automobile dealerships
acquired by Sonic as a part of Sonic's dealership acquisition strategy.
Sonic has privately issued its Class A common stock in the following
dealership acquisition transactions:
On September 18, 1998, Sonic issued 970,588 shares of its Class A common
stock to acquire the assets of HMC Finance Corporation, Inc., Halifax
Ford-Mercury, Inc., Higginbotham Automobiles, Inc., Higginbotham Chevrolet-
Oldsmobile, Inc., and Sunrise Auto World, Inc. with a value of approximately
$8.3 million.
Sonic has also privately issued its Class A convertible preferred stock,
par value $.10 per share (the "Preferred Stock") in dealership acquisition
transactions. The Preferred Stock is divided into three series: the Series I
Preferred Stock, the Series II Preferred Stock and the Series III Preferred
Stock. Each share of Preferred Stock is convertible into shares of Class A
common stock at the holder's option at specified conversion rates. After the
second anniversary of the date of issuance, any shares of Preferred Stock which
have not yet been converted are subject to mandatory conversion to
13
Class A Common Stock at the option of Sonic. No fractional shares of Class A
common stock will be issued upon conversion of any shares of Preferred Stock.
Instead, Sonic will pay cash equal to the value of such fractional shares.
Generally, each share of Preferred Stock is convertible into that number
of shares of Class A common stock that has an aggregate Market Price at the
time of conversion equal to $1,000 (with certain adjustments for Series II and
Series III Preferred Stock). "Market Price" is defined generally as the average
closing price per share of the Class A common stock on the New York Stock
Exchange for twenty trading days immediately preceding the date of
determination. Before the first anniversary of the date of issuance of the
Preferred Stock, each holder of Preferred Stock is unable to convert without
first giving Sonic ten business days' notice and an opportunity to redeem such
Preferred Stock at the then applicable redemption price.
Sonic has privately issued Preferred Stock in the following dealership
acquisition transactions:
On March 24, 1998, Sonic issued 3,960 shares of its Series III Preferred
Stock to acquire the assets of M&S Auto Resources, Inc. (d/b/a Clearwater
Toyota), Clearwater Auto Resources, Inc. (d/b/a Clearwater Mitsubishi) and
Clearwater Collision Center, Inc. with a value of approximately $3.9 million.
On July 8, 1998, Sonic issued 14,025 shares of its Series I Preferred
Stock to acquire the assets of Hatfield Jeep Eagle, Inc., Hatfield Lincoln
Mercury, Inc., Trader Bud's Westside Dodge, Inc., Toyota West, Inc., and
Hatfield Hyundai, Inc. with a value of approximately $12.5 million.
On July 14, 1998, Sonic issued 400 shares of Series II Preferred Stock to
acquire the assets of Fairway Management Company d/b/a Heritage Lincoln-Mercury
with a value of approximately $0.4 million.
On July 31, 1998, Sonic issued 2,166.5 shares of Series II Preferred Stock
to acquire the assets of Century Auto Sales, Inc. d/b/a Century BMW with a
value of approximately $2.3 million.
On July 31, 1998, Sonic issued 381.3 shares of Series I Preferred Stock
and 3,813 shares of Series II Preferred Stock to acquire the outstanding
capital stock of Capitol Chevrolet and Imports, Inc. with a value of
approximately $4.0 million.
On July 31, 1998, Sonic issued 2,313 shares of Series III Preferred Stock
to acquire the outstanding capital stock of Casa Ford of Houston, Inc. with a
value of approximately $2.5 million.
On December 15, 1998, Sonic issued 3,675 shares of Series II Preferred
Stock to acquire the outstanding capital stock of Ron Craft Chevy-Olds with a
value of approximately $3.7 million.
In addition, Sonic has privately issued warrants to purchase Class A
common stock in the following dealership acquisition transactions:
On January 15, 1998, Sonic issued warrants to purchase 88,782 shares of
its Class A common stock at an exercise price of $6 per share. These warrants
are currently exercisable at the option of the holder and expire on January 15,
2003. These warrants were issued as consideration paid by us to acquire the
assets of Dyer Volvo having an aggregate fair value of approximately $266,000.
On July 31, 1998, Sonic issued warrants to purchase 150,000 shares of its
Class A common stock at an exercise price of $10.40 per share. These warrants
are currently exercisable at the option of the holder and expire on July 31,
2003. These warrants were issued as consideration paid by us to acquire the
assets of Century BMW having an aggregate fair value of approximately $450,000.
On November 30, 1998, Sonic issued warrants to purchase 4,000 shares of
its Class A common stock at an exercise price of $11.27 per share. These
warrants are currently exercisable at the option of the holder and expire on
November 30, 2003. These warrants were issued as consideration paid by us to
acquire the assets of Tampa Volvo having an aggregate fair value of
approximately $12,000.
14
ITEM 6: SELECTED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 and the selected consolidated
balance sheet data as of December 31, 1995, 1996, 1997 and 1998 are derived
from Sonic's audited financial statements. The selected consolidated balance
sheet data as of December 31, 1994 are derived from Sonic'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,
--------------------------------------------------------------------
1994 1995 1996(1) 1997(1) 1998(1)
----------- ------------ ------------ -------------- ---------------
(DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Consolidated Statement of Operations Data:
Revenues:
Vehicle sales ...................................... $228,569 $ 267,650 $ 327,674 $ 467,858 $ 1,407,030
Parts, service, and collision repair ............... 33,984 35,860 42,075 57,537 162,660
Finance and insurance .............................. 5,181 7,813 7,118 10,606 34,011
-------- --------- --------- ---------- -----------
Total revenues ....................................... 267,734 311,323 376,867 536,001 1,603,701
Cost of sales ........................................ 233,833 272,130 332,122 473,003 1,396,259
-------- --------- --------- ---------- -----------
Gross profit ......................................... 33,901 39,193 44,745 62,998 207,442
Selling, general and administrative expenses ......... 23,810 28,091 32,602 46,770 150,130
Depreciation and amortization ........................ 838 832 1,076 1,322 4,607
-------- --------- --------- ---------- -----------
Operating income ..................................... 9,253 10,270 11,067 14,906 52,705
Interest expense, floor plan ......................... 3,001 4,505 5,968 8,007 14,096
Interest expense, other .............................. 443 436 433 1,199 9,395
Other income ......................................... -- 106 355 298 426
-------- --------- --------- ---------- -----------
Income before income taxes and minority interest ..... 5,809 5,436 5,021 5,998 29,640
Provision for income taxes ........................... 2,118 2,176 1,924 2,249 11,083
-------- --------- --------- ---------- -----------
Income before minority interest ...................... 3,691 3,260 3,097 3,749 18,557
Minority interest in earnings of subsidiary .......... 15 22 114 47 --
-------- --------- --------- ---------- -----------
Net income ........................................... $ 3,676 $ 3,238 $ 2,983 $ 3,702 $ 18,557
======== ========= ========= ========== ===========
Diluted net income per share ......................... $ 0.27 $ 0.74
Weighted average number of shares outstanding ........ 13,898 24,970
Consolidated Balance Sheet Data:
Working capital ...................................... $ 13,246 $ 18,140 $ 19,780 $ 44,098 $ 79,155
Total assets ......................................... 69,061 79,462 110,976 291,450 576,103
Long-term debt ....................................... 3,773 3,561 5,286 38,640 131,337
Total liabilities .................................... 57,274 62,956 84,367 207,085 433,674
Minority interest .................................... 177 200 314 -- --
Stockholders' equity ................................. 11,610 16,306 26,295 84,365 142,429
- ---------
(1) Selected Financial Data for the years ended December 31, 1996, 1997, and
1998 include the results of operations of certain dealerships acquired
during those periods. All such acquisitions were accounted for using the
purchase method of accounting and, as a result, the results of operations
prior to the date of acquisition have been excluded. Accordingly, the
actual financial data for periods after the acquisitions may not be
comparable to data presented for periods prior to the acquisitions.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial
condition as of December 31, 1998 should be read in conjunction with the Sonic
Automotive, Inc. and Subsidiaries Consolidated Financial Statements and the
related notes thereto included elsewhere herein.
15
OVERVIEW
Sonic is one of the top five automotive retailers in the United States,
operating 38 dealerships and 14 collision repair centers in the southeastern,
southwestern and midwestern United States. We sell new and used cars and light
trucks, sells replacement parts, provide vehicle maintenance, warranty, paint
and repair services and arrange related F&I for its automotive customers. Our
business is geographically diverse, with dealership operations in the Atlanta,
Charlotte, Chattanooga, Columbus, Daytona Beach, Greenville/Spartanburg,
Houston, Montgomery, Nashville, and Tampa-Clearwater markets. Sonic sells 23
domestic and foreign brands, which consist of Acura, BMW, Cadillac, Chevrolet,
Chrysler, Dodge, Ford, Honda, Hyundai, Infiniti, Isuzu, Jeep, KIA, Lincoln,
Mercedes, Mercury, Mitsubishi, Oldsmobile, Plymouth, Subaru, Toyota, Volkswagen
and Volvo.
New vehicle revenues include both the sale and lease of new vehicles. Used
vehicle revenues include amounts received for used vehicles sold to retail
customers, other dealers and wholesalers. Other operating revenues include
parts and services revenues, fees and commissions for arranging F&I and sales
of third party extended warranties for vehicles. In connection with vehicle
financing contracts, Sonic receives a finance fee from the lender for
originating the loan. If, within 90 days of origination, the customer pays off
the loans through refinancing or selling/trading in the vehicle or defaults on
the loan, the finance company will assess a charge (a "chargeback") for a
portion of the original commission. The amount of the chargeback depends on how
long the related loan was outstanding. As a result, Sonic has established
reserves based on its historical chargeback experience. Sonic also sells
warranties provided by third-party vendors, and recognizes a commission at the
time of sale.
While the automotive retailing business is cyclical, we sell several
products and services that are not closely tied to the sale of new and used
vehicles. Such products and services include our parts and service and
collision repair businesses, both of which are not dependent upon near-term new
vehicle sales volume.
Our cost of sales and profitability are also affected by the allocations
of new vehicles which our dealerships receive from manufacturers. When we do
not receive allocations of new vehicle models adequate to meet customer demand,
we may purchase additional vehicles from other dealers at a premium to the
manufacturer's invoice, reducing the gross margin realized on the sales of such
vehicles. In addition, we follow a disciplined approach in selling vehicles to
other dealers and wholesalers when the vehicles have been in our inventory
longer than the guidelines set by us. Such sales are frequently at or below
cost and, therefore, reduce our overall gross margin on vehicle sales. Sonic's
salary expense, employee benefits costs and advertising expenses comprise the
majority of our selling, general and administrative expenses. Sonic's interest
expense fluctuates based primarily on the level of the inventory of new
vehicles held at our dealerships, substantially all of which is financed
through floor plan financing, as well as the amount of indebtedness incurred
for acquisitions.
We have accounted for all of our dealership acquisitions using the
purchase method of accounting and, as a result, we do not include in our
financial statements the results of operations of these dealerships prior to
the date they were acquired by us. The Consolidated Financial Statements of
Sonic discussed below reflect the results of operations, financial position and
cash flows of each of our dealerships acquired prior to December 31, 1998. As a
result of the effects of our acquisitions, the historical consolidated
financial information described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is not necessarily indicative of
the results of operations, financial position and cash flows of Sonic in the
future or the results of operations, financial position and cash flows which
would have resulted had such acquisitions occurred at the beginning of the
periods presented in the Consolidated Financial Statements.
The automobile industry is cyclical and historically has experienced
periodic downturns, characterized by oversupply and weak demand. Many factors
affect the industry including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
available credit.
Sonic's profit margins are primarily impacted by changes in the percentage
of revenues attributed to new vehicle sales.
16
RESULTS OF OPERATIONS
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in Sonic's statement
of operations.
PERCENTAGE OF TOTAL REVENUES FOR
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
Revenues:
New vehicle sales ........................... 62.0% 64.2% 60.0%
Used vehicle sales .......................... 24.9% 23.1% 27.8%
Parts, service and collision repair ......... 11.2% 10.7% 10.1%
Finance and insurance ....................... 1.9% 2.0% 2.1%
Total revenues .............................. 100.0% 100.0% 100.0%
Cost of sales ............................... 88.1% 88.2% 87.1%
Gross profit ................................ 11.9% 11.8% 12.9%
Selling, general and administrative ......... 8.9% 9.0% 9.6%
Operating income ............................ 2.9% 2.8% 3.3%
Interest expense ............................ 1.7% 1.7% 1.5%
Income before taxes ......................... 1.3% 1.5% 1.8%
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1997
REVENUES. Revenues grew in each of Sonic's primary revenue areas for 1998
as compared with 1997, causing total revenues to increase 199% to $1.6 billion.
This increase was due primarily to revenues contributed by our acquisitions
completed in 1997 and 1998 of approximately $994.4 million. New vehicle sales
revenue increased 180% to $962.9 million in 1998, compared with $ 343.9 million
in 1997. The increase was due primarily to an increase in new vehicle unit
sales of 165% to 41,592, as compared with 15,715 in 1997 resulting principally
from 24,922 units contributed by the acquisitions completed during 1997 and
1998. The remainder of the increase was due to a 6% increase in the average
selling price of new vehicles resulting principally from sales of higher priced
luxury and import vehicles contributed by Sonic's acquisitions.
Used vehicle revenues from retail sales increased 281% to $324.7 million
in 1998 from $85.1 million in 1997. The increase was due primarily to an
increase in used vehicle unit sales of 266% to 24,591, as compared with 6,712
in 1997, resulting from additional unit sales contributed by the acquisitions
completed in 1997 and 1998. The remainder of the increase was due to a 4%
increase in the average selling price of used vehicles, resulting principally
from sales of higher priced luxury and import vehicles contributed by our
acquisitions, along with an increase in used vehicle revenues from stores owned
for longer than one year of 23% in 1998 over 1997.
Sonic's parts, service and collision repair revenue increased 183% to
$162.7 million in 1998 compared to $57.5 million in 1997, due principally to
our acquisitions. Finance and insurance revenue increased $23.4 million, or
221%, due principally to increased new vehicle sales and related financing
contributed by the acquisitions completed in 1997 and 1998.
GROSS PROFIT. Gross profit increased 229% to $207.4 million in 1998 from
$63.0 million in 1997 due principally to increases in revenues contributed by
our acquisitions. Gross profit as a percentage of sales increased to 12.9% from
11.8% due to increases in new vehicle gross margins from 7.7% to 7.8% resulting
from sales of higher margin import vehicles contributed by our acquisitions, as
well as improved gross margins of used vehicles from 8.6% to 10.7% resulting
from efforts made to improve management of used vehicle inventories. In
addition, because gross margins from used vehicle revenues are higher than
gross margins from new vehicle revenues, an increase in used vehicle revenues
as a percentage of total revenues from 23.1% in 1997 to 27.8% in 1998, and a
decrease in new vehicle revenues as a percentage of total revenues from 64.2%
in 1997 to 60.0% in 1998, also contributed to the overall increase in gross
profits as a percentage of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including depreciation and amortization, increased
222% to $154.7 million in 1998 from $48.1 million in 1997. Such expenses as a
percentage of revenues increased to 9.6% from 9.0% due principally to expenses
inherent with the rapid growth and formation of Sonic. In addition, because
sales compensation, which comprises over 50% of total selling, general, and
administration
17
expenses, is based on gross profits as opposed to revenues, the increase in
gross profit margins resulted in an increase in total selling, general, and
administrative expenses as a percent of total revenues.
INTEREST EXPENSE, FLOOR PLAN. Interest expense, floor plan increased 76%
to $14.1 million from $8.0 million, due primarily to floor plan interest
incurred by our acquisitions. As a percentage of total revenues, floor plan
interest decreased from 1.5% to 0.9% due to decreased interest rates under
Sonic's floor plan financing arrangements, as well as improvement in turnover
rates.
INTEREST EXPENSE, OTHER. Interest expense, other increased to $9.4 million
from $1.2 million, due primarily to interest incurred on Sonic's senior
subordinated notes and on acquisition-related indebtedness.
NET INCOME. As a result of the factors noted above, Sonic's net income
increased by $14.9 million in 1998 compared to 1997.
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1996
REVENUES. Revenues grew in each of Sonic'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 our 1997 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 dealerships acquired in the
fourth quarter of 1997.
Sonic's parts, service and collision repair revenue increased 36.7% to
$57.5 million from $42.1 million, and declined as a percentage of revenue to
10.7% from 11.2%. The increase in service and parts revenue was due principally
to increased parts revenue, including wholesale parts, from our Lone Star Ford
and Fort Mill Ford locations and additional revenues from our acquisitions in
the fourth quarter of 1997. F&I revenue increased $3.5 million, due principally
to increased new vehicle sales and related financings.
GROSS PROFIT. Gross profit increased 40.8% in 1997 to $63.0 million from
$44.7 million in 1996 due to increases in new vehicle sales revenues
principally at our Lone Star Ford and Fort Mill Ford locations and additional
revenues from our 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. Selling, general and
administrative expenses, including depreciation and amortization, increased
42.8% from $33.7 million to $48.1 million. These expenses increased due to
increases in sales volume as well as expenses inherent with the initial growth
and formation of Sonic.
INTEREST EXPENSE, FLOOR PLAN. Interest expense, floor plan increased 34.2%
to $8.0 million from $6.0 million, primarily due to our 1997 acquisitions. As a
percentage of total revenues, floor plan interest decreased from 1.6% to 1.5%.
INTEREST EXPENSE, OTHER. Interest expense, other increased 176.9% from
$0.4 million to $1.2 million. The increase in interest expense was due to
interest incurred on acquisition related indebtedness.
NET INCOME. As a result of the factors noted above, Sonic's net income
increased by $0.7 million in 1997 compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
Sonic's principal needs for capital resources are to finance acquisitions,
and fund debt service and working capital requirements. Historically, we have
relied on internally generated cash flows from operations, borrowings under its
various credit facilities, and borrowings and capital contributions from our
stockholders to finance our operations and expansion. On November 10, 1997,
Sonic completed its initial public offering of its Class A common stock,
providing approximately $53.7 million of additional capital resources for the
consummation of certain acquisitions. On July 31, 1998, Sonic completed its
private placement of $125 million of its 11% senior subordinated notes which
provided an additional $120.6 million of capital resources for the consummation
of certain acquisitions, for repayment of borrowings under our revolving line
of credit and for future acquisitions.
18
Sonic currently has a standardized floor plan credit facility with Ford
Motor Credit for all its dealership subsidiaries (the "Floor Plan Facility")
used to finance purchases of new and used vehicle inventory. As of December 31,
1998, there was an aggregate of $228.2 million outstanding under the Floor Plan
Facility. The Floor Plan Facility at December 31, 1998 had an effective rate of
prime less 1.1% (6.65%) subject to certain incentives and other adjustments.
Typically new vehicle floor plan indebtedness exceeds the related inventory
balances. The inventory balances are generally reduced by the manufacturer's
purchase discounts which are not reflected in the related floor plan liability.
These manufacturer purchase discounts are standard in the industry, typically
occur on all new vehicle purchases, and are not used to offset the related
floor plan liability. These discounts are aggregated and generally paid to
Sonic by the manufacturer on a quarterly basis. The related floor plan
liability becomes due as vehicles are sold.
The Floor Plan Facility includes an available credit line for the purchase
of used vehicle inventory. Sonic's general practice is to utilize used vehicle
floor plan indebtedness only when purchasing large quantities of used vehicles
in bulk. As of December 31, 1998, there was approximately $18.5 million
available under Sonic's used vehicle credit line of which approximately $17.4
million was unused. Amounts outstanding under used floor plan indebtedness are
due when vehicles are sold.
Sonic makes monthly interest payments on the amount financed under the
Floor Plan Facility but is not required to make loan principal repayments prior
to the sale of the vehicles. The underlying notes are due when the related
vehicles are sold and are collateralized by vehicle inventories and other
assets of the relevant dealership subsidiary. The Floor Plan Facility contains
a number of covenants, including among others, covenants restricting Sonic with
respect to the creation of liens and changes in ownership, officers and key
management personnel.
Sonic generated net cash of $29.8 million from operating activities
in 1998, compared to $6.1 million in 1997. The increase was attributable
principally to increased net income and decreases in inventory levels.
Cash used for investing activities, excluding amounts paid in
acquisitions, was approximately $2.7 million for the year ended December 31,
1998 and related primarily to acquisitions of property and equipment. Cash used
in investing activities was $6.7 million, $86.8 million and $74.9 million in
1996, 1997 and 1998, respectively, including $1.9 million, $2.0 million and
$4.3 million of capital expenditures during such periods. Sonic's principal
capital expenditures typically include building improvements and equipment for
use in our dealerships. Of the capital expenditures in 1998, 0.6 million
related to the construction of new dealerships and a body shop which upon
completion is expected to be sold to an affiliate of MMRT and subsequently
leased back.
Cash provided by financing activities of approximately $78.6 million in
1998 primarily reflected proceeds received from the issuance of our senior
subordinated notes, plus borrowings under our revolving credit facility with
Ford Motor Credit (the "Revolving Facility"), less repayments of other debt.
The purpose of these borrowings was to finance acquisitions in 1998.
The Revolving Facility with Ford Motor Credit currently has a borrowing
limit of $100 million. Amounts outstanding under the Revolving Facility bear
interest at a fluctuating per annum rate equal to 2.75% above the 1 month
commercial finance paper rate as reported by the Federal Reserve Board (7.55% at
December 31, 1998).
The Revolving Facility will mature in March 2001, unless Sonic 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. On July 31, 1998, all amounts
previously outstanding under the Revolving Facility were repaid with a portion
of the net proceeds of the sale of senior subordinated notes. The outstanding
balance of $8.9 million at December 31, 1998 represents amounts borrowed to
finance certain of Sonic's acquisitions completed in 1998. Amounts outstanding
under the Revolving Facility as of March 31, 1999 total approximately $53.7
million which reflects additional borrowings used to finance certain
acquisitions closed subsequent to December 31, 1998. Additional amounts to be
drawn under the Revolving Facility are to be used for the acquisition of
additional dealerships and to provide general working capital needs of Sonic
not to exceed $10 million.
We agreed under the Revolving Facility not to pledge any of our assets to
any third party (with the exception of currently encumbered real estate and
assets of Sonic's dealership subsidiaries that are subject to previous
pledges or liens). In addition, the Revolving Facility contains certain
negative covenants, including covenants restricting or prohibiting the payment
of dividends, capital expenditures and material dispositions of assets as well
as other customary covenants. Additional negative covenants include specified
ratios of
o total debt to tangible base capital (as defined in the Revolving
Facility),
o current assets to current liabilities,
19
o earnings before interest, taxes, depreciation and amortization (EBITDA)
and rent less capital expenditures to fixed charges,
o EBITDA to interest expense,
o EBITDA to total debt and
o the current lending commitment under the Revolving Facility to scaled
assets (as defined in the Revolving Facility).
In addition, the loss of voting control over Sonic by Bruton Smith, Scott
Smith and their spouses or immediate family members or the failure by Sonic,
with certain exceptions, to own all the outstanding equity, membership or
partnership interests in its dealership subsidiaries will constitute an event
of default under the Revolving Facility. Sonic did not meet the specified total
debt to tangible equity ratios required by the Revolving Facility at March 31,
1998 and at June 30, 1998 and obtained a waiver with regard to such requirement
from Ford Motor Credit. In connection with Sonic's offering of its senior
subordinated notes, Sonic and Ford Motor Credit amended the Revolving Facility
to provide that the senior subordinated notes (which are subordinated to the
Revolving Facility) will be treated as equity capital for purposes of this
ratio. Accordingly, Sonic was in compliance with this and all other restrictive
covenants as of December 31, 1998.
On July 31, 1998, Sonic completed its private placement of its senior
subordinated notes in the aggregate principal amount of $125,000,000. The notes
are unsecured, mature on August 1, 2008, and are redeemable at Sonic's option
after August 1, 2003. Interest payments are due semi-annually on February 1 and
August 1, commencing February 1, 1999. The notes are subordinated to all
present and future senior indebtedness of Sonic, including the Revolving
Facility. Redemption prices during 12 month periods beginning August 1 are
105.500% in 2003, 103.667% in 2004, 101.833% in 2005 and 100% thereafter. Net
proceeds after commissions and discounts, including issuance discount of
$937,500, amounted to $120,625,000 and were used to finance certain of our 1998
acquisitions and to repay amounts outstanding under the Revolving Facility. On
December 7, 1998, Sonic completed an exchange offer to exchange the senior
subordinated notes for identical senior subordinated notes registered under the
Securities Act.
The indenture governing the senior subordinated notes contains certain
specified restrictive and required financial covenants. We have agreed not to
pledge our assets to any third party except under certain limited circumstances
(for example, floor plan indebtedness). We also have agreed to certain other
limitations or prohibitions concerning the incurrence of other indebtedness,
capital stock, guaranties, asset sales, investments, cash dividends to
shareholders, distributions and redemptions.
Under Sonic's Amended and Restated Certificate of Incorporation, 3 million
shares of preferred stock are authorized to be issued by Sonic with such
designations, rights and preferences as may be determined from time to time by
our Board of Directors. In March 1998, our Board of Directors designated
300,000 shares of preferred stock as Class A convertible preferred stock (the
"Preferred Stock"), which was divided into 100,000 shares of Series I Preferred
Stock, 100,000 shares of Series II Preferred Stock and 100,000 shares of Series
III Preferred Stock.
The Preferred Stock has a liquidation preference of $1,000 per share. Each
share of Preferred Stock is convertible, at the option of the holder, into that
number of shares of Class A common stock as is determined by dividing $1,000 by
the average closing price for the Class A common stock on the NYSE for the 20
days preceding the date of determination of the shares of Preferred Stock (the
"Market Price"). Conversion of Series II Preferred Stock is subject to certain
adjustments which have the effect of limiting increases and decreases in the
value of the Class A common stock receivable upon conversion by 10% of the
original value of the shares of Series II Preferred Stock. Conversion of
Series III Preferred Stock is subject to certain adjustments which have the
effect of limiting increases in the value of Class A common stock receivable
upon conversion by 10% of the original value of the shares of Series III
Preferred Stock.
The Preferred Stock is redeemable at Sonic's option at any time after the
date of issuance. The redemption price of the Series I Preferred Stock is
$1,000 per share. The redemption price for the Series II Preferred Stock and
Series III Preferred Stock is as follows: (i) prior to the second anniversary
of the date of issuance, the redemption price is the greater of $1,000 per
share or the aggregate Market Price of the Class A common stock into which it
could be converted at the time of redemption, and (ii) after the second
anniversary of the date of issuance, the redemption price is the aggregate
Market Price of the Class A common stock into which it could be converted at
the time of redemption.
Each share of Preferred Stock entitles its holder to a number of votes
equal to that number of shares of Class A common stock into which it could be
converted as of the record date for the vote. Holders of Preferred Stock are
entitled
20
to participate in dividends payable on the Class A common stock on an
"as-if-converted" basis. The Preferred Stock has no preferential dividends.
During 1998, Sonic acquired 19 dealerships for an aggregate purchase price
of approximately $134.0 million. The aggregate purchase price was paid with
approximately $96.2 million in cash, with 970,588 shares of Class A common
stock having an estimated fair value at the time of issuance of approximately
$8.3 million, with 30,733.8 shares of Preferred Stock (14,406.3 shares of
Series I Preferred Stock, 10,054.5 shares of Series II Preferred Stock, and
6,273 shares of Series III Preferred Stock) having an estimated fair value at
the time of issuance of approximately $29.3 million and with warrants to
purchase an aggregate of 154,000 shares of Class A common stock having an
approximate fair value of $0.5 million. The cash portion of the aggregate
purchase price was financed with a combination of cash obtained from the net
proceeds of Sonic's private offering on July 31, 1998 of $125 million in
aggregate principal amount of its 11% senior subordinated notes, cash obtained
from the Revolving Facility, and cash generated from Sonic's existing
operations. In addition, Sonic has issued to the sellers of certain of the
acquired dealerships warrants to purchase an aggregate of 154,000 shares of
Class A common stock having an approximate fair value of $0.5 million. Payables
for acquisitions as of December 31, 1998 on the accompanying consolidated
balance sheet includes $1.7 million of the cash portion of the aggregate
purchase price which was paid subsequent to December 31, 1998.
The difference between the aggregate purchase price of $134.0 million and
amounts paid of $134.3 represents the net of (i) $1.3 million due from a former
owner as a result of a shortage in the actual net book value of assets acquired
compared to the minimum net book value required in the purchase agreement, (ii)
$0.4 million due to a former owner as a result of an excess in the actual net
book value of assets acquired over the minimum net book value required in the
purchase agreement, and (iii) $0.6 million due to a former owner on the first
and second anniversaries of the acquisition date. The $1.3 million due from a
former owner has been included in other current assets on the accompanying
balance sheet. The $0.4 million and $0.6 million due to former owners have been
included in payable for acquisitions on the accompanying balance sheet.
In accordance with terms of certain of the purchase agreements, Sonic may
be required to pay additional consideration contingent upon future earnings of
certain of the dealerships acquired. As of December 31, 1998, Sonic had
recorded approximately $8.0 million relating to such consideration, which has
been accounted for as goodwill. Any additional amounts which may be payable in
the future will also be accounted for as goodwill.
During the first quarter of 1999, Sonic acquired 8 dealerships for
approximately $50.9 million in cash and 34,100 shares of Series III Preferred
Stock having a liquidation preference of $1,000 per share. The cash portion of
the purchase price was financed with a combination of cash borrowed under the
Revolving Facility and cash generated from Sonic's existing operations.
The acquisitions were accounted for using purchase accounting. Sonic may be
required to pay additional amounts based on pre-tax earnings of certain of the
dealerships acquired. Any additional amounts paid will be accounted for as
goodwill.
In connection with the subsequent acquisition of a Honda dealership
located in Chattanooga, Tennessee in March 1999, Sonic sold substantially all
of the assets of its Honda dealership in Cleveland, Tennessee for approximately
$3.6 million.
Sonic has signed definitive agreements to acquire 12 dealerships for
a minimum of approximately $54.9 million in cash, 11,425 shares of Series II
Preferred Stock and 10,525 shares of Series III Preferred Stock having a
liquidation value of $1,000 per share. The aggregate purchase price is subject
to adjustment based on the actual net book value of the assets acquired. The
cash portion of the purchase price will be paid with a combination of borrowings
under the Revolving Facility and with cash generated from Sonic's existing
operations. Sonic may be required to pay additional amounts based on future
pre-tax earnings of certain of these acquired dealerships. These acquisitions
are expected to be consummated in the second and third quarters of 1999.
Sonic incurred a tax liability of approximately $7.1 million in connection
with the change in its tax basis of accounting for inventory from the "last-in,
first-out" method of inventory accounting to the "first-in, first-out" method
of inventory accounting, which is payable over a six-year period beginning in
January 1998. In addition, in connection with certain of our 1998 acquisitions,
we incurred an additional tax liability in the amount of approximately $1.9
million as a result of the change in accounting for the inventory from the
"last-in, first-out" method of inventory accounting to the "first-in,
first-out" method of inventory accounting, which will be payable over a four
year period. As of December 31, 1998, the remaining cumulative balance of this
tax liability was $5.6 million. We expect to pay such obligation with cash
provided by operations.
21
We believe that the net proceeds from the sale of the senior subordinated
notes, together with funds generated through future operations and availability
of borrowings under our floor plan financing (or any replacements thereof) and
our other credit arrangements will be sufficient to fund our debt service and
working capital requirements and any seasonal operating requirements, including
our currently anticipated internal growth, for the foreseeable future. Sonic
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, Preferred Stock or other convertible
instruments.
SEASONALITY
Sonic'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.
YEAR 2000 COMPLIANCE
GENERAL
Due to the limited memory capacity of older computers, many computer
systems and software applications in earlier years were programmed to store
dates using six digit formats (e.g. mm/dd/yy) versus nine digit formats (e.g.
mm/dd/yyyy). Under the six digit format, most computer systems and software
applications are limited to recognizing dates within the 20th century only,
causing computers to interpret the year "00" as the year "1900" rather than the
year "2000." As we approach the beginning of year 2000, there is widespread
concern that the inability of computer systems to recognize dates beyond the
year 1999 will result in software errors and system failures that could be
disruptive to ordinary business operations.
We recognize the need to ensure that our operations will not be disrupted
by Year 2000 (Y2K) system failures either within our own computer systems or
within the computer systems of our primary lenders and suppliers. Each of our
dealerships has appointed a team comprised primarily of department managers
that, using guides developed by the National Automobile Dealers Association
(NADA), is responsible for assessing and resolving potential Year 2000
problems, and developing contingency plans to mitigate the impact of future
problems on operations.
STATE OF READINESS
INTERNAL DEALERSHIP SYSTEMS: Internal systems supporting the dealership's
daily operations are comprised of four primary systems: (i) the Dealer
Management System (DMS), which supports the critical operations of the
dealership including all vehicle sales, vehicle inventory, financing and
insurance operations, service and parts operations, and accounting functions;
(ii) the Dealer Communication System (DCS), which provides on-line
communication with manufacturers necessary for ordering vehicles and parts
inventory, submitting warranty claims, submitting dealership financial
statements, receiving delivery reports, and receiving technical information
used in service department operations; (iii) personal computer systems (PC
systems) used in providing information to and communicating with the parent
company; and (iv) "embedded systems" which use an electric processor or
computer chip to control, monitor, or assist with the operation of equipment,
machinery, and building management (e.g. building access, security and fire
alarms, automotive diagnostic equipment).
DEALER MANAGEMENT SYSTEM: The DMS systems used by our dealerships are
obtained from one of four primary vendors: Reynolds & Reynolds, Infiniti Net,
ADP and UCS. Each of these vendors has developed upgrades to correct Y2K
problems within the DMS systems, and we have completed the process of
installing such upgrades to our systems. In addition, we have received written
verification from each of these vendors that the DMS systems operating within
dealerships currently owned by Sonic are Y2K certified. With respect to
dealerships being acquired, dealerships using DMS systems which are not Y2K
certified are being transferred to existing systems which are Y2K certified.
DEALER COMMUNICATION SYSTEM: The DCS systems used in our dealerships are
provided by the respective manufacturers with whom the dealerships communicate.
As a result, the manufacturers have assumed responsibility for upgrading DCS
systems to Y2K compliant systems. To date, all but 18 of our dealerships have
received written verification from their respective manufacturer that their DCS
system is Y2K compliant. In addition, we have requested
22
from each manufacturer that status reports be provided to both the dealership
and parent company to inform us of remediation efforts at those dealerships
that are not yet Y2K compliant, and when such remediation efforts are expected
to be completed.
PERSONAL COMPUTER SYSTEMS: Most PC systems currently operating in our
dealerships were installed within the past year and were determined to be Y2K
compliant at the time of installation. PC systems and local and wide area
networks used to communicate with our dealerships were also recently installed,
and were Y2K certified upon purchase. As a precautionary measure, we have
provided all dealerships with diskettes containing programs designed to test PC
systems for Y2K capability. All PC systems that have not met certification
standards for compliance will be upgraded or replaced with systems that are Y2K
compliant.
EMBEDDED SYSTEMS: Embedded systems refer to systems that use some sort of
electronic process or computer chip to track time and date information used in
the operation of that system. For example, security systems, or heating,
ventilation, and air-conditioning systems (HVAC) may be programmed to
automatically be activated or deactivated at a certain time. If a security
system is programmed to lock up a dealership on weekends, then some dealerships
may be locked out on Thursday, January 6, 2000 because the computer interprets
the date as Saturday, January 6, 1900. All facilities are currently conducting
an inventory of such systems, and will contact the manufacturer or supplier to
test such systems and obtain verification of Y2K certification. This process
has not yet been completed, though these systems are not considered critical
and a disruption in these systems is not expected to significantly affect
dealerships' daily operations.
EXTERNAL SYSTEMS: A dealership's operations may be adversely affected if
the lenders, suppliers, or other third parties with whom it regularly conducts
business are affected by Y2K problems within their systems. Other than
automobile manufacturers, we are primarily concerned about Y2K failures with
banks and other financial service providers, companies providing financing and
insurance to our customers, and utilities providing electricity and water. We
have received verification from our primary banks and lenders that their
systems are Y2K compliant and that service is not expected to be interrupted by
Y2K problems. We are still in the process of contacting other key vendors and
suppliers regarding their Y2K remediation efforts.
COSTS
The costs associated with converting our internal systems to Y2K compliant
systems have not been, and are not expected to be, material to our financial
position or results of operations. Costs associated with upgrading and
converting the DMS and DCS systems to Y2K compliant systems were covered by
monthly maintenance contracts with the respective suppliers and were expensed
as incurred. Costs associated with upgrading or replacing PC and embedded
systems have not been material and were expensed or capitalized in accordance
with our capitalization policy.
CONTINGENCY PLANS
We cannot state with certainty whether Year 2000 system failures either
within our own internal systems or within the systems of third-parties with
whom we are involved will have a material adverse impact on our results of
operations. In order to mitigate the potential impact of any future Year 2000
problems, each of our dealerships is in the process of developing contingency
plans which include the following:
1. Use of pre-printed and pre-numbered forms and checks (including repair
orders and parts counter tickets) and manual journals and ledger books to
assist in bookkeeping and accounting functions;
2. Use of hand held, battery operated finance computers in order to
continue providing finance services to our customers;
3. Establishing emergency reserves of supplies in the event that service
from third party lenders and suppliers is disrupted due to Y2K problems
within their systems; and
4. Training of employees to manually perform functions that are currently
performed on computers.
While we believe that we are taking appropriate steps to ensure we are
adequately prepared to deal with Year 2000 problems as they arise, we cannot
make assurances that Year 2000 problems will not have a material adverse affect
on our results of operations or financial condition. In a worst case scenario,
Year 2000 problems may delay our ability to sell vehicles, provide financing
and insurance to our customers, provide parts and repair service to our
customers, complete acquisitions or meet third-party obligations until Year
2000 problems can be resolved in the affected systems.
23
SIGNIFICANT MATERIALITY OF GOODWILL
Goodwill represents the excess purchase price over the estimated fair
value of the tangible and separately measurable intangible net assets acquired.
The cumulative amount of goodwill at December 31, 1997 was $75.0 million and at
December 31, 1998 was $182.5 million. As a percentage of total assets and
stockholders' equity, goodwill, net of accumulated amortization, represented
25.5% and 88.1%, respectively, at December 31, 1997, and 31.3% and 126.4%,
respectively, at December 31, 1998. Generally accepted accounting principles
require that goodwill and all other intangible assets be amortized over the
period benefited. We have determined that the period benefited by the goodwill
will be no less than 40 years. Accordingly, we are amortizing goodwill over a
40 year period. Earnings reported in periods immediately following an
acquisition would be overstated if Sonic attributed a 40 year benefit to an
intangible asset that should have had a shorter benefit period. In later years,
Sonic would be burdened by a continuing charge against earnings without the
associated benefit to income valued by management in arriving at the price paid
for the businesses acquired. Earnings in later years also could be
significantly affected if management then determined that the remaining balance
of goodwill was impaired. We periodically compare the carrying value of
goodwill with the anticipated undiscounted future cash flows from operations of
the businesses we have acquired in order to evaluate the recoverability of
goodwill. We have concluded that the anticipated future cash flows associated
with intangible assets recognized in our acquisitions will continue
indefinitely, and these is no pervasive evidence that any material portion will
dissipate over a period shorter than 40 years. We will incur additional
goodwill in future acquisitions.
EFFECTS OF INFLATION
Due to the relatively low levels of inflation in 1996, 1997 and 1998,
inflation did not have a significant effect on Sonic'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. 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
became effective for Sonic's fiscal year ending December 31, 1998. The
implementation of FAS 131 did not have a significant impact on Sonic's
financial statements or related disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instrument
and Hedging Activities." This Standard establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. The Statement will become
effective for Sonic beginning January 1, 2000. We have elected earlier
application of all of the provisions of this Statement beginning October 1,
1998. The implementation of the provisions of this Statement did not have an
impact on Sonic's financial statements for the year ended December 31, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Sonic's only financial instruments with market risk
exposure are variable rate floor plan notes payable, Revolving Facility
borrowings and other variable rate notes and mortgages. As of December 31,
1998, the total outstanding balance of such instruments was approximately
$243.5 million. A change of one percent in the interest rate would have caused
a change in interest expense for the year ended December 31, 1998 of
approximately $2.1 million. In addition, a decrease or increase in interest
rates would cause a respective increase or decrease in the present value of
Sonic's fixed rate senior subordinated notes, which have a carrying value of
$120.7 million at December 31, 1998.
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.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, present principal occupation or employment and the material
occupations, positions, offices or employments for the past five years of each
Sonic director, director-nominee, and executive officer are set forth below.
O. Bruton Smith, 72, has been the Chairman, Chief Executive Officer and a
director of Sonic since its organization in 1997, and he currently is a
director and executive officer of each of Sonic's dealerships. Mr. Smith has
worked in the retail automobile industry since 1966. Mr. Smith's initial term
as a director of Sonic will expire at the 2000 annual stockholders meeting. Mr.
Smith is also the chairman and chief executive officer, a director and
controlling stockholder of Speedway Motorsports, Inc. ("SMI"). SMI is a public
company traded on the NYSE. Among other things, it owns and operates the
following NASCAR racetracks: Atlanta Motor Speedway, Bristol Motor Speedway,
Lowe's Motor Speedway, Las Vegas Motor Speedway, Sears Point Raceway and Texas
Motor Speedway. He is also the executive officer and a director of each of
SMI's operating subsidiaries. Additionally, Mr. Smith serves as chairman of the
board of trustees of Mar Mar Realty Trust, a privately held real estate
investment trust ("MMRT"), and owns and operates Sonic Financial Corporation
among other private businesses. Under his employment agreement with Sonic, Mr.
Smith is required to devote approximately 50% of his business time to Sonic's
business.
Bryan Scott Smith, 31, has been the President and Chief Operating Officer
of Sonic since April 1997 and a Sonic director since its organization in 1997.
Mr. Smith also serves as a director and executive officer of many of Sonic's
subsidiaries. Mr. Smith, who is the son of Bruton Smith, has been an executive
officer of Town and Country Ford since 1993, and was a minority owner of both
Town and Country Ford and Fort Mill Ford before Sonic's acquisition of those
dealerships in 1997. Mr. Smith became the General Manager of Town & Country
Ford in November 1992 where he remained until his appointment to President and
Chief Operating Officer of Sonic in April 1997. Mr. Smith's term as a director
of Sonic will expire at the 2001 annual stockholders meeting.
Dennis D. Higginbotham, 47, has been the President of Retail Operations of
Sonic since September 1998 and a Sonic director since his appointment in
December 1998. Before joining Sonic, Mr. Higginbotham owned and was the
president of, Higginbotham Chevrolet-Oldsmobile (from 1976), Halifax
Ford-Mercury (from 1987) and Higginbotham Automobiles (from 1995), each of
which Sonic acquired in September 1998. Mr. Higginbotham has worked in the
automobile industry since 1965. Mr. Higginbotham is standing for election as a
director of Sonic at the 1999 annual meeting of stockholders.
Theodore M. Wright, 36, has been the Chief Financial Officer, Vice
President-Finance, Treasurer and Secretary of Sonic since April 1997, and a
Sonic director since June 1997. Mr. Wright also serves as a director and
executive officer of many of Sonic's subsidiaries. Before joining Sonic, Mr.
Wright was a Senior Manager and in charge of the Columbia, South Carolina
office of Deloitte & Touche LLP. Before joining the Columbia office, Mr. Wright
was a Senior Manager in Deloitte & Touche LLP's National Office Accounting
Research and SEC Services Departments from 1994 to 1995. From 1992 to 1994, Mr.
Wright was an audit manager with Deloitte & Touche LLP. Mr. Wright is standing
for election as a director of Sonic at the 1999 annual meeting of stockholders.
William R. Brooks, 49, has been a director of Sonic since its formation.
Mr. Brooks also served as Sonic's initial Treasurer, Vice President and
Secretary from its organization in February 1997 to April 1997 when Mr. Wright
was appointed to those positions. Since December 1994, Mr. Brooks has been the
vice president, treasurer, chief financial officer and a director of SMI. Mr.
Brooks also serves as an executive officer and a director for various operating
subsidiaries of SMI. Before the formation of SMI in December 1994, Mr. Brooks
was the vice president of the Lowe's Motor Speedway (formerly the Charlotte
Motor Speedway) and a vice president and a director of Atlanta Motor Speedway.
Mr. Brooks joined Sonic Financial Corporation, an entity controlled by Bruton
Smith, from Price Waterhouse in 1983. At Sonic Financial Corporation, he was
promoted from manager to controller in 1985 and again to chief financial
officer in 1989. Mr. Brooks' term as a Sonic director will expire at the 2000
annual stockholders meeting.
William P. Benton, 75, became a director of Sonic in December 1997. Since
January 1997, Mr. Benton has been the executive director of Ogilvy & Mather, a
world-wide advertising agency. Mr. Benton has been a director of SMI since
February 1995 and a director of Allied Holdings, Inc. since February 1998. He
is also a consultant to the chairman and chief executive officer of TI Group.
Before his appointment at Ogilvy & Mather, Mr. Benton served as vice chairman
of Wells, Rich, Greene/BDDP, Inc., an advertising agency with offices in New
York and Detroit. Mr. Benton retired from Ford Motor Company as its vice
president of marketing worldwide in 1984 after a 37-year career with that
company. Mr. Benton's term as a Sonic director will expire at the 2001 annual
stockholders meeting.
25
William I. Belk, 49, became a director of Sonic in March 1998. Mr. Belk is
currently the vice president and a director for Monroe Hardware Company, a
director for Piedmont Ventures, Inc., and treasurer and a director for Old Well
Water, Inc. For more than the previous five years, Mr. Belk previously held the
position of chairman and director for certain Belk stores (a privately held
retail department store chain). Mr. Belk's term as a Sonic director will expire
at the 2001 annual stockholders meeting.
Sonic's Board of Directors is divided into three classes, each of which,
after a transitional period, will serve for three years, with one class being
elected at Sonic's annual stockholders meeting each year. Messrs. Bruton Smith
and Brooks belong to the class of directors whose term expires in 2000, Messrs.
Wright and Higginbotham belong to the class whose term expires in 1999, and
Messrs. Scott Smith, Benton and Belk belong to the class whose term expires in
2001. The executive officers are elected annually by, and serve at the
discretion of, Sonic's Board of Directors.
COMMITTEES OF THE BOARD
There are two standing committees of the Sonic Board of Directors, the
Audit Committee and the Compensation Committee. The Audit Committee was
appointed on March 20, 1998 and consists of Messrs. Benton, Belk and Brooks.
The Compensation Committee was appointed on October 3, 1998 and consists of
Messrs. Bruton Smith, Benton and Belk. Set forth below is a summary of the
principal functions of each committee. There was one meeting held by the Audit
Committee and one meeting held by the Compensation Committee in 1998.
AUDIT COMMITTEE. The Audit Committee, which held one meeting in 1998,
recommends the appointment of Sonic's independent auditors, determines the
scope of the annual audit to be made, reviews the conclusions of the auditors
and reports the findings and recommendations thereof to the Board, reviews
Sonic's auditors, the adequacy of Sonic's system of internal control and
procedures and the role of management in connection therewith, reviews
transactions between Sonic and its officers, directors and principal
stockholders, and performs such other functions and exercises such other powers
as the Board from time to time may determine.
COMPENSATION COMMITTEE. The Compensation Committee, which held one meeting
in 1998, administers certain compensation and employee benefit plans of Sonic,
annually reviews and determines executive officer compensation, including
annual salaries, bonus performance goals, bonus plan allocations, stock option
grants and other benefits, direct and indirect, of all executive officers and
other senior officers of Sonic. The Compensation Committee administers Sonic's
1997 Stock Option Plan, Employee Stock Purchase Plan and Nonqualified Employee
Stock Purchase Plan, makes recommendations for individual stock option grants
to the full Board of Directors under the plans it administers, and periodically
reviews Sonic's executive compensation programs and takes action to modify
programs that yield payments or benefits not closely related to Sonic or
executive performance. The policy of the Compensation Committee's program for
executive officers is to link pay to business strategy and performance to
attract, retain and reward key executives while also providing performance
incentives and awarding equity-based compensation to align the long-term
interests of executive officers with those of Sonic's stockholders. The
Compensation Committee's objective is to offer salaries and incentive
performance pay opportunities that are competitive in the marketplace.
Sonic currently has no standing nominating committee.
During 1998, there were 3 meetings of the Board of Directors of Sonic,
with each director attending each of the meetings.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Sonic's executive officers, directors and persons who own more than ten percent
(10%) of Sonic's Voting Stock to file reports on ownership and changes in
ownership with the Securities and Exchange Commission (the "SEC").
Additionally, SEC regulations require that Sonic identify any individuals for
whom one of the referenced reports was not filed on a timely basis during the
most recent fiscal year or prior fiscal years. To Sonic'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 (i) Messrs. Bruton Smith,
Scott Smith, Higginbotham, Wright, Belk, Benton and Brooks inadvertently filed
late their Form 5 annual statements of beneficial ownership of securities, and
(ii) Mr. Belk inadvertently filed late his Form 4 statement of changes of
beneficial ownership of securities pertaining to his January 1999 exercise of
options to purchase 20,000 shares of Class A common stock and his January 1999
sale of 15,000 shares of Class A common stock.
26
ITEM 11. EXECUTIVE COMPENSATION
The executive officer compensation for Sonic for 1998 was based on
compensation established in each individual's respective employment agreement
with Sonic as discussed herein. Additionally, certain executive officers in
1998 were granted stock options issued under Sonic's 1997 Stock Option Plan.
Executive officers (including the Chief Executive Officer) were also eligible
in 1998 to participate in various benefit plans similar to those provided to
other employees of Sonic. 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 Board of Directors also considered the base salaries of certain
companies not included in the Peer Group Index because the Board of Directors
considered those to be relatively comparable industries.
Awards of stock options under the 1997 Stock Option Plan are based on a
number of factors in the discretion of the Board of Directors, including
various subjective factors primarily relating to the responsibilities of the
individual officers for and contribution to Sonic's operating results (in
relation to Sonic'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 Sonic's stockholders. For detail
concerning the grant options to the executive officers named in the Summary
Compensation Table below, see "Fiscal Year-End Option Values."
As noted above, Sonic'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 1997 Stock Option
Plan was created with the intention that all compensation attributable to stock
option exercises should qualify as deductible performance-based compensation.
The Board of Directors currently believes that, generally, Sonic should be able
to continue to manage its executive compensation program to preserve federal
income tax deductions.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Compensation Committee's members annually review and approve the
compensation of Mr. Smith, Sonic's Chief Executive Officer. Mr. Smith's salary
has been established through an employment agreement, as discussed herein. The
Board of Directors believes that Mr. Smith is paid a reasonable salary.
O. Bruton Smith, Chairman
William P. Benton
William I. Belk
27
COMPENSATION OF OFFICERS
The following table sets forth compensation paid by or on behalf of Sonic
to the Chief Executive Officer of Sonic and to its other executive officers for
services rendered during Sonic's fiscal years ended December 31, 1996, 1997 and
1998:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
NUMBER OF
ANNUAL COMPENSATION OTHER SHARES
-------------------------------------- ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY (1) BONUS (2) COMPENSATION (3) OPTIONS (4) COMPENSATION (5)
- -------------------------------- ------ --------------- --------------- ------------------ -------------------- -----------------
O. Bruton Smith 1998 $385,772 $350,000 $ (5) 200,000 --
Chairman, Chief Executive 1997 326,704 -- -- (5) -- --
Officer and Director 1996 164,750 -- 33,350 -- --
Bryan Scott Smith 1998 $325,560 $250,000 $ -- (5) 100,000 --
President, Chief Operating 1997 273,767 18,331 -- (5) 199,750 --
Officer and Director 1996 48,000 230,714 -- (5) -- --
Theodore M. Wright 1998 $211,551 $150,000 $ -- (5) 100,620 --
Chief Financial Officer, 1997 (6) (6) -- (5) 76,376 --
Vice President-Finance, 1996 (7) (7) -- -- --
Treasurer and Secretary
Dennis D. Higginbotham 1998 $116,667 $ -- $ -- (5) 150,000 --
President of Retail 1997 (7) (7) -- --
Operations and Director 1996 (7) (7) -- -- --
Nelson E. Bowers, II 1998 $383,333 $150,000 $ -- (5) -- --
Executive Vice President 1997 (6) (6) -- (5) -- --
and Director (8) 1996 (7) (7) -- -- --
- ---------
(1) Does not include the dollar value of perquisites and other personal
benefits.
(2) The amounts shown are cash bonuses earned and paid in the specified year.
(3) Sonic provides Bruton Smith with the use of automobiles for personal use,
the annual cost of which is reflected as Other Annual Compensation.
(4) Sonic's 1997 Stock Option Plan was adopted in October 1997. Therefore, no
options were granted under the 1997 Stock Option Plan to any of Sonic's
executive officers in 1996.
(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.
(6) The amount of salary and bonus earned by the named executive officer in
1997 did not exceed $100,000.
(7) The named executive officer was not employed by Sonic during the year
indicated.
(8) Mr. Bowers resigned as Executive Vice President and as a Director of Sonic
in November 1998.
EMPLOYMENT AGREEMENTS
Sonic has employment agreements with Messrs. Bruton Smith, Scott Smith,
Higginbotham and Wright (the "Employment Agreements"), which provide for an
annual base salary and certain other benefits. Pursuant to the Employment
Agreements, the 1999 base salaries of Messrs. Bruton Smith, Scott Smith, Wright
and Higginbotham will be $500,000, $400,000, $300,000 and $400,000,
respectively. The executives will also receive such additional increases as may
be determined by the Compensation Committee. The Employment Agreements, except
that of Mr. Higginbotham, provide for the payment of annual performance-based
bonuses equal to a percentage of the executive's base salary, upon achievement
by Sonic of certain performance objectives, based on Sonic's pre-tax income, to
be established by the Compensation Committee. The Employment Agreement for Mr.
Higginbotham provides for the payment of bonuses as may be determined and
ratified from time to time by the Compensation Committee. Under the terms of
their respective Employment Agreements, Sonic will employ Messrs. Bruton Smith,
Scott Smith and Wright through November 2000. Under the terms of his Employment
Agreement, Sonic will employ Mr. Higginbotham through September 2001 or until
28
his Employment Agreement is terminated by Sonic or by him. Messrs. Scott Smith
and Wright also received in October 1997, pursuant to their Employment
Agreements, options pursuant to Sonic's 1997 Stock Option Plan, for 199,750
shares and 76,376 shares of Class A common stock, respectively, exercisable at
$6.00 per share, vesting in three equal annual installments beginning October
1998 and expiring in October 2007. Mr. Higginbotham's Employment Agreement
provides that he will receive options to purchase Class A common stock in an
amount and on terms consistent with the grants of options for similar employees
of Sonic. In October 1998, Mr. Higginbotham was granted options to purchase
150,000 shares of Class A common stock at an exercise price of $9.19 per share
under the 1997 Stock Option Plan.
Each of the Employment Agreements contain similar noncompetition
provisions. These provisions, during the term of the Employment Agreement, (i)
prohibit the disclosure or use of confidential Sonic information, and (ii)
prohibit competition with Sonic for Sonic's employees and its customers,
interference with Sonic's relationships with its vendors, and employment with
any competitor of Sonic in specified territories. The provisions referred to in
(ii) above shall also apply for a period of two years following the expiration
or termination of an Employment Agreement. With respect to Messrs. Bruton Smith,
Scott Smith and Wright, the geographic restrictions apply in any Standard
Metropolitan Statistical Area ("SMSA") or county in which Sonic has a place of
business at the time their employment ends. With respect to Mr. Higginbotham,
the territorial restrictions apply only in the SMSAs for Atlanta, Charlotte,
Chattanooga, Columbus, Daytona Beach, Houston, Montgomery, Nashville and
Tampa-St. Petersburg-Clearwater.
OPTION GRANTS IN 1998
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
-------------------------------------------------------------- AT
ASSUMED ANNUAL RATES OF
PERCENT OF STOCK
NUMBER OF TOTAL PRICE APPRECIATION FOR
SECURITIES OPTIONS/ OPTION
UNDERLYING SARS GRANTED EXERCISE OR TERM
OPTION/SARS TO EMPLOYEES BASE PRICE EXPIRATION ----------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- -------------------------------- ------------- ---------------- ------------ ------------------ ------------- -------------
O. Bruton Smith ................ 200,000 14.6% $ 9.19 October, 2008 $1,155,908 $2,929,299
Bryan Scott Smith .............. 100,000 7.3% 9.19 October, 2008 577,954 1,464,649
Theodore M. Wright ............. 100,620 7.3% (1) (1) 581,537 1,473,730
Dennis D. Higginbotham ......... 150,000 10.9% 9.19 October, 2008 866,931 2,196,974
(1) The exercise price and expiration date for options to purchase 100,000
shares of Class A common stock under the 1997 Stock Option Plan is $9.19
and October 2008, respectively, and the exercise price and expiration date
for options to purchase 620 shares of Class A common stock under Sonic's
Employee Stock Purchase Plan was $4.10 and December 1998, respectively.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning outstanding options
to purchase Class A common stock held by executive officers of Sonic as of
December 31, 1998:
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED VALUE OPTIONS/SARS AT OPTIONS/SARS AT
ON EXERCISE (#)(1) REALIZED ($) FY-END (#)(1) FY-END ($)(2)
-------------------- -------------- ----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ------------- --------------- ------------- --------------
O. Bruton Smith -- $ -- -- 200,000 $ -- $1,612,000
Bryan Scott Smith -- -- 66,583 233,167 749,063 2,304,125
Theodore M. Wright 620 8,153 25,459 150,917 286,410 1,378,820
Dennis D. Higginbotham -- -- -- 150,000 -- 1,209,000
29
- ---------
(1) Sonic effected a 2-for-1 split of its Class A common stock on January 25,
1999. Pursuant to the terms of the 1997 Stock Option Plan, this stock
split resulted in an adjustment to the number of options and exercise
price for options outstanding prior to the effective date of such stock
split. The figures represented above reflect the effect of such
adjustment.
(2) Grant date value based on market price at date of grant.
STOCK OPTION PLANS
Sonic currently has in place the 1997 Stock Option Plan with respect to
Class A common stock in order to attract and retain key personnel. The 1997
Stock Option Plan, as adopted in October 1997 and thereafter amended, provides
for options to purchase up to an aggregate of 2,250,000 shares of Class A common
stock that may be granted to key employees of Sonic and its subsidiaries and to
officers, directors, consultants and other individuals providing services to
Sonic. In 1998, Sonic granted options to purchase 1,373,000 shares of Class A
common stock to employees. Messrs. Bruton Smith, Scott Smith, Wright and
Higginbotham were granted aggregate non-statutory stock options (NSO's) and
Incentive Stock Options (ISO's) for 200,000, 100,000, 100,000 and 150,000
shares, respectively, at an exercise price of $18.38 per share.
In October 1997, the Board of Directors and stockholders of Sonic adopted
the Sonic Automotive, Inc. Employee Stock Purchase Plan (the "Employee Plan").
The Employee Plan provides employees of Sonic and its subsidiaries with the
opportunity to purchase Class A common stock. Under the terms of the Employee
Plan, on January 1 of each year all eligible employees electing to participate
are granted an option to purchase shares of Class A common stock. Sonic's
Compensation Committee annually determines 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 Employee Plan will be
85% of the lesser of (i) the fair market value of the Class A common stock on
the applicable grant date and (ii) the fair market value of the Class A common
stock on the applicable exercise date. The grant dates are January 1 of each
year plus any other interim dates designated by the Compensation Committee. The
exercise dates are the last trading days on the New York Stock Exchange for
March, June, September and December, plus any other interim dates designated by
the Compensation Committee. Options will expire under the Employee Plan on the
last exercise date of the calendar year in which granted. Options to purchase
298,740 shares of Class A common stock under the Employee Plan were issued in
1998, and 180,730 shares of Class A common stock were purchased as of December
31, 1998.
On March 20, 1998, the Board of Directors approved an amendment to the
Employee Plan increasing the number of options to purchase Class A common stock
authorized for issuance under the Employee Plan from 300,000 to 600,000.
Sonic's stockholders approved the increase of shares authorized for issuance
under the Employee Plan at the 1998 annual meeting of stockholders.
On March 20, 1998, the Board of Directors adopted the Sonic Automotive,
Inc. Formula Stock Option Plan for Independent Directors (the "Directors Plan")
for the benefit of Sonic's outside directors. Sonic's stockholders approved the
Directors Plan at the 1998 annual meeting of stockholders. The Directors Plan
authorizes the issuance of options to purchase up to an aggregate of 600,000
shares of Class A common stock. Under the Directors Plan, each outside director
is awarded on or before March 31st of each year an option to purchase 20,000
shares at an exercise price equal to the fair market value of the Class A
common stock at the date of the award. Options granted under the Directors Plan
become exercisable in six months, and expire ten years, after their date of
grant.
In December 1998, the Board of Directors of Sonic adopted the Sonic
Automotive, Inc. Nonqualified Employee Stock Purchase Plan (the "Nonqualified
ESPP"). The purpose of the Nonqualified ESPP is to provide options to purchase
Class A common stock to employees of Sonic's subsidiaries that are not eligible
to participate in the Employee Plan; employees of Sonic who are eligible to
participate in the Employee Plan are not eligible to participate in the
Nonqualified ESPP. Under the terms of the Nonqualified ESPP, on January 1 of
each year all employees eligible to participate in the Nonqualified ESPP and who
elect to participate in the Nonqualified ESPP will be granted an option to
purchase shares of Class A common stock. Sonic's Compensation Committee will
annually determine the number of Class A common stock available for purchase
under each option.
The purchase price at which Class A common stock will be purchased through
the Nonqualified ESPP will be 85% of the lesser of (i) the fair market value of
the Class A common stock on the applicable grant date and (ii) the fair market
value of the Class A common stock on the appplicable exercise date. The grant
dates are January 1 of each year plus any other interim dates designated by the
Compensation Committee. The exercise dates are the last trading days on the New
30
York Stock Exchange for March, June, September and December, plus any other
interim dates designated by the Compensation Committee. Options will expire on
the last exercise date of the calendar year in which granted. In adopting the
Nonqualified ESPP in December 1998, the Board of Directors authorized options
to be granted under the Nonqualified ESPP for 300,000 shares of Class A common
stock, which options may be issued effective January 1, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
From Sonic's organization in February 1997 through March 20, 1998, all
matters concerning executive officer compensation were addressed by the entire
Board of Directors. On March 20, 1998, the Board of Directors established the
Compensation Committee and elected Messrs. Bruton Smith, Benton and Belk to
serve as the initial members of the Compensation Committee. Bruton Smith serves
as the Chief Executive Officer of Sonic and serves as an officer for a
substantial majority of Sonic's subsidiaries. Scott Smith serves as Sonic's
President and Chief Operating Officer and serves as an officer for each of
Sonic's subsidiaries. Mr. Wright serves as Sonic's Chief Financial Officer,
Vice President-Finance, Treasurer and Secretary and serves as an officer for a
substantial majority of Sonic's subsidiaries. Mr. Brooks served from February
to April 1997 as Sonic's Treasurer, Vice President and Secretary.
Bruton Smith is the only executive officer to have served on the
Compensation Committee of another entity during 1998. He served as Chairman,
Chief Executive Officer, a Director and a member of the Compensation Committee
of Speedway Motorsports, Inc. ("SMI"). Mr. Brooks is also an executive officer
of SMI.
Bruton Smith received aggregate salary, bonus and other compensation of
$1,545,000 during 1998 from SMI.
DIRECTOR COMPENSATION
Members of the Board of Directors who are not employees of Sonic will be
compensated for their services under the Directors Plan. Sonic will also
reimburse all directors for their expenses incurred in connection with their
activities as directors of Sonic. Directors who are also employees of Sonic
receive no compensation for serving on the Board of Directors.
31
STOCKHOLDER PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative stockholder
return on Sonic's Class A 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 11, 1997 and ending December 31, 1998. The
companies used in the Peer Group Index include Republic Industries, Group 1
Automotive, United Auto Group, Car Max and Lithia Motors, which are all
publicly traded companies known by Sonic to be involved in the automobile
industry. The graph assumes that $100 was invested on November 11, 1997 in each
of Sonic's Class A common stock, the Standard & Poor's 500 Stock Index and the
Peer Group Index companies and that all dividends were reinvested.
[STOCKHOLDER PERFORMANCE GRAPH APPEARS HERE]
11/11/97 12/31/97 12/31/98
-------- -------- --------
SONIC AUTOMOTIVE............. 100.00 79.79 286.01
PEER GROUP INDEX............. 100.00 79.46 52.89
S&P.......................... 100.00 106.43 136.84
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF CAPITAL SECURITIES
The following table sets forth certain information regarding the
beneficial ownership of Sonic's Class A common stock, Class B common stock and
Preferred Stock (collectively, the "Voting Stock") as of March 30, 1999, by (i)
each stockholder who is known to Sonic to own beneficially five percent or more
of each class of the outstanding Voting Stock, (ii) each director and nominee to
the Board of Directors of Sonic, (iii) each executive officer of Sonic
(including the Chief Executive Officer), and (iv) all directors and executive
officers of Sonic 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
Sonic. 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 Sonic or proposed
by all the holders of the Class B common stock or as to which any holder of
Class B common stock (the "Smith Group") or any affiliate thereof has a material
financial interest other than as a then existing stockholder of Sonic
constituting a (a) "going private" transaction (as defined herein),(b)
disposition of substantially all of Sonic's assets, (c) transfer resulting in a
change in the nature of Sonic's business, or (d) merger or consolidation in
which current holders of common stock would own less than 50% of the common
stock following such transaction. 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. Holders of Preferred Stock are
entitled to one vote per each share of Class A common stock into which such
shares of Preferred Stock are convertible into as of the record date of the
annual meeting or any special meeting of the stockholders of Sonic on all
matters submitted to a vote of the stockholders of
32
Sonic. Except as otherwise indicated below, each of the persons named in the
table has sole voting and investment power with respect to the securities
beneficially owned by him or it as set forth opposite his or its name subject
to community property laws where applicable.
NUMBER OF NUMBER OF
SHARES OF PERCENTAGE OF SHARES OF
CLASS A OUTSTANDING CLASS B
COMMON CLASS A COMMON
STOCK COMMON STOCK
BENEFICIAL OWNER OWNED STOCK OWNED
- ---------------------------------------- ---------------------- --------------- ------------
O. Bruton Smith (2)(3) ................. 225,500(4) 1.8% 10,952,500
Sonic Financial Corporation (2) ........ -- -- 8,881,250
Bryan Scott Smith (2) .................. 166,584(4)(5) 1.4% 956,250
Dennis D. Higginbotham (6) ............. 962,088(7) 7.9% --
Theodore M. Wright ..................... 126,079(4)(8) 1.0% --
William R. Brooks ...................... 20,000(9) * --
William P. Benton ...................... 20,000(9) * --
William I. Belk ........................ 5,000 * --
Citicorp (10)(11) ...................... 1,000,000 8.2% --
Citibank, N.A. (11)(12) ................ 1,000,000 8.2% --
Wellington Management Company,
LLP (13)(14) .......................... 994,000 8.2% --
Wellington Trust Company, N.A.
(14)(15) .............................. 616,600 5.1% --
Dan E. Hatfield (16) ................... -- -- --
Bud C. Hatfield (16) ................... -- -- --
Frank McGough (17) ..................... -- -- --
William M. Whitmire (18) ............... -- -- --
Thomas P. Williams, Sr. (19) ........... -- -- --
All directors and executive officers
as a group (7 persons) ................ 1,525,151 12.5% 11,908,750
PERCENTAGE OF NUMBER OF PERCENTAGE
OUTSTANDING SHARES OF PERCENTAGE OF OF ALL
CLASS B PREFERRED OUTSTANDING OUTSTANDING
COMMON STOCK PREFERRED VOTING
BENEFICIAL OWNER STOCK OWNED STOCK STOCK (1)
- ---------------------------------------- --------------- ----------- --------------- ------------
O. Bruton Smith (2)(3) ................. 88.3% -- -- 45.1%
Sonic Financial Corporation (2) ........ 71.6% -- -- 36.1%
Bryan Scott Smith (2) .................. 7.7% -- -- 4.5%
Dennis D. Higginbotham (6) ............. -- -- -- 3.9%
Theodore M. Wright ..................... -- -- -- *
William R. Brooks ...................... -- -- -- *
William P. Benton ...................... -- -- -- *
William I. Belk ........................ -- -- -- *
Citicorp (10)(11) ...................... -- -- -- 4.1%
Citibank, N.A. (11)(12) ................ -- -- -- 4.1%
Wellington Management Company,
LLP (13)(14) .......................... -- -- -- 4.0%
Wellington Trust Company, N.A.
(14)(15) .............................. -- -- -- 2.5%
Dan E. Hatfield (16) ................... -- 3,750 6.7% *
Bud C. Hatfield (16) ................... -- 8,971 15.9% *
Frank McGough (17) ..................... -- 4,194.3 7.5% *
William M. Whitmire (18) ............... -- 15,013 26.7% *
Thomas P. Williams, Sr. (19) ........... -- 13,938 24.8% *
All directors and executive officers
as a group (7 persons) ................ 96.0% -- -- 54.2%
- ---------
* Less than one percent
(1) The percentage of total voting power of Sonic is as follows: O. Bruton
Smith, 78.4%, Sonic Financial Corporation, 63.6%, Bryan Scott Smith, 7.0%,
and less than 1% for all other stockholders shown.
(2) The address of such person or group is 5401 East Independence Boulevard,
Charlotte, North Carolina 28212.
(3) The Schedule 13D filed by the beneficial owner indicates that the shares of
Class B common stock shown as owned by such person or group include all of
the shares shown as owned by Sonic Financial Corporation elsewhere in the
table. Bruton Smith owns the substantial majority Sonic Financial
Corporation's outstanding capital stock.
(4) In October 1998, Messrs. Bruton Smith, Scott Smith and Wright
received grants of options to purchase 200,000, 100,000 and
100,000 shares of Class A common stock, respectively, pursuant to Sonic's
1997 Stock Option Plan. All of such options will become exercisable in
April 1999. The number of shares of Class A common stock listed as owned
by each such person above includes these respective grants of options.
(5) Includes one-third of 199,750 shares that underlie options to purchase
shares of Class A common stock granted by Sonic pursuant to the 1997 Stock
Option Plan in October 1997, which became exercisable in three equal
annual installments beginning in October 1998.
(6) The address of such person is 104 South Riverside Dr., New Smyrna Beach,
Florida 32168.
(7) Does not include options to purchase 150,000 shares of Class A
common stock granted to Mr. Higginbotham under the 1997 Stock Option
Plan, which options become exercisable in three equal annual installments
beginning in October 1999.
(8) Includes one-third of 76,376 shares that underlie options to purchase
shares of Class A common stock granted by Sonic pursuant to the 1997 Stock
Option Plan in October 1997, which became exercisable in three equal
annual installments beginning in October 1998.
(9) Represents 20,000 shares that underlie options to purchase shares of Class
A common stock granted by Sonic pursuant to the Directors Plan, which
became exercisable in December 1998.
(10) The Schedule 13D filed by the beneficial owner indicates that the shares of
Class A common stock shown as owned by such entity or group include all
the shares shown as owned by Citibank, N.A. elsewhere in the table.
Citicorp owns all of the outstanding capital stock of Citibank, N.A.
(11) The address of such entity is 399 Park Avenue, New York, New York 10043.
(12) The Schedule 13D filed by the beneficial owner indicates that Citibank,
N.A. has sole voting power as to 144,000 shares of the 1,000,000 shares
shown with no voting power as to the remainder and has shared dispositive
power over all 1,000,000 shares.
33
(13) The Schedule 13D filed by the beneficial owner indicates that Wellington
Management Company has shared voting power as to 447,400 shares of the
994,000 shares shown with no voting power as to the remainder and has
shared dispositive power over all 994,000 shares.
(14) The address of such entity is 75 State Street, Boston, Massachusetts
02109.
(15) The Schedule 13D filed by the beneficial owner indicates that Wellington
Trust Company, N.A. has shared voting power as to 169,200 shares of the
616,600 shares shown with no voting power as to the remainder and has
shared dispositive power over all 616,600 shares.
(16) The address of such person is 1500 Automall Drive, Columbus, Ohio 43228.
(17) The address of such person is 711 Eastern Blvd., Montgomery, Alabama
36117.
(18) The address of such person is 4412 Paces Battle, Atlanta, GA 30327.
(19) The address of such person is 401 South 20th Street, Birmingham, AL 35233.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REGISTRATION RIGHTS AGREEMENT
When Sonic acquired Town & Country Ford, Lone Star Ford, Fort Mill Ford,
Town & Country Toyota and Frontier Oldsmobile-Cadillac in 1997, Sonic signed a
Registration Rights Agreement dated as of June 30, 1997 with Sonic Financial
Corporation ("SFC"), Bruton Smith, Scott Smith and William S. Egan
(collectively, the "Class B Registration Rights Holders"). SFC currently owns
8,881,250 shares of Class B common stock; Bruton Smith, 2,071,250 shares; Scott
Smith, 956,250 shares; and Egan Group, LLC, an assignee of Mr. Egan (the "Egan
Group"), 491,250 shares, all of which are covered by the Registration Rights
Agreement. The Egan Group also owns 100,000 shares of Class A common stock to
which the Registration Rights Agreement applies. If, among other things
provided in Sonic's charter, offers and sales of shares Class B common stock
are registered with the Commission, then such shares will automatically convert
into a like number of shares of Class A common stock.
The Class B Registration Rights Holders have certain limited piggyback
registration rights under the Registration Rights Agreement. These rights
permit them to have their shares of Sonic's common stock included in any Sonic
registration statement registering Class A common stock, except for
registrations on Form S-4, relating to exchange offers and certain other
transactions, and Form S-8, relating to employee stock compensation plans. The
Registration Rights Agreement expires in November 2007. SFC is controlled by
Bruton Smith. The Class B Registration Rights Holders have agreed to waive
their registration rights in this offering.
THE SMITH SUBORDINATED LOAN
In December 1997, Mr. Smith was required by Ford Motor Credit to lend the
$5.5 million to Sonic on a subordinated basis to increase Sonic's
capitalization (the "Subordinated Smith Loan"). Ford Motor Credit required the
Subordinated Smith Loan as a condition to increasing the Revolving Facility
borrowing limit because the net offering proceeds from Sonic's November 1997
initial public offering were significantly less than expected by Sonic and Ford
Motor Credit. The Subordinated Smith Loan bears interest at NationsBank's (now
Bank of America's) announced prime rate plus 0.5% and matures on November 30,
2000. All amounts owed by Sonic to Mr. Smith under the Subordinated Smith Loan
are to be paid after all amounts owed by Sonic under the Ford Credit Facilities
and Sonic's senior subordinated notes are paid. For further discussion of these
lending arrangements.
TRANSACTIONS WITH MMRT
In 1998, Sonic entered into a Strategic Alliance Agreement and Agreement
for the Mutual Referral of Acquisition Opportunities (the "Strategic Alliance
Agreement") with MMRT. Bruton Smith serves as the chairman of MMRT's board of
trustees. Under the Alliance Agreement, Sonic agreed to refer to MMRT real
estate acquisition opportunities arising with Sonic's dealership acquisitions.
In exchange, MMRT agreed to refer to Sonic dealership acquisition opportunities
and to provide certain real estate development and maintenance services to
Sonic. MMRT will also arrange for property inspections and environmental
reports for prospective dealership properties at Sonic's cost.
In addition, the Alliance Agreement provides for a form of lease to be
used when MMRT leases to Sonic real estate MMRT acquires in the future. Under
terms substantially similar to those of this form lease, Sonic leases or will
lease
34
certain properties from MMR Holdings, LLC ("MMR Holdings"), which is a limited
liability company currently owned by Bruton Smith and SFC that Sonic expects to
be acquired by MMRT.
Sonic entered into the Alliance Agreement with MMRT rather than with an
unaffiliated third party for purposes consistent with Sonic's acquisition
strategy. Sonic is familiar with MMRT's growth and operating strategy and
believes that MMRT is well-positioned to identify and refer attractive
dealership acquisition opportunities for Sonic in the course of MMRT's
acquisitions of real property. In addition, Sonic's relationship with MMRT will
assist Sonic in negotiating transactions with sellers of dealerships that Sonic
has identified for acquisition. Many dealership sellers who own their
dealership's real property wish to sell the dealership real property as well as
dealership businesses. Inclusion of real estate in a transaction may allow
Sonic to negotiate an acquisition on more favorable terms. Finally, MMRT will
provide development assistance to Sonic which will enable Sonic to avoid
additional costs associated with hiring employees with real estate development
expertise. For these reasons, Sonic feels that MMRT's growth and operating
strategies are closely-aligned with Sonic's dealership acquisition strategy and
that the Alliance Agreement will provide significant future benefits to Sonic.
For acquisitions identified by Sonic, the Alliance Agreement is intended
to operate in two different contexts, depending on whether the dealership
seller owns the dealership real property or leases the dealership real property
from an unaffiliated third party. For acquisitions where the dealership seller
owns the dealership real property, Sonic will negotiate acquisition of the real
property from the seller on an arms'-length basis and will assign its
negotiated purchase rights to MMRT. MMRT will then acquire the real property
from the seller. Sonic and MMRT will subsequently enter into a lease agreement
regarding the dealership real property using the lease form attached to the
Alliance Agreement to satisfy all non-economic terms of the lease agreement.
The economic terms of the lease will be negotiated between Sonic and MMRT and
will depend on several factors, including:
o the projected earnings capacity of the dealership,
o the quality, age and condition of the dealership structure(s),
o the location of the dealership property, and
o the rent paid for comparable commercial properties.
As required by Sonic's Charter, the terms of any lease agreement with MMRT
involving total payments of more than $500,000 will be subject to the approval
of Sonic's Board of Directors and of Sonic's independent directors to ensure
that such terms are no less favorable to Sonic than would be available to Sonic
in a transaction with an unrelated third party. When necessary, Sonic will also
obtain independent appraisals to determine the fairness of lease terms to
Sonic.
For acquisitions where the dealership real property is owned by an
unaffiliated third party and is leased to the dealership seller, MMRT will
negotiate with the unaffiliated third party to acquire the dealership real
property. If MMRT is successful in acquiring the dealership real property and
Sonic completes its acquisition of the dealership business, then Sonic and MMRT
will enter into a lease agreement regarding the dealership real property using
the Alliance Agreement's lease form and will determine the economic terms of
the lease according to the principles described in the paragraph above.
Sonic has sold to MMR Holdings the Town and Country Toyota real estate for
approximately $5.7 million and the Fort Mill Ford real estate for approximately
$4.6 million. The sales price for each of these parcels of real property was
determined in negotiations between Sonic and MMRT based on the projected
earnings capacity of the dealership, from which a monthly lease payment was
calculated. Using this rent calculation, Sonic and MMRT agreed to a
capitalization rate for the lease payments in order to determine a purchase
price for the properties themselves. This capitalization rate was based on
several factors, including:
o the quality, age and condition of the dealership structure(s),
o the location of the dealership property,
o the value of the properties for alternative uses,
o the availability of similar properties in the area, and
o recent sales prices for comparable commercial properties in the area.
An additional factor in determining Sonic's sales price for each of the
properties were independent appraisals obtained by Sonic for the Town and
Country Toyota property in December 1997 and Fort Mill Ford property in
February 1996. These
35
appraisals, after giving effect to the passage of time, indicate that the sales
price payable to Sonic by MMRT for each of the properties exceeds the appraised
fair value of such properties determined in the independent appraisals.
Bruton Smith determined the sales price for each of these two properties,
and such determination was approved by Sonic's Board of Directors and Sonic's
independent directors. In giving their approval for these sales, Sonic's
directors evaluated the earning capacities of the dealerships and the
capitalization rates for the related leases through an analysis of the factors
stated above as well as the previously mentioned independent appraisals.
CERTAIN DEALERSHIP LEASES
Certain properties leased by Sonic's dealerships are, or since the
beginning of the last fiscal year were, owned by Sonic's officers or directors
or their affiliates. These leases contain terms comparable to, or more
favorable to Sonic than, terms that would be obtained from unaffiliated third
parties. Many of these properties as well as others are now owned or are under
contract to be acquired by MMR Holdings, which Sonic expects will become a
subsidiary of MMRT.
Sonic leases or will lease 36 properties for 27 of its dealerships,
described in the following table, from MMR Holdings. Sonic's directors have
approved these "triple net leases," which require Sonic to pay all costs of
operating the properties, as well as all taxes, utilities, insurance, repairs,
maintenance and other property related expenses. These leases generally provide
Sonic with options to renew the lease for two additional five year terms after
the expiration of the initial lease term. The rental rates indicated below
reflect minimum or "base" annual rents payable by Sonic in the first year of
the applicable leases. Such rental rates generally are subject to increases
either at renewal or every five years based on factors such as increases in the
consumer price index or an evaluation of fair market rents.
INITIAL INITIAL LEASE
PROPERTY LOCATION BASE RENT TERM EXPIRATION
- -------------------------------------------------------- ---------------------- ---------------------- ----------------
Higginbotham Acura-Mercedes .......................... Daytona Beach, FL $ 221,288 2008
Halifax Ford-Mercury ................................. New Smyrna Beach, FL 536,675(1) 2008
Halifax Ford Used Cars ............................... Edgewater, FL 72,875 2008
Higginbotham Chevy-Olds .............................. New Smyrna Beach, FL 775,131(2) 2009
Infiniti of Charlotte ................................ Charlotte, NC 432,000 2008
Town & Country Ford (Parcel #1) ...................... Charlotte, NC 409,200(3) 2009(3)
Town & Country Ford (Parcel #2) ...................... Charlotte, NC 108,513(4) 2008
Town & Country Toyota ................................ Charlotte, NC 600,000 2008
Lake Norman Chrysler-Plymouth-Jeep ................... Cornelius, NC 480,000 2007
Lake Norman Chrysler-Plymouth-Jeep (Parcel #2) ....... Cornelius, NC 110,250 2008
Lake Norman Dodge .................................... Cornelius, NC 480,000(1) 2007
Westside Dodge ....................................... Columbus, OH 600,000 2009
Toyota West .......................................... Columbus, OH 480,000 2009
Hatfield Hyundai ..................................... Columbus, OH 480,000 2009
Hatfield Lincoln-Mercury ............................. Columbus, OH 300,000 2009
VW & Jeep-Eagle West ................................. Columbus, OH 300,000 2009
Westside Chrysler-Plymouth ........................... Columbus, OH 300,000 2009
Fort Mill Ford ....................................... Fort Mill, SC 480,000 2008
Century BMW .......................................... Greenville, SC 420,000(5) 2008
Heritage Lincoln-Mercury ............................. Greenville, SC 313,898(5) 2008
Century BMW .......................................... Spartanburg, SC 112,805(5) 2008
Infiniti of Chattanooga .............................. Chattanooga, TN 344,224(1)(6) 2007
BMW/Volvo of Chattanooga ............................. Chattanooga, TN 279,840(1)(6) 2007
KIA/Volkswagon of Chattanooga ........................ Chattanooga, TN 132,840(6) 2007
Town & Country Ford of Cleveland ..................... Cleveland, TN 281,424(1)(6) 2007
Cleveland Honda ...................................... Cleveland, TN 154,296(6) 2007
Volkswagen of Nashville .............................. Nashville, TN 147,000 2008
Ron Craft Chrysler Plymouth Jeep ..................... Baytown, TX 210,000 2008
Lone Star Ford ....................................... Houston, TX 360,000(7) 2009(7)
-------------
Total Initial Base Rent Payable to MMR Holdings ..... $ 9,922,259
=============
- ---------
(1) Initial base rent indicated is the total rent payable on more than one
property parcel utilized by the dealership.
36
(2) The Higginbotham Chevy-Olds dealership is presently under construction and
is expected to be completed and available for leasing in 1999. MMR
Holdings will acquire this property after the completion of construction.
(3) The rent on Town & Country Ford (Parcel #1) is currently below market
rates, as supported by independent appraisal. This lease will terminate by
December 31, 1999. As a condition to MMRT's ultimate acquisition of this
property, Sonic and MMRT have signed a new lease taking effect on January
1, 2000, providing for fair market annual rent of $1,140,000 and expiring
on December 31, 2009.
Town & Country Ford (Parcel #2) was owned by STC Properties ("STC"), which
was a joint venture in which Town & Country Ford maintained a 5% undivided
interest and SFC owned the remaining 95%. In October 1998, MMR Holdings
acquired this property by issuing its membership interests to SFC and paying
$425,000 to Town & Country Ford. STC leased this property in 1998 to Sonic
at the annual rent indicated.
(4) Until its acquisition by MMR Holdings in October 1998, Town & Country Ford
(Parcel #2) was owned by Bruton Smith and, in 1998, was leased to Sonic at
the annual base rent indicated.
(5) In July 1998, Chartown, a general partnership controlled by Bruton Smith
("Chartown"), acquired the real property on which this dealership
operated. Chartown then leased the property to the Sonic subsidiary that
acquired the assets of the dealership at the annual rental rate indicated.
In December 1998, MMR Holdings acquired this property from Chartown
subject to the existing lease.
(6) This dealership previously leased its property from Nelson Bowers, Sonic's
former Executive Vice President and a former director, or his affiliates.
In November 1998, MMR Holdings acquired this property subject to the
existing lease. Sonic negotiated this lease in connection with acquisition
of the dealership from Nelson Bowers in 1997 and paid 1998 rent to Mr.
Bowers or his affiliates at the indicated rate.
(7) The rent on Lone Star Ford is currently below market rates, as supported by
independent appraisal. This lease will terminate by December 31, 1999. As
a condition to MMRT's ultimate acquisition of this property, Sonic and
MMRT have signed a new lease taking effect on January 1, 2000, providing
for fair market annual rent of $1,140,000 and expiring on December 31,
2009. The Lone Star Ford property was owned by Viking Investments
Associates, a Texas association controlled by Bruton Smith ("Viking"). In
October 1998, MMR Holdings acquired the Lone Star Ford property. Viking
leased this property in 1998 to Sonic at the annual rent indicated.
CHARTOWN TRANSACTIONS
Chartown is a general partnership engaged in real estate development and
management. Before Sonic's reorganization before its initial public offering,
Town & Country Ford maintained a 49% partnership interest in Chartown with the
remaining 51% held by SMDA Properties, LLC, a North Carolina limited liability
company ("SMDA"). Bruton Smith owns an 80% direct membership interest in SMDA
with the remaining 20% owned indirectly through SFC. In addition, SFC also held
a demand promissory note for approximately $1.6 million issued by Chartown (the
"Chartown Note"), which was uncollectible due to insufficient funds. As part of
Sonic's reorganization, the Chartown Note was canceled and Town & Country Ford
transferred its partnership interest in Chartown to SFC for nominal
consideration. SFC then agreed to indemnify Town & Country Ford for any and all
obligations and liabilities, whether known or unknown, relating to Chartown and
Town & Country Ford's ownership of Chartown.
THE BOWERS VOLVO NOTE
In connection with Volvo's approval of Sonic's acquisition of a Volvo
franchise from Nelson Bowers in 1997, Volvo, among other things, conditioned
its approval upon Nelson Bowers acquiring and maintaining a 20% interest in
Sonic's Chattanooga Volvo subsidiary operating the Volvo franchise. Mr. Bowers
financed all of the purchase price for this 20% interest by issuing a
promissory note (the "Bowers Volvo Note") in favor of Sonic Automotive of
Nevada, Inc., the wholly owned subsidiary of Sonic that controls a majority
interest in Chattanooga Volvo. The Bowers Volvo Note is secured by Mr. Bowers'
interest in Chattanooga Volvo.
The Bowers Volvo Note is for a principal amount of $900,000 and bears
interest at the lowest applicable federal rate as published by the U.S.
Treasury Department in effect on November 17, 1997. Accrued interest is payable
annually. The operating agreement of Chattanooga Volvo provides that profits
and distributions are to be allocated first to Mr. Bowers to 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.
37
Bowers under this arrangement. Volvo has removed its requirement that Mr.
Bowers maintain his interest in Chattanooga Volvo. Sonic and Mr. Bowers are in
the process of redeeming his interest in Chattanooga Volvo and satisfying the
Bowers Volvo Note.
OTHER TRANSACTIONS
o Town & Country Ford and Lone Star Ford had each made several non-interest
bearing advances to SFC, a company controlled by Bruton Smith. In
preparation for Sonic's 1997 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 of $0.5 million of these advances was canceled in June 1997
pursuant to a dividend.
o Sonic had amounts receivable from affiliates of $1.0 million and $1.5
million at December 31, 1997 and 1998, respectively. Of this amount,
$622,000 relates to advances made by Sonic to SFC at December 31, 1997 and
$1.5 million relates to advances made by Sonic to SFC and MMRT at December
31, 1998. The remaining $425,000 at December 31, 1997 primarily relates to
receivables from executives of Sonic who were former owners of certain
dealerships acquired. These 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.
o As part of the purchase price in connection with Sonic's acquisition of
the Bowers Automotive Group in November 1997, Sonic issued its promissory
note in the principal amount of $4.0 million in favor of Nelson Bowers
(the "Bowers Acquisition Note"). The Bowers Acquisition Note is payable in
28 equal quarterly installments and bears interest at the prime rate less
0.5%. The balance outstanding under this note at December 31, 1998 was
$3.4 million.
o Town and Country Toyota has an amount payable to Bruton Smith, which
payable totals approximately $0.7 million as of December 31, 1998. This
loan bears interest at 8.75% per annum.
o Certain subsidiaries of Sonic (such subsidiaries together with Sonic and
SFC are referred to as the "Sonic Group") filed consolidated federal
income tax returns with SFC for several years before our reorganization.
These joint filings were for 1996 and for the period ending on June 30,
1997. Under applicable federal tax law, each corporation included in SFC's
consolidated return is jointly and severally liable for any resultant tax.
Under a tax allocation agreement dated as of June 30, 1997, however, Sonic
agreed to pay to SFC, in the event that additional federal income tax is
determined to be due, an amount equal to Sonic's separate federal income
tax liability computed for all periods in which any member of the Sonic
Group has been a member of SFC's consolidated group less amounts
previously recorded by Sonic. Also pursuant to such agreement, SFC agreed
to indemnify Sonic for any additional amount determined to be due from
SFC's consolidated group in excess of the federal income tax liability of
the Sonic Group for such periods. The tax allocation agreement establishes
procedures with respect to tax adjustments, tax claims, tax refunds, tax
credits and other tax attributes relating to periods ending prior to the
time that the Sonic Group shall leave SFC's consolidated group.
o Sonic acquired Town & Country Ford, Lone Star Ford, Town & Country
Toyota, Fort Mill Ford and Frontier Oldsmobile-Cadillac in its 1997
reorganization pursuant to four separate stock subscription agreements.
These subscription agreements allowed the acquisition of 100% of the
capital stock or membership interests, as the case may be, of each of the
five dealerships from Sonic Financial, Bruton Smith, the Egan Group (an
assignee of Mr. Egan) and Bryan Scott Smith in exchange for certain
amounts of Sonic's Class B common stock.
38
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 Sonic (incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 (Registration No. 333-33295) of Sonic (the "Form S-1")).
3.2* Certificate of Designation, Preferences and Rights of Class A Convertible Preferred Stock (incorporated by
reference to Exhibit 4.1 to Sonic's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).
3.3* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the Form S-1).
4.1* Form of 11% Senior Subordinated Note due 2008, Series B (incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-4 (Registration Nos. 333-64397 and 333-64397-001 through
333-64397-044) of Sonic (the "Form S-4")).
4.2* Indenture dated as of July 1, 1998 between Sonic, as issuer, the subsidiaries of Sonic named therein, as
guarantors, and U.S. Bank Trust National Association, as trustee, relating to the 11% Senior Subordinated
Notes due 2008 (incorporated by reference to Exhibit 4.2 to the Form S-4).
4.3* Registration Rights Agreement dated as of June 30, 1997 among Sonic, O. Bruton Smith, Bryan Scott Smith,
William S. Egan and Sonic Financial Corporation (incorporated by reference to Exhibit 4.2 to the Form S-1).
10.1* Employment Agreement between Sonic and O. Bruton Smith (incorporated by reference to Exhibit 10.29 to
the Form S-1).
10.2* Employment Agreement between Sonic and Bryan Scott Smith (incorporated by reference to Exhibit 10.30 to
the Form S-1).
10.3* Employment Agreement between Sonic and Theodore M. Wright (incorporated by reference to Exhibit 10.31
to the Form S-1).
10.4* Employment Agreement between Sonic and Nelson E. Bowers, II (incorporated by reference to Exhibit 10.32
to the Form S-1).
10.5* Employment Agreement between Sonic and Dennis D. Higginbotham (incorporated by reference to Exhibit
10.90 to the Form S-4).
10.6* Tax Allocation Agreement dated as of June 30, 1997 between Sonic and Sonic Financial Corporation
(incorporated by reference to Exhibit 10.33 to the Form S-1).
10.7* 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).
10.8* Sonic Automotive, Inc. 1997 Stock Option Plan (incorporated by reference to Exhibit 10.34 to the Form S-1).
10.9* Sonic Automotive, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.35 to the
Form S-1).
10.9a* Sonic Automotive, Inc. Employee Stock Purchase Plan Amended and Restated as of December 3, 1998
(incorporated by reference to Sonic's Registration Statement on Form S-8 (Registration No. 333-69907)).
10.10* Sonic Automotive, Inc. Formula Stock Option Plan for Independent Directors (incorporated by reference to
Exhibit 10.69 to Sonic's Amended Annual Report on Form 10-K/A for the year ended December 31, 1997
(the "1997 Form 10-K/A")).
10.11* Sonic Automotive, Inc. Nonqualified Employee Stock Purchase Plan (incorporated by reference to Sonic's
Registration Statement on Form S-8 (Registration No. 333-69899)).
10.12* Subscription Agreement dated as of June 30, 1997 between O. Bruton Smith and Sonic (incorporated by
reference to Exhibit 10.36 to the Form S-1).
10.13* Subscription Agreement dated as of June 30, 1997 between Sonic Financial Corporation and Sonic
(incorporated by reference to Exhibit 10.37 to the Form S-1).
39
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------------------
10.14* Subscription Agreement dated as of June 30, 1997 between Bryan Scott Smith and Sonic (incorporated by
reference to Exhibit 10.38 to the Form S-1).
10.15* Subscription Agreement dated as of June 30, 1997 between William S. Egan and Sonic (incorporated by
reference to Exhibit 10.39 to the Form S-1).
10.16* Credit Agreement dated October 15, 1997 by and between Sonic and Ford Motor Credit Company
(incorporated by reference to Exhibit 10.46 to the Form S-1).
10.17* Amended and Restated Credit Agreement dated as of December 15, 1997 (the "Credit Agreement") between
Sonic, as borrower, and Ford Motor Credit Company, as lender (incorporated by reference to Exhibit 10.70 to
the 1997 Form 10-K/A).
10.18* Amended and Restated Promissory Note dated December 15, 1997 in the amount of $75 million by Sonic, as
borrower, in favor of Ford Motor Credit Company, as lender, under the Credit Agreement (incorporated by
reference to Exhibit 10.71 to the 1997 Form 10-K/A).
10.19* Subordinated Promissory Note dated December 1, 1997 (the "Smith Subordinated Note") in the amount of
$5.5 million by Sonic, as borrower, in favor of O. Bruton Smith, as lender (incorporated by reference to
Exhibit 10.72 to the 1997 Form 10-K/A).
10.20* Subordination Agreement dated as of December 15, 1997 between O. Bruton Smith and Ford Motor Credit
Company and acknowledged by Sonic re: the Smith Subordinated Note (incorporated by reference to Exhibit
10.73 to the 1997 Form 10-K/A)
10.21* Subordination Agreement dated as of July 31, 1998 between O. Bruton Smith and U.S. Bank Trust National
Association, as trustee under the Indenture relating to the 11% Senior Subordinated Notes re: the Smith
Subordinated Note (incorporated by reference to Exhibit 10.89 to the Form S-4).
10.22 Amendment to the Credit Agreement dated March 2, 1999 .
10.23 Second Amended and Restated Promissory Note dated March 2, 1999 in the amount of $100 million by
Sonic, as borrower, in favor of Ford Motor Credit Company, as lender, under the Credit Agreement, as
amended.
10.24* Strategic Alliance Agreement and Agreement for the Mutual Referral of Acquisition Opportunities dated
July 9, 1998 between Sonic and Mar Mar Realty Trust (incorporated by reference to Exhibit 99.7 to Sonic's
Current Report on Form 8-K dated July 24, 1998).
10.25* Supplemental Agreement between Sonic and Ford Motor Company (incorporated by reference to Exhibit
10.48 to the Form S-1).
10.26* Agreement between Toyota Motors Sales USA and Sonic (incorporated by reference to Exhibit 10.49 to the
Form S-1).
10.27* Asset Purchase Agreement dated as of May 27, 1997 by and among Sonic, 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).
10.28* Asset Purchase Agreement dated as of June 24, 1997 by and among Sonic, 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).
10.29* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Bowers Acquisition (incorporated by
reference to Exhibit 10.41a to the Form S-1).
10.30* Stock Purchase Agreement dated as of July 29, 1997 between Sonic 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).
10.31* Asset Purchase Agreement dated as of August 1997 by and among Sonic, 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).
10.32* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Dyer Acquisition (incorporated by
reference to Exhibit 10.43a to the Form S-1).
10.33* Asset Purchase Agreement dated as of February 4, 1998 between Sonic, as buyer, Hatfield Jeep Eagle, Inc.,
Hatfield Lincoln Mercury, Inc, Trader Bud's Westside Dodge, Inc., Toyota West, Inc. and Hatfield Hyundai,
Inc., as sellers, and Bud C. Hatfield, Dan E. Hatfield and Dan E. Hatfield, as Trustee of The Bud C. Hatfield,
Sr. Special Irrevocable Trust, as shareholders of the sellers (the "Hatfield Purchase Agreement") (incorporated
by reference to Exhibit 10.3 to Sonic's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998).
10.33a* Amendment No. 1 and Supplement to the Hatfield Purchase Agreement (incorporated by reference to Exhibit
99.6 to Sonic's Current Report on Form 8-K dated July 9, 1998 (the "July 9, 1998 Form 8-K")).
40
EXHIBIT NO. DESCRIPTION
- ------------- ----------------------------------------------------------------------------------------------------------
10.33b* Amendment No. 2 and Supplement to the Hatfield Purchase Agreement (incorporated by reference to Exhibit
99.3 to Sonic's Current Report on Form 8-K dated July 24, 1998).
10.34* Asset Purchase Agreement dated as of July 7, 1998 by and among Sonic, HMC Finance Corporation, Inc.,
Halifax Ford-Mercury, Inc., Higginbotham Automobiles, Inc., Higginbotham Chevrolet-Oldsmobile, Inc.
Sunrise Auto World, Inc. and Dennis D. Higginbotham (the "Higginbotham Purchase Agreement")
(incorporated by reference to Exhibit 99.14 to the July 9, 1998 Form 8-K).
10.34a* Amendment No. 1 and Supplement to the Higginbotham Purchase Agreement dated as of September 16, 1998
(incorporated by reference to Exhibit 10.85a to the Form S-4).
10.35 Amended and Restated Asset Purchase Agreement dated as of March 16, 1999 by and among Sonic, Tom
Williams Buick, Inc., Williams Cadillac, Inc., Tom Williams Motors, Inc., Tom Williams Auto, Inc., Thomas
P. Williams, Sr., Charles Clark Williams and Thomas P. Williams, Jr.
10.35a Agreement and Plan of Merger dated as of March 16, 1999 by and among Sonic, Williams Cadillac
Company, Inc., Thomas P. Williams, Sr., Charles Clark Williams, Thomas P. Williams, Jr. and Catherine D.
Ward.
10.36 Asset Purchase Agreement by and among Sonic, Global Imports, Inc. and William Morris Whitmire (the
"Global Purchase Agreement").
10.36a Amendment No. 1 and Supplement to the Global Purchase Agreement dated as of February 18, 1999.
10.37 Asset Purchase Agreement dated February 26, 1999 by and among Sonic, Lute Riley Motors, Inc. and L.S.
Riley.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule
- ---------
* Filed previously
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter ended
December 31, 1998.
41
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, 1999
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 (principal March 31, 1999
- ------------------------------------ executive officer) and Chairman
O. BRUTON SMITH
/s/ B. SCOTT SMITH President, Chief Operating Officer and March 31, 1999
- ------------------------------------ Director
B. SCOTT SMITH
/s/ DENNIS D. HIGGINBOTHAM President of Retail Operations and Director March 31, 1999
- ------------------------------------
DENNIS D. HIGGINBOTHAM
/s/ THEODORE M. WRIGHT Chief Financial Office, Vice President- March 31, 1999
- ------------------------------------ Finance, Treasurer, Secretary (Principal
THEODORE M. WRIGHT Financial and Accounting Officer) and
Director
/s/ WILLIAM R. BROOKS Director March 31, 1999
- ------------------------------------
WILLIAM R. BROOKS
/s/ WILLIAM P. BENTON Director March 31, 1999
- ------------------------------------
WILLIAM P. BENTON
/s/ WILLIAM I. BELK Director March 31, 1999
- ------------------------------------
WILLIAM I. BELK
42
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT .............................................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1997 and 1998 ................................ F-3
Consolidated Statements of Income for the years ended December 31, 1996, 1997 and 1998.... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1997 and 1998........................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998.................................................................................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
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, 1997 and
1998, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 16, 1999
F-2
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(DOLLARS IN THOUSANDS)
DECEMBER 31,
---------------------
1997 1998
---------- ----------
ASSETS (Note 5)
CURRENT ASSETS:
Cash and cash equivalents (Note 1) ..................................................... $ 18,304 $ 51,834
Receivables (net of allowance for doubtful accounts of $523 and $700 at December 31,
1997 and 1998, respectively) .......................................................... 19,784 39,902
Inventories (Notes 1 and 3) ............................................................ 156,514 264,971
Deferred income taxes (Note 6) ......................................................... 405 1,702
Due from affiliates (Note 7) ........................................................... 1,047 1,471
Other current assets (Note 2) .......................................................... 1,318 4,961
-------- --------
Total current assets .................................................................. 197,372 364,841
PROPERTY AND EQUIPMENT, NET (Notes 4 and 5) ............................................. 19,081 26,250
GOODWILL, NET (Note 1) .................................................................. 74,362 180,081
OTHER ASSETS ............................................................................ 635 4,931
-------- --------
TOTAL ASSETS ............................................................................ $291,450 $576,103
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- floor plan (Note 3) ................................................... $133,236 $228,158
Trade accounts payable ................................................................. 6,612 14,994
Accrued interest ....................................................................... 1,071 7,058
Other accrued liabilities (Note 6) ..................................................... 10,748 27,763
Payable to affiliates (Note 7) ......................................................... 445 628
Payable for acquisitions (Note 2) ...................................................... -- 2,385
Current maturities of long-term debt (Note 5) .......................................... 584 4,700
-------- --------
Total current liabilities ............................................................. 152,696 285,686
LONG-TERM DEBT (Note 5) ................................................................. 38,640 131,337
PAYABLE FOR ACQUISITIONS (Note 2) ....................................................... 275
PAYABLE TO THE COMPANY'S CHAIRMAN (Note 7) .............................................. 5,500 5,500
PAYABLE TO AFFILIATES (Note 7) .......................................................... 4,394 3,625
DEFERRED INCOME TAXES (Note 6) .......................................................... 1,079 4,066
INCOME TAX PAYABLE (Note 6) ............................................................. 4,776 3,185
COMMITMENTS AND CONTINGENCIES (Notes 7 and 10)
STOCKHOLDERS' EQUITY (Notes 1, 8 and 9):
Preferred Stock, $.10 par, 3.0 million shares authorized; 300,000 shares designated as
Class A Convertible Preferred Stock, liquidation preference $1,000 per share, of which
22,179 shares are issued and outstanding at December 31, 1998 ......................... -- 20,431
Class A Common Stock, $.01 par, 50.0 million shares authorized;
5,000,000 shares issued and outstanding at December 31, 1997 and 11,959,274 shares
issued and outstanding at December 31, 1998 ........................................... 100 120
Class B Common Stock, $.01 par (convertible into Class A Common Stock), 15.0 million
shares authorized; 12,500,000 shares issued and outstanding at December 31, 1997 and
12,400,000 shares issued and outstanding at December 31, 1998 ......................... 125 124
Paid-in capital ........................................................................ 67,933 87,011
Retained earnings ...................................................................... 16,186 34,743
Accumulated other comprehensive income ................................................. 21 --
-------- --------
Total stockholders' equity ............................................................ 84,365 142,429
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................................. $291,450 $576,103
======== ========
See notes to consolidated financial statements.
F-3
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
1996 1997 1998
----------- ------------- ---------------
REVENUES:
Vehicle sales ........................................... $327,674 $ 467,858 $ 1,407,030
Parts, service and collision repair ..................... 42,075 57,537 162,660
Finance and insurance (Note 1) .......................... 7,118 10,606 34,011
-------- --------- -----------
Total revenues ........................................ 376,867 536,001 1,603,701
COST OF SALES (Note 1) ................................... 332,122 473,003 1,396,259
-------- --------- -----------
GROSS PROFIT ............................................. 44,745 62,998 207,442
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................................ 32,602 46,770 150,130
DEPRECIATION AND AMORTIZATION ............................ 1,076 1,322 4,607
-------- --------- -----------
OPERATING INCOME ......................................... 11,067 14,906 52,705
OTHER INCOME AND EXPENSE:
Interest expense, floor plan (Note 3) ................... 5,968 8,007 14,096
Interest expense, other ................................. 433 1,199 9,395
Other income ............................................ 355 298 426
-------- --------- -----------
Total other expense ................................... 6,046 8,908 23,065
-------- --------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST ......... 5,021 5,998 29,640
PROVISION FOR INCOME TAXES (Note 6) ...................... 1,924 2,249 11,083
-------- --------- -----------
INCOME BEFORE MINORITY INTEREST .......................... 3,097 3,749 18,557
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (Note 1) ..... 114 47 --
-------- --------- -----------
NET INCOME ............................................... $ 2,983 $ 3,702 $ 18,557
======== ========= ===========
BASIC NET INCOME PER SHARE (Note 8) ...................... $ 0.27 $ 0.81
========= ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ............ 13,898 22,852
========= ===========
DILUTED NET INCOME PER SHARE (Note 8) .................... $ 0.27 $ 0.74
========= ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ............ 13,898 24,970
========= ===========
See notes to consolidated financial statements.
F-4
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS AND SHARES IN THOUSANDS)
PREFERRED CLASS A CLASS B
STOCK COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ----------- -------- -------- ---------- ----------
BALANCE AT
DECEMBER 31, 1995 ................. -- -- -- -- 12,500 $125
Capital contributions ............. -- -- -- -- -- --
Comprehensive income:
Net income ....................... -- -- -- -- -- --
Net unrealized loss on
marketable equity
securities net of tax
benefit of $35,488 .............. -- -- -- -- -- --
--- -- -- -- ------ ----
Total comprehensive
income .........................
BALANCE AT
DECEMBER 31, 1996 ................. -- -- -- -- 12,500 125
Capital contribution (Note 1) -- -- -- -- -- --
Public offering of common
stock (Note 8) ................... -- -- 10,000 100 -- --
Stock redemption (Note 7) ......... -- -- -- -- -- --
Dividend (Note 7) ................. -- -- -- -- -- --
Comprehensive income:
Net income ....................... -- -- -- -- -- --
Net unrealized gain on
marketable equity
securities net of tax of
$73,864.......................... -- -- -- -- -- --
--- -- ------ --- ------ ----
Total comprehensive
income .........................
BALANCE AT
DECEMBER 31, 1997 ................. -- -- 10,000 100 12,500 125
Issuance of Preferred Stock
(Note 2) ......................... 31 29,342 -- -- -- --
Issuance of Common Stock .......... 975 10
Shares awarded under stock
compensation plans ............... 252 3 --
Issuance of warrants
(Note 8) ......................... --
Conversion of preferred stock
(Note 8) ......................... (9) (8,911) 632 6 -- --
Conversion of Class B
Common stock ..................... -- -- 100 1 (100) (1)
Comprehensive income:
Net income ....................... -- -- -- -- -- --
Net unrealized loss on
marketable equity
securities ...................... -- -- -- -- -- --
---- ------ ------ --- ------ -----
Total comprehensive
income .........................
BALANCE AT
DECEMBER 31, 1998 ................. 22 $ 20,431 11,959 $120 12,400 $124
==== ======== ====== ==== ====== =====
ACCUMULATED
OTHER TOTAL
PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
CAPITAL EARNINGS INCOME (LOSS) EQUITY
----------- ---------- --------------- --------------
BALANCE AT
DECEMBER 31, 1995 ................. $ 6,207 $10,010 $ (35) $ 16,307
Capital contributions ............. 7,064 -- -- 7,064
Comprehensive income:
Net income ....................... -- 2,983 -- 2,983
Net unrealized loss on
marketable equity
securities net of tax
benefit of $35,488 .............. -- -- (59) (59)
-------- ------- ----- --------
Total comprehensive
income ......................... 2,924
--------
BALANCE AT
DECEMBER 31, 1996 ................. 13,271 12,993 (94) 26,295
Capital contribution (Note 1) 3,208 -- -- 3,208
Public offering of common
stock (Note 8) ................... 53,577 -- -- 53,677
Stock redemption (Note 7) ......... (2,123) -- -- (2,123)
Dividend (Note 7) ................. -- (509) -- (509)
Comprehensive income:
Net income ....................... -- 3,702 -- 3,702
Net unrealized gain on
marketable equity
securities net of tax of
$73,864.......................... -- -- 115 115
-------- ------- ----- --------
Total comprehensive
income ......................... 3,817
--------
BALANCE AT
DECEMBER 31, 1997 ................. 67,933 16,186 21 84,365
Issuance of Preferred Stock
(Note 2) ......................... -- -- -- 29,342
Issuance of Common Stock .......... 8,283 8,293
Shares awarded under stock
compensation plans ............... 1,162 1,165
Issuance of warrants
(Note 8) ......................... 728 728
Conversion of preferred stock
(Note 8) ......................... 8,905 -- -- --
Conversion of Class B
Common stock ..................... -- -- -- --
Comprehensive income:
Net income ....................... -- 18,557 -- 18,557
Net unrealized loss on
marketable equity
securities ...................... -- -- (21) (21)
-------- ------- ----- --------
Total comprehensive
income ......................... 18,536
--------
BALANCE AT
DECEMBER 31, 1998 ................. $ 87,011 $34,743 $ -- $142,429
======== ======= ===== ========
See notes to consolidated financial statements.
F-5
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
YEARS ENDED
DECEMBER 31,
-------------
1996
-------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................ $ 2,983
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization ....................................................... 1,076
Minority interest ................................................................... 114
Loss on disposal of property and equipment .......................................... 80
(Gain) loss on sale of marketable equity securities ................................. (355)
Change in deferred income taxes ..................................................... (241)
Changes in assets and liabilities that relate to operations:
Receivables ........................................................................ (2,421)
Inventories ........................................................................ (14,013)
Other assets ....................................................................... (80)
Accounts payable and other current liabilities ..................................... 1,439
Income tax payable ................................................................. 524
-----------
Total adjustments ................................................................. (13,877)
-----------
Net cash provided by (used in) operating activities ................................. (10,894)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired .......................................... (5,127)
Purchases of property and equipment ................................................... (1,907)
Proceeds from sales of property and equipment ......................................... 4
Purchase of marketable equity securities .............................................. (207)
Proceeds from sales of marketable equity securities ................................... 515
-----------
Net cash used in investing activities ............................................... (6,722)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions ................................................................. 7,064
Proceeds from notes payable -- floor plan ............................................. 306,584
Payments from notes payable -- floor plan ............................................. (293,599)
Proceeds from long-term debt .......................................................... 599
Payments of long-term debt ............................................................ (576)
Public offering of common stock ....................................................... --
Issuance of shares under stock compensation plans ..................................... --
Receipts from (advances to) affiliate companies ....................................... (4,771)
Advances from the Company's Chairman (Note 7) ......................................... --
-----------
Net cash provided by financing activities ........................................... 15,301
-----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... (2,315)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................................... 8,994
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................... $ 6,679
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-- Cash paid during the period for:
Interest .............................................................................. $ 6,489
Income taxes .......................................................................... $ 2,042
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Purchase of minority interest in connection with the reorganization (Note 1) .......... --
Cancellation of notes payable from affiliates in connection with the reorganization
(Note 7).............................................................................. --
Cancellation of notes payable from affiliates pursuant to dividend (Note 7) ........... --
Preferred Stock issued pursuant to acquisitions ....................................... --
Conversion of preferred stock ......................................................... --
Common Stock issued to an affiliate pursuant to an acquisition ........................
Payable for acquisitions (Note 2) ..................................................... --
Issuance of warrants (Notes 2 and 8) .................................................. --
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998
------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................ $ 3,702 $ 18,557
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization ....................................................... 1,322 4,607
Minority interest ................................................................... 47 --
Loss on disposal of property and equipment .......................................... 110 278
(Gain) loss on sale of marketable equity securities ................................. (298) 21
Change in deferred income taxes ..................................................... (27) 2,164
Changes in assets and liabilities that relate to operations:
Receivables ........................................................................ (594) (11,018)
Inventories ........................................................................ 1,430 12,030
Other assets ....................................................................... (788) (4,190)
Accounts payable and other current liabilities ..................................... 1,694 11,026
Income tax payable ................................................................. (504) (3,682)
----------- -------------
Total adjustments ................................................................. 2,392 11,236
----------- -------------
Net cash provided by (used in) operating activities ................................. 6,094 29,793
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired .......................................... (85,650) (72,205)
Purchases of property and equipment ................................................... (2,007) (4,335)
Proceeds from sales of property and equipment ......................................... 43 1,655
Purchase of marketable equity securities .............................................. -- --
Proceeds from sales of marketable equity securities ................................... 784
-----------
Net cash used in investing activities ............................................... (86,830) (74,885)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions ................................................................. --
Proceeds from notes payable -- floor plan ............................................. 459,678 1,149,497
Payments from notes payable -- floor plan ............................................. (458,046) (1,166,303)
Proceeds from long-term debt .......................................................... 45,892 179,851
Payments of long-term debt ............................................................ (13,353) (84,594)
Public offering of common stock ....................................................... 53,677 --
Issuance of shares under stock compensation plans ..................................... -- 1,165
Receipts from (advances to) affiliate companies ....................................... (987) (994)
Advances from the Company's Chairman (Note 7) ......................................... 5,500 --
----------- -------------
Net cash provided by financing activities ........................................... 92,361 78,622
----------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... 11,625 33,530
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................................... 6,679 18,304
----------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................... $ 18,304 $ 51,834
=========== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-- Cash paid during the period for:
Interest .............................................................................. $ 8,761 $ 17,504
Income taxes .......................................................................... $ 1,392 $ 10,919
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Purchase of minority interest in connection with the reorganization (Note 1) .......... $ 3,208 --
Cancellation of notes payable from affiliates in connection with the reorganization
(Note 7).............................................................................. $ 2,123 --
Cancellation of notes payable from affiliates pursuant to dividend (Note 7) ........... $ 509 --
Preferred Stock issued pursuant to acquisitions ....................................... -- $ 29,342
Conversion of preferred stock ......................................................... -- $ 8,911
Common Stock issued to an affiliate pursuant to an acquisition ........................ $ 8,250
Payable for acquisitions (Note 2) ..................................................... -- $ 2,685
Issuance of warrants (Notes 2 and 8) .................................................. -- $ 728
See notes to consolidated financial statements.
F-6
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL TABLES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- Sonic Automotive, Inc ("Sonic") is one of the
top five automotive retailers in the United States, operating 38 new car
dealerships and 14 collision repair centers in 10 metropolitan areas of the
Midwestern, Southeastern, and Southwestern United States as of December 31,
1998. Sonic sells new and used cars and light trucks, sells replacement parts,
provides vehicle maintenance, warranty, paint and repair services, and arranges
related financing and insurance for its automotive customers. As of December
31, 1998, Sonic sold a total 23 foreign and domestic brands of new vehicles.
Sonic was incorporated in the State of Delaware in February 1997. Pursuant
to a reorganization on June 30, 1997 (the "Reorganization"), five dealerships
which were affiliated through the common ownership and control of Mr. O. Bruton
Smith, Sonic's Chairman and Chief Executive Officer, became the first
wholly-owned subsidiaries of the Company through the exchange of their common
stock or membership interests for 12.5 million shares of Sonic's Class B common
stock, par value $.01 per share. The Reoganization was accounted for at
historical cost in a manner similar to a pooling-of-interests as the entities
were under common management and control. The financial statements for the
periods through the effective date of the Reorganization represent the combined
data for these five dealerships.
On November 12, 1997, Sonic completed an initial public offering of 10.0
million shares of its Class A common stock, par value $.01 per share which is
currently traded on the New York Stock Exchange under the symbol SAH.
During 1997 and 1998, Sonic completed the acquisitions of 19 dealerships
(see Note 2). Each of these acquisitions has been accounted for using the
purchase method of accounting, and the accompanying financial statements
include the results of operations of the dealerships acquired from their
respective dates of acquisition.
PRINCIPLES OF CONSOLIDATION -- All material intercompany transactions have
been eliminated in the consolidated financial statements.
REVENUE RECOGNITION -- Sonic records revenue when vehicles are delivered
to customers, and when vehicle service work is performed.
Sonic arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined interest
rates set by the financing institution. Sonic also receives commissions from
the sale of credit life, accident, health and disability insurance and extended
service contracts to customers. Sonic may be assessed a chargeback fee in the
event of early cancellation of a loan, insurance contract, or service contract
by the customer. Finance and insurance commission revenue is recorded net of
estimated chargebacks at the time the related contract is placed with the
financial institution.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Commission expense charged to cost of sales was approximately $1.1
million, $1.8 million and $6.0 million for the years ended December 31, 1996,
1997, and 1998, respectively.
DEALER AGREEMENTS -- Sonic purchases substantially all of its new vehicles
from manufacturers at the prevailing prices charged by the manufacturer to its
franchised dealers. Sonic's sales could be unfavorably impacted by the
manufacturer's unwillingness or inability to supply the dealership with an
adequate supply of new vehicle inventory.
Each dealership operates under a dealer agreement with the manufacturer
which generally restricts the location, management and ownership of the
respective dealership. The ability of Sonic to acquire additional franchises
from a particular manufacturer may be limited due to certain restrictions
imposed by manufacturers. Additionally, Sonic's ability to enter into other
significant acquisitions may be restricted and the acquisition of Sonic's stock
by third parties may be limited by the terms of the franchise agreements.
F-7
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
CASH AND CASH EQUIVALENTS -- Sonic considers contracts in transit and all
highly liquid debt instruments with an initial maturity of three months or less
to be cash equivalents. Contracts in transit represent cash in transit to Sonic
from finance companies related to vehicle purchases, and was $12.1 million and
$36.6 million at December 31, 1997 and 1998, respectively.
INVENTORIES -- Inventories of new and used vehicles, including
demonstrators, are stated at the lower of specific cost or market. Inventories
of parts and accessories are accounted for using the "first-in, first-out"
method of inventory accounting ("FIFO") and are stated at the lower of FIFO
cost or market.
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 purchase price over the
estimated fair value of the tangible and separately measurable intangible net
assets acquired. The cumulative amount of goodwill at December 31, 1997 was
$75.0 million and at December 31, 1998 was $182.5 million. As a percentage of
total assets and stockholders' equity, goodwill, net of accumulated
amortization, represented 25.5% and 88.1%, respectively, at December 31, 1997,
and 31.3% and 126.4%, respectively, at December 31, 1998. Generally accepted
accounting principles require that goodwill and all other intangible assets be
amortized over the period benefited. Sonic has determined that the period
benefited by the goodwill will be no less than 40 years. Accordingly Sonic is
amortizing goodwill over a 40 year period. Earnings reported in periods
immediately following an acquisition would be overstated if Sonic attributed a
40 year benefit to an intangible asset that should have had a shorter benefit
period. In later years, Sonic would be burdened by a continuing charge against
earnings without the associated benefit to income valued by management in
arriving at the price paid for the businesses acquired. Earnings in later years
also could be significantly affected if management then determined that the
remaining balance of goodwill was impaired. Sonic periodically compares the
carrying value of goodwill with the anticipated undiscounted future cash flows
from operations of the businesses acquired in order to evaluate the
recoverability of goodwill. Sonic has concluded that the anticipated future
cash flows associated with intangible assets recognized in its acquisitions
will continue indefinitely, and there is no pervasive evidence that any
material portion will dissipate over a period shorter than 40 years. Sonic will
incur additional goodwill in future acquisitions.
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 -- Sonic measures the compensation cost of its
stock-based compensation plans under the provisions of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as
permitted under Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Under the provisions of APB No. 25,
compensation cost is measured based on the intrinsic value of the equity
instrument awarded.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments which potentially
subject Sonic to concentrations of credit risk consist principally of cash on
deposit with financial institutions. At times, amounts invested with financial
institutions may exceed FDIC insurance limits. Concentrations of credit risk
with respect to receivables are limited primarily to
F-8
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
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, 1997 and 1998
the fair values of Sonic's financial instruments including receivables, due
from affiliates, notes payable-floor plan, trade accounts payable, payables to
affiliated companies and Sonic's Chairman and long-term debt excluding Sonic's
senior subordinated notes, approximate their carrying values due either to
length of maturity or existence of variable interest rates that approximate
prevailing market rates. The carrying value of Sonic's senior subordinated
notes as of December 31, 1998 was a reasonable approximation of its fair value.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ADVERTISING -- Sonic expenses advertising costs in the period incurred.
Advertising expense amounted to $5.0 million, $7.0 million and $17.4 million
for the years ended December 31, 1996, 1997 and 1998, respectively.
MINORITY INTEREST -- Prior to the Reorganization, Sonic owned only a 69%
interest in Town and Country Toyota. In connection with the Reorganization,
Sonic purchased the remaining 31% minority interest in Town and Country Toyota,
Inc. for $3.2 million in a transaction accounted for using the purchase method
of accounting. On a pro forma basis for the years ended December 31, 1996 and
1997, revenue 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.
IMPACT OF NEW ACCOUNTING STANDARDS -- 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 became effective for Sonic's fiscal year
ending December 31, 1998. The implementation of FAS 131 did not have an impact
on Sonic's financial statements or related disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instrument
and Hedging Activities." This Standard establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activites. The Statement will become
effective for Sonic beginning January 1, 2000. Sonic has elected earlier
application of all of the provisions of this Statement beginning October 1,
1998. The implementation of the provisions of this Statement did not have an
impact on Sonic's financial statements for the year ended December 31, 1998.
RECLASSIFICATION -- Certain prior year amounts have been reclassified to
conform with current year presentation.
2. BUSINESS ACQUISITIONS
PENDING ACQUISITIONS (UNAUDITED)
The Company has signed definitive agreements to acquire 12 dealerships for
a minimum of approximately $54.9 million in cash, 11,425 shares of Class A
Convertible Preferred Stock, Series II, and 10,525 shares of Class A
Convertible Preferred Stock, Series III having a liquidation value of $1,000
per share. The aggregate purchase price is subject to adjustment based on the
actual net book value of the assets acquired. The cash portion of the purchase
price will be paid with a combination of borrowings under the Company's $100
million acquisition line of credit with Ford Motor Credit Company (the
"Revolving Facility") and with cash generated from the Company's existing
operations. The Company may be required to pay additional amounts based on
future pre-tax earnings of certain of these acquired dealerships. These
acquisitions are expected to be consummated in the second and third quarters of
1999.
F-9
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS -- (Continued)
ACQUISITIONS COMPLETED SUBSEQUENT TO DECEMBER 31, 1998 (THROUGH MARCH 29, 1999)
(UNAUDITED)
Subsequent to December 31, 1998, Sonic acquired 8 dealerships for
approximately $50.9 million in cash, and the issuance of 34,100 shares of
Sonic's Class A Convertible preferred stock, Series III, par value $.10 per
share having a liquidation preference of $1,000 per share. The cash portion of
the purchase price was financed with a combination of cash borrowed under the
Revolving Facility and cash generated from Sonic's existing operations. The
acquisitions were accounted for using the purchase method of accounting. Sonic
may be required to pay additional amounts based on future pre-tax earnings of
certain of the dealerships acquired. Any additional amounts paid will be
accounted for as goodwill.
In connection with the subsequent acquisition of a Honda dealership in
Chattanooga, Tennessee, the Company sold substantially all of the assets of its
Honda dealership in Cleveland, Tennessee in March, 1999 for approximately $3.6
million. There was no material gain or loss as a result of the sale.
ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 1998
During 1998, Sonic acquired 19 dealerships for an aggregate purchase price
of approximately $134.0 million. The aggregate purchase price was paid with
approximately $96.2 million in cash, with 970,588 shares of Class A common
stock having an estimated fair value at the time of issuance of approximately
$8.3 million, with 30,733.8 shares of Preferred Stock (14,406.3 shares of Class
A convertible preferred stock, Series I (the "Series I Preferred Stock"),
10,054.5 shares of Series II Preferred Stock, and 6,273 shares of Class A
convertible preferred stock, Series III (the "Series III Preferred Stock"))
having an estimated fair value at the time of issuance of approximately $29.3
million and with warrants to purchase an aggregate of 154,000 shares of Class A
common stock having an approximate fair value of $0.5 million. The cash portion
of the aggregate purchase price was financed with a combination of cash
obtained from the net proceeds of Sonic's private offering on July 31, 1998 of
$125 million in aggregate principal amount of its 11% senior subordinated notes,
cash obtained from the Revolving Facility, and cash generated from Sonic's
existing operations. Payables for acquisitions as of December 31, 1998 on the
accompanying consolidated balance sheet includes $1.7 million of the cash
portion of the aggregate purchase price which was paid subsequent to
December 31, 1998.
The difference between the aggregate purchase price of $134.0 million and
amounts paid of $134.3 represents the net of (i) $1.3 million due from a former
owner as a result of a shortage in the actual net book value of assets acquired
compared to the minimum net book value required in the purchase agreement, (ii)
$0.4 million due to a former owner as a result of an excess in the actual net
book value of assets acquired over the minimum net book value required in the
purchase agreement, and (iii) $0.6 million due to a former owner on the first
and second anniversaries of the acquisition date. The $1.3 million due from a
former owner has been included in other current assets on the accompanying
balance sheet. The $0.4 million and $0.6 million due to former owners have been
included in payable for acquisitions on the accompanying balance sheet.
In accordance with terms of certain of the purchase agreements, Sonic may
be required to pay additional consideration contingent upon future earnings of
certain of the dealerships acquired. As of December 31, 1998, Sonic had
recorded approximately $8.0 million relating to such consideration, which has
been accounted for as goodwill. Any additional amounts which may be payable in
the future will also be accounted for as goodwill.
All of the acquisitions completed in 1998 have been accounted for using
the purchase method of accounting, and the results of operations of such
acquisitions have been included in the accompanying consolidated financial
statements from their respective acquisition dates. The purhcase price of these
acquisitions has been allocated to the assets and liabilities acquired based on
their estimated fair market value at acquisition date as shown in the table
below. The purchase price and corresponding goodwill may ultimately be
different than amounts recorded depending on the actual fair value of the
tangible net assets acquired.
F-10
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS -- (Continued)
Working capital ...................... $ 30,341
Property and equipment ............... 5,690
Goodwill ............................. 101,323
Non-current liabilities assumed ...... (3,365)
--------
Total purchase price ................. $133,989
========
ACQUISITIONS COMPLETED DURING YEAR ENDED DECEMBER 31, 1997
During 1997, Sonic acquired 13 dealerships for an aggregate purchase price
of approximately $98.8 million. The aggregate purchase price was paid with
approximately $94.8 million in cash and with a $4.0 million promissory note
bearing interest at prime less 0.5% and payable in 28 equal quarterly
installments to a former owner of certain of the acquired dealerships. The cash
portion of the aggregate purchase price was financed with a combination of cash
obtained from the net proceeds of Sonic's initial public offering, cash
obtained from the Revolving Facility, and cash generated from Sonic's existing
operations. In addition, Sonic issued to the seller of one of the acquired
dealerships warrants to purchase an aggregate of 88,782 shares of Class A
common stock having an approximate fair value of $0.3 million.
All of the acquisitions completed in 1997 have been accounted for using
the purchase method of accounting, and the results of operations of such
acquisitions have been included in the accompanying consolidated financial
statements from their respective dates of acquisition. The purchase price of
these acquisitions has been allocated to the assets and liabilities acquired
based on their estimated fair market value at acquisition date as follows:
Working capital ...................... $ 28,247
Property and equipment ............... 3,969
Goodwill ............................. 69,528
Non-current liabilities assumed ...... (2,940)
--------
Total purchase price ................. $ 98,804
========
ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 1996
On February 1, 1996, Sonic 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
========
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma financial information presents a summary
of consolidated results of operations as if the above acquisition transactions
had occurred as of the beginning of the period in which the acquisitions were
completed, and at the beginning of the immediately preceeding period, after
giving effect to certain adjustments, including amortization of goodwill,
interest expense on acquisition debt and related income tax effects. The pro
forma financial information does not give effect to adjustments relating to net
reductions in floorplan interest expense resulting from re-negotiated floorplan
financing agreements or to reductions in salaries and fringe benefits of former
owners or officers of acquired dealerships who have not been retained by Sonic
or whose salaries have been reduced pursuant to employment agreements with
Sonic. The pro forma results have been prepared for comparative purposes only
and are not necessarily
F-11
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS -- (Continued)
indicative of the results of operations that would have occurred had the
acquisitions been completed at the beginning of the periods presented. These
results are also not necessarily indicative of the results of future
operations.
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998
--------------- ---------------
Total revenues ....................... $ 1,855,254 $ 1,996,222
Gross profit ......................... $ 225,374 $ 255,721
Net income ........................... $ 8,198 $ 18,878
Diluted net income per share ......... $ 0.43 $ 0.73
3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN
Inventories consist of the following:
DECEMBER 31,
-----------------------
1997 1998
----------- -----------
New vehicles .................. $118,751 $190,139
Used vehicles ................. 27,990 47,033
Parts and accessories ......... 9,085 16,012
Other ......................... 688 11,787
-------- --------
Total ......................... $156,514 $264,971
======== ========
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 $133.2 million and
$228.2 million at December 31, 1997 and 1998, respectively. The floor plan
notes bear interest payable monthly on the outstanding balance. Prior to
November 15, 1998, the effective interest rate was prime less 0.9%, subject to
certain incentives and other adjustments. Effective November 15, 1998, the
interest rate was reduced to an effective rate of prime less 1.1% subject to
certain incentives and other adjustments (6.65% at December 31, 1998). Total
floor plan interest expense amounted to $6.0 million, $8.0 million and $14.1
million in 1996, 1997 and 1998, respectively. Sonic's floor plan financing
arrangements include an available line of credit for the purchase of used
vehicle inventory. As of December 31, 1998, there was approximately $18.5
million available under Sonic's used vehicle credit line, of which
approximately $17.4 million was unused. Floor plan 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.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
DECEMBER 31,
-----------------------
1997 1998
----------- -----------
Land .................................. $ 4,330 $ 4,330
Building and improvements ............. 11,904 14,085
Office equipment and fixtures ......... 4,102 6,739
Parts and service equipment ........... 4,229 6,495
Company vehicles ...................... 727 1,300
Construction in progress .............. -- 645
-------- --------
Total, at cost ........................ 25,292 33,594
Less accumulated depreciation ......... (6,211) (7,344)
-------- --------
Property and equipment, net ........... $ 19,081 $ 26,250
======== ========
F-12
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-----------------------
1997 1998
----------- -----------
$125.0 million Senior Subordinated Notes bearing interest at 11%, maturing August 1,
2008, net of unamortized discount of $4.3 million....................................... $ -- $120,726
Amounts outstanding under $100 million revolving credit facility with Ford Motor Credit
bearing interest at 2.75% above the 1 month commercial finance paper rate (7.55% at
December 31, 1998) and maturing in March 2001, collateralized by all assets of the
Company ................................................................................ 25,070 8,887
Amounts outstanding under $20.0 million line of credit from NationsBank bearing interest
at 7.75% and maturing February 15, 1998 ................................................ 8,200 --
Mortgage notes payable .................................................................. 4,322 4,091
Other notes payable ..................................................................... 1,632 2,333
------- --------
39,224 136,037
Less current maturities ................................................................. (584) (4,700)
------- --------
Long-term debt .......................................................................... $38,640 $131,337
======= ========
Future maturities of debt at December 31, 1998 are as follows:
Year ending December 31,
1999 ................... $ 4,700
2000 ................... 9,464
2001 ................... 530
2002 ................... 347
2003 ................... 135
Thereafter ............. 120,861
--------
Total .................. $136,037
========
In connection with the sale of real estate at Town and Country Toyota and
Fort Mill Ford in January 1999, the Company repaid all amounts outstanding
under the related mortgages. As a result, the aggregate balance of these
mortgages of $4.1 million as of December 31, 1998 has been included in current
maturities of long-term debt.
SENIOR SUBORDINATED NOTES
On July 31, 1998, Sonic completed its private placement of its 11% senior
subordinated notes in the aggregate principal amount of $125,000,000. The
senior subordinated notes are unsecured, mature on August 1, 2008, and are
redeemable at Sonic's option after August 1, 2003. Interest payments are due
semi-annually on February 1 and August 1, commencing February 1, 1999. The
senior subordinated notes are subordinated to all present and future senior
indebtedness of Sonic, including the Revolving Facility. Redemption prices
during 12 month periods beginning August 1 are 105.500% in 2003, 103.667% in
2004, 101.833% in 2005 and 100% thereafter. Net proceeds after commissions and
discounts, including issuance discount of $937,500, amounted to $120,625,000
and were used to finance certain of Sonic's acquisitions and to repay amounts
outstanding under the Revolving Facility. The discount on the senior
subordinated notes is being amortized over the term of the notes using the
effective interest method. On December 7, 1998, Sonic completed an exchange
offer to exchange the senior subordinated notes for identical senior
subordinated notes registered under the Securities Act of 1933.
The indenture governing the senior subordinated notes contains certain
specified restrictive and required financial covenants. Sonic has agreed not to
pledge its assets to any third party except under certain limited
circumstances. Sonic also has agreed to certain other limitations or
prohibitions concerning the incurrence of other indebtedness, capital stock,
guaranties, asset sales, investments, cash dividends to shareholders,
distributions and redemptions.
F-13
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT -- (Continued)
THE REVOLVING FACILITY
In 1997, Sonic obtained the Revolving Facility with a $75.0 million
borrowing limit from Ford Motor Credit. Effective November 15, 1998, the
aggregate amount available for borrowing under the Revolving Facility was
increased from $75.0 million to $100.0 million. Prior to November 14, 1998,
amounts outstanding under the Revolving Facility bore interest at a fluctuating
per annum rate equal to the "prime" or "base" rate announced by a majority (or
if there was no majority, the median rate announced by three) of the following
banks: The Chase Manhattan Bank, NationsBank, N.A., Citibank, N.A., Bank of
America National Trust and Savings Association and Morgan Guaranty Trust
Company of New York (the "Revolving Facility Prime Rate"). The Revolving
Facility Prime Rate as of November 15, 1998 was 7.75%. Subsequent to November
15, 1998, amounts outstanding under the Revolving Facility bear interest at a
fluctuating per annum rate equal to 2.75% above the 1 month commercial finance
paper rate as reported by the Federal Reserve Board (7.55% at December 31,
1998).
The Revolving Facility will mature in March 2001, unless Sonic 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. On July 31, 1998, all amounts
previously outstanding under the Revolving Facility were repaid with a portion
of the net proceeds of the sale of senior subordinated notes. The outstanding
balance of $8.9 million at December 31, 1998 represents amounts borrowed to
finance certain of Sonic's acquisitions completed in 1998. Additional amounts
to be drawn under the Revolving Facility are to be used for the acquisition of
additional dealerships and to provide general working capital needs of Sonic
not to exceed $10 million.
Sonic agreed under the Revolving Facility not to pledge any of its assets
to any third party (with the exception of currently encumbered real estate and
assets of Sonic's dealership subsidiaries that are subject to previous pledges
or liens). In addition, the Revolving Facility contains certain negative
covenants, including covenants restricting or prohibiting the payment of
dividends, capital expenditures and material dispositions of assets as well as
other customary covenants. Additional negative covenants include specified
ratios of
o total debt to tangible base capital (as defined in the Revolving
Facility),
o current assets to current liabilities,
o earnings before interest, taxes, depreciation and amortization (EBITDA)
and rent less capital expenditures to fixed charges,
o EBITDA to interest expense,
o EBITDA to total debt and
o the current lending commitment under the Revolving Facility to scaled
assets (as defined in the Revolving Facility).
In addition, the loss of voting control over Sonic by Bruton Smith, Scott
Smith, President and Chief Operating Officer, and their spouses or immediate
family members or the failure by Sonic, with certain exceptions, to own all the
outstanding equity, membership or partnership interests in its dealership
subsidiaries will constitute an event of default under the Revolving Facility.
Sonic did not meet the specified total debt to tangible equity ratios required
by the Revolving Facility at March 31, 1998 and at June 30, 1998 and obtained a
waiver with regard to such requirement from Ford Motor Credit. In connection
with Sonic's offering of its senior subordinated notes, Sonic and Ford Motor
Credit amended the Revolving Facility to provide that the senior subordinated
notes (which are subordinated to the Revolving Facility) will be treated as
equity capital for purposes of this ratio. Accordingly, Sonic was in compliance
with this and all other restrictive covenants as of December 31, 1998.
THE SIX-MONTH FACILITY
On August 28, 1997, Sonic 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
F-14
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT -- (Continued)
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.
6. INCOME TAXES
The provision for income taxes consists of the following components:
1996 1997 1998
--------- ------------ -----------
Current:
Federal ............................. $1,857 $1,890 $ 8,145
State ............................... 308 391 756
------ ------ -------
2,165 2,281 8,901
Deferred .............................. (190) (27) 2,252
Change in valuation allowance ......... (51) (5) (70)
------ -------- -------
Total ................................. $1,924 $2,249 $11,083
====== ======= =======
The reconciliation of the statutory federal income tax rate with Sonic's
federal and state overall effective income tax rate is as follows:
1996 1997 1998
----------- ----------- -----------
Statutory federal rate .......... 34.00% 34.00% 35.00%
State income taxes .............. 3.60 3.70 1.46
Miscellaneous ................... 0.71 (0.21) 0.93
----- ----- -----
Effective tax rates ............. 38.31% 37.49% 37.39%
===== ===== =====
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes. Significant
components of Sonic's deferred tax assets and liabilities as of December 31 are
as follows:
1997 1998
---------- -----------
Deferred tax assets:
Allowance for bad debts ................... $ 81 $ 69
Inventory reserves ........................ 40 631
Net operating loss carryforwards .......... 120 517
Other ..................................... 151 746
------ --------
Total deferred tax assets ................. 392 1,963
Valuation allowance ....................... (70) --
------ --------
Deferred tax assets, net .................. 322 1,963
------ --------
Deferred tax liabilities:
Basis difference in property and equipment (799) (1,276)
Basis difference in goodwill .............. (172) (2,757)
Other ..................................... (25) (294)
------ --------
Total deferred tax liability ............... (996) (4,327)
------ --------
Net deferred tax liability ................. $ (674) $ (2,364)
====== ========
The net changes in the valuation allowance against deferred tax assets
were a decrease of $5,000 for the year ended December 31, 1997 and a decrease
of $70,000 for the year ended December 31, 1998. The decrease in 1997 was
related primarily to the expiration of state net operating loss carryforwards.
The decrease in 1998 was primarily related to the implementation of tax
strategies which will allow utilization of the state net operating loss
carryforwards prior to expiration. At December 31, 1998, Sonic had state net
operating loss carryforwards of $7.1 million which will expire primarily
between 1999 and 2003.
F-15
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- (Continued)
Certain of Sonic's dealerships changed their method of accounting for
inventories of new vehicles for income tax purposes from the "last-in,
first-out" method of inventory accounting to the "first-in, first-out" method
of inventory accounting which resulted in an additional income tax liability.
At December 31, 1997 and 1998, this liability was recorded as $7.1 million and
$5.6 million, respectively. The remaining portion of the liability is generally
payable from 1999 to 2002. The current portion of the liability as of December
31, 1998 was $2.4 million and is included in other accrued liabilities.
Certain subsidiaries of Sonic (such subsidiaries together with Sonic and
Sonic Financial Corporation ("SFC") being hereinafter referred to as the "Sonic
Group") have joined with SFC in filing consolidated federal income tax returns
for several years. Under applicable federal tax law, each corporation included
in SFC's consolidated return is jointly and severally liable for any resultant
tax. Under a tax allocation agreement dated as of June 30, 1997, however, Sonic
agreed to pay to SFC, in the event that additional federal income tax is
determined to be due, an amount equal to Sonic's separate federal income tax
liability computed for all periods in which any member of the Sonic Group has
been a member of SFC's consolidated group, less amounts previously recorded by
Sonic. Also pursuant to such agreement, SFC agreed to indemnify Sonic for any
additional amount determined to be due from SFC's consolidated group in excess
of the federal income tax liability of the Sonic Group for such periods. The
tax allocation agreement establishes procedures with respect to tax
adjustments, tax claims, tax refunds, tax credits and other tax attributes
relating to periods ending prior to the time that the Sonic Group shall leave
SFC's consolidated group.
7. RELATED PARTIES
REGISTRATION RIGHTS AGREEMENT
When Sonic acquired Town & Country Ford, Lone Star Ford, Fort Mill Ford,
Town & Country Toyota and Frontier Oldsmobile-Cadillac in 1997, Sonic signed a
Registration Rights Agreement dated as of June 30, 1997 with SFC, Bruton Smith,
Scott Smith and William S. Egan (collectively, the "Class B Registration Rights
Holders"). SFC currently owns 8,881,250 shares of Class B common stock; Bruton
Smith, 2,071,250 shares; Scott Smith, 956,250 shares; and Egan Group, LLC, an
assignee of Mr. Egan (the "Egan Group"), 491,250 shares, all of which are
covered by the Registration Rights Agreement. The Egan Group also owns 32,000
shares of Class A common stock to which the Registration Rights Agreement
applies. If, among other things provided in Sonic's charter, offers and sales
of shares Class B common stock are registered with the Securities and Exchange
Commission, then such shares will automatically convert into a like number of
shares of Class A common stock.
The Class B Registration Rights Holders have certain limited piggyback
registration rights under the Registration Rights Agreement. These rights
permit them to have their shares of Sonic's common stock included in any Sonic
registration statement registering Class A common stock, except for
registrations on Form S-4, relating to exchange offers and certain other
transactions, and Form S-8, relating to employee stock compensation plans. The
Registration Rights Agreement expires in November 2007. SFC is controlled by
Bruton Smith.
THE SMITH GUARANTIES, PLEDGES, ADVANCE AND SUBORDINATED LOAN
In December 1997, Mr. Smith was required by Ford Motor Credit to lend $5.5
million (the "Subordinated Smith Loan") to Sonic to increase Sonic's
capitalization. Ford Motor Credit required the Subordinated Smith Loan as a
condition to increasing the Revolving Facility borrowing limit because the net
offering proceeds from Sonic's November 1997 initial public offering were
significantly less than expected by Sonic and Ford Motor Credit. The
Subordinated Smith Loan bears interest at NationsBank's announced prime rate
plus 0.5% and matures on November 30, 2000. All amounts owed by Sonic to Mr.
Smith under the Subordinated Smith Loan are to be paid after all amounts owed
by Sonic under the Revolving Facility, Sonic's floor plan financing facility
with Ford Motor Credit and Sonic's senior subordinated notes are paid.
F-16
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTIES -- (Continued)
CHARTOWN TRANSACTIONS
Chartown is a general partnership engaged in real estate development and
management. Before Sonic's reorganization before its initial public offering,
Town & Country Ford maintained a 49% partnership interest in Chartown with the
remaining 51% held by SMDA Properties, LLC, a North Carolina limited liability
company ("SMDA"). Mr. Smith owns an 80% direct membership interest in SMDA with
the remaining 20% owned indirectly through SFC. In addition, SFC also held a
demand promissory note for approximately $1.6 million issued by Chartown (the
"Chartown Note"), which was uncollectible due to insufficient funds. As part of
Sonic's 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 then agreed to indemnify
Town & Country Ford for any and all obligations and liabilities, whether known
or unknown, relating to Chartown and Town & Country Ford's ownership of
Chartown.
THE BOWERS VOLVO NOTE
In connection with Volvo's approval of Sonic's acquisition of a Volvo
franchise from Nelson Bowers in 1997, Volvo, among other things, conditioned
its approval upon Nelson Bowers acquiring and maintaining a 20% interest in
Sonic's Chattanooga Volvo subsidiary operating the Volvo franchise. Mr. Bowers
financed all of the purchase price for this 20% interest by issuing a
promissory note (the "Bowers Volvo Note") in favor of Sonic Automotive of
Nevada, Inc., the wholly-owned subsidiary of Sonic that controls a majority
interest in Chattanooga Volvo. The Bowers Volvo Note is secured by Mr. Bowers'
interest in Chattanooga Volvo.
The Bowers Volvo Note is for a principal amount of $900,000 and bears
interest at the lowest applicable federal rate as published by the U.S.
Treasury Department in effect on November 17, 1997. Accrued interest is payable
annually. The operating agreement of Chattanooga Volvo provides that profits
and distributions are to be allocated first to Mr. Bowers to 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. Volvo has removed its requirement that Mr. Bowers maintain his
interest in Chattanooga Volvo. Sonic and Mr. Bowers are in the process of
redeeming his interest in Chattanooga Volvo and satisfying the Bowers Volvo
Note.
TRANSACTIONS WITH MMRT
In 1998, Sonic entered into a Strategic Alliance Agreement (the "Alliance
Agreement") with Mar Mar Realty Trust, a real estate investment trust ("MMRT").
Bruton Smith serves as the chairman of MMRT's board of trustees. Under the
Alliance Agreement, Sonic agreed to refer to MMRT real estate acquisition
opportunities arising with Sonic's dealership acquisitions. In exchange, MMRT
agreed to refer to Sonic dealership acquisition opportunities and to provide
certain real estate development and maintenance services to Sonic. MMRT will
also arrange for property inspections and environmental reports for prospective
dealership properties at Sonic's cost.
In addition, the Alliance Agreement provides for a form of lease to be
used when MMRT leases to Sonic real estate MMRT acquires in the future. Under
terms substantially similar to those of this form lease, Sonic leases or will
lease certain properties from MMR Holdings, LLC ("MMR Holdings"), which is a
limited liability company currently owned by Bruton Smith and SFC that Sonic
expects to be acquired by MMRT.
For acquisitions where the dealership real property is owned by an
unaffiliated third party and is leased to the dealership seller, MMRT will
negotiate with the unaffiliated third party to acquire the dealership real
property. If MMRT is successful in acquiring the dealership real property and
Sonic completes its acquisition of the dealership business, then Sonic and MMRT
will enter into a lease agreement regarding the dealership real property using
the Alliance Agreement's lease form.
Subsequent to year end, Sonic has sold to MMR Holdings the Town and
Country Toyota real estate for approximately $5.7 million and the Fort Mill
Ford real estate for approximately $4.6 million and entered into an agreement
with MMRT to lease back the real estate over a term of 10 years. The gain on
the sale has been deferred and will be amortized against the rent expense over
the term of the lease.
F-17
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTIES -- (Continued)
CERTAIN DEALERSHIP LEASES
Certain properties leased by Sonic's dealerships are, or since the
beginning of the last fiscal year were, owned by Sonic's officers or directors
or their affiliates. These leases contain terms comparable to, or more
favorable to Sonic than, terms that would be obtained from unaffiliated third
parties. Many of these properties as well as others are now owned or are under
contract to be acquired by MMR Holdings, which Sonic expects will become a
subsidiary of MMRT.
Sonic presently leases 36 properties for 27 of its dealerships from MMR
Holdings 34 of which were entered into in 1998. Sonic's directors have approved
these "triple net leases," which require Sonic to pay all costs of operating
the properties, as well as all taxes, utilities, insurance, repairs,
maintenance and other property related expenses. These leases generally provide
Sonic with options to renew the lease for two additional five year terms after
the expiration of the initial lease term. The rental rates indicated in Note 10
reflect minimum or "base" annual rents payable by Sonic in the first year of
the applicable leases. Such rental rates generally are subject to increases
either at renewal or every five years based on factors such as increases in the
consumer price index or an evaluation of fair market rents.
OTHER RELATED PARTY TRANSACTIONS
o Town & Country Ford and Lone Star Ford had each made several non-interest
bearing advances to SFC, a company controlled by Bruton Smith. In
preparation for Sonic's 1997 reorganization, a demand promissory note by SFC
evidencing $2.1 million of these advances was canceled in June 1997 in
exchange tor the redemption of certain shares of the capital stock of Town &
Country Ford held by SFC. In addition, a demand promissory note by SFC
evidencing of $0.5 million of these advances was canceled in June 1997
pursuant to a dividend.
o Sonic had amounts receivable from affiliates of $1.0 million and $1.5
million at December 31, 1997 and 1998, respectively. Of this amount,
$622,000 relates to advances made by Sonic to SFC at December 31, 1997 and
$1.5 million relates to advances made by Sonic to SFC and MMRT at December
31, 1998. The remaining $425,000 at December 31, 1997 primarily relates to
receivables from executives of Sonic who were former owners of certain
dealerships acquired. These 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.
o As part of the purchase price in connection with Sonic's acquisition of the
Bowers Automotive Group in November 1997, Sonic issued its promissory note
in the principal amount of $4.0 million in favor of Nelson Bowers (the
"Bowers Acquisition Note"). The Bowers Acquisition Note is payable in 28
equal quarterly installments and bears interest at the prime rate less 0.5%.
The balance outstanding under this Note was $4.0 million at December 31,
1997, the current portion of which was $445,000. The balance outstanding
under this Note at December 31, 1998 was $3.4 million, the current portion
of which was $572,000.
o Town and Country Toyota has an amount payable to Bruton Smith, which payable
totals approximately $0.8 million as of December 31, 1997 and $0.7 million
as of December 31, 1998. This loan bears interest at 8.75% per annum and is
classified as non-current based on the expected repayment dates.
o Certain subsidiaries of Sonic (such subsidiaries together with Sonic and SFC
are referred to as the "Sonic Group") filed consolidated federal income tax
returns with SFC for several years before our reorganization. These joint
filings were for 1996 and for the period ending on June 30, 1997. Under
applicable federal tax law, each corporation included in SFC's consolidated
return is jointly and severally liable for any resultant tax. Under a tax
allocation agreement dated as of June 30, 1997, however, Sonic agreed to pay
to SFC, in the event that additional federal income tax is determined to be
due, an amount equal to Sonic's separate federal income tax liability
computed for all periods in which any member of the Sonic Group has been a
member of SFC's consolidated group less amounts previously recorded by
Sonic. Also pursuant to such agreement, SFC agreed to indemnify Sonic for
any additional amount determined to be due from SFC's consolidated group in
excess of the federal income tax liability of the Sonic Group for such
periods. The tax allocation agreement establishes procedures with respect to
tax adjustments, tax claims, tax refunds, tax credits and other tax
attributes relating to periods ending prior to the time that the Sonic Group
shall leave SFC's consolidated group.
F-18
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTIES -- (Continued)
o Sonic acquired Town & Country Ford, Lone Star Ford, Town & Country Toyota,
Fort Mill Ford and Frontier Oldsmobile-Cadillac in its 1997 reorganization
pursuant to four separate stock subscription agreements. These subscription
agreements allowed the acquisition of 100% of the capital stock or
membership interests, as the case may be, of each of the five dealerships
from Sonic Financial, Bruton Smith, the Egan Group (an assignee of Mr. Egan)
and Bryan Scott Smith in exchange for certain amounts of Sonic's Class B
Common Stock.
8. CAPITAL STRUCTURE, PUBLIC OFFERING OF COMMON STOCK, AND PER SHARE DATA
PREFERRED STOCK -- In 1997, Sonic authorized 3 million shares of "blank
check" preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. No preferred shares
were issued and outstanding as of December 31, 1997.
In March 1998, the Board of Directors designated 300,000 shares of
preferred stock as Class A convertible preferred stock, par value $0.10 per
share, the "Preferred Stock", which was divided into 100,000 shares of Series I
Preferred Stock, 100,000 shares of Series II Preferred Stock, and 100,000
shares of Series III Preferred Stock.
The Preferred Stock has a liquidation preference of $1,000 per share. Each
share of Preferred Stock is convertible, at the option of the holder, into that
number of shares of Class A common stock as is determined by dividing $1,000 by
the average closing price for the Class A common stock on the NYSE for the 20
days preceding the date of determination of the shares of Preferred Stock (the
"Market Price"). Conversion of Series II Preferred Stock is subject to certain
adjustments which have the effect of limiting increases and decreases in the
value of the Class A common stock receivable upon conversion by 10% of the
original value of the shares of Series II Preferred Stock. Conversion of Series
III Preferred Stock is subject to certain adjustments which have the effect of
limiting increases in the value of Class A common stock receivable upon
conversion by 10% of the original value of the shares of Series III Preferred
Stock.
The Preferred Stock is redeemable at Sonic's option at any time after the
date of issuance. The redemption price of the Series I Preferred Stock is
$1,000 per share. The redemption price for the Series II Preferred Stock and
Series III Preferred Stock is as follows: (i) prior to the second anniversary
of the date of issuance, the redemption price is the greater of $1,000 per
share or the aggregate Market Price of the Class A common stock into which it
could be converted at the time of redemption, and (ii) after the second
anniversary of the date of issuance, the redemption price is the aggregate
Market Price of the Class A common stock into which it could be converted at
the time of redemption.
Each share of Preferred Stock entitles its holder to a number of votes
equal to that number of shares of Class A common stock into which it could be
converted as of the record date for the vote. Holders of preferred stock are
entitled to participate in dividends payable on the Class A common stock on an
"as-if-converted" basis. The Preferred Stock has no preferential dividends.
During 1998, Sonic issued 14,406.3 shares of Series I Preferred Stock,
10,545.5 shares of Series II Preferred Stock and 6,273 shares of Series III
Preferred Stock. These shares were recorded at their estimated fair value on
the date of issuance. In December 1998, 6,241.5 shares of Series II Preferred
Stock and 2,313 shares of Series III Preferred Stock having an estimated fair
value of approximately $8.9 million were converted into 632,244 shares of Class
A common stock. As of December 31, 1998 there were 14,406.3 shares of Series I
Preferred Stock, 3,813 shares of Series II Preferred Stock and 3,960 shares of
Series III Preferred Stock issued and outstanding.
CLASS B COMMON STOCK -- Each share of Class B common stock is convertible
into one share of Class A common stock either upon the voluntary conversion of
the Class B common stock at the option of the holder, or automatically upon the
occurrence of certain events, as provided in Sonic's charter. Holders of Class
B common stock are entitled to ten votes per share, except in certain
circumstances.
STOCK SPLIT -- All share and per share amounts included in the
accompanying consolidated financial statements for all periods presented have
been adjusted to reflect a 2 for 1 stock split of the Class A common stock and
Class B common stock effective January 25, 1999.
PUBLIC OFFERING OF COMMON STOCK -- Sonic completed an initial public
offering of 10.0 million shares of its Class A common stock on November 12,
1997 at a price of $6 per share. Net proceeds of the initial public offering of
F-19
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CAPITAL STRUCTURE, PUBLIC OFFERING OF COMMON STOCK, AND PER SHARE
DATA -- (Continued)
approximately $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.
WARRANTS -- In connection with Sonic's acquisitions, Sonic has issued
warrants to purchase 242,782 shares of Class A common stock at exercise prices
ranging from $6.00 per share to $11.27 per share. The warrants expire on
various dates from January 15, 2003 to November 30, 2003. Sonic has recorded
the issuance of such warrrants at their estimated fair value on the date of
issuance.
PER SHARE DATA -- The calculation of diluted net income per share
considers the potential dilutive effect of options and shares under Sonic's
stock compensation plans, Class A common stock purchase warrants, and Class A
convertible preferred stock. The following table illustrates the dilutive
effect of such items on EPS:
FOR THE TWELVE MONTHS ENDED FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------------- ------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- ----------- ---------- -------- ----------
(DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
BASIC EPS .......................... $3,702 13,898 $ 0.27 $18,557 22,852 $ 0.81
====== ======
EFFECT OF DILUTIVE SECURITIES
Stock compensation plans ........... -- -- -- 630
Warrants ........................... -- -- -- 32
Convertible Preferred Stock ........ -- -- -- 1,456
------ ------ ------- ------
DILUTED EPS ........................ $3,702 13,898 $ 0.27 $18,557 24,970 $ 0.74
====== ====== ====== ======= ====== ======
Options to purchase 1,176,000 shares of Class A common stock at $6.00 per
share were outstanding in November and December of 1997, but were not included
in the computation of diluted EPS because the options were anti-dilutive.
9. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of Sonic are eligible to participate in
a 401(k) plan. Contributions by Sonic to the plan were not significant in any
period presented.
STOCK OPTION PLANS
Sonic currently has two option plans. In October 1997, the Board of
Directors adopted the Sonic Automotive, Inc. 1997 Stock Option Plan (the "Stock
Option Plan") in order to attract and retain key personnel. Under the Stock
Option Plan, options to purchase up to an aggregate of 2.25 million shares of
Class A common stock may be granted to key employees of Sonic and its
subsidiaries and to officers, directors, consultants and other individuals
providing services to Sonic. The options generally are granted at the fair
market value of Sonic's Class A common stock at the date of grant, vest over a
three year period, are exercisable upon vesting and expire ten years from the
date of grant.
In March 1998, the Board of Directors adopted the Sonic Automotive, Inc.
Formula Stock Option Plan for Independent Directors (the "Directors Plan") for
the benefit of Sonic's outside directors, subject to shareholder approval. The
Directors Plan was approved by the stockholders of Sonic at its annual meeting
of stockholders on December 3, 1998. The plan authorized options to purchase up
to an aggregate of 600,000 shares of Class A common stock. Under the plan, each
outside director shall be awarded on or before March 31st of each year an
option to purchase 20,000 shares at an exercise price equal to the fair market
value of the Class A common stock at the date of the award. Options granted
under the Directors Plan become exercisable six months, and expire ten years,
after their date of grant.
F-20
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS -- (Continued)
A summary of the status of Sonic's stock option plans as of December 31,
1997 and 1998 and changes during the years ended on those dates is presented
below.
DECEMBER 31, 1997 DECEMBER 31, 1998
---------------------------------------- -----------------------------------------
EXERCISE WEIGHTED- EXERCISE WEIGHTED-
NUMBER OF PRICE AVERAGE NUMBER OF PRICE AVERAGE
OPTIONS PER SHARE EXERCISE PRICE OPTIONS PER SHARE EXERCISE PRICE
----------- ----------- ---------------- ----------- ------------- ---------------
Outstanding at beginning of year -- $ -- $ -- 1,176 $ 6.00 $ 6.00
Granted-priced at fair value 1,176 6.00 6.00 1,433 7.25-9.19 8.61
Exercised -- -- -- (72) 6.00 6.00
----- ------ ----- ----- ------------ --------
Outstanding at end of year 1,176 $ 6.00 $ 6.00 2,537 $ 6.00-9.19 $ 7.48
===== ======= ====== ===== ============ ========
Of the options outstanding as of December 31, 1998, 486,000 are currently
exercisable and have a weighted average exercise price of $3.53 per share. The
weighted average remaining contractual life of the options outstanding at
December 31, 1998 is 7.78 years. The weighted average fair value of options
granted was $2.89 per share in 1997 and $4.63 per share in 1998.
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 and 61% in 1998; risk-free interest rate of
5.6% in 1997 and 4.6% in 1998; and expected lives of 5 years in 1997 and 1998.
The model reflects that no dividends were declared in 1997 and 1998 and assumes
that no dividends will be declared in the future.
EMPLOYEE STOCK PURCHASE PLAN
In October 1997, the Board of Directors and stockholders of Sonic adopted
the Sonic Automotive, Inc. Employee Stock Purchase Plan (the "ESPP"). Under the
terms of the ESPP, on January 1 of each year all eligible employees electing to
participate will be granted an option to purchase shares of Class A common
stock. Sonic's Compensation Committee will annually determine the number of
shares of Class A common stock available for purchase under each option. The
purchase price at which Class A common stock will be purchased through the ESPP
will be 85% of the lesser of (i) the fair market value of the Class A common
stock on the applicable grant date and (ii) the fair market value of the Class
A common stock on the applicable exercise date. The grant dates are January 1
of each year plus any other interim dates designated by the Compensation
Committee. The exercise dates are the last trading days on the New York Stock
Exchange for March, June, September and December, plus any other interim dates
designated by the Compensation Committee. Options will expire on the last
exercise date of the calendar year in which granted.
On March 20, 1998, the Board of Directors, pursuant to Sonic's ESPP,
increased the authorized shares from 300,000 to 600,000 and issued options
exercisable for 300,000 shares of Class A common stock granting 620 shares per
participant participating in the ESPP. This increase in the number of options
issuable under the ESPP was approved by the stockholders of Sonic at its annual
meeting of stockholders on December 3, 1998. Under the ESPP, Sonic issued
180,730 shares to employees in 1998 at a purchase price of $4.10 per share. The
weighted average fair value of shares granted under the ESPP was $1.97 per
share in 1998.
The fair value of the employees' purchase rights are estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: expected volatility of 61%; risk-free interest rate of 4.6%; and
an expected life of one year. The model reflects that no dividends were
declared in 1997 and 1998 and assumes that no dividends will be declared in the
future.
Sonic has adopted the disclosure-only provisions of SFAS No. 123. No
compensation cost has been recognized for Sonic's stock-based compensation
plans. Had compensation cost for the stock-based compensation plans been
determined based on their fair value as prescribed by SFAS No. 123, Sonic's pro
forma net income and diluted net income per share would have been $3.6 million
and $0.26, respectively for 1997 and $16.8 million and $0.67, respectively for
1998.
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS -- (Continued)
NONQUALIFIED EMPLOYEE STOCK PURCHASE PLAN
In December 1998, the Board of Directors of Sonic adopted the Sonic
Automotive, Inc. Nonqualified Employee Stock Purchase Plan (the "Nonqualified
ESPP"). The purpose of the Nonqualified ESPP is to provide options to purchase
Class A common stock to employees of Sonic's subsidiaries that are not eligible
to participate in the ESPP; employees of Sonic who are eligible to participate
in the ESPP are not eligible to participate in the Nonqualified ESPP. Under the
terms of the Nonqualified ESPP, on January 1 of each year all employees
eligible to participate in the Nonqualified ESPP and who elect to participate
in the Nonqualified ESPP will be granted an option to purchase shares of Class
A common stock. Sonic's Compensation Committee will annually determine the
number of shares of Class A common stock available for purchase under each
option.
The purchase price at which Class A common stock will be purchased through
the Nonqualified ESPP will be 85% of the lesser of (i) the fair market value of
the Class A common stock on the applicable grant date and (ii) the fair market
value of the Class A common stock on the applicable exercise date. The grant
dates are January 1 of each year plus any other interim dates designated by the
Compensation Committee. The exercise dates are the last trading days on the New
York Stock Exchange for March, June, September and December, plus any other
interim dates designated by the Compensation Committee. Options will expire on
the last exercise date of the calendar year in which granted. In adopting the
Nonqualified ESPP in December 1998, the Board of Directors authorized options
to be granted under the Nonqualified ESPP for 300,000 shares of Class A common
stock. These options may be issued effective January 1, 1999.
10. COMMITMENTS AND CONTINGENCIES
FACILITY LEASES
Certain properties leased by Sonic's dealerships are, or since the
beginning of the last fiscal year were, owned by Sonic's officers or directors
or their affiliates. These leases contain terms comparable to, or more
favorable to Sonic than, terms that would be obtained from unaffiliated third
parties. Many of these properties as well as others are not owned or are under
contract to be acquired by MMR Holdings, which Sonic expects will become a
subsidiary of MMRT. Minimum future rental payments required under noncancelable
operating leases are as follows:
RELATED PARTIES THIRD PARTIES TOTAL
Year ending December 31, ----------------- --------------- ----------
1999 ..................... $ 13,660 $ 2,820 $ 16,480
2000 ..................... 13,595 2,479 16,074
2001 ..................... 13,257 2,456 15,713
2002 ..................... 13,147 2,123 15,270
2003 ..................... 13,091 1,997 15,088
Thereafter ............... 60,963 7,645 68,608
-------- ------- --------
Total .................... $127,713 $19,520 $147,233
======== ======= ========
Total rent expense for the years ended December 31, 1996, 1997, and 1998
was approximately, $870,000, $2.4 million and $10.5 million, respectively. Of
these amounts, $870,000, $1.3 million and $7.5 million, respectively, were paid
to related parties.
OTHER CONTINGENCIES (UNAUDITED)
On March 1, 1999, Frank McGough filed a civil action in the Circuit Court
of Montgomery County, Alabama against Sonic, its subsidiary, Capitol Chevrolet
and Imports, Inc. and certain other defendants, which is Civil Action No. CV-
1999-707R. This suit arises in connection with Sonic's acquisition of Capitol
Chevrolet and Imports from Mr. McGough. In the suit, Mr. McGough alleges that
he is entitled to a larger post-closing payment of funds held in escrow than
Sonic has shown on the closing balance sheet prepared in connection with the
acquisition, that the closing balance sheet was delivered late, that the
closing balance sheet was improperly prepared, and that certain
respresentations were made to him concerning the post-closing release of funds
from escrow and the closing balance sheet. The complaint alleges causes of
action for (1) declaratory judgment concerning the closing balance sheet and
release of funds from escrow; and (2)
F-22
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES -- (Continued)
rescission of Sonic's acquisition through merger of Capitol Chevrolet and
Imports. Sonic believes that this suit is without merit and intends to
vigorously defend this action.
Sonic is involved in various other legal proceedings. Management believes
based on advice of counsel that the outcome of such proceedings will not have a
materially adverse effect on Sonic's financial position or future results of
operations and cash flows.
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 1997 and
1998. 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 initial public offering.
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 ............................. $ 10,842 $ 12,790 $ 14,755 $ 24,611
Operating income ......................... $ 2,286 $ 3,417 $ 3,469 $ 5,734
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 ............. $ 0.07 $ 0.07
Year Ended December 31, 1998:
Total revenues ........................... $ 263,979 $ 386,132 $ 504,110 $ 449,480
Gross profit ............................. $ 34,158 $ 48,264 $ 63,974 $ 61,046
Operating income ......................... $ 7,426 $ 12,779 $ 15,646 $ 16,854
Income before taxes ...................... $ 3,474 $ 7,430 $ 8,876 $ 9,860
Net income ............................... $ 2,136 $ 4,668 $ 5,426 $ 6,327
Diluted net income per share ............. $ 0.09 $ 0.20 $ 0.21 $ 0.24
12. SUBSEQUENT EVENTS (UNAUDITED)
On February 4, 1999, Sonic filed a preliminary registration statement for
the issuance of approximately 7.0 million shares of Class A common stock. Sonic
expects to complete this public offering in the second quarter of 1999.
F-23