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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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 $252,545,000 based upon the
closing sales price of the registrant's Class A common stock on March 14, 2000
of $8.625 per share. As of March 14, 2000, there were 31,244,512 shares of
Class A common stock, par value $.01 per share, and 12,250,000 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").
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held June 5, 2000, are
incorporated by reference into Part III of this Form 10-K.
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FORM 10-K TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business .................................................................................. 4
Item 2. Properties ................................................................................ 16
Item 3. Legal Proceedings ......................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 20
Item 6. Selected Financial Data ................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 28
Item 8. Financial Statements and Supplementary Data ............................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 29
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 30
Item 11. Executive Compensation .................................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 30
Item 13. Certain Relationships and Related Transactions ............................................ 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 31
SIGNATURES ....................................................................................... 35
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. This Annual Report on Form 10-K contains statements that
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These forward-looking statements are not historical facts but only
predictions and generally can be identified by use of statements that include
words such as "believe," "expect," "anticipate," "intend," "plan," "foresee" or
other words or phrases of similar import. Similarly, statements that describe
our objectives, plans or goals are also forward-looking statements. We intend
such forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Litigation Securities
Reform Act of 1995, and we are including this statement for purposes of
complying with these safe harbor provisions. These statements appear in a
number of places in this Annual Report on Form 10-K and include statements
regarding our intent, belief or current expectations, or those of our directors
or officers, with respect to, among other things:
o our potential acquisitions;
o trends in our industry;
o our financing plans;
o the effect of the Internet on our business and our ability to implement
our Internet business strategy;
o trends affecting our financial condition or results of operations; and
o our business and growth strategies.
2
You are cautioned that these forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, and that actual
results may differ materially from those projected in the forward-looking
statements as a result of various factors. Among others, factors that could
materially adversely affect actual results and performance include:
o local and regional economic conditions in the areas we serve;
o the level of consumer spending;
o our relationships with manufacturers;
o high competition;
o site selection and related traffic and demographic patterns;
o inventory management and turnover levels;
o the effect of the Internet on our business;
o realization of cost savings; and
o our success in integrating recent and potential future acquisitions.
3
PART I
ITEM 1. BUSINESS.
Sonic Automotive, Inc. was incorporated in the State of Delaware in
February 1997. We are the second largest automotive retailer in the United
States, as measured by total revenue, currently operating 172 dealership
franchises and 30 collision repair centers in 13 states. We own and operate
franchises for 31 different brands of cars and light trucks providing
comprehensive services including sales of both new and used cars and light
trucks, replacement parts and vehicle maintenance, warranty, paint and repair
services. We also arrange extended warranty contracts and financing and
insurance ("F&I") for our automotive customers. Our growth in operations has
been strategically focused on high growth metropolitan markets, predominantly
in the Southeast, Southwest and California, that on average are experiencing
population growth that exceeds the national average.
EASTERN DIVISION
o Atlanta
o Baltimore
o Birmingham
o Charleston
o Charlotte
o Chattanooga
o Columbia
o Columbus
o Daytona Beach
o Fort Myers
o Greenville/Spartanburg
o Mobile/Pensacola
o Montgomery
o Nashville
o Tampa/Clearwater
o Washington D.C.
CENTRAL DIVISION
o Dallas
o Houston
o Tulsa
WESTERN DIVISION
o Las Vegas
o Los Angeles
o San Diego
o San Francisco
o San Jose/Silicon Valley
Our leading new vehicle brands accounted for our 1999 revenue as depicted
in the following chart:
[Chart appears here with the following plot points:]
Percentage of New Vehicle Revenue
for Year Ended December 31, 1999
Ford 23.2%
Chrysler (Chrysler, Plymouth, Jeep, Dodge) 14.0%
Honda 6.7%
General Motors (Buick, Cadillac,
Chevrolet, Oldsmobile, Pontiac, GMC) 13.5%
BMW 9.5%
Toyota 7.9%
Nissan 3.1%
Lexus 3.8%
Other 14.1%
Volvo 4.2%
In addition to these brands we also own and operate dealerships
representing the following other brands:
o Acura o Isuzu o Mercury o Range Rover
o Audi o KIA o Mitsubishi o Subaru
o Hyundai o Lincoln o Porsche o Volkswagen
o Infiniti o Mercedes
Each of our dealership locations throughout our metropolitan markets
provides similar products and services, including (1) new car sales, (2) used
car sales, (3) parts, service and repair, and (4) finance and insurance
services. As compared to automotive manufacturers, we and other automotive
retailers exhibit relatively low earnings volatility. This is primarily due to
the differing expense structures between automotive manufacturers and
retailers. Roughly 70% of manufacturers' expenses are fixed due to factory
overhead and union contracts, whereas only approximately 32% of our expenses
for the year ended December 31, 1999 were fixed (primarily rent and salaries).
The majority of our variable expenses relates to sales commissions, advertising
and floor plan interest expense, and therefore can be adjusted as demand
patterns change. We believe the diversity of our revenue sources and
profitability as a full service automotive dealership and our flexible expense
structure should serve to mitigate the effects of economic cycles and seasonal
influences. The following charts depict the diversity of our revenue and gross
profit for the year ended December 31, 1999:
4
[Charts appear here with the following plot points:]
Revenue Gross Profit
Parts, Service & Repair 11% 34%
New Cars 59% 36%
F&I 2% 15%
Used Cars 28% 15%
BUSINESS STRATEGY
o FURTHER DEVELOP STRATEGIC MARKETS. We intend to continue to capitalize
on the ongoing consolidation of the highly fragmented automotive retailing
industry. We generally seek to acquire larger, well managed multiple franchise
dealerships or multiple dealership groups located in metropolitan or high
growth suburban markets; and smaller, single franchise dealerships that will
allow us to capitalize upon professional management practices and provide
greater breadth of products and services in our markets. We believe that
attractive acquisition opportunities continue to exist for dealership groups
with significant capital and experience in identifying, acquiring and
professionally managing dealerships. The automotive retailing industry is still
highly fragmented, with the largest 100 dealer groups generating less than 10%
of the industry's $650 billion of total automobile sales in 1998 and
controlling less than 5% of all new vehicle dealerships in the United States.
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. We intend to acquire dealerships that have
underperformed the industry average but carry attractive product lines or have
attractive locations and would immediately benefit from our professional
management.
o INCREASE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. We continue to
pursue opportunities to increase our sales of higher-margin products and
services by expanding the following:
RETAIL USED VEHICLES: Retail used vehicle sales typically generate higher
gross margins than new vehicle sales due to limited comparability among
used vehicles and the somewhat subjective nature of their valuation. Our
experience indicates that there are opportunities at acquired dealerships
to improve all aspects of used vehicle operations and used vehicle
inventory control. Retail used vehicle unit sales as a percentage of our
new and used vehicle unit sales increased to 37.4% for the year ended
December 31, 1999, from 37.2% for the year ended December 31, 1998. On a
same store basis, retail used vehicle unit sales increased 12.9% to 24,560
for the year ended December 31, 1999 as compared to the same period in
1998.
FINANCE AND INSURANCE: We currently offer a wide range of nonrecourse
financing, leasing and insurance products to our customers as each sale of
a new or used vehicle provides us the opportunity to earn financing fees
and to sell extended warranty service contracts. We believe there are
opportunities at acquired dealerships to increase earnings from the sale of
financing and insurance as well as warranties. As a result of our size and
scale, we have negotiated increased commissions on the origination of
customer vehicle financing and insurance policies, which resulted in
incremental F&I commissions of $5.6 million for the year ended December 31,
1999. On a per vehicle basis, our F&I revenue has increased 27.2% to $654.
On a same store basis, F&I revenue has increased 41% to $44.1 million for
the year ended December 31, 1999 as compared to the same period in 1998.
SERVICE AND PARTS: Each of our dealerships offers a fully integrated
service and parts department. We believe there are opportunities to
increase the number of service customers we retain at our dealerships
through continued emphasis on customer service. On a same store basis,
service and parts revenue has increased 10.1% to $150.7 million for the
year ended December 31, 1999 as compared to the same period in 1998.
o UTILIZE THE INTERNET TO DRIVE SALES. We intend to continue to utilize
technology and services available to customers over the Internet to drive
sales. We intend to further distinguish our SonicAutomotive.com web site by
expanding capabilities to provide effectively captive referral leads to our
dealership network. To drive significant customer traffic to our site, we plan
to incorporate our SonicAutomotive.com URL into our $75 million annual print,
radio and television advertising efforts for our dealerships.
5
Our acquisition of FirstAmerica enhanced our Internet presence with the
addition of AnyAuto.com. We intend to reposition the AnyAuto.com web site into
our own on-line direct service to compete with on-line auto brokers such as
CarsDirect.com. Our ability to source new vehicles from our extensive network
of 172 dealership franchises provides a substantial competitive advantage over
on-line auto brokers who must purchase new vehicles at a mark-up from a
franchised dealership. We offer the additional advantage of providing service,
warranty and extensive financing alternatives to our AnyAuto.com customers,
further differentiating our capabilities from on-line auto brokers.
While we believe the established local "bricks and mortar" dealership will
continue to serve as the primary point of purchase of automobiles for consumers
for the foreseeable future, we believe the Internet can be a low-cost source of
customer leads for our dealers and an effective means of providing marketing
information and other services to existing and potential customers.
o EMPHASIZE EXPENSE CONTROL. We continually focus on controlling expenses
and expanding margins at the dealerships we acquire and integrate into our
organization. Approximately 68% of our operating costs for the year ended
December 31, 1999 were variable. We are able to adjust these expenses as the
operating or economic environment impacting our dealerships changes. We manage
these variable costs, such as advertising (9% of operating costs) and
compensation (46%) 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. Our selling,
general and administrative expense as a percentage of revenue was 9.8% for the
year ended December 31, 1999 compared to an average of 10.6% for the other four
largest publicly-traded automobile retailers.
o TRAIN, DEVELOP AND MOTIVATE QUALIFIED MANAGEMENT. We believe that our
well-trained dealership personnel are key to our long-term prospects. We
require all of our employees, from service technicians to regional vice
presidents, to participate in in-house training programs. We believe that our
comprehensive training of all employees and professional, multi-tiered
management structure provide us with a competitive advantage over other
dealership groups. This training and organizational structure provides
high-level supervision over the dealerships, accurate financial reporting and
the ability to maintain effective controls as we expand. In order to motivate
management, we employ an incentive compensation program for each officer, vice
president and dealer operator, a portion of which is provided in the form of
Sonic stock options with additional incentives based on the performance of
individual profit centers. We believe that this organizational structure,
together with the opportunity for promotion within our large organization and
for equity participation, serve as a strong motivation for our employees.
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 CSI levels (which vary
by manufacturer) are achieved by a dealer. In addition, all manufacturers
consider CSI scores in approving acquisitions. In order to keep management
focused on customer satisfaction, we include CSI results as a component of our
incentive compensation programs.
DEALERSHIP MANAGEMENT
Sonic manages its business based on individual dealership operations.
Operations of the dealerships are overseen by Regional Vice Presidents, who
report to the Division Vice President for a particular division. Our divisions
consist of the Eastern Division, the Central Division and the Western Division,
with each of the Division Vice Presidents reporting to the Executive Vice
President of Retail Operations.
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.
Each dealer operator is complemented by a team which includes two senior
managers who aid in the operation of the dealership. The general sales manager
is primarily responsible for the operations, personnel, financial performance
and customer satisfaction performance of the new vehicle sales, used vehicle
sales, and finance and insurance departments. The parts and service director is
primarily responsible for the operations, personnel, financial and customer
satisfaction performance of the service, parts and collision repair departments
(if applicable). Each of the departments of the dealership typically has a
manager who reports to the general sales manager or parts and service director.
6
Sonic's dealer operators are also supported by National Directors of Fixed
Operations, Field Operations, Sales and Finance & Insurance, respectively. Each
of these National Directors review the operations and practices of our
dealerships in these specialized areas and assist the dealer operators in
implementing organizational best practices. The National Directors of Fixed
Operations and of Finance & Insurance are each supported by Regional Directors
specializing in these disciplines.
NEW VEHICLE SALES
As of December 31, 1999, Sonic sold 31 brands of cars and light trucks.
The products have a broad range of prices from lower priced, or economy
vehicles, to luxury vehicles. We believe that our brand, product and price
diversity reduces the risk of changes in customer preferences, product supply
shortages and aging products. Approximately 23.6% of new vehicle sales during
the year ended December 31, 1999 were luxury brands (for example, Mercedes,
Lexus, BMW, Cadillac, Infiniti and Volvo).
The following table presents information with respect to Sonic's new
vehicle sales:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
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(DOLLARS IN THOUSANDS)
Unit sales ............ 15,715 41,592 79,294
Sales revenue ......... $ 343,941 $ 962,939 $ 1,968,514
Gross profit .......... $ 26,427 $ 75,494 $ 161,205
Gross margin .......... 7.7% 7.8% 8.2%
New vehicle sales include retail lease transactions and lease-type
transactions, both of which are arranged by Sonic. New vehicle leases generally
have short terms. Lease customers, therefore, return to the new vehicle market
more frequently. Leases also provide a source of late-model, generally low
mileage vehicles for our used vehicle inventory. Generally, leased vehicles are
under warranty for the entire lease term, which allows us to provide repair
service to the lessee throughout the term of the lease.
USED VEHICLE SALES
Sonic sells a broad variety of makes and models of used cars, vans, trucks
and sport utility vehicles. Used vehicles are obtained by us through customer
trade-ins, at "closed" auctions which may be attended only by new vehicle
dealers and which offer off-lease, rental and fleet vehicles, and at "open"
auctions which offer repossessed vehicles and vehicles sold by other dealers.
We sell our used vehicles to retail customers and, in the case of vehicles in
poor condition or vehicles which remain unsold for a specified period of time,
to other dealers or wholesalers. Sales to other dealers or wholesalers are
frequently close to or below cost and therefore negatively affect our gross
margin on used vehicle sales.
The following table sets forth information on Sonic's used vehicle sales:
YEAR ENDED DECEMBER 31,
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1997 1998 1999
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(DOLLARS IN THOUSANDS)
Retail unit sales ............... 6,712 24,591 47,345
Retail sales revenue ............ $85,132 $324,740 $684,560
Retail gross profit ............. $ 7,294 $ 34,826 $ 72,627
Retail gross margin ............. 8.6% 10.7% 10.6%
Wholesale unit sales ............ 7,287 21,886 39,834
Wholesale sales revenue ......... $38,785 $119,351 $250,794
Wholesale gross profit .......... $ (599) $ (1,166) $ (3,734)
Wholesale gross margin .......... (1.5)% (1.0)% (1.5)%
Total unit sales ................ 13,999 46,477 87,179
Total revenue ................... $123,917 $444,091 $935,354
Total gross profit .............. $ 6,695 $ 33,660 $ 68,893
Total gross margin .............. 5.5% 7.6% 7.4%
7
SERVICE AND PARTS 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.
The following table sets forth information regarding Sonic's service and
parts sales:
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------- -------------
(DOLLARS IN THOUSANDS)
Sales revenue ......... $ 51,033 $ 146,456 $ 333,161
Gross profit .......... $ 18,118 $ 62,152 $ 139,738
Gross margin .......... 35.5% 42.4% 41.9%
COLLISION REPAIR
As of December 31, 1999, Sonic operated collision repair centers, or body
shops, at 29 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:
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
(DOLLARS IN THOUSANDS)
Sales revenue ......... $ 6,504 $ 16,204 $ 31,023
Gross profit .......... $ 3,092 $ 8,114 $ 14,933
Gross margin .......... 47.5% 50.0% 48.1%
FINANCE AND INSURANCE
Sonic offers its customers a wide range of financing and leasing
alternatives for the purchase of vehicles. In addition, as part of each sale,
we also offer customers credit life, accident and health and disability
insurance to cover the financing cost of their vehicle, as well as warranty or
extended service contracts.
We assign our vehicle financing contracts and leases to other parties,
instead of directly financing sales, which reduces our exposure to loss from
financing activities. Sonic receives a commission from the lender for
originating and assigning the loan or lease but is assessed a chargeback fee by
the lender if a loan is canceled, in most cases, within 90 days of making the
loan. Early cancellation can result from early repayment because of refinancing
of the loan, the sale or trade-in of the vehicle, or default on the loan. We
establish an allowance to absorb estimated chargebacks and refunds. Finance and
insurance commission revenue is recorded net of such chargebacks. Commission
expense related to finance and insurance commission revenue is charged to cost
of sales upon recognition of such revenue.
The following table sets forth information regarding Sonic's finance and
insurance operations:
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Commission revenue ......... $ 10,606 $ 34,011 $ 82,771
Gross profit ............... $ 8,856 $ 28,022 $ 69,654
Gross margin ............... 83.5% 82.4% 84.2%
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. We
also utilize the SonicAutomotive.com internet web site to refer customers to
our individual dealerships for sales of new and used vehicles, servicing of
vehicles and financing
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alternatives. We plan to incorporate the SonicAutomotive.com URL into the
print, radio and television advertising efforts for our dealerships in order to
drive significant customer traffic to the SonicAutomotive.com web site. Sonic's
internet sales efforts also involve utilizing our AnyAuto.com web site as our
own on-line direct service to compete with other on-line auto brokers.
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 have developed 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.
Sonic believes that it will be able to renew at expiration all of its existing
franchise agreements.
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.
o Under Sonic's agreement with Ford, Ford may cause Sonic to sell or
resign from one or more of Sonic's Ford, Lincoln or Mercury franchises if any
person or entity acquires securities having 50% or more of the voting power of
Sonic's securities.
o 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.
o Under Sonic's agreement with Honda, Honda may force the sale of one or
more of Sonic's Honda or Acura franchises if (1) an automobile manufacturer or
distributor acquires securities having 5% or more of the voting power of
Sonic's securities, (2) an individual or entity that has either a felony
criminal record or a criminal record based solely in connection with dealings
with an automobile manufacturer, distributor or dealership acquires securities
having 5% or more of the voting power of Sonic's securities or (3) any
individual or entity acquires securities having 20% or more of the voting power
of Sonic's securities and Honda reasonably deems such acquisition to be
detrimental to Honda's interests in any material respect.
o 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.
o Similarly, Chrysler has approved of the public sale of only 50% of our
common stock and requires prior approval of any future sales that would result
in a change in voting or managerial control of Sonic.
o Mercedes requires 60 days advance notice to approve any acquisition of
20% or more of Sonic's voting securities.
o Other manufacturers may impose similar restrictions.
Many states, including Alabama, California, Florida, Georgia, Maryland,
Nevada, Ohio, Tennessee and Texas, have placed limitations upon manufacturers'
and distributors' ability to sell new motor vehicles directly to customers in
their respective states in an effort to protect dealers from unfair
competition. In general, these statutes make it unlawful for a
9
manufacturer or distributor to compete with a new motor vehicle dealer in the
same line-make operating under an agreement or franchise from the manufacturer
or distributor in the relevant market area. However, a manufacturer or
distributor is not deemed to be competing when:
1. operating a dealership either temporarily or for a reasonable period;
2. in a bona fide retail operation which is for sale; or
3. in a bona fide relationship in which an independent person has made a
significant investment subject to loss in the dealership and can reasonably
expect to acquire full ownership of such dealership on reasonable terms and
conditions.
Certain states, such as Florida, Georgia and North Carolina, limit the
amount of time that a manufacturer may temporarily operate a dealership to one
year. Further, certain states require a person who is attempting to acquire a
dealership from a manufacturer or distributor to invest a specified amount of
money in the dealership.
There are other exceptions to this prohibition on direct sales to
customers that vary from state to state. For instance, certain states such as
North Carolina allow manufacturers to own, operate or control dealerships if
they have been engaged in the retail sale of motor vehicles through the
dealership for a continuous period of time prior to a certain date and if no
other independent dealer is available in the relevant market to own and operate
the franchise. Further, other states such as Tennessee allow manufacturers to
sell trucks of certain weights directly to customers if the manufacturer has
been selling these trucks at retail for a continuous period of time prior to a
grandfathering date.
In addition to these direct selling prohibitions, there are other state
laws that offer dealers protection from manufacturers. In particular, all of
the states in which Sonic dealerships currently do business require
manufacturers to show "good cause" for terminating or failing to renew a
dealer's franchise agreement. Further, each of the states provides some method
for dealers to challenge manufacturers' attempts to establish dealerships of
the same line-make in their relevant market area. A summary of the relevant
states' laws regarding manufacturer/dealer relations is set forth below:
ALABAMA. 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.
CALIFORNIA. California law requires a manufacturer who wishes to terminate
or refuse to continue any existing franchise to provide written notice to the
franchisee and to California's New Motor Vehicle Board. If the dealer protests,
the manufacturer will be required to show the board that there is good cause
for termination. Possible reasons for termination include transfer of any
ownership or interest in the franchise without the consent of the franchisor
(which consent cannot be unreasonably withheld), misrepresentation by the
franchisee in applying for the franchise, insolvency of the franchisee and
failure of the dealer to conduct its customary sales and service operations
during its customary hours of business for 7 consecutive business days. If a
manufacturer wants to establish an additional motor vehicle dealership within a
relevant market area where the same line-make is then represented or seeks to
relocate an existing motor vehicle dealership, the manufacturer must notify the
New Motor Vehicle Board and each franchisee in that line make in the relevant
area. The franchisee may then file a protest to the establishing or relocating
of the dealership. The franchisee has the burden of proof to show that there is
good cause not to allow the establishment or relocation of the additional motor
vehicle dealership.
FLORIDA. 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.
GEORGIA. 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
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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.
MARYLAND. Under Maryland law, it is unlawful for a manufacturer to
terminate, cancel or fail to renew the franchise of a dealer unless the dealer
has failed to comply substantially with the reasonable requirements of the
franchise and the manufacturer has given the dealer notice. If a dealer
receives written notice that his franchise is being terminated, canceled or not
renewed, he may request a hearing to determine whether he had failed to comply
substantially with the reasonable requirements of the franchise. A manufacturer
in Maryland that terminates, cancels or fails to renew the franchise of a
dealer in violation of the law must pay the dealer the fair value of his
business as a going concern. On payment, the dealer is required to convey his
business, free of liens and encumbrances, to the manufacturer.
NEVADA. Nevada law makes it unlawful for a manufacturer to terminate or
refuse to continue any franchise unless it has received the written consent of
the dealer or it gives written notice of its intention to the dealer and Nevada
and either the dealer does not file a protest; or after the dealer has filed a
protest and the state has conducted a hearing on the matter, the state issues
an order authorizing the manufacturer to terminate the franchise or permit it
to lapse. Possible grounds for termination of a franchise include transfer of
an ownership or interest in a dealership without the consent of the
manufacturer unless the consent has been unreasonably withheld, material
misrepresentation by the dealer in applying for franchise, insolvency of the
dealer, revocation of a dealer's license, conviction of the dealer for a
felony, any unfair business practice by the dealer after the manufacturer has
issued a written warning to the dealer to desist from that practice, or closure
by the dealer for a period of longer than 14 days unless the closure was beyond
the dealer's control. In Nevada, a manufacturer may not enter into a franchise
which would establish an additional dealership within the relevant market area
of another dealer in the same line and make of vehicles unless the manufacturer
has given written notice to each dealer in the same line in the relevant market
area and either none of the dealers protest or after a protest is filed the
state finds that there is not good cause for preventing the intended
establishment or relocation of a dealership and issues an order authorizing the
manufacturer or distributor to establish the additional dealership.
NORTH CAROLINA. Under North Carolina law, it is unlawful for a
manufacturer to prevent or refuse to approve the sale or transfer of the
ownership of a dealership or a change in the executive management of a
dealership or the relocation of a dealership to another site within the
dealership's relevant market area, if the Commissioner had determined, if
requested in writing by the dealer within 30 days after receipt of an objection
to the proposed transfer, sale, assignment, relocation or change, and after a
hearing on the matter, that the failure to permit or honor the sale, transfer,
assignment relocation or change is unreasonable under the circumstances.
OHIO. 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.
OKLAHOMA. Under Oklahoma law, it is unlawful for a manufacturer to
terminate, cancel or fail to renew any franchise with a licensed new motor
vehicle dealer unless the manufacturer has provided notice to the dealer and
has good cause for cancellation, termination or nonrenewal. Furthermore, if a
manufacturer seeks to enter into a franchise establishing a new motor vehicle
dealership or relocating an existing new motor vehicle dealership within or
into a relevant market area where the same line-make is then represented, the
manufacturer must provide notice to the dealer and the dealer may file a
protest. Finally, a dealer proposing a sale, transfer or assignment of a
franchise agreement or the business and assets of a dealership or an interest
in a dealership to another person must notify the manufacturer. The
manufacturer may not unreasonably withhold approval.
SOUTH CAROLINA. 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
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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.
TENNESSEE. 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.
TEXAS. Under Texas law, despite the terms of contracts between
manufacturers and dealers, manufacturers may not unreasonably withhold approval
of a transfer of a dealership. It is unreasonable under Texas law for a
manufacturer to reject a prospective transferee of a dealership who is of good
moral character and who otherwise meets the manufacturer's written, reasonable
and uniformly applied standards or qualifications relating to the prospective
transferee's business experience and financial qualifications. In addition,
under Texas law, franchised dealerships may challenge manufacturers' attempts
to establish new franchises in the franchised dealers' markets, and state
regulators may deny applications to establish new dealerships for a number of
reasons, including a determination that the manufacturer is adequately
represented in the region. Texas law limits the ability of manufacturers to
terminate or fail to renew franchises. In addition, other laws in Texas limit
the ability of manufacturers to withhold their approval for the relocation of a
franchise or require that disputes be arbitrated. In addition, a manufacturer's
license to distribute vehicles in Texas may be revoked if, among other things,
the manufacturer has forced or attempted to force an automobile dealer to
accept delivery of motor vehicles not ordered by that dealer.
VIRGINIA. Virginia law states that it is unlawful for a manufacturer to
prevent or refuse to approve the sale or transfer of the ownership of a
dealership unless the manufacturer provides written notice and the refusal is
reasonable. It is unlawful for a manufacturer to grant an additional franchise
for a particular line-make of motor vehicle in a relevant market area in which
a dealer or dealers of that line-make are already located unless the
manufacturer has first advised in writing all other dealers in the line-make in
the area. A dealer may request a hearing where a determination will be made as
to whether the market will support all of the dealers in that line-make in the
area. It is unlawful for a manufacturer to terminate, cancel or refuse to renew
the franchise of any dealer without good cause and unless the dealer has
received written notice of the manufacturer's intentions and the state has
determined, if requested in writing by the dealer, that there is good cause for
the termination. In the event of a proposed sale or transfer of a dealership,
the manufacturer has a right of first refusal to acquire the new vehicle
dealer's assets or ownership, subject to certain exceptions.
COMPETITION
The retail automotive industry is a highly competitive business with over
22,400 franchised automobile dealerships in the United States at the beginning
of 1999. Depending on the geographic market, Sonic competes both with 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, and with internet companies who provide customer referrals
to other dealerships or who broker vehicle sales between customers and other
dealerships. We compete with small, local dealerships and with large
multi-franchise auto dealerships. Some of our competitors are larger and have
greater financial and marketing resources and are more widely known than us.
Some of our competitors also may utilize marketing techniques, such as the
Internet or "no negotiation" sales methods, not extensively used by us.
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.
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In arranging or providing financing for our customers' vehicle purchases,
we compete with a broad range of financial institutions. In addition, financial
institutions are now offering F&I products through the Internet, which may
reduce our profits on these items. 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, Baltimore, Birmingham,
Charleston, Charlotte, Chattanooga, Columbia, Columbus, Dallas, Daytona Beach,
Ft. Myers, Greenville/Spartanburg, Houston, Las Vegas, Los Angeles,
Mobile/Pensacola, Montgomery, Nashville, San Diego, San Francisco, San
Jose/Silicon Valley, Tampa/Clearwater, Tulsa and Washington, D.C. markets.
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 Alabama, California, Florida, Georgia, Maryland, Nevada, North
Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Virginia 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 use, storage, handling,
recycling and disposal of gasoline, oil and other materials, also apply to us
and our dealership properties.
We believe that we comply in all material respects with the laws affecting
our business. Possible penalties for violation of any of these laws include
revocation of our licenses and fines. In addition, many laws may give customers
a private cause of action.
As with automobile dealerships generally, and service parts and body shop
operations in particular, our business involves the use, storage, handling and
contracting for recycling or disposal of hazardous or toxic substances or
wastes and other environmentally sensitive materials. Our business also
involves the past and current operation and/or removal of aboveground and
underground storage tanks containing such substances or wastes. Accordingly, we
are subject to regulation by federal, state and local authorities which
establish health and environmental quality standards, provide for liability
related to those standards, and in certain circumstances provide penalties for
violations of those standards. We are also subject to laws, ordinances and
regulations governing remediation of contamination at facilities we own or
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
13
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.
EXECUTIVE OFFICERS AND DIRECTORS; KEY PERSONNEL OF THE REGISTRANT
Sonic's executive officers, directors and key personnel, and their ages as
of the date of this Form 10-K, are as follows:
NAME AGE POSITION(S) WITH SONIC
- ----- ----- ----------------------
O. Bruton Smith ..... 73 Chairman, Chief Executive Officer and Director*
Thomas A. Price ..... 56 Vice Chairman and Director*
B. Scott Smith ...... 32 President, Chief Operating Officer and Director*
Theodore M. Wright .. 37 Chief Financial Officer, Vice President, Treasurer
and Director*
Jeffrey C. Rachor ... 38 Executive Vice President of Retail Operations and Director*
Mark J. Iuppenlatz .. 40 Vice President of Corporate Development*
William R. Brooks ... 50 Director
William P. Benton ... 76 Director
William I. Belk ..... 50 Director
H. Robert Heller .... 60 Director
- ---------
* Executive Officer
O. Bruton Smith has been the Chairman, Chief Executive Officer and a
director of Sonic since its organization in 1997, and he currently is a
director and executive officer of each of Sonic's dealerships. Mr. Smith has
worked in the retail automobile industry since 1966. Mr. Smith has agreed to
stand for reelection as a Sonic director at the 2000 annual stockholders
meeting. Mr. Smith is also the chairman and chief executive officer, a director
and controlling shareholder of Speedway Motorsports, Inc. ("SMI"). SMI is a
public company traded on the NYSE. Among other things, it owns and operates the
following NASCAR racetracks: Atlanta Motor Speedway, Bristol Motor Speedway,
Lowe's Motor Speedway at Charlotte, 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. Under his employment
agreement with Sonic, Mr. Smith is required to devote approximately 50% of his
business time to Sonic's business.
Thomas A. Price was appointed Vice Chairman and a director of Sonic on
January 1, 2000. Mr. Price's term as a director of Sonic will expire at the
2002 annual meeting of stockholders. Before joining Sonic, Mr. Price was
chairman of the FirstAmerica Automotive board of directors since August 1999
and had been FirstAmerica's Chief Executive Officer, President and a director
since September 1996. From March 1976 to June 1997, Mr. Price owned and
operated nine vehicle dealerships. Mr. Price has worked in the automotive
industry since 1963 in various capacities including marketing and field
assignments at Ford Motor Company. Mr. Price is currently a member of the Lexus
National Dealer Advisory Board and he is a charter member of the J.D. Power
Superdealer Roundtable.
B. Scott Smith has been the President and Chief Operating Officer of Sonic
since April 1997 and a Sonic director since its organization in 1997. Mr. Smith
also serves as a director and executive officer of many of Sonic's
subsidiaries. Mr. Smith, who is the son of Bruton Smith, has been an executive
officer of Town and Country Ford since 1993, and was a minority owner of both
Town and Country Ford and Fort Mill Ford before Sonic's acquisition of those
dealerships in 1997. Mr. Smith became the General Manager of Town & Country
Ford in November 1992 where he remained until his appointment to President and
Chief Operating Officer of Sonic in April 1997. Mr. Smith's term as a director
of Sonic will expire at the 2001 annual stockholders meeting.
Theodore M. Wright has been the Chief Financial Officer, Vice President
and Treasurer of Sonic since April 1997, and a Sonic director since June 1997.
Mr. Wright also serves as a director and executive officer of many of Sonic's
subsidiaries. Before joining Sonic, Mr. Wright was a Senior Manager and in
charge of the Columbia, South Carolina office of Deloitte & Touche LLP. Before
joining the Columbia office, Mr. Wright was a Senior Manager in Deloitte &
Touche LLP's National Office Accounting Research and SEC Services Departments
from 1994 to 1995. From 1992 to 1994, Mr. Wright was an audit manager with
Deloitte & Touche LLP. Mr. Wright's term as a director of Sonic will expire at
the 2002 annual stockholders meeting.
Jeffrey C. Rachor is Sonic's Executive Vice President of Retail Operations.
In May 1999, Mr. Rachor was appointed a director of Sonic and promoted to
executive officer status. He originally joined Sonic as its Regional Vice
President -- Mid-South region upon Sonic's 1997 acquisition of dealerships in
Chattanooga, Tennessee and was subsequently promoted to Vice President of Retail
Operations in September 1998. Mr. Rachor has agreed to stand for reelection as a
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Sonic director at the 2000 annual meeting of stockholders. Mr. Rachor has over
14 years experience in automobile retailing and was the chief operating officer
of the Chattanooga dealerships from 1989 until their acquisition by Sonic in
1997. During this period, Mr. Rachor has also served at various times as the
general manager of Toyota, Saturn and Chrysler-Plymouth-Jeep-Eagle dealerships.
Before then, Mr. Rachor was an assistant regional manager with American Suzuki
Motor Corporation from 1987 to 1989 and a metro sales manager and a district
sales manager with GM's Buick Motor Division from 1983 to 1987.
Mark J. Iuppenlatz has been Sonic's Vice President of Corporate
Development since August 1999. Before joining Sonic, Mr. Iuppenlatz served as
the Executive Vice President -- Acquisitions and Chief Operating Officer of Mar
Mar Realty Trust, a real estate investment trust specializing in sale/leaseback
financing of automotive-related real estate, from September 1998 to August
1999. From 1996 to September 1998, Mr. Iuppenlatz was employed by Brookdale
Living Communities, Inc., a publicly-traded company, where he was responsible
for conducting that company's development operations. From 1994 to 1996, he
served as Vice President of Schlotzky's, Inc., a publicly-traded company, where
his responsibilities included the development of over 30 new restaurant
locations in more than 10 states. From 1991 to 1994, Mr. Iuppenlatz served in
Spain as the director of marketing and the assistant director of development
for Kepro S.A., an affiliate of The Prime Group. During his service with Kepro
S.A, Mr. Iuppenlatz was responsible for the marketing and development of a
mixed use planned development comprised of 22 office buildings, a 2.0 million
square foot shopping mall, apartments, cultural facilities and a major urban
park. From 1989 to 1991, Mr. Iuppenlatz served as the director of leasing for
The Prime Group in Chicago, where his responsibilities included the marketing,
negotiating and closing of lease agreements for commercial space in a 1.0
million square foot office tower.
William R. Brooks has been a director of Sonic since its formation. Mr.
Brooks also served as Sonic's initial Treasurer, Vice President and Secretary
from its organization in February 1997 to April 1997 when Mr. Wright was
appointed to those positions. Since December 1994, Mr. Brooks has been the vice
president, treasurer, chief financial officer and a director of SMI. Mr. Brooks
also serves as an executive officer and a director for various operating
subsidiaries of SMI. Before the formation of SMI in December 1994, Mr. Brooks
was the vice president of the Charlotte Motor Speedway and a vice president and
a director of Atlanta Motor Speedway. Mr. Brooks joined Sonic Financial
Corporation, an entity controlled by Bruton Smith, from Price Waterhouse in
1983. At Sonic Financial Corporation, he was promoted from manager to
controller in 1985 and again to chief financial officer in 1989. Mr. Brooks has
agreed to stand for reelection as a Sonic director at the 2000 annual
stockholders meeting.
William P. Benton became a director of Sonic in December 1997. Since
January 1997, Mr. Benton has been the executive director of Ogilvy & Mather, a
world-wide advertising agency. Mr. Benton has been a director of SMI since
February 1995 and a director of Allied Holdings, Inc. since February 1998. He
is also a consultant to the chairman and chief executive officer of TI Group.
Before his appointment at Ogilvy & Mather, Mr. Benton served as vice chairman
of Wells, Rich, Greene/BDDP, Inc., an advertising agency with offices in New
York and Detroit. Mr. Benton retired from Ford Motor Company as its vice
president of marketing worldwide in 1984 after a 37-year career with that
company. Mr. Benton's term as a Sonic director will expire at the 2001 annual
stockholders meeting.
William I. Belk became a director of Sonic in March 1998. Mr. Belk is
currently the vice president and a director for Monroe Hardware Company, a
director for Piedmont Ventures, Inc., and treasurer and a director for Old Well
Water, Inc. For more than the previous five years, Mr. Belk previously held the
position of chairman and director for certain Belk stores (a privately held
retail department store chain). Mr. Belk's term as a Sonic director will expire
at the 2001 annual stockholders meeting.
H. Robert Heller was appointed a director of Sonic on January 1, 2000. Mr.
Heller's term as a director of Sonic will expire at the 2002 annual
stockholders meeting. Mr. Heller served as a director of FirstAmerica from
January 1999 until its acquisition by Sonic in December 1999. Mr. Heller has
been a director and Executive Vice President of Fair, Isaac and Company since
1994. At Fair, Isaac and Company, he is responsible for the corporate services
group, including marketing information services, human resources, corporate
affairs and real estate. From 1991 to 1993, Mr. Heller was President and Chief
Executive Officer of Visa U.S.A. Mr. Heller is a former Governor of the Federal
Reserve System, and has had an extensive career in banking, international
finance, government service and education.
Sonic's Board of Directors is divided into three classes, each of which
serves for a three year term, with one class being elected at Sonic's annual
stockholders meeting each year. Messrs. Bruton Smith, Rachor and Brooks belong
to the class of directors whose term expires in 2000, Messrs. Scott Smith,
Benton and Belk belong to the class whose term expires in 2001 and Messrs.
Wright, Price and Heller belong to the class whose term expires in 2002. The
executive officers are elected annually by, and serve at the discretion of,
Sonic's Board of Directors.
15
EMPLOYEES
As of December 31, 1999, Sonic employed approximately 8,300 people, of
whom approximately 995 were employed in managerial positions, 2,240 were
employed in non-managerial sales positions, 3,985 were employed in
non-managerial parts and service positions and 1,080 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 relationships with our employees are good.
Approximately 230 of our employees, primarily service technicians formerly
employed by FirstAmerica Automotive, are 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 owned by
affiliates of Capital Automotive REIT. The following table identifies each of
the properties to be utilized by Sonic's operations and their respective
locations, after giving effect to Sonic's pending acquisitions:
ATLANTA MARKET
o Dyer & Dyer Oldsmobile, 5585 Peachtree Industrial Blvd., Chamblee, GA, (770)
220-2441
o Dyer & Dyer Volvo, 5260 Peachtree Industrial Blvd., Chamblee, GA, (770)
452-0077
o Dyer & Dyer Volvo of Gwinnett, 3373 Sattelite Blvd., Duluth, GA, (678)
475-9330
o Dyer & Dyer Volvo of Southlake, 1345 Southlake Pwy., Morrow, GA, (770)
968-3610
o Global Imports, 500 & 550 Interstate North Pwy., N.W., Atlanta, GA, (770)
951-2697
BALTIMORE MARKET
o Village Volvo, 728 Bel Air Road, Bel Air, MD, (410) 879-3400
BIRMINGHAM MARKET
o Tom Williams Cadillac, 325 S. 20th St., Birmingham, AL, (205) 322-6731
o Tom Williams Imports, 2200 3rd Ave. South, Birmingham, AL, (205) 252-9512
o Tom Williams Lexus, 300 S. 22nd St., Birmingham, AL, (205) 252-5000 or (800)
395-3987
CHARLESTON MARKET
o Altman Dodge, 2049 Remount Rd., Charleston, SC, (843) 747-0461
o Charleston Lincoln-Mercury, 8485 Rivers Ave., North Charleston, SC, (843)
797-2324
o North Charleston Hyundai, 8475 Rivers Ave., North Charleston, SC, (843)
797-8808
CHARLOTTE MARKET
o Freedom Chevrolet Oldsmobile Cadillac, 3112 Hwy. 74 West, Monroe, NC, (704)
289-8444
o Fort Mill Chrysler-Plymouth-Dodge, 3310 Hwy. 51, Fort Mill, SC, (704)
375-4799
o Fort Mill Ford, 788 Gold Hill Rd., Fort Mill, SC, (704) 377-8877
o Infiniti of Charlotte, 9103 E. Independence Blvd., Charlotte, NC, (704)
845-1556
o Lake Norman Chrysler-Plymouth-Jeep, 20435 Chartwell Center Dr., Cornelius,
NC, (704) 896-3800
o Lake Norman Dodge, 2070 Torrence Chapel Rd., Cornelius, NC, (704) 892-7800
o Town & Country Chrysler-Plymouth-Jeep of Rock Hill, 803 North Anderson Rd.,
Rock Hill, SC, (803) 324-4042
o Town & Country Ford, 5401 East Independence Blvd., Charlotte, NC, (704)
536-5600
o Town & Country Toyota, 9101 South Blvd., Charlotte, NC, (704) 552-7600
CHATTANOOGA MARKET
o BMW of Chattanooga, 5949 Brainerd Rd., Chattanooga, TN, (423) 894-5660
o Cleveland Chrysler-Plymouth-Jeep, 717 South Lee Hwy., Cleveland, TN, (423)
339-8756 or (888) 269-2629
o Cleveland Oldsmobile-Cadillac-GMC, 875 Keith St., Cleveland, TN, (423)
478-5201
o Dodge of Chattanooga, 402 West Martin Luther King Blvd., Chattanooga, TN,
(423) 265-0505
o Economy Honda, 2135 Chapman Rd., Chattanooga, TN, (423) 899-1122
o Infiniti of Chattanooga, 5915 Brainerd Rd., Chattanooga, TN, (423) 899-8934
o Volkswagen/KIA of Chattanooga, 6015 International Dr., Chattanooga, TN, (423)
855-4981
16
o Town & Country Ford of Cleveland, 2496 South Lee Hwy., Cleveland, TN, (423)
472-5454
o Volvo of Chattanooga, 5915 Brainerd Rd., Chattanooga, TN, (423) 899-8934
COLUMBIA MARKET
o Imports of Florence, 2199 David McLeod Blvd., Florence, SC, (843) 662-8711
o Newsome Automotive, 2199 David McLeod Blvd., Florence, SC, (843) 662-8711
o Newsome Chevrolet World, 4013 W. Beltline Blvd. & 6217 Monticello Rd.,
Columbia, SC, (803) 254-1431
COLUMBUS MARKET
o Hatfield Hyundai-Isuzu-Subaru, 1400 Automall Dr., Columbus, OH, (614)
870-9559
o Hatfield Lincoln Mercury, 1495 Automall Dr., Columbus, OH, (614) 870-1495
o Hatfield Volkswagen/KIA West, 1455 Automall Dr., Columbus, OH, (614) 870-5425
o Toyota West, 1500 Automall Dr., Columbus, OH, (614) 870-8200
o Trader Bud's Westside Chrysler Plymouth Jeep, 3700 W. Broad St., Columbus,
OH, (614) 272-8100
o Trader Bud's Westside Dodge, 4000 W. Broad St., Columbus, OH, (614) 272-0000
DALLAS MARKET
o Lute Riley Honda, 1331 North Central Expressway, Richardson, TX, (972)
238-1700
DAYTONA BEACH MARKET
o Bondesen Chevrolet Oldsmobile Cadillac, 2800 South Highway 17-92, DeLand, FL,
(904) 734-2661
o Halifax Ford-Mercury, 1307 N. Dixie Hwy., New Smyrna Beach, FL, (904)
428-9094
o Higginbotham Automobiles, 1720 Mason Ave., Daytona Beach, FL, (904) 274-4775
o Higginbotham Chevy-Olds, 1919 N. Dixie Hwy., New Smyrna Beach, FL, (904)
427-1313
o HMC Finance, 3741 S. Nova Rd., Port Orange, FL, (904) 322-1020
o Sunrise Auto World, 241 Ridgewood Ave., Holly Hill, FL, (904) 254-8441
FORT MYERS MARKET
o BMW of Fort Myers, 7070 Lakes Terrace, Ft. Myers, FL, (941) 433-8306
o Honda of Fort Myers, 14020 S. Tamiami Tr., Ft. Myers, FL, (941) 433-8383
o Mercedes-Benz of Fort Myers, 13880 S. Tamiami Tr., Ft. Myers, FL, (941)
433-8300
o Nissan of Fort Myers, 13950 S. Tamiami Tr., Ft. Myers, FL, (941) 433-8378
o Volkswagen of Fort Myers, 3405 Fowler St., Ft. Myers, FL, (941) 275-4800
GREENVILLE/SPARTANBURG MARKET
o Century BMW, 2752 Laurens Rd., Greenville, SC, (864) 234-6437
o Heritage Lincoln Mercury, 2424 Laurens Rd., Greenville, SC, (864) 234-6400
HOUSTON MARKET
o Baytown Pontiac-GMC-Buick, 1701 I-10 East, Baytown, TX, (281) 843-2067
o Casa Chrysler Plymouth Jeep, 5225 I-10 East, Baytown, TX, (281) 421-9041
o Casa Ford, 4701 I-10 East, Baytown, TX, (281) 421-7111
o LaPorte Ford, 621 New Highway 146 South, LaPorte, TX, (281) 471-1642
o Lone Star Ford, 8477 North Fwy., Houston, TX, (281) 931-3300
o Lone Star Nissan, 12230 Southwest Fwy., Stafford, TX, (281) 243-8600
o Lone Star Oldsmobile, 12230 Southwest Fwy., Stafford, TX, (281) 243-8600
o Ron Craft Chevy-Olds-Cadillac, 3401 N. Main St., Baytown, TX, (281) 427-9525
o Toyota of Baytown, 1701 I-10 East, Baytown, TX, (281) 843-2067
LAS VEGAS MARKET
o Honda West, 4645 W. Tropicana Ave., Las Vegas, NV, (702) 367-1919
o Nevada Dodge, 5750 Sky Pointe Dr., Las Vegas, NV, (702) 396-5886
o Volvo of Las Vegas, 5750 E. Russell Rd., Las Vegas, NV, (702) 317-1000
LOS ANGELES MARKET
o Beverly Hills BMW, 8833 Wilshire Blvd., Beverly Hills, CA, (310) 358-7880
o Honda of Santa Monica, 1726 Santa Monica Blvd., Santa Monica, CA, (310)
264-4900
o South Bay Chrysler Plymouth Jeep, 20900 Hawthorne Blvd., Torrance, CA, (310)
542-0900
o Volkswagen of Woodland Hills, 21141 Ventura Blvd., Woodland Hills, CA, (818)
884-4444
o Volvo of Santa Monica, 1719 Santa Monica Blvd., Santa Monica, CA, (310)
264-4900
MOBILE/PENSACOLA MARKET
o Classic Dodge, 3118 Government Blvd., Mobile, AL, (334) 478-5252
o Lloyd Nissan, 120 E. 23rd St., Panama City, FL, (850) 785-9561
17
o Lloyd Pontiac-Cadillac-GMC, 100 E. 23rd St., Panama City, FL, (850) 763-6575
o Pensacola Honda, 5600 Pensacola Blvd., Pensacola, FL, (850) 479-9091
MONTGOMERY MARKET
o Capitol Chevrolet, 711 Eastern Blvd., Montgomery, AL, (334) 272-8700 or (800)
225-2771
o Capitol Hyundai & Capitol Mitsubishi, 190 Eastern Blvd., Montgomery, AL,
(334) 279-6555
o Capitol KIA, 845 Eastern Blvd., Montgomery, AL, (334) 260-8791
o Classic Cadillac Pontiac, 2820 Eastern Blvd., Montgomery, AL, (334) 277-3480
o City Chrysler Plymouth Jeep, 833 Eastern Bypass, Montgomery, AL, (334)
279-9300
o Friendly Ford Lincoln Mercury, 4000 Eastern Blvd., Montgomery, AL, (334)
613-5000
NASHVILLE MARKET
o BMW of Nashville, 4040 Armory Oaks Dr., Nashville, TN, (615) 850-4040
o Volkswagen/Mitsubishi of Nashville, 630 Murfreesboro Rd., Nashville, TN,
(615) 254-5641
SAN DIEGO MARKET
o Poway Dodge, 13750 Poway Rd., Poway, CA 94064, (858) 486-2900
o Poway Honda, 14110 Poway Rd., Poway, CA 94064, (858) 486-2900
o Poway Toyota, 13760 Poway Rd., Poway, CA 94064, (858) 486-2900
o Ritchey/Fipp Poway Chevrolet-Oldsmobile, 13742 Poway Rd., Poway, CA 92064,
(858) 486-2900
SAN FRANCISCO MARKET
o Acura of Serramonte, 707 Serramonte Blvd., Colma, CA, (650) 985-2178
o Concord Honda, 1300 Concord Ave., Concord, CA, (925) 825-8000
o Concord Nissan, 1290 Concord Ave., Concord, CA, (925) 676-4400
o Concord Toyota, 1090 Concord Ave., Concord, CA, (925) 682-7131
o Dublin Nissan, 6015 Scarlett Ct., Dublin, CA, (925) 829-0800
o Dublin Volkswagen/Dodge, 6015 Scarlett Ct., Dublin, CA, (925) 829-0800
o First Dodge -- Marin, 513 Francisco Blvd. East, San Rafael, CA, (415)
258-4900
o First Nissan -- Marin, 601 Francisco Blvd. East, San Rafael, CA, (415)
455-1900
o Ford of San Rafael, 619 Francisco Blvd. East, San Rafael, CA, (415) 453-4220
o Honda of Hayward, 24895 Mission Blvd., Hayward, CA, (510) 582-1300
o Honda of Serramonte, 485 Serramonte Blvd., Colma, CA, (650) 758-4800
o Land Rover of Marin, 647 Irwin Dr., San Rafael, CA, (415) 455-5500
o Lexus of Marin, 620 DuBois St., San Rafael, CA, (415) 460-6000
o Lexus of Serramonte, 700 Serramonte Blvd., Colma, CA, (650) 994-2255
o Melody Toyota, 750 El Camino Real, San Bruno, CA, (650) 825-5200
o Serramonte Dodge/Isuzu/Mitsubishi/Nissan, 1500 Collins Ave., Colma, CA, (650)
985-1151
SAN JOSE/SILICON VALLEY MARKET
o Autobahn Motors, 700 Island Pwy., Belmont, CA, (650) 637-2333
o Capitol Nissan, 1120 W. Capitol Expressway, San Jose, CA, (408) 978-1234
o Honda of Stevens Creek, 4590 Stevens Creek Blvd., San Jose, CA, (408)
247-2550
o St. Claire Cadillac/Oldsmobile, 4343 Stevens Creek Blvd., Santa Clara, CA,
(408) 244-1000
o Stevens Creek BMW, 3737 Stevens Creek Blvd., Santa Clara, CA, (408) 249-9070
o Stevens Creek Nissan, 4855 Stevens Creek Blvd., Santa Clara, CA, (408)
983-5947
TAMPA/CLEARWATER MARKET
o Clearwater Collision Center, 2300 Drew St., Clearwater, FL, (727) 797-6335
o Clearwater Mitsubishi, 21699 US Hwy. 19N, Clearwater, FL, (727) 799-6400
o Clearwater Toyota, 21799 US Hwy. 19N, Clearwater, FL, (727) 799-1234
o Freedom Ford, 24825 US Hwy. 19 North, Clearwater & 3925 Tampa Rd., Oldsmar,
FL, (727) 797-2277
o Volvo of Tampa, 6008 N. Dale Mabry Ave., Tampa, FL, (813) 885-2717
TULSA MARKET
o Jim Glover Dodge, 2920 N. Aspen Ave., Broken Arrow, OK, (918) 335-5000
o Larry Miller Chevrolet, 2301 N. Aspen Ave., Broken Arrow, OK, (918)
258-8000(1)
o Riverside Chevrolet, 707 W. 51st St., Tulsa, OK, (918) 446-2200
o Riverside Nissan, 8190 E. Skelly Dr., Tulsa, OK, (918) 628-0280
WASHINGTON, D.C. MARKET
o BMW of Fairfax, 8427 Lee Hwy., Fairfax, VA, (703) 560-2300
o Lexus of Rockville, 15501 Frederick Rd., Rockville, MD, (301) 762-9009
o Nissan Jeep of Waldorf, 2950 Crain Hwy., Waldorf, MD, (301) 645-0800
o Rockville Porsche Audi, 15515 Frederick Rd., Rockville, MD, (301) 881-0900
- ---------
(1) Pending acquisition.
18
Our dealerships are generally located along major U.S. or interstate
highways. One of the principal factors considered by Sonic in evaluating an
acquisition candidate is its location. We prefer to acquire dealerships located
along major thoroughfares, primarily interstate highways with ease of access,
which can be easily visited by prospective customers.
We lease all of the properties utilized by our dealership operations,
except for the Classic Dodge dealership premises and surplus land adjacent to
Lone Star Nissan, which we currently own. Our leased properties are leased from
affiliates of Capital Automotive REIT and other individuals and entities. We
believe that our facilities are adequate for our current needs.
Under the terms of our franchise agreements, Sonic must maintain an
appropriate appearance and design of its facilities and is restricted in its
ability to relocate its dealerships. See "Business -- Relationships with
Manufacturers."
ITEM 3: LEGAL PROCEEDINGS.
From time to time, Sonic is named in claims involving the manufacture of
automobiles, contractual disputes and other matters arising in the ordinary
course of our business. Currently, no legal proceedings are pending against or
involve 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.
Not Applicable.
19
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, 1999, 28,351,837 shares of Class A common stock and
12,250,000 shares of Sonic's Class B common stock were outstanding. As of March
14, 2000, there were 97 record holders of the Class A common stock and 4 record
holders of the Class B common stock. As of March 14, 2000, the closing stock
price for the Class A common stock was $8.63.
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.
1999 HIGH LOW
- --------------------------- ---------- ---------
First Quarter ........... 18 7/16 13 15/16
Second Quarter .......... 16 3/8 12
Third Quarter ........... 14 15/16 10 5/8
Fourth Quarter .......... 12 1/4 7 7/8
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
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.
On December 10, 1999, Sonic privately issued 5,209,415 shares of its Class
A common stock with a value of approximately $53.4 million to acquire
approximately 92% of the outstanding stock and approximately 94% of the
outstanding warrants to purchase shares of stock of FirstAmerica Automotive,
Inc. from certain stock and warrant holders of FirstAmerica.
20
ITEM 6: SELECTED FINANCIAL DATA.
The selected consolidated statement of operations data for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999 and the selected consolidated
balance sheet data as of December 31, 1995, 1996, 1997, 1998 and 1999 are
derived from Sonic's audited financial statements. 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,
--------------------------------------------------------------------
1995 1996(1) 1997(1) 1998(1) 1999(1)
----------- ----------- ------------- -------------- ---------------
(DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Consolidated Statement of Operations Data:
Revenues:
New vehicles ....................................... $186,859 $233,979 $ 343,941 $ 962,939 $ 1,968,514
Used vehicles ...................................... 60,766 68,054 85,132 324,740 684,560
Wholesale vehicles ................................. 20,025 25,641 38,785 119,351 250,794
-------- -------- --------- ----------- -----------
Total vehicles .................................... 267,650 327,674 467,858 1,407,030 2,903,868
Parts, service, and collision repair ............... 35,860 42,075 57,537 162,660 364,184
Finance and insurance .............................. 7,813 7,118 10,606 34,011 82,771
-------- -------- --------- ----------- -----------
Total revenues .................................... 311,323 376,867 536,001 1,603,701 3,350,823
Cost of sales ........................................ 272,130 332,122 473,003 1,396,259 2,896,400
-------- -------- --------- ----------- -----------
Gross profit ......................................... 39,193 44,745 62,998 207,442 454,423
Selling, general and administrative expenses ......... 28,091 32,602 46,770 150,130 326,914
Depreciation ......................................... 832 978 776 1,384 3,138
Goodwill Amortization ................................ -- -- 546 3,223 8,561
-------- -------- --------- ----------- -----------
Operating income ..................................... 10,270 11,067 14,906 52,705 115,810
Other Income and Expense:
Interest expense, floor plan ....................... 4,504 5,968 8,007 14,096 22,536
Interest expense, other ............................ 436 433 1,199 9,395 21,586
Other income ....................................... 106 355 298 426 1,286
-------- -------- --------- ----------- -----------
Total other expense ............................... 4,834 6,046 8,908 23,065 42,836
-------- -------- --------- ----------- -----------
Income before income taxes and minority interest ..... 5,436 5,021 5,998 29,640 72,974
Provision for income taxes ........................... 2,176 1,924 2,249 11,083 28,325
-------- -------- --------- ----------- -----------
Income before minority interest ...................... 3,260 3,097 3,749 18,557 44,649
Minority interest in earnings of subsidiary .......... 22 114 47 -- --
-------- -------- --------- ----------- -----------
Net income ........................................... $ 3,238 $ 2,983 $ 3,702 $ 18,557 $ 44,649
======== ======== ========= =========== ===========
Diluted net income per share ......................... -- -- $ 0.27 $ 0.74 $ 1.27
======== ======== ========= =========== ===========
Weighted average number of shares outstanding ........ -- -- 13,898 24,970 35,248
======== ======== ========= =========== ===========
Consolidated Balance Sheet Data:
Working capital ...................................... $ 18,140 $ 19,780 $ 44,098 $ 79,155 $ 177,657
Total assets ......................................... 79,462 110,976 291,450 576,103 1,501,102
Long-term debt (2) ................................... 6,950 6,719 49,653 145,790 425,894
Total liabilities .................................... 62,956 84,367 207,085 433,674 1,098,529
Minority interest .................................... 200 314 -- -- --
Stockholders' equity ................................. 16,306 26,295 84,365 142,429 402,573
- ---------
(1) Selected Financial Data for the years ended December 31, 1996, 1997, 1998
and 1999 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.
(2) Long-term debt includes current maturities of long-term debt, the payable
to Sonic's Chairman and the payable to affiliates of Sonic. See Sonic's
Consolidated Financial Statements and related notes included elsewhere in
this Form 10-K.
21
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 and 1999 should be read in conjunction with
the Sonic Automotive, Inc. and Subsidiaries Consolidated Financial Statements
and the related notes thereto included elsewhere herein.
OVERVIEW
Sonic is the second largest automotive retailer in the United States, as
measured by total revenue, operating 172 dealership franchises and 30 collision
repair centers in the southeastern, southwestern, mid-western, mid-Atlantic and
western United States. We sell new and used cars and light trucks, sell
replacement parts, provide vehicle maintenance, warranty, paint and repair
services and arrange related F&I for its automotive customers.
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.
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.
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. Approximately 68%
of our operating costs for the year ended December 31, 1999 were variable. We
are able to adjust these expenses as the operating or economic environment
impacting our dealerships changes. We manage these variable costs, such as
advertising (9% of operating costs) and sales compensation (46%) 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. 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. Our
floor plan expenses are offset by amounts received from manufacturers, in the
form of floor plan inventory incentives. These payments are credited against
our cost of sales. In 1999, the amounts we received in manufacturer inventory
incentives exceeded our floor plan expenses by approximately $0.8 million. This
results in the effective borrowing rate under our floor plan facilities being
reduced to 0% after the incentives are taken into account.
Sonic's business is fundamentally managed based on individual dealership
operating performance. Each of Sonic's dealerships have similar economic and
operating characteristics. Each dealership sells similar products and services
(new and used vehicles, parts, service and collision repair services), uses
similar processes in selling its products and services, and sells its products
and services to similar classes of customers. As a result, Sonic's dealerships
are aggregated into a single operating segment for purposes of reporting
financial condition and results of operations.
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
22
position and cash flows of each of our dealerships acquired prior to December
31, 1999. 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.
RESULTS OF OPERATIONS
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in Sonic's
Consolidated Statements of Income.
PERCENTAGE OF TOTAL REVENUES FOR
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---------- ---------- ----------
REVENUES:
New vehicle sales ................... 64.2% 60.0% 58.7%
Used vehicle sales .................. 23.1% 27.8% 27.9%
Parts, service, and collision repair 10.7% 10.1% 10.9%
Finance and insurance ............... 2.0% 2.1% 2.5%
Total revenues ...................... 100.0% 100.0% 100.0%
Cost of sales ....................... 88.2% 87.1% 86.4%
Gross profit ........................ 11.8% 12.9% 13.6%
Selling, general, and administrative 9.0% 9.6% 10.1%
Operating income .................... 2.8% 3.3% 3.5%
Interest expense .................... 1.7% 1.5% 1.3%
Income before income taxes .......... 1.5% 1.8% 2.2%
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1998
REVENUES. Revenues grew in each of our primary revenue areas for 1999 as
compared with 1998, causing total revenues to increase 109% to $3.4 billion.
New vehicle sales revenue increased 104% to $2.0 billion in 1999, compared with
$962.9 million in 1998. The increase was due primarily to a 90.6% increase in
new vehicle unit sales to 79,294 in 1999 from 41,592 in 1998. Of this increase,
approximately 89.6%, or 33,792 units, resulted from acquisitions and 10.4%
resulted from stores owned longer than one year. The remainder of the increase
in new vehicle revenues was due to a 7.2% increase in the average selling price
of new vehicles, resulting primarily from an increase in revenues of higher
priced luxury brands contributed by acquisitions. The percentage of new vehicle
revenues comprised of luxury brands increased to 23.6% in 1999 from 12.3% in
1998.
Used vehicle revenues from retail sales increased 111% to $684.6 million
in 1999 from $324.7 million in 1998. The increase was primarily due to a 92.5%
increase in used vehicle unit sales to 47,345 in 1999 from 24,591 in 1998. Of
this increase, approximately 87.7%, or 19,952 units, resulted from acquisitions
and 12.3% resulted from stores owned longer than one year. The remainder of the
increase was due to a 9.5% increase in the average selling price of used
vehicles, including a 4.3% increase in the average selling price of used
vehicles from stores owned for longer than one year.
Parts, service and collision repair revenue increased 124% to $364.2
million in 1999 compared to $162.7 million in 1998, of which approximately
92.8% resulted from our acquisitions. Finance and insurance revenue increased
$48.8 million, or 143%, principally due to vehicle sales and related financing
contributed by our acquisitions, as well as a 27.2% improvement in finance and
insurance revenues per vehicle resulting from newly implemented programs
designed to improve training and development of finance and insurance sales
people.
GROSS PROFIT. Gross profit increased 119% to $454.4 million in 1999 from
$207.4 million in 1998. Approximately 88.3%, or $218.1 million, of the increase
resulted from acquisitions. Gross profit as a percentage of sales increased to
13.6% from 12.9% due primarily to an increase in revenues contributed by retail
used vehicles, parts, service and collision repair services, and finance and
insurance products, which earn higher margins than new vehicles. Used vehicle
revenues as a percentage of total revenues increased to 27.9% in 1999 from
27.8% in 1998. Parts, service and collision repair revenues as a percentage of
total revenues increased to 10.9% in 1999 from 10.1% in 1998. Finance and
insurance revenues as a percentage of total revenues increased to 2.5% in 1999
from 2.1% in 1998.
23
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding depreciation and amortization, increased
118% to $326.9 million in 1999 from $150.1 million in 1998, resulting
principally from acquisitions. Such expenses as a percentage of revenues
increased to 9.8% in 1999 from 9.4% in 1998. Compensation programs, which
represent over 50% of a dealership's selling, general and administrative
expenses, are primarily based on gross profits. As a result, the improvement in
gross profit margins resulted in an increase in compensation expense as a
percentage of total revenues to 6.0% in 1999 from 5.7% in 1998. In addition,
rent expense increased as a percentage of total revenues to 0.8% in 1999 from
0.7% in 1998 primarily due to acquisitions of dealerships located in higher
rent markets. As a percentage of gross profits, selling, general and
administrative expenses decreased to 71.9% in 1999 from 72.4%, resulting
primarily from benefits of scale which has allowed us to recognize cost
savings, especially in the areas of advertising costs and insurance premiums.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation expense, excluding
goodwill amortization, increased 127% to $3.1 million in 1999 from $1.4 million
in 1998, resulting primarily from acquisitions. As a percentage of total
revenues, depreciation expense was at 0.1% in both 1999 and 1998. Goodwill
amortization expense increased 166% to $8.6 million in 1999 from $3.2 million
in 1998, resulting principally from additional acquisitions.
INTEREST EXPENSE, FLOOR PLAN. Interest expense, floor plan increased 59.9%
to $22.5 million in 1999 from $14.1 million in 1998, due primarily to floor
plan interest expense incurred by dealerships acquired. As a percentage of
total revenues, floor plan interest decreased to 0.7% in 1999 from 0.9% in 1998
resulting from a decrease in the average interest rate under our floor plan
financing arrangements as well as improvement in inventory turnover rates.
INTEREST EXPENSE, OTHER. Interest expense, other increased to $21.6
million in 1999 from $9.4 million in 1998 due primarily to interest incurred on
our senior subordinated notes issued on July 31, 1998 and on additional
borrowings under our Revolving Facility.
PROVISION FOR INCOME TAXES. The effective tax rate for 1999 was 38.82%,
compared to an effective rate of 37.39% in 1998. The increase was primarily
attributable to acquisitions we made during the year which were either (1)
companies operating in states with higher income tax rates, or (2) stock
purchases in which the goodwill amortization is not deductible for income tax
purposes. We expect our effective tax rate to increase in 2000 as the 1999
acquisitions will be part of our results for the full period.
NET INCOME. As a result of the factors noted above, our net income
increased by $26.1 million in 1999 compared to 1998.
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
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 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
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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 initial growth and formation of Sonic. In addition, because
sales compensation, which comprises over 50% of total selling, general and
administrative 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.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation expense, excluding
goodwill amortization, increased 78.4% to $1.4 million in 1998 from $0.8 million
in 1997, resulting primarily from acquisitions. As a percentage of total
revenues, depreciation expense was at 0.1% in both 1998 and 1997. Goodwill
amortization expense increased 490% to $3.2 million in 1998 from $0.5 million in
1997, resulting principally from additional acquisitions.
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.
LIQUIDITY AND CAPITAL RESOURCES
Our 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 our
various credit facilities, and borrowings and capital contributions from our
stockholders to finance our operations and expansion. On May 5, 1999, we
completed a public offering of Class A common stock which provided
approximately $86.1 million of additional capital resources for the
consummation of acquisitions and repayment of borrowings under our $350 million
acquisition line of credit with Ford Motor Credit Company (the "Revolving
Facility").
During 1999, net cash provided by operating activities was approximately
$46.1 million. During 1998, net cash provided by operating activities was
approximately $13.0 million. The increase was attributable principally to
increases in net income offset by increases in accounts receivable.
Cash used for investing activities in 1999 was approximately $368.6
million, including $360.7 million paid for acquisitions, net of cash received,
and $21.5 million in capital expenditures. Cash used for investing activities
in 1999 was offset by proceeds received from the sale of real estate at Town
and Country Toyota and Fort Mill Ford of approximately $10.6 million. Cash used
for investing activities in 1998 was approximately $74.9 million, including
$72.2 million paid for acquisitions, net of cash received, and $4.3 million in
capital expenditures. Our principal capital expenditures typically include
building improvements and equipment for use in our dealerships. Of the capital
expenditures in 1999, approximately $9.0 million related to the construction of
new dealerships and collision repair centers. Of this amount, approximately
$3.0 million was subsequently sold to MMR Holdings, LLC, a limited liability
company owned by Bruton Smith and Sonic Financial Corporation ("SFC") and
leased back. There was no gain or loss on the sale. As noted below, MMR
Holdings was subsequently acquired by CAR MMR L.L.C., an affiliate of Capital
Automotive REIT which is not affiliated with Sonic. Other dealerships and
collision repair centers still under construction as of December 31, 1999 are
expected to be either financed separately by Sonic or sold to third parties in
sale-leaseback transactions upon completion.
On August 13, 1999, CAR MMR L.L.C. acquired all of the ownership interests
of MMR Holdings, L.L.C., and two of its affiliates, MMR Viking Investment
Associates, L.P. and MMR Tennessee, L.L.C (collectively, the "MMR Group"). As
of that date, Sonic leased 48 properties for 38 of its dealerships from the MMR
Group under "triple net leases" which
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required Sonic to pay all costs of operating the properties, as well as all
taxes, utilities, insurance, repairs, maintenance and other property related
expenses. Sonic has entered into new leases with CAR MMR L.L.C. with terms
similar to those under Sonic's former leases with the MMR Group. 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. Sonic has agreed to
renew approximately 75% of its lease rental stream for an additional five year
period after the expiration of the initial lease terms. In connection with the
acquisition, Sonic, MMR Holdings and Mar Mar Realty Trust, an affiliate of the
MMR Group, terminated the strategic alliance agreement whereby Mar Mar Realty
Trust had provided Sonic with real estate sale-leaseback financing, acquisition
referral and related services.
As a part of the August 13, 1999 sale of the MMR Group to CAR MMR, Bruton
Smith and SFC signed agreements with Sonic to induce Sonic to enter into a real
estate financing arrangement with CAR MMR and, among other things, amend its
leases with the MMR Group to standardize their terms. Under these agreements,
Mr. Smith and SFC agreed to pay approximately $2.5 million to Sonic, which
amount represented Mr. Smith's and SFC's profits on the sale of the MMR Group
less their selling expenses and a 14% annual return on their initial investment
in the MMR Group, net of any advances made by Sonic to the MMR Group.
During 1999, we acquired 73 dealerships for approximately $420.4 million in
cash, 6,282 shares of Sonic's Class A convertible preferred stock, Series II,
recorded at an estimated value of approximately $6.3 million, 45,783 shares of
Sonic's Class A convertible preferred stock, Series III, recorded at an
estimated value of approximately $45.8 million, and 6,784,347 shares of Sonic's
Class A common stock having an estimated fair value at the time of issuance of
approximately $75.8 million. The cash portion of the purchase price was financed
with a combination of a portion of the proceeds from our public offering of
Class A common stock in May 1999, cash borrowed under our Revolving Facility and
cash generated from our existing operations. The acquisitions were accounted for
using the purchase method of accounting, and the results of operations of such
acquisitions have been included in our consolidate