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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.
30
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 construction line of credit (the "Construction Loan") and a
related mortgage refinancing facility (the "Permanent Loan" and together with
the Construction Loan, the "Mortgage Facility") with Ford Motor Credit. Under
the Construction Loan, our dealership development subsidiaries can borrow up
to $50.0 million to finance land acquisition and dealership construction
costs. Advances can be made under the Construction Loan until December 2003.
All advances mature on June 22, 2005, bear interest at 2.25% above LIBOR and
are secured by Sonic's guarantee and a lien on all of the borrowing
subsidiaries' real estate and other assets. The total outstanding balance
under the Construction Loan as of December 31, 2000 was approximately $4.6
million.
Under the Permanent Loan, we can refinance up to $50.0 million in advances
under the Construction Loan once the projects are completed. Advances can be
made under the Permanent Loan until June 2005. All advances under the
Permanent Loan mature on June 22, 2010, bear interest at 2.00% above LIBOR and
are secured by the same collateral given under the Construction Loan. As of
December 31, 2000, no amounts were outstanding under the Permanent Loan.
The Mortgage Facility allows us to borrow up to $100 million in the
aggregate under the Construction Loan and the Permanent Loan. The Mortgage
Facility is not cross-collateralized with the Revolving Facility; however, a
default under one will cause a default under the other. Among other customary
covenants, the borrowing subsidiaries under the Mortgage Facility agreed not
to incur any other liens on their property (except for existing encumbrances
on property acquired) and not to transfer their property or more than 20% of
their ownership interests to any third party. In addition, the loss of voting
control over Sonic by Bruton Smith, Scott Smith and their spouses or immediate
family members, with certain exceptions, will result in an event of default
under the Mortgage Facility. Sonic was in compliance with all restrictive
covenants as of December 31, 2000.
The 11% Senior Subordinated Notes Due 2008: We currently have an aggregate
principal balance of $125 million in senior subordinated notes outstanding
which mature on August 1, 2008 and bear interest at a stated rate of 11.0%.
The notes are unsecured and are redeemable at our option after August 1, 2003.
Interest payments are due semi-annually on August 1 and February 1 and
commenced February 1, 1999. The notes are subordinated to all of our present
and future senior indebtedness, including the Revolving Facility. Redemption
prices during 12 month periods beginning August 1 are 105.500% in 2003,
103.667% in 2004, 101.833% in 2005 and 100% thereafter.
The indenture governing the senior subordinated notes contains certain
specified restrictive and required financial covenants. We have agreed not to
pledge our assets to any third party except under certain limited
31
circumstances (for example, floor plan indebtedness). We have also agreed to
certain other limitations or prohibitions concerning the incurrence of other
indebtedness, capital stock, guaranties, asset sales, investments, cash
dividends to stockholders, distributions and redemptions. We are in compliance
with all restrictive covenants as of December 31, 2000.
Stock Repurchase Program: Our Board of Directors has authorized us to expend
up to $75 million to repurchase shares of our Class A common stock or redeem
securities convertible into Class A common stock. As of December 31, 2000 we
had repurchased 3,576,363 million shares of Class A common stock for
approximately $32.8 million and had also redeemed 13,551 shares of Class A
convertible preferred stock at a total cost of approximately $13.6 million.
Through March 20, 2001, we have repurchased approximately 4,987,163 million
shares of Class A common stock for approximately $43.5 million and have
redeemed 13,801.5 shares of Class A convertible preferred stock for
approximately $13.8 million. We will continue to repurchase shares from time
to time subject to market conditions.
We believe that funds generated through future operations and availability
of borrowings under our floor plan financing (or any replacements thereof) and
other credit arrangements will be sufficient to fund our debt service and
working capital requirements and any seasonal operating requirements,
including our currently anticipated internal growth for our existing
businesses, for the foreseeable future. We expect to fund any future
acquisitions from future cash flow from operations, additional debt financing
(including the Revolving Facility) or the issuance of Class A common stock,
preferred stock or other convertible instruments.
Seasonality
Our operations are subject to seasonal variations. The first quarter
generally contributes less revenue and operating profits than the second,
third and fourth quarters. Seasonality is principally caused by weather
conditions and the timing of manufacturer incentive programs and model
changeovers.
Significant Materiality of Goodwill
Goodwill represents the excess purchase price over the estimated fair value
of the tangible and separately measurable intangible net assets acquired. The
cumulative gross goodwill balance was approximately $697.8 million at December
31, 2000 and approximately $605.1 million at December 31, 1999. As a
percentage of total assets and stockholders' equity, goodwill, net of
accumulated amortization, represented 37.4% and 148.3%, respectively, at
December 31, 2000, and 39.5% and 147.2%, respectively, at December 31, 1999.
Generally accepted accounting principles in the United States of America
require that goodwill and all other intangible assets be amortized over the
period benefited. We have determined that the period benefited by the goodwill
will be no less than 40 years. Accordingly, we are amortizing goodwill over a
40 year period. Earnings reported in periods immediately following an
acquisition would be overstated if we attributed a 40 year benefit to an
intangible asset that should have had a shorter benefit period. In later
years, we would be burdened by a continuing charge against earnings without
the associated benefit to income valued by management in arriving at the
consideration paid for the businesses acquired. Earnings in later years also
could be significantly affected if management then determined that the
remaining balance of goodwill was impaired. We periodically compare the
carrying value of goodwill with the anticipated undiscounted future cash flows
from operations of the business we have acquired in order to evaluate the
recoverability of goodwill. We have concluded that the anticipated future cash
flows associated with intangible assets recognized in our acquisitions will
continue indefinitely, and there is no pervasive evidence that any material
portion will dissipate over a period shorter than 40 years. We will incur
additional goodwill in future acquisitions.
The Financial Accounting Standards Board recently proposed new rules
relating to the accounting for business combinations and intangible assets.
One aspect of the proposal would not permit amortization of goodwill, but
would require the carrying amount of goodwill to be reduced only if it was
found to be impaired or was associated with assets to be sold or otherwise
disposed. If the proposed rules are adopted, goodwill arising
32
from acquisitions completed prior to the date of adoption would no longer be
amortized, though reversal of goodwill amortization recognized in prior
periods would not be permitted.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our variable rate floor plan notes payable, revolving
credit facility borrowings and other variable rate notes expose us to risks
caused by fluctuations in the underlying interest rates. The total outstanding
balance of such instruments was approximately $1.1 billion at December 31,
2000 and approximately $822.0 million at December 31, 1999. A change of one
percent in the interest rate would have caused a change in interest expense of
approximately $9.5 million in 2000 and approximately $4.2 million in 1999. Of
the total change in interest expense, approximately $5.9 million in 2000 and
approximately $3.3 million in 1999 would have resulted from floor plan notes
payable.
Our exposure with respect to floor plan notes payable is mitigated by floor
plan incentives received from manufacturers which are generally based on rates
similar to those incurred under our floor plan financing arrangements. Our
floor plan interest expense in 2000 exceeded the amounts we received from
these manufacturer floor plan incentives by only approximately $9.8 million.
As a result, the effective rate incurred under our floor plan financing
arrangements was reduced to an annualized rate of approximately 1.7% after
considering these incentives.
Item 8. Financial Statements and Supplementary Data.
See "Consolidated Financial Statements and Notes" beginning on page F-1
herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
33
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information required by this item with respect to compliance by Sonic's
directors, executive officers and certain beneficial owners of Sonic's Common
Stock with Section 16(a) of the Securities Exchange Act of 1934, is furnished
by incorporation by reference to all information under the captions entitled
"Election of Directors," and "Ownership of Capital Securities" in the Proxy
Statement (to be filed hereafter) for Sonic's Annual Meeting of the
Stockholders to be held on May 2, 2001 (the "Proxy Statement"). The
information required by this item with respect to Sonic's executive officers
and directors appears in Item I of Part I of this Annual Report on Form 10-K
under the caption "Executive Officers and Directors of the Registrant."
Item 11. Executive Compensation.
The information required by this item is furnished by incorporation by
reference to all information under the captions entitled "Election of
Directors" and "Executive Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is furnished by incorporation by
reference to all information under the caption "General--Ownership of Capital
Securities" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is furnished by incorporation by
reference to all information under the caption "Certain Transactions" in the
Proxy Statement.
34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
The exhibits and other documents filed as a part of this Annual Report on
Form 10-K, including those exhibits which are incorporated by reference
herein, are:
(a)(1) Financial Statements:
See the Consolidated Financial Statements beginning on page F-1 hereof.
(2) Financial Statement Schedules: No financial statement schedules are
required to be filed as part of this Annual Report on Form 10-K.
(3) Exhibits:
Exhibits required in connection with this Annual Report on Form 10-K are
listed below. Certain of such exhibits, indicated by an asterisk, are
hereby incorporated by reference to other documents on file with the
Securities and Exchange Commission with which they are electronically
filed, to be a part hereof as of their respective dates.
Exhibit No. Description
----------- -----------
3.1* Amended and Restated Certificate of Incorporation of Sonic
(incorporated by reference to Exhibit 3.1 to Sonic's Registration
Statement on Form S-1 (Reg. No. 333-33295) (the "Form S-1")).
3.2* Certificate of Amendment to Sonic's Amended and Restated
Certificate of Incorporation effective June 18, 1999 (incorporated
by reference to Exhibit 3.2 to Sonic's Annual Report on Form 10-K
for the year ended December 31, 1999 (the "1999 Form 10-K")).
3.3* Certificate of Designation, Preferences and Rights of Class A
Convertible Preferred Stock (incorporated by reference to Exhibit
4.1 to Sonic's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
3.4* Bylaws of Sonic (incorporated by reference to Exhibit 3.2 to the
Form S-1).
4.1* Specimen Certificate representing Class A Common Stock
(incorporated by reference to Exhibit 4.1 to the Form S-1).
4.2* Form of 11% Senior Subordinated Note due 2008, Series B
(incorporated by reference to Exhibit 4.3 to Sonic's Registration
Statement on Form S-4 (Reg. Nos. 333-64397 and 333-64397-001
through 333-64397-044) (the "Form S-4")).
4.3* Indenture dated as of July 1, 1998 among Sonic, as issuer, the
subsidiaries of Sonic named therein, as guarantors, and U.S. Bank
Trust National Association, as trustee (the "Trustee"), relating
to the 11% Senior Subordinated Notes due 2008 (incorporated by
reference to Exhibit 4.2 to the Form S-4).
4.4* First Supplemental Indenture dated as of December 31, 1999 among
Sonic, as issuer, the subsidiaries of Sonic named therein, as
guarantors and additional guarantors, and the Trustee, relating to
the 11% Senior Subordinated Notes due 2008 (incorporated by
reference to Exhibit 4.2a to the 1999 Form 10-K).
4.5* Second Supplemental Indenture dated as of September 15, 2000 among
Sonic, as issuer, the subsidiaries of Sonic named therein, as
guarantors and additional guarantors, and the Trustee, relating to
the 11% Senior Subordinated Notes due 2008 (incorporated by
reference to Exhibit 4.4 to Sonic's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000 (the "September 30, 2000
Form 10-Q")).
35
Exhibit No. Description
----------- -----------
4.6* Registration Rights Agreement dated as of June 30, 1997 among
Sonic, O. Bruton Smith, Bryan Scott Smith, William S. Egan and
Sonic Financial Corporation (incorporated by reference to Exhibit
4.2 to the Form S-1).
10.1* Credit Agreement dated as of August 10, 2000 (the "Credit
Agreement") between Sonic, as Borrower, Ford Motor Credit Company
("Ford Credit"), as Agent and Lender, and Chrysler Financial
Company, L.L.C. ("Chrysler Financial"), as Lender (incorporated by
reference to Exhibit 10.1 to the September 30, 2000 Form 10-Q).
10.2* Promissory Note dated August 10, 2000 executed by Sonic in favor
of Ford Credit pursuant to the Credit Agreement (incorporated by
reference to Exhibit 10.2 to the September 30, 2000 Form 10-Q).
10.3* Promissory Note dated August 10, 2000 executed by Sonic in favor
of Chrysler Financial pursuant to the Credit Agreement
(incorporated by reference to Exhibit 10.3 to the September 30,
2000 Form 10-Q).
10.4* Guaranty dated August 10, 2000 by the subsidiaries of Sonic named
therein, as Guarantors, in favor of Ford Credit, as Agent for the
Lenders under the Credit Agreement (incorporated by reference to
Exhibit 10.4 to the September 30, 2000 Form 10-Q).
10.5* Security Agreement dated August 10, 2000 by Sonic in favor of Ford
Credit, as Agent for the Lenders under the Credit Agreement
(incorporated by reference to Exhibit 10.5 to the September 30,
2000 Form 10-Q).
10.6* Security Agreement dated August 10, 2000 by the subsidiaries of
Sonic named therein in favor of Ford Credit, as Agent for the
Lenders under the Credit Agreement (incorporated by reference to
Exhibit 10.6 to the September 30, 2000 Form 10-Q).
10.7* Master Construction Loan Agreement dated as of June 23, 2000 (the
"Construction Loan Agreement") between the subsidiaries of Sonic
named therein, as borrowers, and Ford Credit, as lender
(incorporated by reference to Exhibit 10.7 to the September 30,
2000 Form 10-Q).
10.8* Permanent Loan Agreement dated as of June 23, 2000 (the "Permanent
Loan Agreement") between the subsidiaries of Sonic named therein,
as borrowers, and Ford Credit, as lender (incorporated by
reference to Exhibit 10.8 to the September 30, 2000 Form 10-Q).
10.9* Promissory Note dated June 23, 2000 by the subsidiaries of Sonic
named therein, as borrowers, in favor of Ford Credit, as lender,
pursuant to the Construction Loan Agreement (incorporated by
reference to Exhibit 10.9 to the September 30, 2000 Form 10-Q).
10.10* Promissory Note dated June 23, 2000 by the subsidiaries of Sonic
named therein, as borrowers, in favor of Ford Credit, as lender,
pursuant to the Permanent Loan Agreement (incorporated by
reference to Exhibit 10.10 to the September 30, 2000 Form 10-Q).
10.11* Guaranty dated June 23, 2000 by Sonic in favor of Ford Credit
guaranteeing the obligations of the subsidiaries of Sonic under
the Construction Loan Agreement and the Permanent Loan Agreement
(incorporated by reference to Exhibit 10.11 to the September 30,
2000 Form 10-Q).
10.12* Security Agreement dated June 23, 2000 by Sonic in favor of Ford
Credit pursuant to the Construction Loan Agreement and the
Permanent Loan Agreement (incorporated by reference to Exhibit
10.12 to the September 30, 2000 Form 10-Q).
10.13* Sonic Automotive, Inc. 1997 Stock Option Plan, Amended and
Restated as of June 5, 2000 (incorporated by reference to Exhibit
4.1 to Sonic's Registration Statement on Form S-8 (Reg. No. 333-
46272)).
36
Exhibit No. Description
----------- -----------
10.14* Sonic Automotive, Inc. Employee Stock Purchase Plan, Amended and
Restated as of June 5, 2000 (incorporated by reference to Exhibit
4.1 to Sonic's Registration Statement on Form S-8 (Reg. No. 333-
46274)).
10.15* Sonic Automotive, Inc. Formula Stock Option Plan for Independent
Directors (incorporated by reference to Exhibit 10.69 to Sonic's
Amended Annual Report on Form 10-K/A for the year ended December
31, 1997) (the "1997 Form 10-K/A")).
10.16* FirstAmerica Automotive, Inc. 1997 Stock Option Plan, Amended and
Restated as of December 10, 1999 (incorporated by reference to
Exhibit 4.1 to Sonic's Registration Statement on Form S-8 (Reg.
No. 333-95791)).
10.17* Employment Agreement between Sonic and O. Bruton Smith
(incorporated by reference to Exhibit 10.29 to the Form S-1).
10.18* Employment Agreement between Sonic and Thomas A. Price (the "Price
Employment Agreement") (incorporated by reference to Exhibit 10.2
to the 1999 Form 10-K).
10.18a First Amendment to the Price Employment Agreement.
10.19* Employment Agreement between Sonic and B. Scott Smith
(incorporated by reference to Exhibit 10.30 to the Form S-1).
10.20 Employment Agreement between Sonic and Theodore M. Wright.
10.21* Tax Allocation Agreement dated as of June 30, 1997 between Sonic
and Sonic Financial Corporation (incorporated by reference to
Exhibit 10.33 to the Form S-1).
10.22* Subordinated Promissory Note dated December 1, 1997 (the "Smith
Subordinated Note") in the amount of $5.5 million by Sonic, as
borrower, in favor of O. Bruton Smith, as lender (incorporated by
reference to Exhibit 10.72 to the 1997 Form 10-K/A).
10.23* Subordination Agreement dated as of July 31, 1998 between O.
Bruton Smith and the Trustee, acting for the benefit of the
holders of the Senior Subordinated Notes, and acknowledged by
Sonic, re: the Smith Subordinated Note (incorporated by reference
to Exhibit 10.89 to the Form S-4).
10.24* Agreement and Plan of Merger and Reorganization dated as of
October 31, 1999 by and among Sonic, FAA Acquisition Corp.,
FirstAmerica Automotive, Inc. and certain stockholders of
FirstAmerica Automotive, Inc. listed on the signature page therein
(incorporated by reference to Exhibit 10.8 to Sonic's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999).
21.1 Subsidiaries of Sonic.
23.1 Consent of Deloitte & Touche LLP.
99.1 Risk Factors.
- --------
* Filed previously
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by Sonic during the quarter ended
December 31, 2000.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Sonic Automotive, Inc.
/s/ Theodore M. Wright
By: _________________________________
Theodore M. Wright
Chief Financial Officer, Vice
President and Treasurer
Date: April 2, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ O. Bruton Smith Chief Executive Officer April 2, 2001
______________________________________ (principal executive
O. Bruton Smith officer) and chairman
/s/ Thomas A. Price Vice Chairman and Director April 2, 2001
______________________________________
Thomas A. Price
/s/ B. Scott Smith President, Chief Operating April 2, 2001
______________________________________ Officer and Director
B. Scott Smith
/s/ Theodore M. Wright Chief Financial Officer, April 2, 2001
______________________________________ Vice President and
Theodore M. Wright Treasurer (principal
financial and accounting
officer) and Director
/s/ Jeffrey C. Rachor Executive Vice President April 2, 2001
______________________________________ of Retail Operations and
Jeffrey C. Rachor Director
/s/ William R. Brooks Director April 2, 2001
______________________________________
William R. Brooks
/s/ William P. Benton Director April 2, 2001
______________________________________
William P. Benton
/s/ William I. Belk Director April 2, 2001
______________________________________
William I. Belk
/s/ H. Robert Heller Director April 2, 2001
______________________________________
H. Robert Heller
38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Sonic Automotive, Inc.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of Sonic
Automotive, Inc. and Subsidiaries (the "Company") as of December 31, 1999 and
2000, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 1999 and 2000, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
Charlotte, North Carolina
February 26, 2001
F-1
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 2000
(Dollars in thousands)
1999 2000
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 83,111 $ 109,325
Receivables, net...................................... 99,987 127,865
Inventories........................................... 630,857 773,785
Other current assets.................................. 21,612 26,428
---------- ----------
Total current assets................................ 835,567 1,037,403
Property and Equipment, net............................. 63,681 72,966
Goodwill, net........................................... 592,670 668,782
Other Assets............................................ 9,184 10,097
---------- ----------
Total Assets........................................ $1,501,102 $1,789,248
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable--floor plan............................. $ 517,575 $ 684,718
Trade accounts payable................................ 48,405 50,274
Accrued interest...................................... 11,605 10,279
Other accrued liabilities............................. 77,937 70,453
Current maturities of long-term debt.................. 2,388 2,597
---------- ----------
Total current liabilities........................... 657,910 818,321
Long-Term Debt.......................................... 418,006 485,212
Other Long-Term Liabilities............................. 3,923 5,733
Payable to the Company's Chairman....................... 5,500 5,500
Deferred Income Taxes................................... 8,476 21,093
Income Tax Payable...................................... 4,714 2,467
Commitments and Contingencies (Note 10).................
Stockholders' Equity:
Class A Convertible Preferred Stock................... 27,191 251
Class A Common Stock.................................. 291 333
Class B Common Stock.................................. 123 123
Paid-in capital....................................... 301,934 329,489
Retained earnings..................................... 79,392 153,564
Treasury Stock, at cost............................... (6,358) (32,838)
---------- ----------
Total stockholders' equity.......................... 402,573 450,922
---------- ----------
Total Liabilities and Stockholders' Equity.............. $1,501,102 $1,789,248
========== ==========
See notes to consolidated financial statements.
F-2
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1999 and 2000
(Dollars and shares in thousands, except per share amounts)
1998 1999 2000
---------- ---------- ----------
Revenues:
New vehicles............................... $ 962,939 $1,968,514 $3,522,049
Used vehicles.............................. 324,740 684,560 1,249,188
Wholesale vehicles......................... 119,351 250,794 430,513
---------- ---------- ----------
Total vehicles........................... 1,407,030 2,903,868 5,201,750
Parts, service and collision repair........ 162,660 364,184 687,975
Finance, insurance and other............... 34,011 82,771 162,751
---------- ---------- ----------
Total revenues........................... 1,603,701 3,350,823 6,052,476
Cost of sales................................ 1,396,259 2,896,400 5,187,289
---------- ---------- ----------
Gross profit................................. 207,442 454,423 865,187
Selling, general and administrative
expenses.................................... 150,130 326,914 633,356
Depreciation................................. 1,384 3,138 5,944
Goodwill amortization........................ 3,223 8,561 16,770
---------- ---------- ----------
Operating income............................. 52,705 115,810 209,117
Other income and expense:
Interest expense, floor plan............... 14,096 22,536 47,108
Interest expense, other.................... 9,395 21,586 42,244
Other income............................... 426 1,286 107
---------- ---------- ----------
Total other expense, net................. 23,065 42,836 89,245
---------- ---------- ----------
Income before income taxes................... 29,640 72,974 119,872
Provision for income taxes................... 11,083 28,325 45,700
---------- ---------- ----------
Net income................................... $ 18,557 $ 44,649 $ 74,172
========== ========== ==========
Basic net income per share................... $ 0.81 $ 1.41 $ 1.74
========== ========== ==========
Weighted average number of shares
outstanding................................. 22,852 31,744 42,518
========== ========== ==========
Diluted net income per share................. $ 0.74 $ 1.27 $ 1.69
========== ========== ==========
Weighted average number of diluted shares
outstanding................................. 24,970 35,248 43,826
========== ========== ==========
See notes to consolidated financial statements.
F-3
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1999 and 2000
(Dollars and shares in thousands)
Class A Class B
Preferred Stock Common Stock Common Stock
--------------- ------------- --------------
Shares Amount Shares Amount Shares Amount
------ -------- ------ ------ ------ ------
BALANCE AT DECEMBER 31, 1997..... -- $ -- 10,000 $100 12,500 $125
Issuance of Preferred Stock.... 31 29,342 -- -- -- --
Issuance of Class A Common
Stock......................... -- -- 975 10 -- --
Shares awarded under stock
compensation plans............ -- -- 252 3 -- --
Issuance of warrants........... -- -- -- -- -- --
Conversion of Preferred Stock.. (9) (8,911) 632 6 -- --
Conversion of Class B Common
Stock......................... -- -- 100 1 (100) (1)
Comprehensive income:
Net income................... -- -- -- -- -- --
Net unrealized loss.......... -- -- -- -- -- --
---- -------- ------ ---- ------ ----
Total comprehensive
income.................... -- -- -- -- -- --
---- -------- ------ ---- ------ ----
BALANCE AT DECEMBER 31, 1998..... 22 20,431 11,959 120 12,400 124
Issuance of Preferred Stock.... 59 59,045 -- -- -- --
Issuance of Class A Common
Stock......................... -- -- 12,852 129 -- --
Shares awarded under stock
compensation plans............ -- -- 281 3 -- --
Conversion of Preferred Stock.. (53) (52,285) 3,833 38 -- --
Conversion of Class B Common
Stock......................... -- -- 150 1 (150) (1)
Purchase of Treasury Stock..... -- -- -- -- -- --
Net income..................... -- -- -- -- -- --
---- -------- ------ ---- ------ ----
BALANCE AT DECEMBER 31, 1999..... 28 27,191 29,075 291 12,250 123
Issuance of Preferred Stock.... 11 11,589 -- -- -- --
Issuance of Class A Common
Stock......................... -- -- 809 8 -- --
Shares awarded under Stock
compensation plans............ -- -- 441 4 -- --
Conversion of Preferred Stock.. (26) (25,947) 2,967 30 -- --
Redemption of Preferred Stock.. (13) (12,582) -- -- -- --
Purchase of Treasury Stock..... -- -- -- -- -- --
Net income..................... -- -- -- -- -- --
---- -------- ------ ---- ------ ----
BALANCE AT DECEMBER 31, 2000..... -- $ 251 33,292 $333 12,250 $123
==== ======== ====== ==== ====== ====
F-4
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
Years Ended December 31, 1998, 1999 and 2000
(Dollars and shares in thousands)
Accumulated
Other Total
Paid-In Retained Treasury Comprehensive Stockholders'
Capital Earnings Stock Income (Loss) Equity
-------- -------- -------- ------------- -------------
BALANCE AT DECEMBER 31,
1997.................. $ 67,933 $ 16,186 $ -- $ 21 $ 84,365
Issuance of Preferred
Stock............... -- -- -- -- 29,342
Issuance of Class A
Common Stock........ 8,283 -- -- -- 8,293
Shares awarded under
stock compensation
plans............... 1,162 -- -- -- 1,165
Issuance of
warrants............ 728 -- -- -- 728
Conversion of
Preferred Stock..... 8,905 -- -- -- --
Conversion of Class B
Common Stock........ -- -- -- -- --
Comprehensive income:
Net income......... -- 18,557 -- -- 18,557
Net unrealized
loss.............. -- -- -- (21) (21)
-------- -------- -------- ---- --------
Total
comprehensive
income.......... -- -- -- -- 18,536
-------- -------- -------- ---- --------
BALANCE AT DECEMBER 31,
1998.................. 87,011 34,743 -- -- 142,429
Issuance of Preferred
Stock............... -- -- -- -- 59,045
Issuance of Class A
Common Stock........ 160,665 -- -- -- 160,794
Shares awarded under
stock compensation
plans............... 2,011 -- -- -- 2,014
Conversion of
Preferred Stock..... 52,247 -- -- -- --
Conversion of Class B
Common Stock........ -- -- -- -- --
Purchase of Treasury
Stock............... -- -- (6,358) -- (6,358)
Net income........... -- 44,649 -- -- 44,649
-------- -------- -------- ---- --------
BALANCE AT DECEMBER 31,
1999.................. 301,934 79,392 (6,358) -- 402,573
Issuance of Preferred
Stock............... -- -- -- -- 11,589
Issuance of Class A
Common Stock........ (8) -- -- -- --
Shares awarded under
stock compensation
plans............... 2,615 -- -- -- 2,619
Conversion of
Preferred Stock..... 25,917 -- -- -- --
Redemption of
Preferred Stock..... (969) -- -- -- (13,551)
Purchase of Treasury
Stock............... -- -- (26,480) -- (26,480)
Net income........... -- 74,172 -- -- 74,172
-------- -------- -------- ---- --------
BALANCE AT DECEMBER 31,
2000.................. $329,489 $153,564 $(32,838) -- $450,922
======== ======== ======== ==== ========
See notes to consolidated financial statements.
F-5
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1999 and 2000
(Dollars in thousands)
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 18,557 $ 44,649 $ 74,172
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 4,607 11,699 22,714
Loss on disposal of property and equipment... 278 249 317
Deferred income taxes........................ 2,164 2,075 12,384
Changes in assets and liabilities that relate
to operations:
Receivables................................ (11,018) (27,860) (25,167)
Inventories................................ 12,030 (45,665) (72,080)
Other assets............................... (4,586) 7,118 2,637
Notes payable--floor plan.................. (16,806) 50,707 105,809
Trade accounts payable and other
liabilities............................... 6,767 2,831 (14,590)
-------- -------- --------
Total adjustments........................ (6,564) 1,154 32,024
-------- -------- --------
Net cash provided by operating activities.... 11,993 45,803 106,196
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired.. (72,205) (362,383) (91,554)
Purchases of property and equipment............ (4,335) (21,548) (73,171)
Proceeds from sales of property and equipment.. 1,655 13,600 47,943
Proceeds from sale of dealerships ............. -- 1,700 7,148
-------- -------- --------
Net cash used in investing activities........ (74,885) (368,631) (109,634)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings/(repayments) in revolving credit
facilities.................................... (24,383) 280,116 69,342
Proceeds from long-term debt................... 121,034 1,380 1,418
Payments on long-term debt..................... (1,394) (8,037) (3,696)
Public offering of Class A common stock........ -- 84,990 --
Redemptions of Class A Convertible Preferred
Stock......................................... -- -- (13,551)
Purchases of Class A common stock.............. -- (6,358) (26,480)
Issuance of shares under stock compensation
plans......................................... 1,165 2,014 2,619
-------- -------- --------
Net cash provided by financing activities.... 96,422 354,105 29,652
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS........ 33,530 31,277 26,214
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..... 18,304 51,834 83,111
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR........... $ 51,834 $ 83,111 $109,325
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest..................................... $ 17,504 $ 39,575 $ 90,678
Income taxes................................. $ 10,919 $ 20,681 $ 36,821
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES:
Preferred Stock issued for acquisitions and
contingent consideration...................... $ 29,342 $ 59,045 $ 11,589
Conversion of Preferred Stock.................. $ 8,911 $ 52,285 $ 25,947
Class A common stock issued for acquisitions... $ 8,250 $ 75,802 --
See notes to consolidated financial statements.
F-6
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands except per share amounts)
1. Description of Business and Summary of Significant Accounting Policies
Organization and Business--Sonic Automotive, Inc ("Sonic") is the second
largest automotive retailer in the United States (as measured by total
revenue), operating 169 dealership franchises and 30 collision repair centers
throughout the United States as of December 31, 2000. Sonic sells new and used
cars and light trucks, sells replacement parts, provides vehicle maintenance,
warranty, paint and repair services, and arranges related financing and
insurance for its automotive customers. As of December 31, 2000, Sonic sold a
total of 31 foreign and domestic brands of new vehicles.
Principles of Consolidation--All material intercompany balances and
transactions have been eliminated in the consolidated financial statements.
Revenue Recognition--Sonic records revenue when vehicles are delivered to
customers, when vehicle service work is performed and when parts are
delivered.
Sonic arranges financing for customers through various financial
institutions and receives a commission from the lender equal to the difference
between the interest rates charged to customers over the predetermined
interest rates set by the financing institution. Sonic also receives
commissions from the sale of various insurance contracts to customers. Sonic
may be assessed a chargeback fee in the event of early cancellation of a loan
or insurance contract by the customer. Finance and insurance commission
revenue is recorded net of estimated chargebacks at the time the related
contract is placed with the financial institution.
Sonic also receives commissions from the sale of non-recourse third party
extended service contracts to customers. Under these contracts the applicable
manufacturer or third party warranty company is directly liable for all
warranties provided within the contract. Commission revenue from the sale of
these third party extended service contracts is recorded net of estimated
chargebacks at the time of sale.
Commissions expense related to finance and insurance commission revenue is
charged to cost of sales upon recognition of such revenue, net of estimated
chargebacks. Commission expense charged to cost of sales was approximately
$6.0 million, $13.1 million and $25.8 million for the years ended December 31,
1998, 1999, and 2000, respectively.
Dealer Agreements--Sonic purchases substantially all of its new vehicles
from manufacturers at the prevailing prices charged by the manufacturer to its
franchised dealers. Sonic's sales could be unfavorably affected by the
manufacturer's unwillingness or inability to supply the dealership with an
adequate supply of new vehicle inventory.
Each dealership operates under a dealer agreement with the manufacturer
which generally restricts the location, management and ownership of the
respective dealership. The ability of Sonic to acquire additional franchises
from a particular manufacturer may be limited due to certain restrictions
imposed by manufacturers. Additionally, Sonic's ability to enter into other
significant acquisitions may be restricted and the acquisition of Sonic's
stock by third parties may be limited by the terms of the franchise
agreements.
Cash and Cash Equivalents--Sonic considers contracts in transit and all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents. Contracts in transit represent cash in transit to
Sonic from finance companies related to vehicle purchases. Sonic had $83.1
million and $108.1 million in contracts in transit at December 31, 1999 and
2000, respectively.
Inventories--Inventories of new and used vehicles, including demonstrators,
are stated at the lower of specific cost or market. Inventories of parts and
accessories are accounted for using the "first-in, first-out"
F-7
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
method of inventory accounting ("FIFO") and are stated at the lower of FIFO
cost or market. Other inventories, which primarily include rental and service
vehicles, are stated at the lower of specific cost or market.
Property and Equipment--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. The range of estimated useful lives is as follows:
Useful Lives
------------
Building and improvements..................................... 5-40
Office equipment and fixtures................................. 5-15
Parts and service equipment................................... 15
Company vehicles.............................................. 5
Goodwill--Goodwill represents the excess purchase price over the estimated
fair value of the tangible and separately measurable intangible net assets
acquired. The cumulative gross amount of goodwill at December 31, 1999 was
$605.1 million and at December 31, 2000 was $697.8 million. As a percentage of
total assets and stockholders' equity, goodwill, net of accumulated
amortization, represented 39.5% and 147.2%, respectively, at December 31,
1999, and 37.4% and 148.3%, respectively, at December 31, 2000. Generally
accepted accounting principles require that goodwill and all other intangible
assets be amortized over the period benefited. Sonic has determined that the
period benefited by the goodwill will be no less than 40 years. Accordingly,
Sonic is amortizing goodwill over a 40 year period. Earnings reported in
periods immediately following an acquisition would be overstated if Sonic
attributed a 40 year benefit to an intangible asset that should have had a
shorter benefit period. In later years, Sonic would be burdened by a
continuing charge against earnings without the associated benefit to income
valued by management in arriving at the price paid for the businesses
acquired. Earnings in later years also could be significantly affected if
management then determined that the remaining balance of goodwill was
impaired. Sonic periodically compares the carrying value of goodwill with the
anticipated undiscounted future cash flows from operations of the businesses
acquired in order to evaluate the recoverability of goodwill. Sonic has
concluded that the anticipated future cash flows associated with intangible
assets recognized in its acquisitions will continue indefinitely, and there is
no pervasive evidence that any material portion will dissipate over a period
shorter than 40 years. Sonic will incur additional goodwill in future
acquisitions.
The Financial Accounting Standards Board recently proposed new rules
relating to the accounting for business combinations and intangible assets.
One aspect of the proposal would not permit amortization of goodwill, but
would require the carrying amount of goodwill to be reduced only if it was
found to be impaired or was associated with assets to be sold or otherwise
disposed. If the proposed rules are adopted, goodwill arising from
acquisitions completed prior to the date of adoption would no longer be
amortized, though reversal of goodwill amortization recognized in prior
periods would not be permitted.
Income Taxes--Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes are provided at currently enacted tax rates for
the tax effects of carryforward items and temporary differences between the
tax basis of assets and liabilities and their reported amounts in the
financial statements. A valuation allowance is provided when it is more likely
than not that taxable income will not be sufficient to fully realize the
benefits of deferred tax assets.
Stock-Based Compensation--Sonic measures the compensation cost of its stock-
based compensation plans under the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted
under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation." Under the provisions of APB No. 25,
compensation cost is measured based on the intrinsic value of the equity
instrument awarded.
F-8
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentrations of Credit Risk--Financial instruments which potentially
subject Sonic to concentrations of credit risk consist principally of cash on
deposit with financial institutions. At times, amounts invested with financial
institutions may exceed FDIC insurance limits. Concentrations of credit risk
with respect to receivables are limited primarily to automobile manufacturers
and financial institutions. Credit risk arising from trade receivables from
commercial customers is reduced by the large number of customers comprising
the trade receivables balances.
Fair Value of Financial Instruments--As of December 31, 1999 and 2000 the
fair values of Sonic's financial instruments including receivables, notes
payable-floor plan, trade accounts payable, payables to Sonic's Chairman and
long-term debt, excluding Sonic's senior subordinated notes, approximate their
carrying values due either to length of maturity or existence of variable
interest rates that approximate prevailing market rates. The fair value of
Sonic's senior subordinated notes based on the quoted bid price as of December
31, 1999 and 2000 was approximately $121.9 million and $106.3 million,
respectively. The carrying value of Sonic's senior subordinated notes as of
December 31, 1999 and 2000 was approximately $121.0 million and $121.3
million, respectively.
Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The accounts in the accompanying financial
statements which require the use of significant estimates are receivables,
inventories, intangible assets, income taxes and certain accrued expenses.
Advertising--Sonic expenses advertising costs in the period incurred.
Advertising expense amounted to $17.4 million, $33.1 million and $58.8 million
for the years ended December 31, 1998, 1999 and 2000, respectively.
Segment Information--Sonic's business is fundamentally managed based on
individual dealership operating performance. Each of Sonic's dealerships have
similar economic and operating characteristics. Each dealership sells similar
products and services (new and used vehicles, parts, service and collision
repair services), uses similar processes in selling its products and services,
and sells its products and services to similar classes of customers. As a
result, Sonic's dealerships are aggregated into a single operating segment for
purposes of reporting financial condition and results of operations.
Reclassifications--In order to maintain consistency and comparability of
financial information between periods presented, certain reclassifications
have been made to Sonic's prior year financial statements to conform to the
current year presentation.
2. Business Acquisitions
Completed Acquisitions
During 2000, Sonic acquired 11 dealerships for approximately $92.0 million
in cash and 11,589 shares of Sonic's Class A convertible preferred stock,
Series II, recorded at an estimated value of approximately $11.6 million.
During 1999, Sonic acquired 72 dealerships for $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 $52.1 million, and 6,784,347 shares of Class A common stock
recorded at a value of approximately $75.8 million.
F-9
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1998, Sonic acquired 19 dealerships for approximately $95.9 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 an aggregate of 154,000 shares of Class A
common stock having an approximate fair value of $0.5 million.
In accordance with terms of certain of the purchase agreements, Sonic may be
required to pay additional consideration contingent upon future earnings of
certain of the dealerships acquired. For the year ended December 31, 2000,
Sonic paid approximately $2.0 million in cash and for the year ended December
31, 1999 paid approximately $5.0 million in cash and issued 6,980.2 shares of
Class A convertible preferred stock (6,717 of Series II and 263.2 shares of
Series III) relating to such consideration, all of which has been accounted
for as additional goodwill. Any additional amounts which may be payable in the
future are not expected to be material.
All of our acquisitions have been accounted for using the purchase method of
accounting, and the results of operations of such acquisitions have been
included in the accompanying consolidated financial statements from their
respective acquisition dates. The purchase price of these acquisitions has
been allocated to the assets and liabilities acquired based on their estimated
fair market value at acquisition date as shown in the table below. We are
still in the process of obtaining data necessary to complete the allocation of
the purchase price of our recent acquisitions. As a result, the values of
assets and liabilities included in the table below for 2000 reflect
preliminary estimates where values have not yet been determined and may
ultimately be different than amounts recorded once actual values are
determined. Any adjustment to the value of assets and liabilities will be
recorded against goodwill.
1998 1999 2000
-------- -------- --------
Working capital............................ $ 30,341 $103,569 $ 11,988
Property, equipment and other long term
assets.................................... 5,690 38,497 4,459
Goodwill................................... 101,323 417,251 88,070
Non-current liabilities assumed............ (3,365) (11,033) (943)
-------- -------- --------
Total purchase price....................... $133,989 $548,284 $103,574
======== ======== ========
Pro Forma Results of Operations
The following unaudited pro forma financial information presents a summary
of consolidated results of operations as if the above acquisition transactions
had occurred as of the beginning of the year in which the acquisitions were
completed, and at the beginning of the immediately preceding year, after
giving effect to certain adjustments, including amortization of goodwill,
interest expense on acquisition debt and related income tax effects. The pro
forma financial information does not give effect to adjustments relating to
net reductions in floorplan interest expense resulting from renegotiated
floorplan financing agreements or to reductions in salaries and fringe
benefits of former owners or officers of acquired dealerships who have not
been retained by Sonic or whose salaries have been reduced pursuant to
employment agreements with Sonic. The pro forma results have been prepared for
comparative purposes only and are not necessarily indicative of the results of
operations that would have occurred had the acquisitions been completed at the
beginning of the periods presented. These results are also not necessarily
indicative of the results of future operations.
Year Ended December 31,
-----------------------
1999 2000
----------- -----------
Total revenues.................................... $ 6,195,876 $ 6,388,965
Gross profit...................................... $ 831,302 $ 900,436
Net income........................................ $ 53,658 $ 74,529
Diluted income per share.......................... $ 1.15 $ 1.70
F-10
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sale of Dealership Subsidiaries
In the ordinary course of business, we evaluate dealerships 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 or otherwise disposed of assets from eight of
our dealership franchises which contributed approximately $65.5 million in
revenue for the year ended December 31, 2000. Proceeds, net of disposal costs,
from these dispositions were approximately $7.1 million. No material gains or
losses resulted from these dispositions.
3. Inventories and Related Notes Payable--Floor Plan
Inventories consist of the following:
December 31,
-----------------
1999 2000
-------- --------
New vehicles............................................... $459,382 $591,583
Used vehicles.............................................. 109,130 116,836
Parts and accessories...................................... 44,821 48,916
Other...................................................... 17,524 16,450
-------- --------
Total.................................................... $630,857 $773,785
======== ========
All new and certain used vehicles are financed with borrowings under floor
plan credit facilities and are pledged to collateralize amounts borrowed under
those facilities. We currently have standardized floor plan credit facilities
with Chrysler Financial Corporation ("Chrysler Financial"), General Motors
Acceptance ("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 facility with GMAC, which was
obtained on June 23, 2000, currently 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, 1999 there was an aggregate of
approximately $102.7 million outstanding under the Chrysler Financial floor
plan facility and $400.8 million outstanding under the Ford Motor Credit floor
plan facility. 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.
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 an effective interest rate of prime (prime was 9.5% at December
31, 2000), subject to certain incentives and other adjustments. The weighted
average interest rate for our floor plan facilities was 6.91% for the year
ended December 31, 1999 and 7.93% for the year ended December 31, 2000. The
inventory balances are generally reduced by the manufacturer's purchase
discounts, which are not reflected in the related floor plan liability. These
manufacturer purchase discounts are standard in the industry, typically occur
on all new vehicle purchases, and are not used to offset the related floor
plan liability. These discounts are aggregated and generally paid to us by the
manufacturers on a quarterly basis.
We make monthly interest payments on the amount financed under the floor
plan facilities but are not required to make loan principal repayments prior
to the sale of the vehicles. The underlying notes are due when the related
vehicles are sold and are collateralized by vehicle inventories and other
assets of the relevant dealership subsidiary. As such, these floor plan notes
payable are shown as a current liability in the accompanying consolidated
balance sheets. 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.
Sonic is in compliance with all restrictive covenants as of December 31, 2000.
F-11
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
Property and equipment is comprised of the following:
December 31,
-----------------
1999 2000
------- --------
Land...................................................... $ 953 $ 53
Building and improvements................................. 23,120 25,771
Office equipment and fixtures............................. 22,616 23,599
Parts and service equipment............................... 16,008 20,132
Company vehicles.......................................... 4,664 5,812
Construction in progress.................................. 5,785 12,244
------- --------
Total, at cost............................................ 73,146 87,611
Less accumulated depreciation............................. (9,465) (14,645)
------- --------
Property and equipment, net............................... $63,681 $ 72,966
======= ========
In addition to the $12.2 million classified as construction in progress at
December 31, 2000, Sonic has incurred approximately $5.2 million in
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 sheets. Sonic had no such construction in progress recorded in current
assets at December 31, 1999.
5. Long-Term Debt
Long-term debt consists of the following:
December 31,
------------------
1999 2000
-------- --------
$125 million Senior Subordinated Notes bearing interest
at 11%, maturing August 1, 2008....................... $125,000 $125,000
$500 million revolving credit facility with Ford Motor
Credit and Chrysler Financial bearing interest at
2.50% above LIBOR and maturing in October 2003,
collateralized by all assets of Sonic................. 289,003 353,787
$50 million revolving construction line of credit
bearing interest at 2.25% above LIBOR and maturing in
June 2005............................................. -- 4,559
Other notes payable (primarily equipment notes)........ 10,403 8,181
-------- --------
424,406 491,527
Less unamortized discount on Senior Subordinated
Notes................................................. (4,012) (3,718)
Less current maturities................................ (2,388) (2,597)
-------- --------
Long-term debt......................................... $418,006 $485,212
======== ========
Future maturities of debt are as follows:
Year ending December 31,
------------------------
2001.............................................................. $ 2,597
2002.............................................................. 2,530
2003.............................................................. 355,537
2004.............................................................. 908
2005.............................................................. 150
Thereafter........................................................ 129,805
--------
Total........................................................... $491,527
========
F-12
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Senior Subordinated Notes
At December 31, 1999 and 2000, Sonic had $125,000,000 in aggregate principal
outstanding of its 11% senior subordinated notes. The senior subordinated
notes are unsecured, mature on August 1, 2008, and are redeemable at Sonic's
option after August 1, 2003. Interest payments are due semi-annually on
February 1 and August 1.
The senior subordinated notes are subordinated to all present and future
senior indebtedness of Sonic, including the revolving credit facility
discussed below. Redemption prices during the 12 month periods beginning
August 1 are 105.500% in 2003, 103.667% in 2004, 101.833% in 2005 and 100%
thereafter. The discount on the senior subordinated notes is being amortized
over the term of the notes using the effective interest method.
The indenture governing the senior subordinated notes contains certain
specified restrictive and required financial covenants. Sonic has agreed not
to pledge its assets to any third party except under certain limited
circumstances. Sonic also has agreed to certain other limitations or
prohibitions concerning the incurrence of other indebtedness, capital stock,
guaranties, asset sales, investments, cash dividends to shareholders,
distributions and redemptions. Sonic is in compliance with all restrictive
covenants as of December 31, 2000.
The Revolving Facility
The 1999 Revolving Facility--Effective November 1, 1999, the total borrowing
limit under the revolving credit facility between Sonic and Ford Motor Credit
(the "1999 Revolving Facility") was increased from $150 million to $350
million, subject to a borrowing base calculated on the basis of our
receivables, inventory, equipment and a pledge of certain additional
collateral by a Sonic affiliate. Prior to that date, amounts outstanding under
the 1999 Revolving Facility bore interest at a fluctuating per annum rate
equal to 2.75% above the one month commercial finance paper rate as reported
by the Federal Reserve Board (the one month commercial finance paper rate was
5.77% at October 31, 1999). Subsequent to November 1, 1999, amounts
outstanding under the 1999 Revolving Facility bore interest at 2.50% above
LIBOR (LIBOR was 5.82% at December 31, 1999). The weighted average interest
rate on the 1999 Revolving Facility was 7.86% for the year ended December 31,
1999.
The 2000 Revolving Facility--On August 10, 2000, we entered into a revolving
credit facility with Ford Motor Credit and Chrysler Financial (the "2000
Revolving Facility") to replace the 1999 Revolving Facility. The 2000
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 an affiliate of
Sonic (the borrowing base was approximately $426.8 million at December 31,
2000). The 2000 Revolving Facility bears interest at 2.5% above LIBOR as
quoted in the Wall Street Journal 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). The weighted average interest rate
on the 2000 Revolving Facility was 9.02% for the year ended December 31, 2000.
Amounts drawn under the 2000 Revolving Facility are to be used for the
acquisition of additional dealerships and to provide for the general working
capital needs of Sonic and other general corporate purposes.
Sonic agreed under the 2000 Revolving Facility not to pledge any of its
assets to any third party (with the exception of assets of Sonic's dealership
subsidiaries that are subject to previous pledges or liens). In addition, the
2000 Revolving Facility contains certain negative covenants, including
covenants restricting or prohibiting the payment of dividends, capital
expenditures and material dispositions of assets as well as other customary
covenants. Additional financial covenants include specified ratios as follows:
. 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).
F-13
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the failure by
Sonic, with certain exceptions, to own all the outstanding equity, membership
or partnership interests in its dealership subsidiaries will constitute an
event of default under the 2000 Revolving Facility. Sonic was 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
construction line of credit (the "Construction Loan") and a related mortgage
refinancing facility (the "Permanent Loan" and together with the Construction
Loan, the "Mortgage Facility") with Ford Motor Credit. Under the Construction
Loan, our dealership development subsidiaries can borrow up to $50.0 million
to finance land acquisition and dealership construction costs. Advances can be
made under the Construction Loan until December 2003. All advances mature on
June 22, 2005, bear interest at 2.25% above LIBOR and are secured by Sonic's
guarantee and a lien on all of the borrowing subsidiaries' real estate and
other assets. The total outstanding balance under the Construction Loan as of
December 31, 2000 was approximately $4.6 million.
Under the Permanent Loan, we can refinance up to $50.0 million in advances
under the Construction Loan once the projects are completed. Advances can be
made under the Permanent Loan until June 2005. All advances under the
Permanent Loan mature on June 22, 2010, bear interest at 2.00% above LIBOR and
are secured by the same collateral given under the Construction Loan. As of
December 31, 2000, no amounts were outstanding under the Permanent Loan.
The Mortgage Facility allows us to borrow up to $100 million in the
aggregate under the Construction Loan and the Permanent Loan. The Mortgage
Facility is not cross-collateralized with the Revolving Facility; however, a
default under one will cause a default under the other. Among other customary
covenants, the borrowing subsidiaries under the Mortgage Facility agreed not
to incur any other liens on their property (except for existing encumbrances
on property acquired) and not to transfer their property or more than 20% of
their ownership interests to any third party. In addition, the loss of voting
control over Sonic by Bruton Smith, Scott Smith and their spouses or immediate
family members, with certain exceptions, will result in an event of default
under the Mortgage Facility. Sonic was in compliance with all restrictive
covenants as of December 31, 2000.
Subsidiary Guarantees
Balances outstanding under Sonic's 2000 Revolving Facility and $125 million
senior subordinated notes are guaranteed by all of Sonic's operating
subsidiaries. These guarantees are full and unconditional and joint and
several. The parent company has no independent assets or operations and
subsidiaries that are not guarantors are minor.
6. Income Taxes
The provision for income taxes consists of the following components:
1998 1999 2000
------- ------- -------
Current:
Federal.......................................... $ 8,145 $24,198 $29,177
State............................................ 756 2,052 4,139
------- ------- -------
8,901 26,250 33,316
Deferred........................................... 2,252 2,075 12,384
Change in valuation allowance...................... (70) -- --
------- ------- -------
Total income tax provision..................... $11,083 $28,325 $45,700
======= ======= =======
F-14
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of the statutory federal income tax rate with Sonic's
federal and state overall effective income tax rate is as follows:
1998 1999 2000
----- ----- -----
Statutory federal rate.................................. 35.00% 35.00% 35.00%
Effective state income tax rates........................ 1.46 2.26 1.87
Nondeductible goodwill amortization..................... 1.13 1.20 1.36
Other................................................... (0.20) 0.36 (0.11)
----- ----- -----
Effective tax rates..................................... 37.39% 38.82% 38.12%
===== ===== =====
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes.
Significant components of Sonic's deferred tax assets and liabilities as of
December 31 are as follows:
1999 2000
------- --------
Deferred tax assets:
Allowance for bad debts................................ $ 824 $ 918
Inventory.............................................. 1,515 972
Warranty reserves...................................... 577 --
Accrued compensation................................... 777 --
Accrued severance...................................... 595 281
Net operating loss carryforwards....................... 124 2,949
Other.................................................. 2,198 1,894
------- --------
Total deferred tax assets............................ 6,610 7,014
Deferred tax liabilities:
Basis difference in property and equipment............. (637) (6,387)
Basis difference in goodwill........................... (6,726) (13,116)
Other.................................................. (1,113) (1,590)
------- --------
Total deferred tax liability......................... (8,476) (21,093)
------- --------
Net deferred tax liability........................... $(1,866) $(14,079)
======= ========
Deferred tax assets are recorded in other current and long term assets on
the accompanying consolidated balance sheets. At December 31, 2000, Sonic had
state net operating loss carryforwards of $48.2 million which will expire
between 2008 and 2020.
7. Related Parties
Registration Rights Agreement
When Sonic acquired Town & Country Ford, Lone Star Ford, Fort Mill Ford,
Town & Country Toyota and Frontier Oldsmobile-Cadillac in 1997, Sonic signed a
Registration Rights Agreement dated as of June 30, 1997 with Sonic Financial
Corporation ("SFC"), Bruton Smith, Scott Smith and William S. Egan
(collectively, the "Class B Registration Rights Holders"). SFC currently owns
8,881,250 shares of Class B common stock; Bruton Smith, 2,071,250 shares;
Scott Smith, 956,250 shares; and Egan Group, LLC, an assignee of Mr. Egan (the
"Egan Group"), 341,250 shares, all of which are covered by the Registration
Rights Agreement. The Egan Group also owns 32,000 shares of Class A common
stock to which the Registration Rights Agreement applies. If, among other
things provided in Sonic's charter, offers and sales of shares of Class B
common stock are
F-15
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
registered with the Securities and Exchange Commission, then such shares will
automatically convert into a like number of shares of Class A common stock.
The Class B Registration Rights Holders have certain limited piggyback
registration rights under the Registration Rights Agreement. These rights
permit them to have their shares of Sonic's common stock included in any Sonic
registration statement registering Class A common stock, except for
registrations on Form S-4, relating to exchange offers and certain other
transactions, and Form S-8, relating to employee stock compensation plans. The
Registration Rights Agreement expires in November 2007. SFC is controlled by
Bruton Smith.
Payable to Company's Chairman
Sonic has a note payable to Mr. Smith in the amount of $5.5 million (the
"Subordinated Smith Loan"). The Subordinated Smith Loan bears interest at Bank
of America's announced prime rate plus 0.5% (prime rate was 9.5% at December
31, 2000) and has a stated maturity date of November 30, 2000. Under the terms
of a subordination agreement currently in effect, however, all amounts owed by
Sonic to Mr. Smith under the Subordinated Smith Loan are to be paid only after
Sonic's senior subordinated notes are fully paid in cash. Accordingly, the
Subordinated Smith Loan has been classified as non-current on the accompanying
consolidated balance sheets.
Dealership Leases:
On August 13, 1999, CAR MMR L.L.C., an affiliate of Capital Automotive REIT,
which is not affiliated with Sonic, acquired all of the ownership interests of
MMR Holdings, L.L.C., and two of its affiliates, MMR Viking Investment
Associates, L.P. and MMR Tennessee, L.L.C (collectively, the "MMR Group"). MMR
Holdings was a limited liability company owned by Bruton Smith and SFC. As of
that date, Sonic leased 50 properties for 42 of its dealerships from the MMR
Group. Sonic has entered into new leases with CAR MMR L.L.C. with terms
similar to those under Sonic's former leases with the MMR Group. These leases
generally provide Sonic with options to renew the lease for two additional
five year terms after the expiration of the initial lease term. Sonic has
agreed to renew approximately 75% of its lease rental stream for an additional
five year period after the expiration of the initial lease terms. In
connection with the acquisition, Sonic, MMR Holdings and Mar Mar Realty Trust,
an affiliate of the MMR Group, terminated the strategic alliance agreement
whereby Mar Mar Realty Trust had provided Sonic with real estate financing,
acquisition referrals and related services.
As a part of the August 13, 1999 sale of the MMR Group to CAR MMR, Bruton
Smith and SFC signed agreements with Sonic to induce Sonic to enter into a
real estate financing arrangement with CAR MMR and, among other things, amend
its leases with the MMR Group to standardize their terms. Under these
agreements, Mr. Smith and SFC paid approximately $2.5 million to Sonic, which
amount represented Mr. Smith's and SFC's profits on the sale of the MMR Group
less their selling expenses and a 14% annual return on their initial
investment in the MMR Group, net of any advances made by Sonic to the MMR
Group. This amount was deferred and is being amortized against rent expense
over the average lease term.
Other Transactions
Sonic has entered into various other transactions with SFC and Speedway
Motorsports, Inc. ("SMI") or subsidiaries of these entities. These
transactions include the rental of aircraft for business-related travel by
Sonic executives, the purchase of apparel items for marketing and sales
promotions, the reimbursement of personnel costs for construction project
management services and the purchase of automobile products for resale
purposes. Such transactions with these affiliated companies totalled
approximately $0.1 million, $0.3 million and $1.8 million for the years ended
December 31, 1998, 1999 and 2000, respectively.
During 2000, Sonic entered into a fleet sale with a subsidiary of SMI for a
total purchase price of approximately $0.5 million. Sonic recognized no
material income or loss from this transaction.
During 2000, Sonic sold substantially all of the assets of one of its
dealerships to an entity owned by Sonic's vice-chairman for approximately $5.0
million. No material gain or loss was recognized on this sale.
F-16
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Capital Structure and Per Share Data
Preferred Stock--Sonic has 3 million shares of "blank check" preferred stock
authorized with such designations, rights and preferences as may be determined
from time to time by the Board of Directors. The Board of Directors has
designated 300,000 shares of preferred stock as Class A convertible preferred
stock, par value $0.10 per share (the "Preferred Stock") which is divided into
100,000 shares of Series I Preferred Stock, 100,000 shares of Series II
Preferred Stock, and 100,000 shares of Series III Preferred Stock. As of
December 31, 1999 there were 8,801 shares of Series I Preferred Stock, 7,675
shares of Series II Preferred Stock and 11,683 shares of Series III Preferred
Stock issued and outstanding. As of December 31, 2000 there were 250.5 shares
of Series II Preferred Stock issued and outstanding.
The Preferred Stock has a liquidation preference of $1,000 per share. Each
share of Preferred Stock is convertible, at the option of the holder, into
that number of shares of Class A common stock as is determined by dividing
$1,000 by the average closing price for the Class A common stock on the NYSE
for the 20 days preceding the date of determination of the shares of Preferred
Stock (the "Market Price"). Conversion of Series II Preferred Stock is subject
to certain adjustments which have the effect of limiting increases and
decreases in the value of the Class A common stock receivable upon conversion
by 10% of the original value of the shares of Series II Preferred Stock.
Conversion of Series III Preferred Stock is subject to certain adjustments
which have the effect of limiting increases in the value of Class A common
stock receivable upon conversion by 10% of the original value of the shares of
Series III Preferred Stock.
The Preferred Stock is redeemable at Sonic's option at any time after the
date of issuance. The redemption price of the Series I Preferred Stock is
$1,000 per share. The redemption price for the Series II Preferred Stock and
Series III Preferred Stock is as follows: (i) prior to the second anniversary
of the date of issuance, the redemption price is the greater of $1,000 per
share or the aggregate Market Price of the Class A common stock into which it
could be converted at the time of redemption, and (ii) after the second
anniversary of the date of issuance, the redemption price is the aggregate
Market Price into which it could be converted at the time of redemption.
During the year ended December 31, 2000, we redeemed 13,551 shares of
Preferred Stock at a total cost of approximately $13.6 million. Subsequent to
December 31, 2000, we redeemed the remaining 250.5 shares of Preferred Stock
for a total cost of approximately $0.2 million.
Each share of Preferred Stock entitles its holder to a number of votes equal
to that number of shares of Class A common stock into which it could be
converted as of the record date for the vote. Holders of Preferred Stock are
entitled to participate in dividends payable on the Class A common stock on an
"as-if-converted" basis. The Preferred Stock has no preferential dividends.
During 2000, Sonic issued 11,589 shares of Series II Preferred Stock. These
shares were recorded at their estimated value. During the year, 14,264 shares
of Series II Preferred Stock and 11,683 shares of Series III Preferred Stock
having an aggregate estimated value of approximately $25.9 million were
converted into 2,967,173 shares of Class A common stock.
Common Stock--Sonic has two classes of common stock. Sonic has authorized
100 million shares of Class A common stock at a par value of 0.01 per share.
Class A common stock entitles its holder to one vote per share. Sonic had
29,075,437 and 33,291,933 shares of Class A common stock issued at December
31, 1999 and 2000, respectively. Of these issued shares, there were 28,351,837
and 29,715,570 shares outstanding at December 31, 1999 and 2000, respectively.
Sonic has also authorized 30 million shares of Class B common stock at a par
value of $.01 per share. Class B common stock entitles its holder to ten votes
per share, except in certain circumstances. Each share of Class B common stock
is convertible into one share of Class A common stock either upon voluntary
conversion at the option of the holder, or automatically upon the occurrence
of certain events, as provided in Sonic's charter. Sonic had issued and
outstanding 12,250,000 shares of Class B common stock at December 31, 1999 and
2000.
Treasury Stock/Share Repurchase Program--Over the course of 1999 and 2000,
Sonic's Board of Directors has authorized Sonic to expend up to $75 million to
repurchase shares of its Class A common stock or redeem
F-17
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
securities convertible into Class A common stock. As of December 31, 2000,
Sonic has repurchased 3,576,363 shares of Class A common stock at an average
price per share of approximately $9.18. As of December 31, 1999, Sonic had
repurchased 723,600 shares of Class A common stock at an average price per
share of approximately $8.79. Subsequent to December 31, 2000, Sonic has
purchased an additional 1,410,800 shares of Class A common stock for
approximately $10.7 million. Sonic will continue to repurchase shares in the
open market from time to time subject to market conditions.
Stock Split--All share and per share amounts included in the accompanying
consolidated financial statements for all periods presented have been adjusted
to reflect a 2 for 1 stock split of the Class A common stock and Class B
common stock effective January 25, 1999.
Warrants--In connection with Sonic's prior year acquisitions, Sonic has
issued warrants to purchase 242,782 shares of Class A common stock at exercise
prices ranging from $6.00 per share to $11.27 per share. The warrants expire
on various dates from January 15, 2003 to November 30, 2003. Sonic has
recorded the issuance of such warrants at their estimated fair value on the
date of issuance.
Per Share Data--The calculation of diluted net income per share considers
the potential dilutive effect of options and shares under Sonic's stock
compensation plans, Class A common stock purchase warrants, and Class A
convertible preferred stock. The following table illustrates the dilutive
effect of such items on net income per share:
For the year ended For the year ended For the year ended
December 31, 1998 December 31, 1999 December 31, 2000
------------------------ ------------------------ ------------------------
Net Per-share Net Per-share Net Per-share
Income Shares amount Income Shares amount Income Shares amount
------- ------ --------- ------- ------ --------- ------- ------ ---------
Basic Net Income Per
Share.................. $18,557 22,852 $0.81 $44,649 31,744 $1.41 $74,172 42,518 $1.74
===== ===== =====
Effect of Dilutive
Securities:
Stock compensation
plans................. -- 630 -- 949 -- 455
Warrants............... -- 32 -- 78 -- 31
Convertible Preferred
Stock................. -- 1,456 -- 2,477 -- 822
------- ------ ------- ------ ------- ------
Diluted Net Income Per
Share.................. $18,557 24,970 $0.74 $44,649 35,248 $1.27 $74,172 43,826 $1.69
======= ====== ===== ======= ====== ===== ======= ====== =====
In addition to the stock options included in the table above, options to
purchase 2,688,676 shares of Class A common stock were outstanding during 2000
but were not included in the computation of diluted EPS because the options
were anti-dilutive.
9. Employee Benefit Plans
Substantially all of the employees of Sonic are eligible to participate in a
401(k) plan. Contributions by Sonic to the plan were not significant in any
period presented.
Stock Option Plans
Sonic currently has three option plans, the Sonic Automotive, Inc. 1997
Stock Option Plan (the "Stock Option Plan"), the Sonic Automotive, Inc.
Formula Stock Option Plan for Independent Directors (the "Directors' Plan"),
and the FirstAmerica Automotive, Inc. 1997 Stock Option Plan ( the "First
America Plan").
The Stock Option Plan was adopted by the Board of Directors in order to
attract and retain key personnel. At December 31, 2000, there are 6.0 million
shares authorized for issuance under the Stock Option Plan. Under the Stock
Option Plan, options to purchase shares of Class A common stock may be granted
to key employees of Sonic and its subsidiaries and to officers, consultants
and other individuals providing services to Sonic. The options generally are
granted at the fair market value of Sonic's Class A common stock at the date
of grant, vest over a three year period, are exercisable upon vesting and
expire ten years from the date of grant.
F-18
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Directors' Plan authorizes options to purchase up to an aggregate of
600,000 shares of Class A common stock. Under the plan, each outside director
shall be awarded on or before March 31st of each year an option to purchase
10,000 shares at an exercise price equal to the fair market value of the Class
A common stock at the date of the award. Options granted under the Directors'
Plan become exercisable six months, and expire ten years, after their date of
grant.
In connection with its acquisition of FirstAmerica Automotive, Inc., Sonic
agreed to assume the FirstAmerica Plan. The FirstAmerica Plan was amended and
restated as of December 10, 1999 to provide that each unexpired option to
purchase FAA's Class A common stock that was outstanding under the
FirstAmerica Plan be converted into an option to purchase shares of Sonic's
Class A common stock. A conversion factor of .32232 shares of Sonic's Class A
common stock for each share covered by options to purchase FAA Class A common
stock was utilized to retain the aggregate intrinsic value of the options
immediately before the change and, accordingly, a new measurement date did not
result from the conversion. Other than the conversion to options for Sonic's
stock, there were no significant changes to the FirstAmerica Plan. Options
continue to vest according to the terms of the original option agreements,
generally over a five year period, and expire if unexercised ten years from
the date of grant.
A summary of the status of Sonic's stock option plans as of December 31,
1998, 1999 and 2000 and changes during the years ended on those dates is
presented below.
Exercise Price Weighted Average
Number of Options Per Share Exercise Price
--------------------- -------------- ----------------
(shares in thousands)
Outstanding at December
31, 1997............... 1,176 $6.00 $ 6.00
Granted............... 1,433 7.25-9.19 8.61
Exercised............. (72) 6.00 6.00
-----
Outstanding at December
31, 1998............... 2,537 6.00-9.19 7.48
Granted............... 1,643 10.06-18.32 14.27
Options assumed from
acquired company..... 467 2.85-13.12 9.73
Exercised............. (212) 6.00-7.25 6.18
Forfeited............. (248) 6.00-15.44 9.29
-----
Outstanding at December
31, 1999............... 4,187 2.85-18.32 10.35
Granted............... 1,868 7.94-11.19 9.15
Exercised............. (300) 2.85-13.12 5.95
Forfeited............. (683) 2.85-15.44 10.33
-----
Outstanding at December
31, 2000............... 5,072 $2.85-18.32 $10.13
=====
The following table summarizes information about stock options outstanding
at December 31, 2000:
Shares Weighted Average Shares
Outstanding at Remaining Weighted Average Exercisable Weighted Average
Range of Exercise Prices 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price
------------------------ -------------- ---------------- ---------------- ----------- ----------------
(shares in thousands)
$ 2.85................... 61 6.53 years $ 2.85 42 $2.85
$ 6.00-7.25.............. 919 7.02 6.34 840 6.26
$ 7.94-8.88.............. 1,144 9.42 8.09 40 8.88
$ 9.19-13.12............. 1,766 8.52 10.28 848 9.53
$13.63-18.32............. 1,182 8.35 15.20 533 15.23
----- ----- ------ ----- -----
Totals................. 5,072 8.39 years $10.13 2,303 $9.53
===== ===== ====== ===== =====
F-19
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair value of options granted or assumed was $4.63,
$6.76 and $4.41 per share in 1998, 1999 and 2000, respectively. The fair value
of each option granted during 1998, 1999 and 2000 was estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions.
1998 1999 2000
----------- ------------- -------------
Employee Stock Purchase Plan
Dividend yield..................... n/a n/a n/a
Risk free interest rates........... 5.51% 4.49%-6.15% 5.32%-6.74%
Expected lives..................... 1.0 year 0.25-1.0 year 0.25-1.0 year
Volatility......................... 61.31% 53.15% 44.85%
Stock Option Plans
Dividend yield..................... n/a n/a n/a
Risk free interest rates........... 4.24%-5.57% 4.53%-6.15% 5.92%-6.53%
Expected lives..................... 5 years 3-5 years 5 years
Volatility......................... 61.31% 53.15% 44.85%
Employee Stock Purchase Plan
The Board of Directors and stockholders of Sonic adopted the Sonic
Automotive, Inc. Employee Stock Purchase Plan (the "ESPP") to attract and
retain key personnel. Under the terms of the ESPP, on January 1 of each year
all eligible employees electing to participate will be granted an option to
purchase shares of Class A common stock. Sonic's Compensation Committee will
annually determine the number of shares of Class A common stock available for
purchase under each option. The purchase price at which Class A common stock
will be purchased through the ESPP will be 85% of the lesser of (i) the fair
market value of the Class A common stock on the applicable grant date and (ii)
the fair market value of the Class A common stock on the applicable exercise
date. The grant dates are January 1 of each year plus any other interim dates
designated by the Compensation Committee. The exercise dates are the last
trading days on the New York Stock Exchange for March, June, September and
December, plus any other interim dates designated by the Compensation
Committee. Options will expire on the last exercise date of the calendar year
in which granted.
During 2000, the Board of Directors, pursuant to Sonic's ESPP and with the
approval of the stockholders at Sonic's 2000 Annual Meeting, increased the
authorized shares from 1.2 million to 1.8 million and issued options
exercisable for approximately 524,000 shares of Class A common stock, granting
300 shares to each participant in the ESPP.
Nonqualified Employee Stock Purchase Plan
The Board of Directors of Sonic adopted the Sonic Automotive, Inc.
Nonqualified Employee Stock Purchase Plan (the "Nonqualified ESPP") to provide
options to purchase Class A common stock to employees of Sonic's subsidiaries
that are not eligible to participate in the ESPP. Employees of Sonic who are
eligible to participate in the ESPP are not eligible to participate in the
Nonqualified ESPP. Under the terms of the Nonqualified ESPP, on January 1 of
each year all employees eligible to participate in the Nonqualified ESPP and
who elect to participate in the Nonqualified ESPP will be granted an option to
purchase shares of Class A common stock. Sonic's Compensation Committee will
annually determine the number of shares of Class A common stock available for
purchase under each option.
The purchase price at which Class A common stock will be purchased through
the Nonqualified ESPP will be 85% of the lesser of (i) the fair market value
of the Class A common stock on the applicable grant date and (ii) the fair
market value of the Class A common stock on the applicable exercise date. The
grant dates are January 1 of each year plus any other interim dates designated
by the Compensation Committee. The exercise
F-20
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dates are the last trading days on the New York Stock Exchange for March,
June, September and December, plus any other interim dates designated by the
Compensation Committee. Options will expire on the last exercise date of the
calendar year in which granted. In adopting the Nonqualified ESPP the Board of
Directors authorized options to be granted under the Nonqualified ESPP for
300,000 shares of Class A common stock.
Under both the ESPP and the Nonqualified ESPP, Sonic issued approximately
93,600 and 147,800 shares to employees in 1999 and 2000 at a weighted average
purchase price of $10.70 and $7.27 per share, respectively. The weighted
average fair value of shares granted under both plans was $2.91 and $2.95 per
share in 1999 and 2000, respectively.
Sonic has adopted the disclosure-only provisions of SFAS No. 123. No
compensation cost has been recognized for Sonic's stock-based compensation
plans in the accompanying consolidated financial statements. Had compensation
cost for the stock-based compensation plans been determined based on their
fair value as prescribed by SFAS No. 123, Sonic's pro forma net income and
diluted net income per share would have been $16.8 million and $0.67,
respectively for 1998, $39.9 million and $1.13, respectively for 1999, and
$70.4 million and $1.61, respectively for 2000.
10. Commitments and Contingencies
Facility Leases
Certain properties leased by Sonic's dealerships are, or since the beginning
of the last fiscal year were, owned by Sonic's officers or directors or their
affiliates. These leases contain terms comparable to, or more favorable to
Sonic than, terms that would be obtained from unaffiliated third parties.
Minimum future rental payments required under noncancelable operating leases
are as follows:
Related Third
Parties Parties Total
------- -------- --------
Year Ending December 31,
2001............................................. $ 3,930 $ 54,331 $ 58,261
2002............................................. 4,108 51,672 55,780
2003............................................. 3,810 51,691 55,501
2004............................................. 3,810 51,995 55,805
2005............................................. 3,810 50,458 54,268
Thereafter....................................... 25,331 276,253 301,584
------- -------- --------
Total.......................................... $44,799 $536,400 $581,199
======= ======== ========
Total rent expense for the years ended December 31, 1998, 1999, and 2000 was
approximately $10.5 million, $26.4 million and $54.7 million, respectively. Of
these amounts, approximately $7.5 million, $7.7 million and $3.3 million,
respectively, were paid to related parties.
Other Contingencies
Sonic is involved in various legal proceedings. Management believes based on
advice of counsel that the outcome of such proceedings will not have a
materially adverse effect on Sonic's financial position or future results of
operations and cash flows.
F-21
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Summary of Quarterly Financial Data (Unaudited)
The following table summarizes the Company's results of operations as
presented in the Consolidated Statements of Income by quarter for 1999 and
2000.
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Year Ended December 31, 1999:
Total revenues.................... $ 593,452 $ 723,530 $ 869,964 $1,163,877
Gross profit...................... $ 78,075 $ 94,261 $ 116,654 $ 165,433
Operating income.................. $ 18,954 $ 24,588 $ 31,012 $ 41,256
Income before taxes............... $ 10,848 $ 16,230 $ 20,543 $ 25,353
Net income........................ $ 6,687 $ 10,101 $ 12,583 $ 15,278
Diluted net income per share...... $ 0.24 $ 0.30 $ 0.33 $ 0.38
Year Ended December 31, 2000:
Total revenues.................... $1,464,401 $1,548,339 $1,594,861 $1,444,875
Gross profit...................... $ 208,034 $ 219,298 $ 228,741 $ 209,114
Operating income.................. $ 49,001 $ 58,655 $ 57,328 $ 44,133
Income before taxes............... $ 28,416 $ 36,347 $ 35,119 $ 19,991
Net income........................ $ 17,371 $ 22,452 $ 22,059 $ 12,291
Diluted net income per share...... $ 0.39 $ 0.51 $ 0.51 $ 0.29
F-22