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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 year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13395
SONIC AUTOMOTIVE, INC.
(Exact Name of Registrant as Specified in its Charter)
56-2010790
Delaware (I.R.S. Employer Identification No.)
(State or Other Jurisdiction of
Incorporation or Organization)
28212
(Zip Code)
5401 East Independence Boulevard
P.O. Box 18747
Charlotte, North Carolina
(Address of Principle Executive Offices)
(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
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 $215,526,024 based upon the closing sales
price of the registrant's Class A common stock on March 16, 2001 of $8.00 per
share. As of March 16, 2001, there were 28,593,205 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 May 2, 2001, are
incorporated by reference into Part III of this Form 10-K.
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FORM 10-K TABLE OF CONTENTS
Page
----
PART I
Item 1. Business...................................................... 4
Item 2. Properties.................................................... 19
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..................................... 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 33
Item 8. Financial Statements and Supplementary Data................... 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant............ 34
Item 11. Executive Compensation........................................ 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 34
Item 13. Certain Relationships and Related Transactions................ 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 35
SIGNATURES.............................................................. 38
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES............................. 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, including the exhibits
filed herewith, 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 the exhibits filed herewith and include
statements regarding our intent, belief or current expectations, or those of
our directors or officers, with respect to, among other things:
. our potential acquisitions;
. trends in our industry;
. our financing plans;
. the effect of the Internet on our business and our ability to implement
our Internet business strategy;
. trends affecting our financial condition or results of operations; and
. our business and growth strategies.
You are cautioned that these forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, and that actual
results may differ materially from those projected in the forward-looking
statements as a result of various factors. Among others, factors that could
materially adversely affect actual results and performance include:
. local and regional economic conditions in the areas we serve;
2
. the level of consumer spending;
. our relationships with manufacturers;
. high competition;
. site selection and related traffic and demographic patterns;
. inventory management and turnover levels;
. the effect of the Internet on our business;
. realization of cost savings; and
. our success in integrating recent and potential future acquisitions.
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 165 dealership franchises and
30 collision repair centers in 13 states as of March 20, 2001. 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, Midwest and California, that on average are
experiencing population growth that exceeds the national average.
. Atlanta . Houston
. Baltimore . Las Vegas
. Birmingham . Los Angeles
. Charleston . Mobile/Pensacola
. Charlotte . Montgomery
. Chattanooga . Nashville
. Columbia . San Diego
. Columbus . San Francisco
. Dallas . San Jose/Silicon Valley
. Daytona Beach . Tampa/Clearwater
. Fort Myers . Tulsa
. Greenville/Spartanburg . Washington D.C.
Our leading new vehicle brands accounted for our 2000 revenue as depicted
in the following chart:
[GRAPHIC]
General
Honda Ford Chrysler(1) BMW Motors(2) Toyota Nissan Lexus Other(3)
- ----- ---- ----------- --- --------- ------ ------ ----- -------
14.4% 13.5% 12.0% 10.7% 10.7% 8.3% 6.5% 5.3% 18.6%
(1) Includes Chrysler, Dodge, Jeep and Plymouth
(2) Includes Buick, Cadillac, Chevrolet, GMC, Oldsmobile and Pontiac
(3) Includes Acura, Audi, Hyundai, Infiniti, Isuzu, KIA, Land Rover, Lincoln,
Mercedes, Mercury, Mitsubishi, Porsche, Subaru, Volkswagen and Volvo
4
Each of our dealership locations throughout our metropolitan markets provide
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.
Approximately 35.8% of our selling, general and administrative expenses for
the year ended December 31, 2000 were fixed (primarily rent and salaries). The
majority of our variable expenses relates to sales commissions and advertising
expense, all of which can be adjusted as demand patterns change. We believe
the diversity of our revenue sources at our automotive dealerships 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 sources of revenue and gross profit for the year ended December 31, 2000:
[GRAPHIC]
Revenues Gross Profit
- -------- ------------
New vehicles 58% Parts, service and
Used vehicles 28% collision repair 35%
Parts, service and New vehicles 34%
collision repair 11% Finance and insurance 16%
Finance and insurance 3% Used vehicles 15%
Business Strategy
. 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. 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 also intend to acquire dealerships that have underperformed in
comparison to the industry average but carry attractive product lines or have
attractive locations and would immediately benefit from our professional
management.
. Increase Sales of Higher Margin Products and Services. We continue to
pursue opportunities to increase our sales of higher-margin products and
services by expanding the following:
Retail Used Vehicles: Retail used vehicle sales typically generate higher
gross margins than new vehicle sales due to limited comparability among
used vehicles and the somewhat subjective nature of their valuation. Our
experience indicates that there are typically opportunities at acquired
dealerships to improve all aspects of used vehicle operations and used
vehicle inventory control. Retail used vehicle unit sales accounted for
approximately 37% of our new and used vehicle unit sales for the years
ended December 31, 1999 and 2000. Our gross profit per used retail unit
sold increased 11.0% for the year ended December 31, 2000 compared to the
same period in 1999.
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Finance and Insurance: Each sale of a new or used vehicle provides us the
opportunity to earn financing fees and to sell extended warranty service
contracts. We currently offer a wide range of nonrecourse financing,
leasing and insurance products to our customers. We believe there are
opportunities at acquired dealerships to increase earnings from the sale of
finance and insurance products as well as warranties. As a result of our
size and scale, we have also negotiated increased commissions on the
origination of customer vehicle financing, insurance policies and extended
warranty service contracts. On a per vehicle basis, our F&I revenue for the
year ended December 31, 2000 increased 15.5% to $755 compared to the same
period in 1999. On a same store basis, F&I revenue increased 11.5% for the
year ended December 31, 2000 as compared to the same period in 1999.
Parts, Service & Repair: 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. In addition, we operated
collision repair centers at 30 locations at December 31, 2000. On a same
store basis, parts, service and collision repair revenue increased 7.1% for
the year ended December 31, 2000 as compared to the same period in 1999.
. Utilize the Internet to Drive Sales. We intend to continue to utilize
technology and services available to consumers via the Internet to drive
sales. We will further enhance the capabilities of our dealership websites
with second generation sites, which include personalized consumer websites,
vehicle configuration functions and other enhancements.
Our SonicAutomotive.com website, our individual dealerships' websites,
heavily promoted manufacturers' websites and third party referral sites will
provide traffic to our dealership or dealership platform Internet marketing
departments with personnel trained specifically to work with Internet sourced
consumers. These marketing departments are supported by national and
divisional specialists in Internet marketing dealership platforms. Our
Internet marketing successes to date have demonstrated that trained Internet
sales people and timeliness of response--not technology--are the driving
factors in Internet sales success.
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. However, 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.
. Emphasize Expense Control. We continually focus on controlling expenses
and expanding margins at the dealerships we acquire and integrate into our
organization. Approximately 64.2% of our selling, general and administrative
expenses for the year ended December 31, 2000 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 (9.3%
of selling, general and administrative expenses) and non-salaried compensation
(48.2%) expenses, so that they are generally related to vehicle sales and can
be adjusted in response to changes in vehicle sales volume. Salespersons,
sales managers, service managers, parts managers, service advisors, service
technicians and all other non-clerical dealership personnel are paid either a
commission or a modest salary plus commissions. In addition, management
compensation is tied to individual dealership profitability and stock price
appreciation through stock options.
. 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
6
operator, a portion of which is provided in the form of Sonic stock options
with additional incentives based on the performance of individual profit
centers. We believe that this organizational structure, together with the
opportunity for promotion within our large organization and for equity
participation, serve as a strong motivation for our employees.
. Achieve High Levels of Customer Satisfaction. We focus on maintaining high
levels of customer satisfaction. Our personalized sales process is designed to
satisfy customers by providing high-quality vehicles in a positive, "consumer
friendly" buying environment. Some manufacturers offer specific performance
incentives on a per vehicle basis if certain Customer Satisfaction Index
("CSI") levels (which vary by manufacturer) are achieved by a dealer. In
addition, all manufacturers consider CSI scores in approving acquisitions. In
order to keep management focused on customer satisfaction, we include CSI
results as a component of our incentive compensation programs.
Dealership Management
Sonic manages its business based on individual dealership operations.
Operations of the dealerships are overseen by Regional or Divisional Vice
Presidents for a particular geographic area. These Vice Presidents all report
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 generally 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 or managers who reports to the general
sales manager or parts and service director.
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 reviews the operations and practices of our
dealerships in these specialized areas and assists 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, 2000, 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 26.9% of new vehicle sales during the year
ended December 31, 2000 were luxury brands (for example, Mercedes, Lexus, BMW,
Infiniti and Volvo) compared to 21.9% for the same period in 1999.
7
The following table presents information regarding Sonic's new vehicle
sales:
Year Ended December 31,
--------------------------------
1998 1999 2000
-------- ---------- ----------
(dollars in thousands)
Unit sales................................. 41,592 79,294 135,919
Sales revenue.............................. $962,939 $1,968,514 $3,522,049
Gross profit............................... $ 75,494 $ 161,205 $ 293,034
Gross margin............................... 7.8% 8.2% 8.3%
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 and light
trucks. 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 presents information regarding Sonic's used vehicle
sales:
Year Ended December 31,
--------------------------------
1998 1999 2000
-------- -------- ----------
(dollars in thousands)
Retail unit sales....... 24,591 47,345 79,749
Retail sales revenue.... $324,740 $684,560 $1,249,188
Retail gross profit..... $ 34,826 $ 72,627 $ 135,736
Retail gross margin..... 10.7% 10.6% 10.9%
Wholesale unit sales.... 21,886 39,834 67,835
Wholesale sales
revenue................ $119,351 $250,794 $ 430,513
Wholesale gross profit.. $ (1,166) $ (3,734) $ (7,587)
Wholesale gross margin.. (1.0)% (1.5)% (1.8)%
Total unit sales........ 46,477 87,179 147,584
Total revenue........... $444,091 $935,354 $1,679,701
Total gross profit...... $ 33,660 $ 68,893 $ 128,149
Total gross margin...... 7.6% 7.4% 7.6%
8
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 presents information regarding Sonic's service and parts
sales:
Year Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
(dollars in thousands)
Sales revenue.................................. $146,456 $333,161 $640,662
Gross profit................................... $ 62,152 $139,738 $283,124
Gross margin................................... 42.4% 41.9% 44.2%
Collision Repair Operations
As of December 31, 2000, Sonic operated 30 collision repair centers. 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,
-------------------------
1998 1999 2000
------- ------- -------
(dollars in thousands)
Sales revenue..................................... $16,204 $31,023 $47,312
Gross profit...................................... $ 8,114 $14,933 $23,882
Gross margin...................................... 50.0% 48.1% 50.5%
Finance and Insurance Operations
Sonic offers its customers a wide range of financing and leasing
alternatives for the purchase of vehicles 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 presents information regarding Sonic's finance and
insurance operations:
Year Ended December 31,
--------------------------
1998 1999 2000
------- ------- --------
(dollars in thousands)
Commission revenue............................... $34,011 $82,771 $162,751
Gross profit..................................... $28,022 $69,654 $136,998
Gross margin..................................... 82.4% 84.2% 84.2%
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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.
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, South Carolina, 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 before August 3,
2001.
. 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 (other than O. Bruton Smith and any entity
controlled by him) acquires securities or has a binding agreement to
acquire securities having 50% or more of the voting power of Sonic's
securities.
. Under Sonic's Dealer Agreements with GM and Infiniti, these
manufacturers may force the sale of their respective franchises if 20%
or more of Sonic's voting securities are similarly acquired.
. Under Sonic's agreement with Toyota, Toyota may force the sale of one or
more of Sonic's Toyota or Lexus dealerships if (1) an automobile
manufacturer or distributor acquires securities, or the right to vote
securities by proxy or voting agreement, having more than 5% of the
voting power of Sonic's securities, (2) any individual or entity
acquires securities, or the right to vote securities by proxy or voting
agreement, having more than 20% of the voting power of Sonic's
securities, (3) there is a material change in the composition of Sonic's
Board of Directors that Toyota reasonably concludes will be materially
incompatible with Toyota's interests or will have an adverse effect on
Toyota's reputation or brands in the marketplace or the performance of
Sonic or its Toyota and Lexus dealerships, (4) there occurs an
extraordinary transaction whereby Sonic's shareholders immediately prior
to such transaction own in the aggregate securities having less than a
majority of the voting power of Sonic or the successor entity, or (5)
any individual or entity acquires control of Sonic, Sonic Financial
Corporation or any Toyota or Lexus dealership owned by Sonic.
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. 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 relating solely to
dealings with an automobile manufacturer, distributor or dealership
acquires securities having 5% or more of the voting power of Sonic's
securities or (3) any individual or entity acquires securities having
20% or more of the voting power of Sonic's securities and Honda
reasonably deems such acquisition to be detrimental to Honda's interests
in any material respect.
. Chrysler requires prior approval of any future sales that would result
in a change in voting or managerial control of Sonic.
. 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.
. Mercedes requires 60 days advance notice to approve any acquisition of
20% or more of Sonic's voting securities.
. Other manufacturers may impose similar restrictions.
Many states, including Alabama, California, Florida, Georgia, Maryland,
Nevada, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Virginia 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 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, Oklahoma, North Carolina, South
Carolina and Virginia 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
certain 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 certain provisions 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
11
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 seven 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 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. It is unlawful for a manufacturer to cancel a franchise
agreement for any reason not constituting good cause under Georgia law. 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 to
the state 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
12
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
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
13
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
21,600 franchised automobile dealerships in the United States at the end of
2000. Depending on the geographic market, we compete both with dealers
offering the same brands and product lines as ours and dealers offering other
automakers' vehicles. We also compete for vehicle sales with auto brokers and
leasing companies, and with internet companies that 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 we
are. Some of our competitors also may utilize marketing techniques, such as
"no negotiation" sales methods, not extensively used by us.
Additionally, the Internet has become a significant part of the sales
process in our industry. Customers are using the Internet to compare pricing
for cars and related F&I services, which may further reduce margins for new
and used cars and profits for related F&I services. In addition,
CarsDirect.com and others are selling vehicles over the Internet without the
benefit of having a dealership franchise, although they must currently source
their vehicles from a franchised dealer. CarsDirect.com has entered into an
alliance with United Auto Group to facilitate their sourcing of vehicles.
Also, AutoNation is selling vehicles for its new car dealerships through its
AutoNationDirect.com web site. If Internet new vehicle sales are allowed to be
conducted without the involvement of franchised dealers, our business could be
materially adversely affected. In addition, other franchise groups have
aligned themselves with Internet car sellers or are spending significant sums
on developing their own Internet capabilities, which could materially
adversely affect our business.
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
14
competitive factors in parts and service sales are price, the use of factory-
approved replacement parts, the familiarity with a dealer's makes and models
and the quality of customer service. A number of regional and national chains
offer selected parts and service at prices that may be lower than our prices.
In arranging or providing financing for our customers' vehicle purchases, we
compete with a broad range of financial institutions. 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 the laws of the states in which we currently operate 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
15
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 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 of the Registrant
Sonic's executive officers and directors and their ages as of the date of
this Form 10-K, are as follows:
Name Age Position(s) with Sonic
---- --- ----------------------
O. Bruton Smith.................. 74 Chairman, Chief Executive Officer and Director*
Thomas A. Price.................. 57 Vice Chairman and Director*
B. Scott Smith................... 33 President, Chief Operating Officer and Director*
Theodore M. Wright............... 38 Chief Financial Officer, Vice President,
Treasurer and Director*
Jeffrey C. Rachor................ 39 Executive Vice President of Retail Operations
and Director*
Mark J. Iuppenlatz............... 41 Vice President of Corporate Development*
William R. Brooks................ 51 Director
William P. Benton................ 77 Director
William I. Belk.................. 51 Director
H. Robert Heller................. 61 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 many of Sonic's subsidiaries. Mr. Smith has
worked in the retail automobile industry since 1966. Mr. Smith is also the
chairman and chief executive officer, a director and controlling stockholder
of Speedway Motorsports, Inc. ("SMI"). SMI is a public company traded on the
NYSE. Among other things, it owns and operates the following NASCAR
racetracks: Atlanta Motor Speedway, Bristol Motor Speedway, Lowe's Motor
Speedway at Charlotte, Las Vegas Motor Speedway, Sears Point Raceway and Texas
Motor Speedway. He is also an 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. Mr. Smith's term as a director of Sonic will expire at the 2003
annual stockholders' meeting.
Thomas A. Price was appointed Vice Chairman and a director of Sonic on
January 1, 2000. Before joining Sonic, Mr. Price had been chairman of the
board of directors of FirstAmerica Automotive, Inc. ("First America") since
August 1999 and 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
16
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. Mr. Price's term as a director of Sonic will expire at the 2002
annual stockholders' meeting.
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 O. 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 has agreed to stand for re-election as a Sonic director 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. He
served as Sonic's secretary until February 9, 2000. 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. 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 over 15 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. Mr. Rachor's terms
as a director of Sonic will expire at the 2003 annual stockholders' meeting.
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 two million
square foot shopping mall, apartments, cultural facilities and a major urban
park.
William R. Brooks has been a director of Sonic since its formation in 1997.
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,
17
treasurer, chief financial officer and a director of SMI. Mr. Brooks also
serves as an executive officer and a director for various operating
subsidiaries of SMI. Before the formation of SMI in December 1994, Mr. Brooks
was the vice president of the Charlotte Motor Speedway and a vice president
and a director of Atlanta Motor Speedway. Mr. Brooks joined Sonic Financial
Corporation, an entity controlled by Bruton Smith, from Price Waterhouse in
1983. At Sonic Financial Corporation, he was promoted from manager to
controller in 1985 and again to chief financial officer in 1989. Mr. Brooks'
term as a director of Sonic will expire at the 2003 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. 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 has agreed to stand for re-election as a Sonic director 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 held the
position of chairman and director for certain Belk stores, (a privately held
retail department store chain). Mr. Belk has agreed to stand for re-election
as a Sonic director at the 2001 annual stockholders' meeting.
H. Robert Heller was appointed a director of Sonic on January 1, 2000. 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 strategic relationships and marketing. 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. Mr. Heller's term as a director of Sonic will expire at the
2002 annual stockholders' meeting.
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. Scott Smith, Benton and Belk belong
to the class of directors whose term expires in 2001, Messrs. Wright, Price
and Heller belong to the class whose term expires in 2002 and Messrs. Bruton
Smith, Rachor and Brooks belong to the class whose term expires in 2003. The
executive officers are elected annually by, and serve at the discretion of,
Sonic's Board of Directors.
Employees
As of December 31, 2000, Sonic employed approximately 9,400 people. 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. 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
250 of our employees, primarily service technicians in our Northern California
markets, 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.
18
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.
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. 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."
In the ordinary course at business, we evaluate our facilities for possible
disposition based on various performance criteria. Our dispositions are
generally smaller dealerships with less attractive franchises. During the year
ended December 31, 2000 we sold eight dealerships which contributed $65.5
million in revenue for 2000. The aggregate proceeds from these dispositions,
net of costs of disposal, were approximately $7.1 million. No material gains
or losses have been realized from these sales.
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, employment practices liability
insurance, employee dishonesty coverage, directors and officers insurance 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, 2000, there were 29,715,570 shares of Sonic's Class A
common stock and 12,250,000 shares of Sonic's Class B common stock
outstanding. As of March 16, 2001, there were 155 record holders of the Class
A common stock and four record holders of the Class B common stock. As of
March 16, 2001, the closing stock price for the Class A common stock was
$8.00.
Sonic intends to retain future earnings to provide funds for operations and
future acquisitions. As a holding company, Sonic depends 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 syndicated credit
agreement between Sonic, Ford Motor Credit Company ("Ford Motor Credit"), and
Chrysler Financial Company, LLC ("Chrysler Financial") 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.
High Low
----- -----
2000
First Quarter................................................ 9.81 7.69
Second Quarter............................................... 11.25 9.50
Third Quarter................................................ 12.13 8.31
Fourth Quarter............................................... 9.00 6.00
High Low
----- -----
1999
First Quarter................................................ 18.44 13.94
Second Quarter............................................... 16.38 12.00
Third Quarter................................................ 14.94 10.63
Fourth Quarter............................................... 12.25 7.88
20
Item 6: Selected Financial Data.
The selected consolidated income statement data for the years ended December
31, 1996, 1997, 1998, 1999 and 2000 and the selected consolidated balance
sheet data as of December 31, 1996, 1997, 1998, 1999 and 2000 are derived from
Sonic's audited financial statements. In accordance with accounting principles
generally accepted in the United States of America, the selected consolidated
financial data has been retroactively restated to reflect Sonic's two-for-one
common stock split that occurred on January 25, 1999. This selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related notes included elsewhere
herein.
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 selected consolidated financial data of Sonic
discussed below reflect the results of operations and financial positions of
each of our dealerships acquired prior to December 31, 2000. As a result of
the effects of our acquisitions, the historical consolidated financial
information described in selected consolidated financial data is not
necessarily indicative of the results of operations and financial position of
Sonic in the future or the results of operations and financial position that
would have resulted had such acquisitions occurred at the beginning of the
periods presented in the selected consolidated financial data.
21
Year Ended December 31,
--------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- ---------- ---------- ----------
(dollars and shares in thousands except per share
amounts)
Income Statement Data:
Revenues:
New vehicles............. $233,979 $343,941 $ 962,939 $1,968,514 $3,522,049
Used vehicles............ 68,054 85,132 324,740 684,560 1,249,188
Wholesale vehicles....... 25,641 38,785 119,351 250,794 430,513
-------- -------- ---------- ---------- ----------
Total vehicles......... 327,674 467,858 1,407,030 2,903,868 5,201,750
Parts, service, and
collision repair........ 42,075 57,537 162,660 364,184 687,975
Finance, insurance and
other................... 7,118 10,606 34,011 82,771 162,751
-------- -------- ---------- ---------- ----------
Total revenues......... 376,867 536,001 1,603,701 3,350,823 6,052,476
Cost of sales.............. 332,122 473,003 1,396,259 2,896,400 5,187,289
-------- -------- ---------- ---------- ----------
Gross profit............... 44,745 62,998 207,442 454,423 865,187
Selling, general and
administrative expenses... 32,602 46,770 150,130 326,914 633,356
Depreciation and
amortization.............. 1,076 1,322 4,607 11,699 22,714
-------- -------- ---------- ---------- ----------
Operating income........... 11,067 14,906 52,705 115,810 209,117
Other income and expense:
Interest expense, floor
plan.................... 5,968 8,007 14,096 22,536 47,108
Interest expense, other.. 433 1,199 9,395 21,586 42,244
Other income............. 355 298 426 1,286 107
-------- -------- ---------- ---------- ----------
Total other expense,
net................... 6,046 8,908 23,065 42,836 89,245
-------- -------- ---------- ---------- ----------
Income before income taxes
and minority interest..... 5,021 5,998 29,640 72,974 119,872
Provision for income
taxes..................... 1,924 2,249 11,083 28,325 45,700
-------- -------- ---------- ---------- ----------
Income before minority
interest.................. 3,097 3,749 18,557 44,649 74,172
Minority interest in
earnings of subsidiary.... 114 47 -- -- --
-------- -------- ---------- ---------- ----------
Net income................. $ 2,983 $ 3,702 $ 18,557 $ 44,649 $ 74,172
======== ======== ========== ========== ==========
Diluted net income per
share..................... N/A $ 0.27 $ 0.74 $ 1.27 $ 1.69
======== ======== ========== ========== ==========
Weighted average number of
diluted shares
outstanding............... N/A 13,898 24,970 35,248 43,826
======== ======== ========== ========== ==========
Consolidated Balance Sheet
Data:
Working capital............ $ 19,780 $ 44,098 $ 79,155 $ 177,657 $ 219,082
Total assets............... 110,976 291,450 576,103 1,501,102 1,789,248
Long-term debt (1)......... 6,719 49,653 145,790 425,894 493,309
Total liabilities.......... 84,367 207,085 433,674 1,098,529 1,338,326
Minority interest.......... 314 -- -- -- --
Stockholders' equity....... 26,295 84,365 142,429 402,573 450,922
- --------
(1) Long-term debt includes current maturities of long-term debt and the
payable to Sonic's Chairman. See Sonic's Consolidated Financial Statements
and related notes included elsewhere in this Form 10-K.
22
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis of the results of operations and
financial condition should be read in conjunction with the Sonic Automotive,
Inc. and Subsidiaries Consolidated Financial Statements and the related notes
thereto beginning on page F-1 of this annual report.
Overview
We are the second largest automotive retailer in the United States, as
measured by total revenue, operating 165 dealership franchises and 30
collision repair centers throughout the United States as of March 20, 2001. 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 for our automotive customers.
The following table depicts the breakdown of our new vehicle revenues by
brand for each of the past three years:
Percentage of New
Vehicle Revenues for
the year ended
December 31,
--------------------
1998 1999 2000
------ ------ ------
Brand
Honda................................................... 1.0% 6.7% 14.4%
Ford.................................................... 40.5% 23.2% 13.5%
Chrysler (1)............................................ 18.9% 14.0% 12.0%
BMW..................................................... 5.3% 9.5% 10.7%
General Motors (2)...................................... 6.2% 13.5% 10.7%
Toyota.................................................. 10.7% 7.9% 8.3%
Nissan.................................................. 0.0% 3.1% 6.5%
Lexus................................................... 0.0% 3.8% 5.3%
Other (3)............................................... 17.4% 18.3% 18.6%
------ ------ ------
Total................................................... 100.0% 100.0% 100.0%
====== ====== ======
- --------
(1) Includes Chrysler, Dodge, Jeep and Plymouth
(2) Includes Buick, Cadillac, Chevrolet, GMC, Oldsmobile and Pontiac
(3) Includes Acura, Audi, Hyundai, Infiniti, Isuzu, KIA, Land Rover,
Lincoln, Mercedes, Mercury, Mitsubishi, Porsche, Subaru, Volkswagen and
Volvo
New vehicle revenues include both the sale and lease of new vehicles. Used
vehicle revenues include amounts received for used vehicles sold to retail
customers, other dealers and wholesalers. Other operating revenues include
parts and services revenues, fees and commissions for arranging financing and
insurance and sales of third party extended warranties for vehicles. In
connection with vehicle financing contracts, we receive 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,
we have established reserves based on our historical chargeback experience. We
also sell warranties provided by third-party vendors, and recognize 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. During the fourth quarter of 2000, we saw a rapid slowdown
in the new vehicle sales of domestic manufacturer brands as a
23
result of these factors. This caused many of our dealerships to have excess
new vehicle inventory and to overspend on advertising and promotional
programs. As a result of this slowdown in the new vehicle market, our new
vehicle revenue declined by approximately 5.5% on a same store basis in the
fourth quarter of 2000. We expect this slowdown in domestic new vehicle sales
to continue into the first quarter of 2001. While used vehicle sales are
affected by the same factors as new vehicle sales, generally a slowdown in new
vehicle sales does not necessarily indicate a similar slowdown in used vehicle
sales due to limited comparability among used vehicles and the subjective
nature of their valuation. In the fourth quarter of 2000, our used vehicle
revenues declined less than 1% on a same store basis.
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, service and collision
repair businesses, none of which are 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. Salary expense, employee benefits costs, facility rent and advertising
expenses comprise the majority of our selling, general and administrative
expenses. Approximately 64.2% of our selling, general and administrative
expenses for the year ended December 31, 2000 were variable. We are able to
adjust these expenses as the operating or economic environment impacting our
dealerships changes. We manage these variable expenses, such as advertising
(9.3% of selling, general and administrative expenses) and non-salaried sales
compensation (48.2%) 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. 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 substantially offset by amounts
received from manufacturers, in the form of floor plan inventory incentives.
These payments are credited against our cost of sales. In 2000, we received
approximately $37.3 million in manufacturer inventory incentives which
resulted in an effective borrowing rate under our floor plan facilities of
approximately 1.7%.
Our business is fundamentally managed based on individual dealership
operating performance. Each of our 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, we have aggregated
our dealerships 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. Our Consolidated Financial Statements discussed below
reflect the results of operations, financial position and cash flows of each
of our dealerships acquired prior to December 31, 2000. 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 which would have resulted had
such acquisitions occurred at the beginning of the periods presented, nor is
it indicative of future results of operations, financial position and cash
flows.
24
Results of Operations
The following table summarizes, for the periods presented, the percentages
of total revenues represented by certain items reflected in our Consolidated
Statements of Income.
Percentage of Total Revenues for
the Year Ended December 31,
--------------------------------
1998 1999 2000
---------- ---------- ----------
Revenues:
New vehicles............ 60.0% 58.7% 58.2%
Used vehicles........... 27.8% 27.9% 27.7%
Parts, service and
collision repair....... 10.1% 10.9% 11.4%
Finance, insurance and
other.................. 2.1% 2.5% 2.7%
---------- ---------- ----------
Total revenues............ 100.0% 100.0% 100.0%
Cost of sales............. 87.1% 86.4% 85.7%
---------- ---------- ----------
Gross profit.............. 12.9% 13.6% 14.3%
Selling, general and
administrative expenses.. 9.3% 9.7% 10.4%
Depreciation.............. 0.1% 0.1% 0.1%
Goodwill amortization..... 0.2% 0.3% 0.3%
---------- ---------- ----------
Operating income.......... 3.3% 3.5% 3.5%
Interest expense, floor
plan..................... 0.9% 0.7% 0.8%
Interest expense, other... 0.6% 0.6% 0.7%
---------- ---------- ----------
Income before income
taxes.................... 1.8% 2.2% 2.0%
========== ========== ==========
Revenues
Revenues grew in each of our primary revenue areas in 2000, causing total
revenues to increase 80.6% over the previous year. Of this increase,
approximately 97.5% resulted from acquisitions completed in 1999 and 2000 and
approximately 2.5% was contributed by stores owned longer than one year. These
increases were slightly offset by the disposal of certain dealership
franchises in 2000, which did not have a significant impact on our revenues.
Revenues also grew in each of our primary revenue areas in 1999, causing total
revenues to increase 109% over the previous year. Of this increase,
approximately 88.9% resulted from acquisitions completed in 1998 and 1999 and
approximately 11.1% was contributed by stores owned longer than one year.
New vehicles: Revenues from the sale of new vehicles increased approximately
78.9% in 2000, representing an increase in unit sales of approximately 71.4%
and an increase in the average selling price of approximately 4.4%. The
increase in unit sales resulted primarily from acquisitions, which was offset
by an approximate 5.4% decline in unit sales from dealerships owned longer
than one year. The increase in the average selling price resulted primarily
from an increase in the percentage of units sold contributed by luxury brands
which carry higher sales prices than other non-luxury brands. Luxury brands
comprised 16.5% of our new vehicle unit sales in 2000 compared to 13.5% in
1999.
In 1999, revenues from the sale of new vehicles increased approximately
104%, representing an increase in unit sales of approximately 90.6% and an
increase in the average selling price of approximately 7.2%. Of the increase
in unit sales, approximately 89.6% resulted from acquisitions and
approximately 10.4% resulted from stores owned longer than one year. The
increase in the average selling price resulted primarily from an increase in
the percentage of units sold contributed by higher-priced luxury brands.
Luxury brands comprised 13.5% of our new vehicle unit sales in 1999 compared
to 7.3% in 1998.
25
The following charts depict the percentage of new vehicle units and revenues
contributed by domestic, import and luxury import brands over each of the last
three years:
[GRAPHIC]
Revenues Units
---------------------- ----------------------
1998 1999 2000 1998 1999 2000
------ ------ ------ ----- ------ ------
Domestic 69.2% 53.2% 38.0% 71.7% 56.5% 39.7%
Import 18.7% 24.8% 35.1% 21.0% 30.0% 43.8%
Luxury Import 12.1% 22.0% 26.9% 7.3% 13.5% 16.5%
Used Vehicles: Revenues from retail sales of used vehicles increased
approximately 82.5% in 2000. The increase was primarily due to an increase in
unit sales of approximately 68.4% and an increase in the average selling price
of approximately 8.3%. Of the increase in unit sales, approximately 94.6%
resulted from acquisitions and 5.4% resulted from stores owned longer than one
year.
In 1999, revenues from retail sales of used vehicles increased 111%. The
increase was primarily due to an increase in unit sales of approximately 92.5%
and an increase in the average selling price of approximately 9.5%. Of the
increase in unit sales, approximately 87.7% resulted from acquisitions and
12.3% resulted from stores owned longer than one year
Fixed Operations and Finance and Insurance: Revenues from parts, service and
collision repair increased approximately 88.9% in 2000, of which approximately
93.8% resulted from acquisitions. In 1999, revenues from parts, service and
collision repair increased approximately 124%, of which approximately 92.8%
resulted from acquisitions.
Finance and insurance revenue increased 96.6% in 2000 and 143% in 1999
resulting primarily from increases in revenues from the retail sale of new and
used vehicles in both years. Finance and insurance revenues per vehicle
increased 15.5% in 2000 and 27.2% in 1999 resulting primarily from
management's continued focus on improving training and development programs
for finance and insurance sales people.
Gross profit and gross margins
Gross profit increased 90.4% in 2000, of which approximately 94.9% resulted
from acquisitions. Our overall gross profit percentage increased to 14.3% from
13.6% due primarily to an increase in the percentage of revenues contributed
by parts, service, collision repair services and finance and insurance
products, which earn higher margins than vehicles sales. Parts, service and
collision repair revenues as a percentage of total revenues increased to 11.4%
in 2000 from 10.9% in 1999. Finance and insurance revenues as a percentage of
total revenues increased to 2.7% in 2000 from 2.5% in 1999. In addition, the
gross profit percentage earned on our parts, service, collision repair and
finance and insurance products increased to 52.2% in 2000 from 50.2% in 1999.
Gross profit increased 119% in 1999, of which approximately 88.3% resulted
from acquisitions. Our overall gross profit percentage increased to 13.6% in
1999 from 12.9% in 1998 due primarily to an increase in the percentage of
revenues contributed by parts, service, collision repair services and finance
and insurance products, which earn higher margins than vehicles sales. 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.
In addition, the gross profit percentage earned
26
on our parts, service, collision repair and finance and insurance products
increased to 50.2% in 1999 from 50.0% in 1998.
The following graph depicts our mix of revenue and gross profit for each of
the past three years:
[GRAPHIC]
New Used Parts, service Finance
vehicles vehicles and collision repair and insurance
1998
- ----
Revenue 60.0% 27.8% 10.1% 2.1%
Gross Profit 36.4% 16.2% 33.9% 13.5%
1999
- ----
Revenue 58.7% 28.0% 10.9% 2.5%
Gross Profit 35.5% 15.2% 34.0% 15.3%
2000
- ----
Revenue 58.2% 28.7% 11.4% 2.7%
Gross Profit 33.9% 14.8% 35.5% 15.8%
Selling, general and administrative expenses
Selling, general and administrative expenses increased 93.7% in 2000,
resulting principally from acquisitions. Such expenses as a percentage of
revenues increased to 10.4% in 2000 from 9.7% in 1999. The significant
expenses in this category are primarily compensation, advertising and facility
rental. 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 6.4% in
2000 from 6.0% in 1999 (as a percentage of gross profits, compensation expense
increased slightly to 44.5% in 2000 from 44.2% in 1999). In addition, rent
expense increased as a percentage of total revenues to 0.9% in 2000 from 0.8%
in 1999 primarily due to acquisitions of dealerships located in higher rent
markets and increased lease costs on newly constructed dealerships.
Advertising expense as a percentage of total revenues remained constant at
1.0% of revenues in both 2000 and 1999.
In 1999, selling, general and administrative expenses increased 118%,
resulting principally from acquisitions. Such expenses as a percentage of
revenues increased to 9.7% in 1999 from 9.3% in 1998. 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.
Advertising expense as a percentage of total revenues decreased to 1.0% in
1999 from 1.1% in 1998 resulting primarily from benefits of scale which
allowed us to recognize cost savings.
Depreciation and amortization
Depreciation expense, excluding goodwill amortization, increased
approximately 89.4% in 2000. The balance of gross property and equipment,
excluding land and construction in process, increased approximately $8.9
million in 2000, of which approximately $4.3 million resulted from dealership
acquisitions and approximately $4.6 million from additional capital
expenditures, net of disposals and other adjustments. In 1999, depreciation
expense increased approximately 127%. The balance of property and equipment,
excluding
27
construction in process, increased approximately $37.8 million in 1999, of
which approximately $30.7 million resulted from dealership acquisitions and
approximately $7.1 million resulted from additional capital expenditures, net
of disposals and other adjustments. As a percentage of total revenues,
depreciation expense was at 0.1% in 2000, 1999 and 1998. Goodwill amortization
expense increased 95.9% in 2000 and 166% in 1999 as a result of additional
acquisitions. Goodwill arising from acquisitions was approximately $88.1
million in 2000 and approximately $417.3 million in 1999.
Interest expense, floor plan
Interest expense, floor plan increased 109% in 2000, approximately 77.4% of
which resulted from acquisitions and 22.6% of which was contributed by stores
owned longer than one year. As a percentage of total revenues, floor plan
interest increased to 0.8% in 2000 from 0.7% in 1999. The increases in
interest expense from stores owned longer than one year, as well as the
increase in interest expense as a percentage of revenues, was due to an
increase in the average floor plan interest rate to approximately 7.9% in 2000
from 6.9% in 1999, as well as an increase in our average days supply of new
vehicles in inventory to approximately 57.5 days in 2000 from 53.9 days in
1999. This increase in our average days supply, which occurred primarily in
the fourth quarter of 2000, resulted in larger inventory and floor plan
balances.
In 1999, interest expense, floor plan increased 59.9% due to interest
expense contributed by dealerships acquired which was offset by a decline in
interest expense from stores owned longer than one year. As a percentage of
total revenues, floor plan interest decreased to 0.7% in 1999 from 0.9% in
1998 as a result of a decrease in the average floor plan interest rate and an
improvement in inventory turnover rates.
Interest expense, other
Interest expense, other increased $20.6 million in 2000, due primarily to an
increase in the average balance under our $500 million revolving credit
agreement with Ford Motor Credit Company ("Ford Motor Credit") and Chrysler
Financial Company, LLC ("Chrysler Financial") (the "Revolving Facility") to
$331.8 million in 2000 from $76.3 million in 1999, as well as an increase in
the average interest rate to approximately 9.0% in 2000 from 7.9% in 1999.
This increase in interest expense, other was partially offset by the
capitalization of $1.9 million of interest costs on construction projects.
Interest expense, other increased $12.2 million in 1999 due primarily to
interest incurred on the $125 million of 11% senior subordinated notes we
issued on July 31, 1998 and on additional borrowings under our Revolving
Facility. This increase in interest expense, other was partially offset by the
capitalization of $0.2 million of interest costs on construction projects.
Provision for income taxes
The effective tax rate was 38.1% in 2000 compared to 38.8% in 1999 and 37.4%
in 1998. The decrease from 1999 to 2000 was primarily attributable to the
realization of the benefits of certain tax planning strategies, offset
somewhat by acquisitions we made in the latter part of 1999 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.
The increase in 1999 from 1998 was also primarily attributable to
acquisitions 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.
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 offerings of debt and equity securities to
finance our operations and expansion.
28
Cash from operations:
During 2000, net cash provided by operating activities was approximately
$106.2 million compared to $45.8 million in 1999 and $12.0 million in 1998.
The increases each year were primarily due to increases in net income.
Cash flows from operations include the effect of vehicle purchases and
related floor plan financing. We currently have standardized floor plan credit
facilities with Chrysler Financial, General Motors Acceptance Corporation
("GMAC") and Ford Motor Credit. The floor plan credit facility with Chrysler
Financial provides up to $750 million for the purchase of vehicles at our
Chrysler dealerships. The floor plan credit facility with GMAC, which was
obtained on June 30, 2000, provides for the purchase of vehicles at nine of
our General Motors dealerships. The floor plan facility with Ford Motor Credit
provides up to $550 million for the purchase of vehicles at all of our other
dealerships. As of December 31, 2000, there was an aggregate of approximately
$143.0 million outstanding under the Chrysler Financial floor plan facility,
$70.8 million outstanding under the GMAC floor plan facility and $470.9
million outstanding under the Ford Motor Credit floor plan facility. Balances
outstanding under new vehicle floor plan indebtedness generally exceed the
related inventory balances, which are generally reduced by purchase discounts
from manufacturers that are not reflected in the related floor plan liability.
These manufacturer purchase discounts are standard in the automotive retail
industry, typically occur on all new vehicle purchases and are not used to
offset the related floor plan liability. These discounts are aggregated and
generally paid to us by the manufacturers on a quarterly basis.
Amounts outstanding under the Chrysler Financial floor plan facility bear
interest at 1.25% above LIBOR (LIBOR was 6.56% at December 31, 2000). Amounts
outstanding under the Ford Motor Credit and GMAC floor plan facilities bear
interest at prime rate (prime was 9.50% at December 31, 2000), subject to
certain incentives and other adjustments. Interest payments under each of our
floor plan facilities are due monthly, but we are not required to make
principal repayments prior to the sale of the vehicles. The underlying notes
are due when the related vehicles are sold and are collateralized by vehicle
inventories and other assets, excluding franchise agreements, of the relevant
dealership subsidiary. The floor plan facilities contain a number of
covenants, including among others, covenants restricting us with respect to
the creation of liens and changes in ownership, officers and key management
personnel. We are in compliance with all restrictive covenants as of December
31, 2000.
Investing activities:
Cash used for investing activities in 2000 was approximately $109.6 million,
compared to $368.6 million in 1999 and $74.9 million in 1998. Our principal
investing activities include capital expenditures and dealership acquisitions.
Capital Expenditures: Other than construction of new dealerships and
collision repair centers, our capital expenditures generally include building
improvements and equipment for use in our dealerships. Capital expenditures in
2000 were approximately $73.2 million, compared to $21.5 million in 1999 and
$4.3 million in 1998. The year over year increases primarily represent
expenditures for the construction and renovation of dealerships and collision
repair centers. Of the capital expenditures in 2000, approximately $57.9
million related to the construction of new dealerships and collision repair
centers compared to $9.0 million for similar expenditures in 1999. Once
completed, these new dealerships and collision repair centers are generally
sold to third parties in sale-leaseback transactions. We sold $44.1 million of
completed construction projects in sale leaseback transactions in 2000 and
$3.0 million in 1999. There were no material gains or losses on these sales.
In addition, in 1999 we sold real estate at two of our existing dealerships in
sale-leaseback transactions for approximately $10.6 million. We recognized a
gain of approximately $2.1 million which was deferred and is being amortized
against rent expense over the term of the lease. As of December 31, 2000,
total construction in progress was approximately $17.4 million, of which
approximately $5.2 million represented construction costs on facilities which
are expected to be completed and sold within one year in sale-leaseback
transactions. Accordingly, these costs have been classified in other current
assets on the accompanying Consolidated Balance Sheet as of December 31, 2000.
We do not expect any significant gains or losses from these sales.
29
Dealership acquisitions: During 2000, we acquired 11 dealerships for
approximately $92.0 million in cash and 11,589 shares of Class A convertible
preferred stock, Series II, recorded at an estimated value of approximately
$11.6 million. The cash portion of the purchase price was financed with a
combination of cash borrowed under our Revolving Facility and cash generated
from our existing operations.
During 1999, we acquired 72 dealerships for approximately $420.4 million in
cash, 52,065 shares of Class A convertible preferred stock (6,282 shares of
Series II and 45,783 shares of Series III) recorded at an estimated value of
approximately $52.0 million, and 6,784,347 shares of Class A common stock
recorded at a value of approximately $75.8 million. The cash portion of the
purchase price was financed with a combination of a portion of the net
proceeds received 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.
During 1998, we acquired 19 dealerships for approximately $96.2 million in
cash, 30,733.8 shares of Class A convertible preferred stock (14,406.3 shares
of Series I, 10,054.5 shares of Series II and 6,273 shares of Series III)
recorded at an estimated value of approximately $29.3 million, 970,588 shares
of Class A common stock recorded at a value of approximately $8.3 million, and
warrants to purchase 154,000 shares of Class A common stock recorded at a
value of approximately $0.5 million. The cash portion of the purchase price
was financed with a portion of the net proceeds from our offering of $125
million in senior subordinated notes in July 1998, cash borrowed under the
Revolving Facility and cash generated from our existing operations.
In the ordinary course of business, we evaluate dealerships for possible
disposition based on various performance criteria. During 2000, we sold or
otherwise disposed of assets from eight of our dealership franchises which
contributed approximately $65.5 million in revenues in 2000. Proceeds, net of
disposal costs, from these dispositions were approximately $7.1 million, and
we have recognized no material gains or losses on these dispositions.
Financing activities:
Cash flows from financing activities were approximately $29.7 million in
2000 and primarily related to net borrowings under our Revolving Facility of
approximately $64.8 million, net borrowings under our revolving real estate
acquisition and construction line of credit with Ford Motor Credit of
approximately $4.5 million, and repurchases of stock under our stock
repurchase program of approximately $40.0 million.
Cash flows from financing activities in 1999 were approximately $354.1
million and primarily related to net borrowings under our Revolving Facility
of approximately $280.1 million, net proceeds received from our public
offering of public stock on May 5, 1999 of approximately $85.0 million, and
repurchases of stock under our stock repurchase program of approximately $6.4
million.
Cash flows from financing activities in 1998 were approximately $96.4
million and primarily represented net proceeds of approximately $121.0 million
received from the issuance of our senior subordinated notes on July 31, 1998
and net repayments under our Revolving Facility of approximately $24.4
million.
The Revolving Facility: On August 10, 2000, we entered into the Revolving
Facility with Ford Motor Credit and Chrysler Financial to replace our previous
$350 million acquisition line of credit with Ford Motor Credit. The Revolving
Facility has a borrowing limit of $500 million, subject to a borrowing base
calculated on the basis of our receivables, inventory and equipment and a
pledge of certain additional collateral by one of our affiliated companies
(the borrowing base was approximately $426.8 million at December 31, 2000).
Amounts outstanding under the Revolving Facility bear interest at 2.50% above
LIBOR (LIBOR was 6.56% at December 31, 2000) and will mature on October 31,
2003 (but may be extended for a number of additional one year terms to be
negotiated with Ford Motor Credit and Chrysler Financial). Borrowings, net of
repayments, under the Revolving Facility for the year ended December 31, 2000
were approximately $64.8 million and were primarily used to finance
acquisitions. The total outstanding balance as of December 31, 2000 was
approximately $353.8 million. Additional amounts to be drawn under the
Revolving Facility are to be used for the acquisition of additional
dealerships and to provide for general working capital and other general
corporate purposes.
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We agreed under the Revolving Facility not to pledge any of our assets to
any third party (with the exception of currently encumbered assets of our
dealership subsidiaries that are subject to previous pledges or liens). In
addition, the Revolving Facility contains certain negative covenants,
including covenants restricting or prohibiting the payment of dividends,
capital expenditures and material dispositions of assets as well as other
customary covenants and default provisions. Financial covenants include
specified ratios of
. current assets to current liabilities (at least 1.23:1),
. earnings before interest, taxes, depreciation and amortization (EBITDA)
and rent, less capital expenditures, to fixed charges (at least 1.4:1),
. EBITDA to interest expense (at least 2:1) and
. total adjusted debt to EBITDA (no greater than 2.25:1).
In addition, the loss of voting control over Sonic by Bruton Smith, Chairman
and Chief Executive Officer, Scott Smith, President and Chief Operating
Officer, and their spouses or immediate family members or our failure, with
certain exceptions, to own all the outstanding equity, membership or
partnership interests in our dealership subsidiaries will constitute an event
of default under the Revolving Facility. We are in compliance with all
restrictive covenants as of December 31, 2000.
The Mortgage Facility: In June 2000, we entered into a revolving real estate
acquisition and constructio