SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13395
SONIC AUTOMOTIVE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of 56-2010790
Incorporation or Organization) (I.R.S. Employer
Identification No.)
5401 EAST INDEPENDENCE BOULEVARD
P.O. BOX 18747
CHARLOTTE, NORTH CAROLINA 28212
(Address of Principle Executive Offices) (Zip Code)
(704) 566-2400
(Registrant's telephone number, including area code)
----------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
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. [X]
The aggregate market value of the voting common stock held by
non-affiliates of the registrant was approximately $816,306,901 based upon the
closing sales price of the registrant's Class A common stock on March 15, 2002
of $30.03 per share. As of March 15, 2002, there were 28,755,269 shares of Class
A common stock, par value $.01 per share, and 12,029,375 shares of Class B
common stock, par value $.01 per share, outstanding.
Documents incorporated by reference. Portions of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held May 8, 2002 are
incorporated by reference into Part III of this Form 10-K.
=========================================================
FORM 10-K TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business................................................................................................... 4
Item 2. Properties................................................................................................. 16
Item 3. Legal Proceedings.......................................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders........................................................ 19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................................. 20
Item 6. Selected Financial Data.................................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................. 28
Item 8. Financial Statements and Supplementary Data................................................................ 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant......................................................... 30
Item 11. Executive Compensation..................................................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 30
Item 13. Certain Relationships and Related Transactions............................................................. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................... 31
SIGNATURES............................................................................................................ 35
CONSOLIDATED FINANCIAL STATEMENTS..................................................................................... F-1
The following Annual Report on Form 10-K contains numerous
"forward-looking statements" within the meaning of the Private Litigation
Securities Reform Act of 1995. These forward looking statements address our
future objectives, plans and goals, as well as our intent, beliefs and current
expectations regarding future operating performance, and can generally be
identified by words such as "may," "will," "should," "believe," "expect,"
"anticipate," "intend," "plan," "foresee," and other similar words or phrases.
Specific events addressed by these forward looking statements include, but are
not limited to:
. future acquisitions;
. industry trends;
. general economic trends, including employment rates and consumer
confidence levels;
. vehicle sales rates and same store sales growth;
. our financing plans;
. our business and growth strategies.
These forward-looking statements are based on our current estimates and
assumptions and involve various risks and uncertainties. As a result, you are
cautioned that these forward looking statements are not guarantees of future
performance, and that actual results could differ materially from those
projected in these forward looking statements. Factors which may cause actual
results to differ materially from our projections include those risks described
in Exhibit 99.1 of this Form 10-K and elsewhere in this report, as well as:
. our ability to generate sufficient cash flows or obtain additional
financing to support acquisitions, capital expenditures, our share
repurchase program, and general operating activities;
. the reputation and financial condition of vehicle manufacturers whose
brands we represent, and their ability to design, manufacture, deliver
and market their vehicles successfully;
. our relationships with manufacturers which may affect our ability to
complete additional acquisitions;
2
. changes in laws and regulations governing the operation of automobile
franchises, accounting standards, taxation requirements, and
environmental laws;
. general economic conditions in the markets in which we operate,
including fluctuations in interest rates, employment levels, and the
level of consumer spending;
. high competition in the automotive retailing industry which not only
creates pricing pressures on the products and services we offer, but
on businesses we seek to acquire;
. our ability to successfully integrate recent and potential future
acquisitions.
3
PART I
ITEM 1. BUSINESS.
Sonic Automotive, Inc. was incorporated in Delaware in 1997. We are the
second largest automotive retailer in the United States, as measured by total
revenue. As of March 15, 2002, we operated 160 dealership franchises at 118
dealership locations, representing 30 different brands of cars and light trucks,
and 29 collision repair centers in 13 states. We have grown from 10 stores, 6
collision centers, 8 brands in 4 states since our initial public offering in
November 1997. Through December 31, 2001, our five-year compound annual growth
rates are 85% for revenues, 115% for net income and 63% for earnings per share.
Each of our dealerships provides comprehensive services including (1) sales of
both new and used cars and light trucks, (2) sales of replacement parts and
performance of vehicle maintenance, warranty, paint and repair services and (3)
arrangement of extended warranty contracts and financing and insurance ("F&I")
for our automotive customers.
As compared to automotive manufacturers, we and other automotive
retailers exhibit relatively low earnings volatility. This is primarily due to a
higher ratio of variable costs that allows us to manage the majority of our
expenses, such as advertising, sales commissions and vehicle carrying costs, as
demand patterns change. We also have a greater diversity in our sources of
revenues compared to automobile manufacturers. In addition to new vehicle sales,
our revenues include used vehicle sales and parts, service and collision repair,
which carry higher gross margins and are less sensitive to economic cycles and
seasonal influences than are new vehicle sales. The following charts depict the
diversity of our sources of revenue and gross profit for the year ended December
31, 2001:
[PIE CHART] [PIE CHART]
Revenue Gross Profit
Used vehicles 25% Used vehicles 13%
Parts, service and Parts, service and
collision repair 12% collision repair 37%
Finance and Insurance 3% Finance and Insurance 19%
New vehicles 60% New vehicles 31%
4
BUSINESS STRATEGY
Further Develop Strategic Markets and Brands. Our growth strategy has been
focused on metropolitan markets, predominantly in the Southeast, Southwest,
Midwest and California, that on average are experiencing population growth that
exceeds the national average. Where practicable, we also seek to acquire
franchises that we believe have above average sales prospects. We have a
dealership portfolio of 30 American, European and Asian brands. A majority of
our dealerships are either luxury or mid-line import brands. Our dealership
network is organized into regional dealership groups. As of December 31, 2001,
we operated dealerships in the following regional areas:
Percent of
Number of Number of 2001 Total
Stores Franchises Revenue
------------- ---------------- --------------
Northern California 18 23 20%
Houston 10 12 12%
Southern California/Nevada 16 18 10%
Dallas 4 4 8%
North Carolina 9 14 8%
W est Florida 8 8 7%
Birmingham/Tennessee 10 13 6%
Ohio 7 12 5%
Alabama 8 16 5%
Oklahoma 6 6 5%
Mid-Atlantic 5 6 4%
South Carolina 7 12 4%
Georgia 3 3 3%
East Florida 4 8 3%
-------- ------- -------
115 155 100%
-------- ------- -------
We believe that further consolidation in the auto retailing industry is likely
and we intend to seek acquisitions consistent with our operating strategy. We
generally seek to acquire larger, well managed multiple franchise dealerships or
multiple dealership groups located in metropolitan or high growth suburban
markets. We also look to acquire 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 the capital and experience to identify, acquire and professionally manage
dealerships.
The automotive retailing industry remains highly fragmented. We believe our
"hub and spoke" acquisition strategy will allow us to realize economies of
scale, offer a greater breadth of products and services and increase brand
diversity. We also intend to acquire dealerships that have under performed the
industry average but represent attractive franchises or have attractive
locations that 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 37.0% of our new and used vehicle unit sales for the year
ended December 31, 2001 and 36.2% of our new and used vehicle unit sales for
the year ended December 31, 2000.
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,
insurance and warranty products. As a result of our size and scale, we have
also negotiated higher commissions on the origination of customer vehicle
financing, insurance policies and extended warranty contracts. On a per
vehicle basis, our F&I revenue for the year ended December 31, 2001
increased 12.1% to $846 compared to 2000.
5
Parts, Service & Repair: Each of our dealerships offers a fully integrated
service and parts department. Manufacturers permit warranty work to be
performed only at franchised dealerships. As a result, our dealerships are
uniquely qualified to perform work covered by manufacturer warranties on
increasingly complex vehicles. We believe we can continue to grow our
profitable parts and service business by using variable rate pricing
structures, focusing on customer service and efficiently managing our parts
inventory.
In addition, we operated collision repair centers at 29 locations at
December 31, 2001. We recently added two regional managers to oversee these
operations. We believe we can improve these operations by capitalizing on
the synergies between our franchised dealerships and our collision repair
centers. These synergies include access to customer networks, ready access
to parts and the ability to share employees.
. Emphasize Expense Control. We continually focus on controlling expenses
and expanding margins at the dealerships we acquire and integrate into our
organization. Approximately 63.1% of our selling, general and administrative
expenses for the year ended December 31, 2001 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 (7.0%
of selling, general and administrative expenses) and non-salaried compensation
(50.1%) 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.
. Effectively Manage Inventory Levels. Maintaining appropriate levels of
both vehicle and parts inventories has a direct impact on profitability. We
believe that vehicle gross margins decline as inventory levels increase and more
pressure is exerted on the sales staff to close deals. In addition, net
profitability is negatively affected by the higher costs (floor plan interest
and insurance) of carrying that inventory. We have implemented financial
reporting systems that give us the ability to analyze our vehicle inventory on a
consolidated basis. Inventory management is also a key component of the various
incentive programs we have implemented at our dealerships. During 2001, we
reduced our new vehicle inventory levels from 68.1 days supply at the beginning
of the year to 45.4 days supply at year end and our used vehicle inventory
levels from 40.1 days supply to 35.1 days supply.
. 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 each year. We have expanded our Sonic
Dealer Academy to include modules not only for our dealer operators but also for
general sales managers and fixed operations managers. We believe that our
comprehensive training of all employees and professional, multi-tiered
management structure provide us with a competitive advantage over other
dealership groups. This training and organizational structure provides
high-level supervision over the dealerships, accurate financial reporting and
the ability to maintain effective controls as we expand. In order to motivate
management, we employ an incentive compensation program for each officer, vice
president and dealer operator, a portion of which is provided in the form of
Sonic stock options with additional incentives based on the performance of
individual profit centers. We believe that this organizational structure,
together with the opportunity for promotion within our large organization and
for equity participation, serve as a strong motivation for our employees.
. 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. Our success in this area is
evident by the number of manufacturer awards our dealerships have received. In
2001, a number of our dealerships received BMW's Center of Excellence award,
Chrysler's Five Star Certification, the Lexus Elite Award, Toyota's President's
Award, Honda's President's Award and Infiniti's Reward of Excellence.
. Management Information System. Our dealerships process their financial
and operating data through their individual dealer management system using
software provided by ADP, Inc., Reynolds & Reynolds, Co. or UCS, Inc. We then
consolidate the data received from our dealers using an exclusive private
communication network. We aggregate the information at our corporate
headquarters using Hyperion financial systems. This technology allows us to
quickly integrate the information from a new acquisition. Using our private
network, we upload the financial and operational data of a newly acquired
dealership and thereby efficiently integrate the acquired dealership into our
operational strategy.
. Customer Relationship Management. We believe that we can increase
customer loyalty and reduce marketing costs by using Customer Relationship
Management ("CRM") software to more efficiently target our advertising
communications. We expect these systems to allow us to capture a greater
percentage of our targeted customers' automotive spending. We are implementing a
standardized system throughout our dealership network to allow us access to
centralized information. We completed our pilot program and have successfully
deployed our CRM system in fifty percent of our dealerships.
6
Dealership Management
Our dealership operations are overseen by regional, senior regional or
divisional vice presidents for a particular geographic area. These vice
presidents are geographically aligned with regional and divisional controllers
who are responsible for maintaining effective internal controls and accurate
financial reporting at each dealership. Our divisional and regional management
teams use our computer-based information systems to monitor each dealership's
sales, profitability, inventory and other financial and operating data. We
believe this regional management structure gives us a competitive advantage over
many dealerships. It allows us to effectively oversee our operations, recruit
new employees and implement best practices using employees that have a thorough
understanding of the local market. In addition, it gives us the ability to
quickly field an experienced team of professionals to lead our acquisition due
diligence and integration efforts thereby increasing the speed with which we
deploy our operating strategy at acquired dealerships.
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 that 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 assist the dealer operators in implementing
organizational best practices. Regional directors of fixed operations, collision
repair centers and finance & insurance support the national directors.
New Vehicle Sales
As of December 31, 2001, Sonic sold 30 brands of new 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 25.4% of new vehicle sales during
the year ended December 31, 2001 were luxury brands (such as Mercedes, Lexus,
BMW, Infiniti and Volvo) compared to 26.5% for the same period in 2000. In
addition, approximately 59.7% of our new vehicle sales in 2001 were import
brands and 40.3% were domestic brands.
Our leading new vehicle brands accounted for our 2001 revenue as depicted
in the following chart:
[PIE CHART]
General Motors(2) 12.2%
Toyota 11.3%
Nissan 5.3%
Lexus 5.3%
Other(3) 15.3%
Honda 13.0%
Ford 18.6%
Chrysler(1) 8.3%
BMW 10.7%
(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
7
The following table presents information regarding Sonic's new vehicle sales:
Year ended December 31,
------------------------------------------
1999 2000 2001
------------- --------------- ------------
(dollars in thousands, except per vehicle selling prices)
Unit sales ...................... 79,294 135,919 142,720
Vehicle Revenue (1) ............. $ 1,962,129 $ 3,499,546 $ 3,772,133
Average vehicle Selling Price ... $ 24,745 $ 25,747 $ 26,430
Gross Profit .................... $ 161,205 $ 293,034 $ 298,589
Gross Margin .................... 8.2% 8.4% 7.9%
(1) In order to maintain consistency and comparability of financial
information between periods presented, certain reclassifications have
been made to prior year financial statements to conform to the current
year presentation.
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 than do customers who purchase vehicles using cash or
traditional financing. 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 motivates our customers to
return to our dealerships for repair service throughout the term of the lease.
Used Vehicle Sales
Sonic sells a broad variety of makes and models of used cars and light
trucks. We obtain used vehicles through customer trade-ins, at "closed" auctions
which may be attended only by new vehicle dealers and which offer off-lease,
rental and fleet vehicles, and at "open" auctions which offer repossessed
vehicles and vehicles sold by other dealers. We sell our used vehicles to retail
customers and, in the case of vehicles in poor condition or vehicles that 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,
--------------------------------------------------
1999 2000 2001
---------------- --------------- -------------
(dollars in thousands, except per vehicle selling prices)
Retail unit sales ........................ 47,345 79,749 81,122
Retail vehicle revenue (1) ............... $ 651,461 $ 1,174,660 $ 1,174,064
Average retail selling price ............. $ 13,760 $ 14,729 $ 14,473
Retail gross profit ...................... $ 72,627 $ 135,736 $ 134,823
Retail gross margin (1) .................. 11.2% 11.6% 11.5%
Wholesale unit sales ..................... 39,834 67,835 70,200
Wholesale vehicle revenue ................ $ 250,794 $ 430,513 $ 418,006
Average wholesale vehicle selling price .. $ 6,296 $ 6,346 $ 5,955
Wholesale gross profit ................... $ (3,734) $ (7,587) $ (9,382)
Wholesale gross margin ................... -1.5% -1.8% -2.2%
Total unit sales ......................... 87,179 147,584 151,322
Total revenue ............................ $ 902,225 $ 1,605,173 $ 1,592,070
Total gross profit ....................... $ 68,893 $ 128,149 $ 125,441
Total gross margin ....................... 7.6% 8.0% 7.9%
(1) In order to maintain consistency and comparability of financial
information between periods presented, certain reclassifications have
been made to prior year financial statements to conform to the
current year presentation.
8
Service and Parts Sales
Sonic sells parts and provides maintenance and both warranty and
non-warranty repair services at each of our franchised dealerships. Service and
parts sales provide higher gross margins than vehicle sales and, generally, are
not as sensitive to economic cycles and seasonality factors as vehicle sales.
The following table presents information regarding Sonic's service and
parts sales:
Year ended December 31,
-----------------------------------------
1999 2000 2001
------------- -------------- ------------
(dollars in thousands)
Sales revenue ................ $ 333,161 $ 640,662 $ 733,242
Gross profit ................. $ 139,738 $ 283,124 $ 335,510
Gross margin ................. 41.9% 44.2% 45.8%
Collision Repair Operations
As of December 31, 2001, Sonic operated 29 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,
-----------------------------------------
1999 2000 2001
------------- -------------- ------------
(dollars in thousands)
Sales revenue ................. $ 31,023 $ 47,312 $ 50,587
Gross profit .................. $ 14,933 $ 23,882 $ 25,868
Gross margin .................. 48.1% 50.5% 51.1%
Finance and Insurance Operations
Sonic offers its customers a wide range of financing and leasing
alternatives for the purchase of vehicles as well as third-party 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
provider of the finance, lease or extended warranty contract but is assessed a
chargeback fee by that provider if a contract is canceled, in most cases, within
90 days of originating the contract. 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 contract. 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 selling, general and administrative
expenses upon recognition of such revenue.
The following table presents information regarding Sonic's finance and
insurance operations:
Year ended December 31,
-----------------------------------------
1999 2000 2001
------------- ------------- -------------
(dollars in thousands, except per unit data)
Commission revenue ......... $ 82,771 $ 162,751 $ 189,325
Revenue per unit retailed... $ 654 $ 755 $ 846
Gross profit (1) ........... $ 82,771 $ 162,751 $ 189,325
Gross margin ............... 100.0% 100.0% 100.0%
(1) In order to maintain consistency and comparability of financial
information between periods presented, certain reclassifications have
been made to prior year financial statements to conform to the current
year presentation.
9
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.
Relationships with Manufacturers
Each of Sonic's dealerships operates under a separate franchise or dealer
agreement that 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 that 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 and dealer agreements. Other policies implemented by manufacturers
include:
. 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.
. General Motors and Infiniti may force the sale of their respective
franchises if 20% or more of Sonic's voting securities are similarly
acquired.
. 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 stockholders
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.
. 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 require the prior
approval of Volkswagen.
. Mercedes requires 60 days advance notice to approve any acquisition of
20% or more of Sonic's voting securities.
10
. Other manufacturers may impose similar restrictions.
Many states 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, South Carolina, North
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 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 attorney's 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 franchiser (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
11
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 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
12
dealer. A manufacturer's Tennessee license may also be revoked if the
manufacturer prevents or attempts to prevent the sale or transfer of the
dealership by unreasonably withholding consent to the transfer.
Texas. Under Texas law, despite the terms of contracts between manufacturers
and dealers, manufacturers may not unreasonably withhold approval of a transfer
of a dealership. It is unreasonable under Texas law for a manufacturer to reject
a prospective transferee of a dealership who is of good moral character and who
otherwise meets the manufacturer's written, reasonable and uniformly applied
standards or qualifications relating to the prospective transferee's business
experience and financial qualifications. In addition, under Texas law,
franchised dealerships may challenge manufacturers' attempts to establish new
franchises in the franchised dealers' markets, and state regulators may deny
applications to establish new dealerships for a number of reasons, including a
determination that the manufacturer is adequately represented in the region.
Texas law limits the ability of manufacturers to terminate or fail to renew
franchises. In addition, other laws in Texas limit the ability of manufacturers
to withhold their approval for the relocation of a franchise or require that
disputes be arbitrated. In addition, a manufacturer's license to distribute
vehicles in Texas may be revoked if, among other things, the manufacturer has
forced or attempted to force an automobile dealer to accept delivery of motor
vehicles not ordered by that dealer.
Virginia. Virginia law states that it is unlawful for a manufacturer to
prevent or refuse to approve the sale or transfer of the ownership of a
dealership unless the manufacturer provides written notice and the refusal is
reasonable. It is unlawful for a manufacturer to grant an additional franchise
for a particular line-make of motor vehicle in a relevant market area in which a
dealer or dealers of that line-make are already located unless the manufacturer
has first advised in writing all other dealers in the line-make in the area. A
dealer may request a hearing where a determination will be made as to whether
the market will support all of the dealers in that line-make in the area. It is
unlawful for a manufacturer to terminate, cancel or refuse to renew the
franchise of any dealer without good cause and unless the dealer has received
written notice of the manufacturer's intentions and the state has determined, if
requested in writing by the dealer, that there is good cause for the
termination. In the event of a proposed sale or transfer of a dealership, the
manufacturer has a right of first refusal to acquire the new vehicle dealer's
assets or ownership, subject to certain exceptions.
Competition
The retail automotive industry is highly competitive. Depending on the
geographic market, we compete both with dealers offering the same brands and
product lines as ours and dealers offering other manufacturers 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.
We believe that the principal competitive factors in vehicle sales are the
marketing campaigns conducted by manufacturers, the ability of dealerships to
offer a wide selection of the most popular vehicles, the location of dealerships
and the quality of customer service. Other competitive factors include customer
preference for makes of automobiles, pricing (including manufacturer rebates and
other special offers) and warranties.
In addition to competition for vehicle sales, we also compete with other
auto dealers, service stores, auto parts retailers and independent mechanics in
providing parts and service. We believe that the principal competitive factors
in parts and service sales are price, the use of factory-approved replacement
parts, the familiarity with a dealer's makes and models and the quality of
customer service. A number of regional and national chains offer selected parts
and service at prices that may be lower than our prices.
In arranging or providing financing for our customers' vehicle purchases,
we compete with a broad range of financial institutions. 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. Conditions and competitive pressures affecting the markets in which
we operate, 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
Numerous federal and state regulations govern 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 sales,
operating, advertising, financing and employment practices. These laws also
include federal and state wage-hour, anti-discrimination and other employment
practices laws.
13
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.
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. However, claims arising out of actual or alleged violations of
laws may be asserted against us or our dealerships by individuals or
governmental entities, and may expose us to significant damages or other
penalties, including possible suspension or revocation of our licenses to
conduct dealership operations and fines.
As with automobile dealerships generally, and service, parts and body shop
operations in particular, our business involves the use, storage, handling and
contracting for recycling or disposal of hazardous or toxic substances or wastes
and other environmentally sensitive materials. Our business also involves the
past and current operation and/or removal of aboveground and underground storage
tanks containing such substances or wastes. Accordingly, we are subject to
regulation by federal, state and local authorities that 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 of the Registrant
The executive officers are elected annually by, and serve at the discretion
of, Sonic's Board of Directors. Sonic's executive officers as of the date of
this Form 10-K, are as follows:
NAME AGE POSITION(S) WITH SONIC
- ---- --- ----------------------
O. Bruton Smith.............. 75 Chairman, Chief Executive Officer and Director
Thomas A. Price.............. 58 Vice Chairman and Director
B. Scott Smith............... 34 President, Chief Operating Officer and Director
Theodore M. Wright........... 39 Chief Financial Officer, Vice President, Treasurer and Director
Jeffrey C. Rachor............ 40 Executive Vice President of Retail Operations and Director
Mark J. Iuppenlatz........... 42 Vice President of Corporate Development
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 dealerships. Mr. Smith has worked in
the retail automobile industry since 1966. Mr. Smith is also the chairman and
chief executive officer, a director and controlling stockholder of Speedway
Motorsports, Inc. ("SMI"). SMI is a public company traded on the New York Stock
Exchange (the "NYSE"). Among other things, it owns and operates the following
NASCAR racetracks: Atlanta MotorSpeedway, Bristol MotorSpeedway, Lowe's
MotorSpeedway at Charlotte, Las Vegas MotorSpeedway, Sears Point Raceway and
Texas MotorSpeedway. He is also the executive officer and a director of each of
SMI's operating subsidiaries. Mr. Smith's term as a director of Sonic will
expire at the 2003 annual stockholders' meeting.
14
Thomas A. Price was appointed Vice Chairman and a director of Sonic in
January 2000. Before joining Sonic, Mr. Price had been Chief Executive Officer,
President and a director of FirstAmerica Automotive, Inc. ("FirstAmerica") since
September 1996. From March 1976 to June 1997, Mr. Price owned and operated nine
vehicle dealerships. Mr. Price has worked in the automotive industry since 1963
in various capacities including marketing and field assignments at Ford Motor
Company. He is a charter member of the J.D. Power Superdealer Roundtable. Mr.
Price has agreed to stand for re-election as a director of Sonic at the Annual
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 January 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's term
as a director of Sonic will expire at the 2004 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. From 1992 to
1994, Mr. Wright was an audit manager with Deloitte & Touche LLP. Mr. Wright has
agreed to stand for re-election as a director of Sonic at the Annual 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 14 years experience in
automobile retailing and was the chief operating officer of the Chattanooga
dealerships from 1989 until their acquisition by Sonic in 1997. During this
period, Mr. Rachor has also served at various times as the general manager of
Toyota, Saturn and Chrysler-Plymouth-Jeep-Eagle dealerships. Before then, Mr.
Rachor was an assistant regional manager with American Suzuki Motor Corporation
from 1987 to 1989 and a metro sales manager and a district sales manager with
GM's Buick Motor Division from 1983 to 1987. Mr. Rachor's term 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 ("MMRT"), 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 company that owns, operates, develops and manages luxury
senior housing communities, where he was responsible for the company's
development operations. From 1994 to 1996, he served as Vice President of
Schlotzky's, Inc., a restaurant chain, 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., a real estate development
company and joint venture of Kemper Insurance Company and 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.
Employees
As of December 31, 2001, Sonic employed approximately 10,000 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 dealership. 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.
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)
566-2400. 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
15
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 substantially 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."
Item 3: Legal Proceedings
Sonic is involved, and will continue to be involved, in numerous legal
proceedings arising in the ordinary course of our business, including litigation
with customers, employment related lawsuits, contractual disputes and actions
brought by governmental authorities. 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. However, the results of these
proceedings cannot be predicted with certainty, and an unfavorable resolution of
one or more of these proceedings could have a material adverse effect on our
business, financial condition, results of operations, cash flows and prospects.
Item 4: Submission of Matters to a Vote of Security Holders.
Not Applicable.
16
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 NYSE under the
symbol "SAH."
As of March 15, 2002, there were 28,755,269 shares of Sonic's Class A common
stock and 12,029,375 shares of Sonic's Class B common stock outstanding. As of
March 15, 2002, there were 97 record holders of the Class A common stock and
four record holders of the Class B common stock. As of March 15, 2002, the
closing stock price for the Class A common stock was $30.03.
Sonic intends to retain future earnings to provide funds for operations and
future acquisitions. As a holding company, Sonic will depend on dividends and
other payments from its subsidiary dealership operations to pay cash dividends
to stockholders, as well as to meet debt service and operating expense
requirements.
We do not anticipate paying any dividends in the foreseeable future. The
credit agreement related to our senior credit facility and the indentures
governing the terms of our senior subordinated notes due 2008 prohibit the
payment of dividends by Sonic.
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.
2001 HIGH LOW
- ---- ---- ---
First Quarter......................... 8.45 6.00
Second Quarter........................ 19.10 7.69
Third Quarter......................... 22.75 10.90
Fourth Quarter........................ 23.86 13.00
2000 HIGH LOW
- ---- ---- ---
First Quarter......................... 9.81 7.69
Second Quarter........................ 11.25 9.50
Third Quarter......................... 12.13 8.31
Fourth Quarter........................ 9.00 6.00
During 2001, there were no issuances of equity securities by Sonic that were
not registered under the Securities Act.
17
Item 6: Selected Financial Data.
The selected consolidated income statement data for the years ended December
31, 1997, 1998, 1999, 2000, and 2001 and the selected consolidated balance sheet
data as of December 31, 1997, 1998, 1999, 2000, and 2001 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 have 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 in this Form 10-K.
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
on the following page reflect the results of operations and financial positions
of each of our dealerships acquired prior to December 31, 2001. As a result of
the effects of our acquisitions and other potential factors in the future, 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.
18
Year Ended December 31,
------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(dollars and shares in thousands except per share amounts)
Income Statement Data:
Revenues (1):
New vehicles..................................... $ 342,909 $ 960,050 $ 1,962,129 $ 3,499,546 $ 3,772,133
Used vehicles.................................... 79,270 307,916 651,461 1,174,660 1,174,064
Wholesale vehicles............................... 38,785 119,351 250,794 430,513 418,006
--------- ---------- ----------- ----------- -----------
Total vehicles................................ 460,964 1,387,317 2,864,384 5,104,719 5,364,203
Parts, service, and collision repair............. 57,537 162,660 364,184 687,975 783,830
Finance, insurance, and other.................... 10,606 34,011 82,771 162,751 189,325
--------- ---------- ----------- ----------- -----------
Total revenues................................ 529,107 1,583,988 3,311,339 5,955,445 6,337,358
Cost of sales (1)...................................... 464,169 1,370,557 2,843,800 5,064,505 5,362,623
--------- ---------- ----------- ----------- -----------
Gross profit........................................... 64,938 213,431 467,539 890,940 974,735
Selling, general and administrative expenses (1)....... 48,710 156,119 340,030 659,109 747,656
Depreciation and amortization.......................... 1,322 4,607 11,699 22,714 25,790
--------- ---------- ----------- ----------- -----------
Operating income....................................... 14,906 52,705 115,810 209,117 201,289
Other income and expense:
Interest expense, floor plan..................... 8,007 14,096 22,536 47,108 35,501
Interest expense, other.......................... 1,199 9,395 21,586 42,244 35,869
Other income..................................... 298 426 1,286 107 124
--------- ---------- ----------- ----------- -----------
Total other expenses, net 8,908 23,065 42,836 89,245 71,245
--------- ---------- ----------- ----------- -----------
Income before income taxes and minority
interest............................................ 5,998 29,640 72,974 119,872 130,044
Provision for income taxes............................. 2,249 11,083 28,325 45,700 50,715
--------- ---------- ----------- ----------- ----------
Income before minority interest........................ 3,749 18,557 44,649 74,172 79,329
Minority interest in earnings of subsidiary............ 47 - - - -
--------- ---------- ----------- ----------- -----------
Net income............................................. $ 3,702 $ 18,557 $ 44,649 $ 74,172 $ 79,329
========= ========== =========== =========== ===========
Diluted net income per share $ 0.27 $ 0.74 $ 1.27 $ 1.69 $ 1.91
========= ========== =========== =========== ===========
Weighted average number of diluted shares
outstanding......................................... 13,898 24,970 35,248 43,826 41,609
========= ========== =========== =========== ===========
Consolidated Balance Sheet Data:
Working capital........................................ $ 44,098 $ 79,155 $ 177,657 $ 214,410 $ 219,043
Total assets........................................... 291,450 576,103 1,501,102 1,784,576 1,805,926
Long-term debt (2)..................................... 49,653 145,790 425,894 493,309 519,963
Total liabilities...................................... 207,085 433,674 1,098,529 1,333,654 1,288,665
Stockholders' equity................................... 84,365 142,429 402,573 450,922 517,261
___________________________
(1) Amounts reflect certain reclassifications in order to make Sonic's
presentation more consistent with our peer group and revised accounting
standards regarding manufacturer incentives.
(2) 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.
19
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 appearing elsewhere in this report.
Overview
We are the second largest automotive retailer in the United States, as
measured by total revenue, operating 160 dealership franchises at 118 locations
and 29 collision repair centers throughout the United States as of March 22,
2002. We own and operate franchises for 30 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
Year Ended December 31,
--------------------------------
1999 2000 2001
------- -------- -------
Brand (1)
Ford .................. 23.3% 13.5% 18.6%
Honda ................. 6.7% 14.4% 13.0%
General Motors (2) .... 13.5% 10.8% 12.2%
Toyota ................ 7.9% 8.4% 11.3%
BMW ................... 9.3% 10.4% 10.7%
Chrysler (3) .......... 14.0% 12.1% 8.3%
Nissan ................ 3.1% 6.5% 5.3%
Lexus ................. 3.8% 5.3% 5.3%
Other (4) ............. 18.4% 18.6% 15.3%
------- ------- -------
Total ................. 100.0% 100.0% 100.0%
======= ======= =======
(1) Amounts reflect certain reclassifications in order to make
Sonic's presentation more consistent with our peer group and
revised accounting standards regarding manufacturer
incentives.
(2) Includes Buick, Cadillac, Chevrolet, GMC, Oldsmobile, and
Pontiac.
(3) Includes Chrysler, Dodge, Jeep, and Plymouth.
(4) 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, warranty and insurance contracts, we receive
a commission from the provider for originating the contract. If, within 90 days
of origination, the customer cancels or defaults on the contract, the provider
will assess a charge (a "chargeback") for a portion of the original commission.
The amount of the chargeback depends on how long the related contract was
outstanding. As a result, we have established reserves based on our historical
chargeback experience.
The automobile manufacturing 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,
manufacturer incentives and available credit. New and used vehicle sales slowed
substantially for several weeks following September 11, 2001. In response
certain manufacturers, especially of domestic brands, introduced incentive
programs, which contributed to a significant increase in new vehicle sales in
the fourth quarter of 2001. In addition, our dealerships in Northern California
experienced significant declines in revenue run rates due to the depressed
economic conditions in that market compared to the rest of the country. 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. These
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 that our dealerships receive from
20
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. These 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 63.1% of our selling, general and administrative
expenses for the year ended December 31, 2001 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
(7.0% of selling, general and administrative expenses) and non-salaried sales
compensation (50.1%) 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.
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 2001, we
received approximately $33.8 million in manufacturer inventory incentives that
resulted in an effective borrowing rate under our floor plan facilities of
approximately 0.3%.
We sell similar products and services (new and used vehicles, parts,
service and collision repair services), use similar processes in selling our
products and services, and sell our products and services to similar classes of
customers. As a result of this and the way we manage our business, we have
aggregated our results into a single 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, 2001. As a result of the effects
of our acquisitions and other potential factors in the future, 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.
Use of Estimates and Critical Accounting Policies
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. Certain of our accounting policies employing the use of significant
estimates are as follows:
Accounts receivable - Our accounts receivable consist primarily of
amounts due from the manufacturers for repair services performed on vehicles
with a remaining factory warranty and amounts due from third parties from the
sale of parts. We believe that there is minimal risk of uncollectability on
warranty receivables. We evaluate parts and other receivables for collectability
based on the age of the receivable, the credit history of the customer and past
collection experience. The allowance for doubtful accounts we have recorded for
accounts receivable is not significant. As of December 31, 2001, we also had
outstanding notes receivable from finance contracts of $13.7 million (net of an
allowance for credit losses of $1.8 million). These notes have average terms of
approximately 30 months and are secured by the related vehicles. The assessment
of our allowance for credit losses considers historical loss ratios and the
performance of the current portfolio with respect to past due accounts.
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"
("FIFO") method of inventory accounting 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.
We assess the valuation of all of our vehicle and parts inventories
and maintain a reserve where the cost basis exceeds the fair market value. In
making this assessment for new vehicles, we primarily consider the age of the
vehicles along with the timing of annual and model changeovers. For used
vehicles we consider recent market data and trends such as loss histories along
with the current age of the inventory. Parts inventories are assessed
considering primarily excess quantity and continued usefulness of the part. The
risk with parts
21
inventories is minimized by the fact that, generally, excess or obsolete parts
can be returned to the manufacturer. We have not recorded any significant
reserves on any of our inventory balances.
Income taxes - We provided for deferred taxes at currently enacted tax
rates for the tax effects of carry forward items and temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements. A valuation allowance is established when management
determines it is more likely than not that taxable income will not be sufficient
to fully realize the benefits of deferred tax assets. We currently have not
established any valuation allowance on our deferred tax assets.
Goodwill -- Goodwill represents the excess purchase price over the
estimated fair value of the tangible and separately measurable intangible net
assets acquired. As of December 31, 2000, the carrying amount of goodwill was
$668.8 million and represented 37.4% of total assets and 148.3% of total
stockholders' equity. As of December 31, 2001, the carrying amount of goodwill
was $738.1 million and represented 40.9% of total assets and 142.7% of total
stockholders' equity. Prior to the issuance of Statement of Financial Accounting
Standards ("SFAS") No. 141 and SFAS No. 142, generally accepted accounting
principles required that goodwill be amortized over the period benefited,
limited to a period of 40 years. Sonic has determined that the period benefited
by goodwill will be no less than 40 years. Accordingly, goodwill acquired in
business combinations completed prior to July 1, 2001 has been amortized over 40
years. In order to evaluate the recoverability of goodwill, Sonic periodically
compares the carrying value of goodwill with the anticipated undiscounted future
cash flows from operations of the business acquired. 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. Pursuant to the provisions of SFAS No. 142, goodwill acquired in business
combinations completed subsequent to June 30, 2001 has not been amortized, but
will be tested for impairment in accordance with the provisions of SFAS No. 142.
Upon full adoption of SFAS No. 142 in January 2002, all goodwill will no longer
be amortized. See discussion of "Recent Accounting Pronouncements."
Accruals - Various accruals, such as reserves for contingencies and
reserves for incurred but not reported claims under various insurance programs,
require management to make estimates in determining the ultimate liability we
may incur. The ultimate cost of these insurance reserves are estimated by
management and by actuarial evaluations based on historical claims experience,
adjusted for current trends and changes in claims processing procedures.
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,
----------------------------------------
1999 2000 2001
-------- ------- --------
Revenues (1):
New Vehicles .................................... 59.3% 58.8% 59.5%
Used Vehicles ................................... 19.7% 19.7% 18.5%
Wholesale Vehicles .............................. 7.6% 7.2% 6.6%
Parts, service and collision repair ............. 10.9% 11.6% 12.4%
Finance and insurance and other ................. 2.5% 2.7% 3.0%
-------- ------- -------
Total revenues ........................................... 100.0% 100.0% 100.0%
Cost of sales (1) ........................................ 85.9% 85.0% 84.6%
------- ------- -------
Gross profit (1) ......................................... 14.1% 15.0% 15.4%
Selling, general and administrative (1) .................. 10.2% 11.1% 11.8%
Depreciation ............................................. 0.1% 0.1% 0.1%
Goodwill amortization .................................... 0.3% 0.3% 0.3%
------- ------- -------
Operating income ......................................... 3.5% 3.5% 3.2%
Interest expense, floor plan ............................. 0.7% 0.8% 0.6%
Interest expense, other .................................. 0.6% 0.7% 0.6%
------- ------- -------
Income before income taxes ............................... 2.2% 2.0% 2.0%
Income tax expense ....................................... 0.9% 0.8% 0.8%
------- ------- -------
Net Income ............................................... 1.3% 1.2% 1.2%
======= ======= =======
(1) Amounts reflect certain reclassifications in order to make
Sonic's presentation more consistent with our peer group and
revised accounting standards regarding manufacturer incentives.
Revenues
Total revenues increased $381.9 million, or 6.4% in 2001, reflecting
increases in new vehicle revenues; parts, service, and collision repair; and
finance and insurance revenues, offset slightly by decreases in used and
wholesale vehicle revenues. The overall increase was primarily due to
acquisitions, which contributed $672.2 million in revenue in 2001. This increase
was offset by lower revenues from dealerships owned longer than one year ("same
store") of approximately $290.3 million, or 5.2% in 2001. The majority of this
decline was due to our Northern California, North Carolina, and South Carolina
regions, which accounted for $260.0 million of the same store revenue decrease.
In 2000, total revenues increased 80.6% over the previous year. Of this
increase, approximately 97.5% resulted from acquisitions and approximately 2.5%
was contributed by dealerships owned longer than one year.
22
New Vehicles: Revenues from the sale of new vehicles increased
approximately $272.6 million, or 7.8%, in 2001 over 2000, reflecting an increase
in units sold of approximately 5.0%, or 6,801 units, and a slight increase in
the average new vehicle selling price of approximately $683, or 2.7%. The impact
of dealerships acquired in 2000 and 2001 by a decline in same store unit sales
of 11,511 units, or 9.0%. The decline in same store unit sales was primarily
isolated to domestic brands, which are generally more sensitive to weaker
economic conditions than import brands. Sales of domestic brands on a same store
basis declined approximately 19.2% in 2001, and accounted for approximately
76.0% of the total decline in same store unit sales. Sales of import brands on a
same store basis declined only 3.9% in 2001. Same store unit sales were also
negatively affected by weaker economic conditions in our Northern California
region where same store unit sales declined 13.7%, representing 40.0% of the
total decline in same store sales. We also saw relatively significant declines
in same store unit sales in our North and South Carolina regions of 19.7% and
26.6%, respectively, primarily as a result of a heavier concentration of
domestic versus import brands in those regions. These regions represented 32.8%
of the total decline in same store unit sales. While we saw declines in same
store unit sales in most of our other regions, no other region accounted for
more than 10% of the total decline.
In 2000, revenues from the sale of new vehicles increased
approximately 78.4%, representing an increase in unit sales of approximately
71.4% and an increase in the average selling price of approximately 4.1%. The
increase in unit sales resulted primarily from acquisitions, which was partially
offset by an approximate decline of 5.4% in same store unit sales. The increase
in the average selling price resulted primarily from an increase in the
percentage of higher-priced luxury brand units sold. Luxury brands comprised
16.5% of our new vehicle unit sales in 2000 compared to 13.5% in 1999.
Used Vehicles: Revenues from retail sales of used vehicles remained
mostly flat in 2001. Revenues from acquisitions contributed $103.3 million, but
this increase was offset by a decrease in same store sales of $103.9 million.
The decrease in same store sales was due to decreases in both selling price, of
$105 per unit, and units sold of 6,549. Dealerships acquired contributed 7,922
units in 2001. Half of the decline in same store unit sales was due to our
Northern California and Birmingham/Tennessee markets, which made up $52.6
million of the $103.9 million decline in used vehicle revenues.
Revenues from retail sales of used vehicles increased approximately
80.3% 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 7.0%. Of the increase in unit sales, approximately 94.6% resulted
from acquisitions and 5.4% resulted from same store sales.
Wholesale Vehicles: Wholesale revenues decreased 2.9% in 2001. The
majority of the decline was due to a reduction in same store revenue of $48.1
million, offset by an increase from acquisitions, of $35.6 million. The majority
of the decline in same store sales resulted from a lower selling price of $331
per unit and a decrease in units of 4,633 in 2001. The decrease in average price
per unit was caused by the declines in values of used units at the wholesale
level, especially in the fourth quarter.
Wholesale revenues in 2000 increased 71.7% over 1999. The increase was
due primarily to an increase in unit sales of 70.3% and an increase in the
average price per unit of 0.8%. Of the increase in unit sales, approximately
93.2% resulted from acquisitions and 6.8% resulted from same store sales.
Fixed Operations: Revenues from parts, service and collision repair
increased approximately 13.9% in 2001, of which approximately 29.5% resulted
from same store sales with the remaining 70.5% coming from acquisitions. Same
store revenues increased $28.2 million, or 4.5%, resulting in part from
investments in real estate and construction projects on collision facilities,
which allowed us to increase our overall service and parts capacity. Revenues
from parts, service and collision repair increased approximately 88.9% in 2000,
of which approximately 93.8% resulted from acquisitions.
Finance and Insurance: Finance and insurance revenue increased 16.3%
in 2001 resulting primarily from increases in revenues from the retail sale of
new vehicles in 2001. Finance and insurance revenue increased 96.6% in 2000
resulting primarily from increases in revenues from the retail sale of new and
used vehicles. The total increase in 2001 of $26.6 million was made up of $19.0
million from acquisitions, and $7.6 million from same store sale growth. Finance
and insurance revenue per unit increased $91 per unit in 2001. Finance and
insurance revenue increased $101 per unit in 2000. The increase in per unit
revenue in both years reflects our continued focus on training programs for
finance and insurance sales people along with our ability to negotiate higher
commissions on the origination of customer vehicle financing, insurance polices
and extended warranty contracts.
Gross profit and gross margins
Gross profit increased 9.4% in 2001, primarily as a result of
acquisitions. Gross profit as a percentage of revenues ("gross margins")
increased to 15.4% from 15.0% 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 12.4% in 2001 from 11.6% in 2000. Finance and insurance revenues as
a percentage of total revenues increased to 3.0% in 2001 from 2.7% in 2000. In
addition, the gross profit percentage earned on our parts, service, and
collision repair and finance and insurance products increased to 56.6% in 2001
from 55.2% in 2000. The overall increase in gross margin
23
was offset by a decrease in floor plan assistance received from manufacturers to
$33.8 million in 2001, from $37.3 million in 2000 as a result off a decline in
interest rates (see additional discussion of floor plan assistance under
Liquidity and Capital Resources: Floor Plan Facilities).
Gross profit increased 90.6% in 2000, the majority of which resulted
from acquisitions. Gross margin increased to 15.0% in 2000 from 14.1% in 1999
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 11.6% in 2000 from 11.0%
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, and collision repair and finance and
insurance products increased to 55.2% in 2000 from 53.1% in 1999.
The following graph depicts our mix of revenue and gross profit for
each of the past three years:
[GRAPHS]
The above chart reflects certain reclassifications in order to make Sonic's
presentation more consisent with peer group and revised accounting standards
regarding manufacturer incenttives.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 13.4% in 2001,
with approximately 80.8% of the increase coming primarily from acquisitions. Of
our total selling, general and administrative expenses, approximately 63.1% were
variable, comprised primarily of non-salaried sales compensation and
advertising, and approximately 36.9% were fixed, comprised primarily of rent
expense and fixed compensation. Variable selling, general and administrative
expenses are generally tied to vehicle sales and can be adjusted in response to
changes in sales volume or gross profits. As a percentage of gross profits,
variable expenses actually declined slightly in 2001 to 48.4% from 48.5% in
2000. These declines were offset by fixed expenses, which increased as a
percentage of gross profits to 28.3% in 2001 from 25.5% in 2000, primarily as a
result of increases in rent expense due to investments in dealership facilities,
and increases in medical insurance costs. Total selling, general, and
administrative expenses as a percentage of gross profit increased to 76.7% in
2001 from 74.0% in 2000 as a result of these factors, as well as a result of a
decline in floor plan assistance received from manufacturers, which are included
in gross profits. Floor plan assistance declined to $33.8 million in 2001, from
$37.3 million in 2000 primarily as a result off a decline in interest rates (see
additional discussion of floor plan assistance under Liquidity and Capital
Resources: Floor Plan Facilities).
24
Selling, general and administrative expenses increased 93.8% in 2000,
primarily as a result of acquisitions. Of our total selling, general and
administrative expenses, approximately 65.6% were variable, comprised primarily
of non-salaried sales compensation and advertising, and approximately 34.4% were
fixed, comprised primarily of rent expense and fixed compensation. Variable
selling, general and administrative expenses are generally tied to vehicle sales
and can be adjusted in response to changes in sales volume or gross profits. As
a percentage of gross profits, variable expenses actually declined slightly in
2000 to 48.5% from 48.7% in 1999. These declines were offset by fixed expenses,
which increased as a percentage of gross profits to 25.5% in 2000 from 24.0% in
1999, primarily as a result of increases in rent expense due to acquisitions of
dealerships located in higher rent markets and increased lease costs on newly
constructed dealerships. As a result, total selling, general, and administrative
expenses as a percentage of gross profit increased to 74.0% in 2000 from 72.7%
in 1999.
Depreciation and amortization
Depreciation expense, excluding goodwill amortization, increased
approximately 25.3% in 2001. The balance of gross property and equipment,
excluding land and construction in process, increased approximately $17.6
million in 2001, of which approximately $7.4 million resulted from dealership
acquisitions and approximately $9.5 million from additional capital
expenditures. In 2000, depreciation expense increased approximately 89.4%. The
balance of property and equipment, excluding 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 resulted from
additional capital expenditures. As a percentage of total revenues, depreciation
expense was at 0.1% in 2000 and 2001.
Goodwill amortization expense increased 9.4% in 2001 due to an increase
of $22.5 million in amortizable goodwill arising from acquisitions. An
additional $65.9 million of goodwill was acquired but not amortized in
accordance with SFAS No. 142.
Floor plan interest expense
Floor plan interest expense decreased by $11.6 million, or 24.6% in
2001. As a percentage of total revenues, floor plan interest expense decreased
to 0.6% in 2001 from 0.8% in 2000. The change reflects a same store decrease of
$14.6 million offset by an increase due to acquisitions of $3.0 million. Of the
same store decrease, $12.6 million was due to a decrease in the average floor
plan interest rate to 5.9% in 2001 from 7.9% in 2000. The remainder of the same
store decrease was due to a decrease in the average floor plan liability to
$485.4 million in 2001 from $519.9 million in 2000. Contributing to a lower
floor plan liability was a decrease in our average days supply of new vehicles
in inventory to approximately 45.4 days at December 31, 2001 from 68.1 days at
December 31, 2000.
Floor plan interest expense increased 109% in 2000 compared to 1999.
Approximately 77.4% of the increase resulted from acquisitions, and 22.6% was
contributed by dealerships 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. These
increases resulted from an increase in the average interest rate to
approximately 7.9% in 2000 from 6.9% in 1999, as well as an increase in our days
supply of new vehicles in inventory to approximately 68.1 days at December 31,
2000 from 53.9 days at December 31, 1999. This increase in our days supply
resulted in larger inventory and floor plan balances.
Other interest expense
Other interest expense decreased by $6.4 million, or 15.1% in 2001. Of
the total decrease, approximately $7.0 million was attributable to the decrease
in the average interest rate incurred on our senior credit facility to
approximately 6.9% in 2001 from 9.0% in 2000. This decrease was partially offset
by an increase in the average outstanding balance of the revolving credit
agreement to $341.9 million in 2001 from $331.8 in 2000 due to additional
borrowings for acquisitions.
Other interest expense increased $20.6 million in 2000, due primarily
to an increase in the average balance under our senior credit 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 was partially offset by the capitalization of an additional $1.9
million of interest costs on construction projects compared to 1999.
Provision for income taxes
The effective tax rate was 39.0% in 2001 compared to 38.1% in 2000.
The increase was primarily attributable to the number of stock purchases of
dealerships in which the goodwill amortization is not deductible for income tax
purposes. The effective tax rate was 38.8% in 1999. The decrease in 2000
compared to 1999 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. We expect our effective
tax rate for 2002 to be in the 37% to 38% range due to the changes in accounting
for goodwill amortization.
25
Liquidity and Capital Resources
We require cash to finance acquisitions and fund debt service and
working capital requirements. We rely on cash flows from operations, borrowings
under our various credit facilities and offerings of debt and equity securities
to meet these requirements.
Floor Plan Facilities:
We finance our new vehicle inventory through standardized floor plan
credit facilities with the following:
2001 Outstanding Balance
--------------------------------------
Lender Availability December 31, 2001 December 31, 2000
- ------------------------------------------------------------- ------------ ----------------- -----------------
Chrysler Financial Company, LLC ("Chrysler Financial") $750 million $ 142.6 million $ 143.0 million
General Motors Acceptance Corporation ("GMAC") $ 94 million $ 51.7 million $ 70.8 million
Ford Motor Credit Company ("Ford Motor Credit") $650 million $ 377.2 million $ 470.9 million
Toyota Motor Credit Corporation ("Toyota Credit") $100 million $ 16.4 million ----
Amounts outstanding under the Chrysler Financial and Toyota Credit
floor plan facilities bear interest at 1.25% above LIBOR (LIBOR was 1.90% at
March 22, 2002). Amounts outstanding under the Ford Motor Credit and GMAC floor
plan facilities bear interest at the prime rate (prime was 4.75% at March 22,
2002), subject to certain incentives and other adjustments. The weighted average
interest rate for our floor plan facilities was 5.63% for the year ended
December 31, 2001 and 7.93% for the year ended December 31, 2000. Our floor plan
interest expenses are substantially offset by amounts received from
manufacturers, in the form of floor plan assistance, which is recorded as a
reduction of cost of sales. In 2001 we received approximately $33.8 million in
manufacturer assistance, which resulted in an effective borrowing rate under our
floor plan facilities of approximately 0.3%. 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 were in compliance with all restrictive covenants as of
December 31, 2001.
Credit Facilities:
The Revolving Facility: On June 20, 2001 we entered into a new
revolving credit facility (the "Revolving Facility") with Ford Motor Credit,
Chrysler Financial and Toyota Credit with a borrowing limit of $600 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 $456.0 million at
December 31, 2001). The Revolving Facility replaced our prior revolving credit
facility with Ford Motor Credit and Chrysler Financial, as lenders, which had a
borrowing limit of $500 million, subject to a similar borrowing base. The
amounts outstanding under the Revolving Facility bear interest at 2.50% above
LIBOR and will mature on October 1, 2004 (but may be extended for a number of
additional one year terms to be negotiated with Ford Motor Credit, Chrysler
Financial and Toyota Credit). The Revolving Facility includes a commitment fee
equal to 0.25% of the unused portion of the facility. This fee was approximately
$0.5 million in 2001 and approximately $0.2 million in 2000. The total
outstanding balance was approximately $299.2 million as of December 31, 2001 and
approximately $353.8 million as of December 31, 2000.
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 on the Revolving Facility
are as follows:
Covenant Required Actual
----------------------- ------------ ----------
Current ratio **1.23 1.30
Fixed charge coverage **1.41 1.66
Interest coverage **2.00 3.18
Adjusted debt to EBITDA *2.25 1.40
* denotes less than.
** denotes greater than.
26
In addition, the loss of voting control over Sonic by Bruton Smith,
Chairman and Chief Executive Office, 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 were in compliance with all restrictive
covenants as of December 31, 2001.
The Mortgage Facility: We currently have a revolving real estate
acquisition and construction line of credit (the "Construction Loan") and a
related mortgage refinancing facility (the "Permanent Loan" and collectively
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 will mature on September 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. Borrowings, net of repayments, under
the Construction Loan in 2001 were approximately $4.0 million and were primarily
used in construction of dealership facilities. The total outstanding balance
under the Construction Loan as of December 31, 2001 was approximately $8.5
million.
Under the Permanent Loan, we can refinance up to $50.0 million in
advances under the Construction Loan once the projects are completed and can
finance real estate acquisition costs to the extent these costs were not
previously financed under the Construction Loan. 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. Borrowings under the Permanent
Loan in 2001 were approximately $4.8 million and were used to finance the
acquisition of real estate. The total outstanding balance as of December 31,
2001 was approximately $4.7 million.
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
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, 2001.
The Senior Subordinated Notes: We currently have an aggregate
principal balance of $200 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 February 1 and August 1. The notes are
subordinated to all of our present and future senior indebtedness, including the
Revolving Facility. 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 indentures governing the senior subordinated notes contain certain
specified restrictive and required financial covenants. We have agreed not to
pledge our assets to any third party except under certain limited circumstances
(for example, floor plan indebtedness). We have also 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. We were in compliance with all
restrictive covenants as of December 31, 2001.
Dealership acquisitions and dispositions:
During 2001, we acquired 12 dealerships for approximately $129.9
million in cash. The purchases were financed with a combination of cash borrowed
under our revolving acquisition line of credit and cash generated from our
existing operations.
As of March 22, 2002, we have acquired six dealerships for
approximately $25.1 million in cash and have entered into an agreement to
purchase 16 Don Massey dealerships, which is expected to close by the end of the
first quarter 2002. This acquisition will be paid for with a combination of cash
borrowed under our Revolving Facility and 1,470,588 shares of Sonic Automotive,
Inc. Class A Common Stock. The shares to be issued will be restricted from sale
for one year after closing, but will have certain piggy-back registration rights
in the event of a future underwritten stock offering. After completing the
Massey acquisition, we expect the size and frequency of our acquisitions to
diminish in the second quarter of 2002 and increase again in the second half of
the year.
In the ordinary course of business, we evaluate dealerships or
dealership franchises for possible disposition based on various performance
criteria. During 2001, we sold or otherwise disposed of assets from 15 of our
franchises, resulting in the closing of nine dealerships, which contributed
approximately $81.6 million in 2001 revenues. In addition, in connection with
General Motor's decision to discontinue its Oldsmobile brand and Chrysler's
decision to discontinue its Plymouth brand, we terminated four Oldsmobile and
seven Plymouth franchises in 2001. Net proceeds for all of our 2001 dealership
dispositions were approximately $14.1 million resulting in no material gain or
loss. As of December 31, 2001, we had three remaining Oldsmobile franchises
which may be terminated with 30 days notice any time between now and 2005.
27
Investments in Unconsolidated Affiliates:
We currently have 50% joint venture investments in North Point Volvo,
LLC, a Volvo automobile dealership in the greater Atlanta area, and Fort Myers
Collision Center, LLC, located in Florida, in which we initially invested
$900,000 and $100,000, respectively. The partners in these joint ventures are
not affiliated with Sonic. These entities are not consolidated into Sonic's
financial statements because we do not have operating control of the entities.
However, we have guaranteed $6.0 million in indebtedness between North Point
Volvo, LLC and Bank of America, including a $5.5 million revolving floor plan
financing agreement expiring in 2003, of which $3.1 million was outstanding as
of December 31, 2001, and a $0.5 million term loan expiring in 2007. We have
guaranteed no other obligations of either company. The investments are accounted
for under the equity method whereby we record our share of each respective joint
venture's pretax profit or loss. We recorded $264,023 in net income in 2001 and
$119,672 in net losses in 2000 related to these investments. We may elect to
make future investments in these entities.
Sale-Leaseback Transactions:
In an effort to generate additional capital, we typically seek to
structure our operations to minimize the ownership of real property. As a
result, facilities either constructed by us or obtained in acquisitions are
typically sold to third parties in sale-leaseback transactions. The resulting
leases generally have initial terms of 10-15 years and include a series of
five-year renewal options. We have no continuing obligations under these
arrangements other than lease payments. The majority of our sale-leaseback
transactions are done with Capital Automotive REIT. Under our agreement with
Capital Automotive, we have the ability to substitute properties in the lease
portfolio should we decide to dispose of a dealership currently being leased
from Capital Automotive.
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 2001 were
approximately $43.6 million, of which approximately $34.1 million related to the
construction of new dealerships and collision repair centers. Once completed,
these new dealerships and collision repair centers are generally sold in
sale-leaseback transactions. We sold approximately $9.0 million of completed
construction projects in sale-leaseback transactions during 2001. There were no
material gains or losses on these sales. As of December 31, 2001, total
construction in progress was approximately $34.0 million, of which approximately
$18.0 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, 2001. We do not
expect any significant gains or losses from these sales. Through March 22, 2002,
there have been no additional sale/leaseback transactions.
Stock Repurchase Program:
Our Board of Directors has authorized us to expend up to $100 million
to repurchase shares of our Class A common stock or redeem securities
convertible into Class A common stock. From inception through December 31, 2001
we had repurchased a total of 6,330,264 shares of Class A common stock for
approximately $59.4 million and had also redeemed 13,801.5 shares of Class A
convertible preferred stock at a total cost of approximately $13.8 million. We
have limited our stock repurchase activity recently and anticipate that we will
continue to limit such activity to utilizing option exercise proceeds to
repurchase shares on an opportunistic basis.
Cash Flows:
During 2001, net cash provided by operating activities was
approximately $146.6 million, which was generated primarily by net income plus
non-cash items such as depreciation, amortization and deferred income taxes. A
decrease in inventory levels of $219.1 million was offset by a related decrease
in floor plan liabilities of $203.8 million. Cash used for investing activities
in 2001 was approximately $136.9 million. Our principal investing activities
include dealership acquisitions, capital expenditures and dealership
dispositions. During 2001, net cash provided by financing activities was
approximately $8.9 million and primarily related to proceeds from the issuance
of senior subordinated notes of $74.6 million coupled with issuances of stock
under stock compensation plans of approximately $10.0 million, offset by net
payments on our revolving credit facilities of $45.9 million and repurchases of
stock under our stock repurchase program of approximately $26.5 million.
28
Future Liquidity Outlook:
Our obligations under our existing credit facilities, indentures and
leasing programs are as follows:
2002 2003 2004 2005 2006 Thereafter Total
-------------- ------------ ------------- -------------- ----------- -------------- ------------
Floor Plan Financing $ 587,914 $ - $ - $ - $ - $ - $ 587,914
Long Term Debt 2,586 1,932 300,676 8,605 72 204,896 518,767
Operating Leases:
Third Party 58,483 58,458 57,961 57,370 55,632 314,763 602,667
Related Parties 4,587 4,410 4,319 4,319 4,319 20,672 42,626
We believe our best source of liquidity for future growth remains our
cash flows generated from operations. Our 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. With
forecasted capital expenditures that will not be funded by sale leaseback
financing transactions of approximately $12 to $15 million for the year 2002, we
expect to generate substantial "free" cash flow to support our acquisition
strategy.
Seasonality
Our operations are subject to seasonal variations. The first and fourth
quarters generally contribute less revenue and operating profits than the second
and third quarters. Weather conditions, the timing of manufacturer incentive
programs and model changeovers cause seasonality in new vehicle demand. Parts
and service demand remains more stable throughout the year.
Effect of New Accounting Pronouncements:
Recent Accounting Pronouncements: In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS 141: Business Combinations. SFAS
141 prohibits the pooling-of-interests method of accounting and requires the use
of the purchase method of accounting for all business combinations initiated
after June 30, 2001. In addition, SFAS 141 provides additional guidance
regarding the measurement and recognition of goodwill and other acquired
intangible assets. The provisions of this standard became effective beginning
July 1, 2001. For acquisitions after this date, we are required to classify
certain intangible assets, such as franchise rights granted from automobile
manufacturers, as intangible assets apart from goodwill. We are still in the
process of obtaining data necessary to complete the allocation of the purchase
price of our recent acquisitions, including the calculation of any franchise
rights, if any, we may need to recognize.
In June 2001, the FASB also issued SFAS 142: Goodwill and Other
Intangible Assets. Among other things, SFAS 142 no longer permits the
amortization of goodwill, but requires that the carrying amount of goodwill be
reviewed and reduced against operations if it is found to be impaired. This
review must be performed on at least an annual basis (with an initial review
within six months of adopting the new standard), but must also be performed upon
the occurrence of an event or circumstance that indicates a possible reduction
in value. SFAS 142 does require the amortization of intangible assets other than
goodwill over their useful economic lives, unless the useful economic life is
determined to be indefinite. Intangible assets determined to have a finite life
are required to be reviewed for impairment in accordance with SFAS 144:
Accounting for Impairment or Disposal of Long-Lived Assets. Intangible assets
that are determined to have an indefinite economic life are not amortized and
must be reviewed for impairment in accordance with the terms of SFAS 142. The
provisions of SFAS 142 become effective for us beginning January 1, 2002;
however, goodwill and other intangible assets determined to have an indefinite
useful life acquired in business combinations completed after June 30, 2001 have
not been amortized. We are currently evaluating the provisions of SFAS 142 and
we have not yet determined the impact on our consolidated financial statements.
The cumulative gross goodwill balance was approximately $785.2 million
at December 31, 2001 and approximately $697.8 million at December 31, 2000.
Goodwill, net of accumulated amortization, represented 40.9% of total assets at
December 31, 2001 and 37.4% at December 31, 2000. Net goodwill represented
142.7% of stockholders' equity at December 31, 2001 and 148.3% at December 31,
2000.
In August 2001, the FASB issued SFAS No. 144: Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes a single
accounting model for assets to be disposed of by sale whether previously held
and used or newly acquired. SFAS No. 144 requires certain long-lived assets to
be reported at the lower of carrying amount or fair value, less cost to sell,
and provides guidance in asset valuation and measuring impairment. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001. We are
currently evaluating the provisions of SFAS No. 144 and have not yet determined
the impact on our consolidated financial statements.
29
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 $911.3 million at both
December 31, 2001 and 2000. A change of 100 basis points in the underlying
interest rate would have caused a change in interest expense of approximately
$9.7 million in 2001 and approximately $9.5 million in 2000. Of the total change
in interest expense, approximately $6.2 million in 2001 and approximately $5.9
million in 2000 would have resulted from floor plan notes payable.
Our exposure with respect to floor plan notes payable is mitigated by
floor plan assistance received from manufacturers that are generally based on
rates similar to those incurred under our floor plan financing arrangements. Our
floor plan interest expense in 2001 exceeded the amounts we received from
manufacturer floor plan assistance by approximately $1.7 million. As a result,
the effective rate incurred under our floor plan financing arrangements was
reduced to an annualized rate of approximately 0.3% after considering these
30
incentives. A change in interest rates of 100 basis points would have had an
estimated impact on floor plan assistance of approximately $5.4 million in 2001.
While interest expense incurred under our fixed rate senior
subordinated notes is not affected by fluctuations in interest rates, such
fluctuations do affect the fair value of those notes. Based on the quoted bid
price as of December 31, 2001 and 2000, the fair value of our senior
subordinated notes was approximately $207.0 million and $106.3 million,
respectively. The carrying value of our senior subordinated notes was
approximately $195.7 million and $121.3 million at December 31, 2001 and 2000,
respectively.
In addition to our variable rate debt, we also have lease agreements on
a portion of our dealership facilities where the monthly lease payment
fluctuated based on LIBOR interest rates. A change of 100 basis points in the
underlying rates would have caused a change in rent expense of approximately
$2.6 million in 2001 and $2.1 million in 2000.
In order to reduce its exposure to market risks from changing interest
rates, on January 15, 2002, Sonic entered into an interest rate swap agreement
with a financial institution to effectively convert a notional principal amount
of $100 million of its LIBOR-based debt from variable to fixed rate. Under the
agreement, we will receive interest payments on the notional $100 million at a
variable rate equal to the one month LIBOR rate, adjusted monthly, and make
interest payments at a fixed rate of 3.88%. This interest rate swap has been
designated as a cash flow hedging relationship and, as a result, any changes in
fair value will be reflected in other comprehensive income in our statement of
stockholders' equity rather than our statement of income. While we may enter
into additional interest rate swaps in order to hedge our interest rate cash
flow risk and limit volatility created by changing rates, we believe variable
rates will give us the lowest cost of capital long term and believe some
variable rate exposure is a natural hedge in our business to economic cycles.
Item 8. Financial Statements and Supplementary Data.
See "Consolidated Financial Statements and Notes" that appears on page
F-1 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
31
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 "General Ownership of Voting Stock" in the Proxy
Statement (to be filed hereafter) for Sonic's Annual Meeting of the Stockholders
to be held on May 8, 2002 (the "Proxy Statement"). The information required by
this item with respect to Sonic's executive officers appears in Part I of this
Annual Report on Form 10-K under the caption "Executive Officers 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 "Executive Compensation" and
"Election of Directors" 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 "Voting Stock" 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.
32
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 that are incorporated by reference herein, are:
(a) (1) Financial Statements:
. Consolidated Balance Sheets as of December 31, 2000 and 2001
. Consolidated Statements of Income for the Years Ended
December 31, 1999, 2000 and 2001
. Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999, 2000 and 2001
. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 2000 and 2001.
(2) Financial Statement Schedules: No financial statement schedules are
required to be filed as part of this Annual Report on Form 10-K.
(3) Exhibits: Exhibits required in connection with this Annual Report on
Form 10-K are listed below. Certain of such exhibits, indicated by an
asterisk, are hereby incorporated by reference to other documents on
file with the Securities and Exchange Commission with which they are
physically filed, to be a part hereof as of their respective dates.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1* Amended and Restated Certificate of Incorporation of Sonic
(incorporated by reference to Exhibit 3.1 to 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 (as amended December 14, 2001).
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 "1998 Exchange Offer 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 1998 Exchange Offer Form S-4).
4.4* First Supplemental Indenture.4 to Sonic's Quarterly Report on Form 10-Q
for the quarter ended September 30,2000 (the "September 30, 2000
Form 10-Q")).
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 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")).
4.6* Third Supplemental Indenture dated as of March 31, 2001 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 4.6
to Sonic's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001 (the "June 30, 2001 Form 10-Q")).
4.7* Fourth Supplemental Indenture dated as of November 19, 2001 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 4.7 to Sonic's Registration Statement on Form S-4 (Reg. Nos.
333-75220 and 333-75220-01 through 333-75220-I2) (the "2001/2002
Exchange Offer Form S-4")).
33
4.8* Form of 11% Senior Subordinated Note due 2008, Series D (incorporated
by reference to Exhibit 4.9 to the 2001/2002 Exchange Offer Form S-4).
4.9* Indenture dated as of November 19, 2001 among Sonic, as issuer, the
subsidiaries of Sonic named therein, as guarantors, and the Trustee,
relating to the 11% Senior Subordinated Notes due 2008, Series C and
Series D. (incorporated by reference to Exhibit 4.9 to the 2001/2002
Exchange Offer Form S-4).
4.10* 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 June 20, 2001 (the "Credit Agreement")
between Sonic, as Borrower, Ford Motor Credit Company ("Ford Credit"),
as Agent and Lender, Chrysler Financial Company, L.L.C. ("Chrysler
Financial"), as Lender, and Toyota Motor Credit Corporation ("Toyota
Credit"), as Lender (incorporated by reference to Exhibit 10.1 to the
June 30, 2001 Form 10-Q).
10.2* Amendment to Credit Agreement and Reaffirmation of Guaranty dated
August 15, 2001 between Sonic, as Borrower, the subsidiaries of Sonic
named therein, as Guarantors, Ford Credit, as Agent and Lender,
Chrysler Financial, as Lender, and Toyota Credit, as Lender
(incorporated by reference to Exhibit 10.1 to Sonic's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001 (the "September
30, 2001 Form 10-Q")).
10.3* Amended and Restated Promissory Note dated August 15, 2001 executed by
Sonic in favor of Ford Credit pursuant to the Credit Agreement
(incorporated by reference to Exhibit 10.2 to the September 30, 2001
Form 10-Q).
10.4* Promissory Note dated June 20, 2001 executed by Sonic in favor of
Chrysler Financial pursuant to the Credit Agreement (incorporated by
reference to Exhibit 10.3 to the June 30, 2001 Form 10-Q).
10.5* Promissory Note dated June 20, 2001 executed by Sonic in favor of
Toyota Credit pursuant to the Credit Agreement (incorporated by
reference to Exhibit 10.4 to the June 30, 2001 Form 10-Q).
10.6* Guaranty dated June 20, 2001 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 10.5 to the June 30, 2001 Form 10-Q).
10.7* Security Agreement dated June 20, 2001 by Sonic in favor of Ford
Credit, as Agent for the Lenders under the Credit Agreement
(incorporated by reference to Exhibit 10.6 to the June 30, 2001 Form
10-Q).
10.8* Security Agreement dated June 20, 2001 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 10.7 to the
June 30, 2001 Form 10-Q).
10.9* 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).
10.10* 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).
10.11* 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).
10.12* 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).
10.13* 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).
10.14* 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).
10.15* 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)).(1)
34
10.16* 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)).
(1)
10.17* 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")). (1)
10.18* 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)). (1)
10.19* 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). (1)
10.20* First Amendment to the Price Employment Agreement (incorporated by
reference to Exhibit 10.18a to Sonic's Annual Report on Form 10-K for
the year ended December 31, 2000 (the "2000 Form 10-K"). (1)
10.21* Employment Agreement between Sonic and Theodore M. Wright (incorporated
by reference to Exhibit 10.20 to the 2000 Form 10-K). (1)
10.22 Employment Agreement between Sonic and Jeffrey C. Rachor. (1)
10.23* 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).
10.24* 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).
10.25* 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, Series A and Series B, and acknowledged by
Sonic, re: the Smith Subordinated Note (incorporated by reference to
Exhibit 10.89 to the 1998 Exchange Offer Form S-4).
10.26* Subordination Agreement dated as of November 19, 2001 between O. Bruton
Smith and the Trustee, acting for the benefit of the holders of the
Senior Subordinated Notes, Series C and Series D, and acknowledged by
Sonic, re: the Smith Subordinated Note (incorporated by reference to
Exhibit 4.13 to the 2001/2002 Exchange Offer Form S-4).
21.1 Subsidiaries of Sonic.
23.1 Consent of Deloitte & Touche LLP.
99.1 Risk Factors.
* Filed Previously
(1) Indicates a management contract or compensatory plan or
arrangement.
b) Reports on Form 8-K
No reports on Form 8-K have been filed by Sonic during the quarter
ended December 31, 2001.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SONIC AUTOMOTIVE, INC.
BY /s/ Theodore M. Wright
----------------------
Theodore M. Wright
Chief Financial Officer, Vice President
and Treasurer
Date: March 27, 2002
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 (principal March 27, 2002
------------------- executive officer) and Chairman
O. Bruton Smith
/s/ Thomas A. Price Vice Chairman and Director March 27, 2002
-------------------
Thomas A. Price
/s/ B. Scott Smith President, Chief Operating Officer and March 27, 2002
------------------ Director
B. Scott Smith
/s/ Theodore M. Wright Chief Financial Officer, Vice President and March 27, 2002
---------------------- Treasurer (principal financial and
Theodore M. Wright accounting officer) and Director
/s/ Jeffrey C. Rachor Executive Vice President of Retail March 27, 2002
--------------------- Operations and Director
Jeffrey C. Rachor
/s/ William R. Brooks Director March 27, 2002
---------------------
William R. Brooks
/s/ William P. Benton Director March 27, 2002
---------------------
William P. Benton
/s/ William I. Belk Director March 27, 2002
-------------------
William I. Belk
/s/ H. Robert HelleR Director March 27, 2002
-------------------
H. Robert Heller
/s/ Maryann N. Keller Director March 27, 2002
---------------------
Maryann N. Keller
/s/ Robert L. Rewey Director March 27, 2002
-------------------
Robert L. Rewey
/s/ Thomas P. Capo Director March 27, 2002
-----------------
Thomas P. Capo
36
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, 2000 and
2001, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2001. 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, 2000 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Charlotte, North Carolina
February 25, 2002
F-1
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(Dollars in thousands)
2000 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 109,325 $ 127,943
Receivables, net 127,865 134,968
Inventories 773,785 664,258
Other current assets 21,756 29,127
----------- -----------
Total current assets 1,032,731 956,296
Property and Equipment, net 72,966 98,972
Goodwill, net 668,782 738,103
Other Assets 10,097 12,555
----------- -----------
Total Assets $ 1,784,576 $ 1,805,926
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable - floor plan $ 684,718 $ 587,914
Trade accounts payable 50,274 44,802
Accrued interest 10,279 9,676
Other accrued liabilities 70,453 92,275
Current maturities of long-term debt 2,597 2,586
----------- -----------
Total current liabilities 818,321 737,253
Long-Term Debt 485,212 511,877
Other Long-Term Liabilities 8,200 5,836
Payable to the Company's Chairman 5,500 5,500
Deferred Income Taxes 16,421 28,199
Stockholders' Equity:
Class A Convertible Preferred Stock 251 -
Class A Common Stock, 33,291,933 shares issued at December 31, 2000
and 34,850,738 shares issued at December 31, 2001 333 348
Class B Common Stock, 12,250,000 shares at December 31, 2000
and 12,029,375 shares at December 31, 2001, were issued and outstanding. 123 121
Paid-in capital 329,489 343,256
Retained earnings 153,564 232,893
Treasury Stock, at cost (3,576,363 shares held at December 31, 2000
and 6,330,264 at December 31, 2001) (32,838) (59,357)
----------- -----------
Total stockholders' equity 450,922 517,261
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,784,576 $ 1,805,926
=========== ===========
See notes to consolidated financial statements.
F-2
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 2000 and 2001
(Dollars and shares in thousands, except per share amounts)
Year Ended December 31,
1999 2000 2001
---------- ----------- -----------
Revenues:
New vehicles $ 1,962,129 $ 3,499,546 $ 3,772,133
Used vehicles 651,461 1,174,660 1,174,064
Wholesale vehicles 250,794 430,513 418,006
----------- ----------- -----------
Total vehicles 2,864,384 5,104,719 5,364,203
Parts, service and collision repair 364,184 687,975 783,830
Finance & insurance and other 82,771 162,751 189,325
----------- ----------- -----------
Total revenues 3,311,339 5,955,445 6,337,358
Cost of sales 2,843,800 5,064,505 5,362,623
----------- ----------- -----------
Gross profit 467,539 890,940 974,735
Selling, general and administrative expenses 340,030 659,109 747,656
Depreciation 3,138 5,944 7,445
Goodwill amortization 8,561 16,770 18,345
----------- ----------- -----------
Operating income 115,810 209,117 201,289
Other income and expense:
Interest expense, floor plan 22,536 47,108 35,501
Interest expense, other 21,586 42,244 35,869
Other income 1,286 107 124
----------- ----------- -----------
Total other expense 42,836 89,245 71,245
----------- ----------- -----------
Income before income taxes 72,974 119,872 130,044
Provision for income taxes 28,325 45,700 50,715
----------- ----------- -----------
Net income $ 44,649 $ 74,172 $ 79,329
----------- ----------- -----------
Basic net income per share $ 1.41 $ 1.74 $ 1.96
=========== =========== ===========
Weighted average number of basic shares outstanding 31,744 42,518 40,541
=========== =========== ===========
Diluted net income per share $ 1.27 $ 1.69 $ 1.91
=========== =========== ===========
Weighted average number of diluted shares outstanding 35,248 43,826 41,609
=========== =========== ===========
See notes to consolidated financial statements.
F-3
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 2000 and 2001
(Dollars and shares in thousands)
Preferred Class A Class B
Stock Common Stock Common Stock
Shares Amount Shares Amount Shares Amount
------- ------- ------- ------ ------- -------
BALANCE AT DECEMBER 31, 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
Shares awarded under stock compensation plans - - 1,257 12 - -
Conversion of Class B Common Stock - - 221 2 (221) (2)
Redemption of Preferred Stock - (251) - - - -
Exercise of Warrants - - 81 1 - -
Purchase of Treasury Stock - - - - - -
Income tax benefit associated with stock
compensation plans - - - - - -
Net Income - - - - - -
-------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2001 - - 34,851 $ 348 12,029 $ 121
======== ======== ======== ======== ========= ========
F-4
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years Ended December 31, 1999, 2000 and 2001
(Dollars and shares in thousands)
Total
Paid-In Retained Treasury Stockholders'
Capital Earnings Stock Equity
----------- ----------- ----------- ---------------
BALANCE AT DECEMBER 31, 1998 $ 87,011 $ 34,743 - $ 142,429
Issuance of P referred 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 P referred 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
Shares awarded under stock compensation plans 9,970 - - 9,982
Conversion of Class B Common Stock - - - -
Redemption of Preferred Stock - - - (251)
Exercise of Warrants (1) - - -
Purchase of Treasury Stock - - (26,519) (26,519)
Income tax benefit associated with stock
compensation plans 3,798 - - 3,798
Net Income - 79,329 - 79,329
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2001 $ 343,256 $ 232,893 $ (59,357) $ 517,261
========= ========= ========= =========
See notes to consolidated financial statements.
F-5
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 2000 and 2001
(Dollars in thousands)
Years Ended December 31,
1999 2000 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,649 $ 74,172 $ 79,329
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,699 22,714 25,790
Deferred income taxes 2,075 12,384 11,788
Equity interest in earnings of investees - 119 (264)
(Gain)/Loss on disposal of assets 249 317 (897)
Changes in assets and liabilities that relate to operations:
Receivables (27,860) (25,167) 8,380
Inventories (45,665) (72,080) 219,135
Other assets 7,118 2,518 (2,258)
Notes payable - floor plan 50,707 105,809 (203,840)
Trade accounts payable and other liabilities 2,831 (14,590) 9,391
--------- --------- ---------
Total adjustments 1,154 32,024 67,225
--------- --------- ---------
Net cash provided by operating activities 45,803 106,196 146,554
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired (362,383) (91,554) (120,158)
Purchases of property and equipment (21,548) (73,171) (43,600)
Proceeds from sales of property and equipment 13,600 47,943 12,810
Proceeds from sale of dealerships 1,700 7,148 14,068
--------- --------- ---------
Net cash used in investing activities (368,631) (109,634) (136,880)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings/(repayments) on revolving credit facilities 280,116 69,342 (45,885)
Proceeds from long-term debt 1,380 1,418 74,583
Payments on long-term debt (8,037) (3,696) (2,966)
Public offering of Class A Common Stock 84,990 -
Redemptions of Preferred Stock - (13,551) (251)
Purchases of Class A Common Stock (6,358) (26,480) (26,519)
Issuance of shares under stock compensation plans 2,014 2,619 9,982
--------- --------- ---------
Net cash provided by financing activities 354,105 29,652 8,944
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 31,277 26,214 18,618
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 51,834 83,111 109,325
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 83,111 $ 109,325 $ 127,943
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 39,575 $ 90,678 $ 71,972
Income taxes $ 20,681 $ 36,821 $ 30,553
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Class A Convertible Preferred Stock issued for acquisitions and contingent
consideration $ 59,045 $ 11,589 $ -
Conversion of Class A Convertible Preferred Stock $ 52,285 $ 25,947 $ -
Class A Common Stock issued for acquisitions $ 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 Siginificant 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 155 dealership franchises and 29 collision repair centers
throughout the United States as of December 31, 2001. 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, 2001, Sonic sold a
total of 30 foreign and domestic brands of new vehicles.
Principles of Consolidation -- All material intercompany balances and
transactions have been eliminated in the consolidated financial statements. In
addition, Sonic has a 50% ownership interest in two joint ventures where the
partners are not affiliated with Sonic. These investments are accounted for
under the equity method whereby we record our share of each respective joint
venture's pretax profit or loss. We recorded $0.3 million in net income in 2001
and $0.1 million in net loss in 2000 related to these investments. These
entities are not consolidated into Sonic's financial statements because Sonic
does not have operating control of the entities. However, Sonic has guaranteed
$6.0 million in indebtedness between North Point Volvo, LLC and Bank of America,
including a $5.5 million revolving floor plan agreement, expiring in 2003 of
which $3.1 million was outstanding at December 31, 2001 and a $0.5 million term
loan expiring in 2007. We have guaranteed no other obligations of either
company.
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. Commission expense related to finance and
insurance commission revenue is charged to selling, general and administrative
expenses upon recognition of such revenue.
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
that 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 $108.1
million and $127.9 million in contracts in transit at December 31, 2000 and
2001, 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"
("FIFO") method of inventory accounting 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.
F-7
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. Description Of Business And Summary Of Significant Accounting Policies --
(Continued)
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:
Building and improvements..................................... 5-40 years
Office equipment and fixtures................................. 5-15 years
Parts and service equipment................................... 15 years
Company vehicles.............................................. 5 years
Goodwill -- Goodwill represents the excess purchase price over the
estimated fair value of the tangible and separately measurable intangible net
assets acquired. As of December 31, 2000, the carrying amount of goodwill was
$668.8 million and represented 37.4% of total assets and 148.3% of total
stockholders' equity. As of December 31, 2001, the carrying amount of goodwill
was $738.1 million and represented 40.9% of total assets and 142.7% of total
stockholders' equity. Prior to the issuance of Statement of Financial Accounting
Standards ("SFAS") No. 141 and SFAS No. 142, generally accepted accounting
principles required that goodwill be amortized over the period benefited,
limited to a period of 40 years. Sonic has determined that the period benefited
by goodwill will be no less than 40 years. Accordingly, goodwill acquired in
business combinations completed prior to July 1, 2001 has been amortized over 40
years. In order to evaluate the recoverability of goodwill, Sonic periodically
compares the carrying value of goodwill with the anticipated undiscounted future
cash flows from operations of the business acquired. 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. Pursuant to the provisions of SFAS No. 142, goodwill acquired in business
combinations completed subsequent to June 30, 2001 has not been amortized, but
will be tested for impairment in accordance with the provisions of SFAS No. 142.
Upon full adoption of SFAS No. 142 in January 2002, all goodwill will no longer
be amortized. See discussion of "Recent Accounting Pronouncements."
Recent Accounting Pronouncements -- In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141: Business Combinations.
SFAS No. 141 prohibits the pooling-of-interests method of accounting and
requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001. In addition, SFAS No. 141 provides
additional guidance regarding the measurement and recognition of goodwill and
other acquired intangible assets. The provisions of this standard became
effective beginning July 1, 2001. For acquisitions after this date, we are
required to classify certain intangible assets, such as franchise rights granted
from automobile manufacturers, as intangible assets apart from goodwill. We are
still in the process of obtaining data necessary to complete the allocation of
the purchase price of our recent acquisitions, including the calculation of any
franchise rights, if any, we may need to recognize (see Note 2).
In June 2001, the FASB also issued SFAS No. 142: Goodwill and Other
Intangible Assets. Among other things, SFAS No. 142 no longer permits the
amortization of goodwill, but requires that the carrying amount of goodwill be
reviewed and reduced against operations if it is found to be impaired. This
review must be performed on at least an annual basis (with an initial review
within six months of adopting the new standard), but must also be performed upon
the occurrence of an event or circumstance that indicates a possible reduction
in value. SFAS No. 142 does require the amortization of intangible assets other
than goodwill over their useful economic lives, unless the useful economic life
is determined to be indefinite. These intangible assets are required to be
reviewed for impairment in accordance with SFAS No. 144: Accounting for
Impairment or Disposal of Long-Lived Assets. Intangible assets that are
determined to have an indefinite economic life may not be amortized and must be
reviewed for impairment in accordance with the terms of SFAS No. 142. The
provisions of SFAS No. 142 become effective for us beginning January 1, 2002;
however, goodwill and other intangible assets determined to have an indefinite
useful life acquired in business combinations completed after June 30, 2001 have
not been amortized. We are currently evaluating the provisions of SFAS No. 142
and have not yet determined its full impact on our consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144: Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes a single
accounting model for assets to be disposed of by sale whether previously held
and used or newly acquired. SFAS No. 144 requires certain long-lived assets to
be reported at the lower of carrying amount or fair value, less cost to sell,
and provides guidance on asset valuation and measuring impairment. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001. We are
currently evaluating the provisions of SFAS No. 144 and have not yet determined
the impact on our consolidated financial statements.
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.
F-8
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. Description Of Business And Summary Of Significant Accounting Policies --
(Continued)
Stock-Based Compensation --Sonic accounts for its stock-based
compensation plans under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." Sonic has adopted the disclosure
option of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Under the provisions of APB No. 25,
compensation cost is generally measured based on the intrinsic value of the
equity instrument when it is awarded. Sonic has granted options at market value
and, accordingly, no compensation expense has been recorded for our option
plans.
Concentrations of Credit Risk --Financial instruments that 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. The large number of customers comprising the trade
receivables balances reduces credit risk arising from trade receivables from
commercial customers.
As of December 31, 2001, Sonic has outstanding notes receivable from
finance contracts of $13.7 million, net of an allowance for credit losses of $
1.8 million. Outstanding notes receivable at December 31, 2000 $9.5 million, net
of an allowance of $1.3 million. These notes have average terms of approximately
30 months and are secured by the related vehicles. The assessment of our
allowance for credit losses considers historical loss ratios and the performance
of the current portfolio with respect to past due accounts. These notes are
recorded in other current and long-term assets on the accompanying Consolidate
Balance Sheets.
Financial Instruments and Market Risks --As of December 31, 2000 and
2001 the fair values of Sonic's financial instruments including receivables,
notes payable-floor plan, trade accounts payable, payables to Sonic's Chairman,
payables for acquisitions 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, 2000 and 2001 was approximately $106.3
million and $207.0 million, respectively. The carrying value of Sonic's senior
subordinated notes as of December 31, 2000 and 2001 was approximately $121.3
million and $195.7 million, respectively.
Sonic has variable rate floor plan note facilities, revolving credit
facilities and other variable rate notes that expose it to risks caused by
fluctuations in the underlying interest rates. The total outstanding balance of
such facilities was approximately $1.1 billion at December 31, 2000 and $911.3
million at December 31, 2001.
In order to reduce its exposure to market risks from changing interest
rates, on January 15, 2002, Sonic entered into an interest rate swap agreement
with a financial institution to effectively convert a notional principal amount
of $100 million of its LIBOR-based debt from variable to fixed rate. Under the
agreement, Sonic will receive interest payments on the notional $100 million at
a variable rate equal to the one month LIBOR rate, adjusted monthly, and make
interest payments at a fixed rate of 3.88%. This swap qualifies as a cash flow
hedging relationship and, as a result, any changes in fair value will be
reflected in other comprehensive income in our statement of stockholders'
equity.
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 particularly related to allowance for credit loss,
realization of inventory, intangible asset and deferred tax asset values,
reserves for future chargebacks, insurance reserves and certain accrued
expenses.
Advertising -- Sonic expenses advertising costs in the period incurred.
Advertising expense amounted to $31.0 million, $54.3 million and $52.2 million
for the years ended December 31, 1999, 2000 and 2001, respectively.
Segment Information -- Sonic has adopted the provisions of SFAS No.
131, "Disclosures about segments of an Enterprise and Related Information." We
sell similar products and services (new and used vehicles, parts, service and
collision repair services), use similar processes in selling our products and
services, and sell our products and services to similar classes of customers. As
a result of this and the way we manage our business, we have aggregated our
results into a single 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 presentation. These reclassifications
F-9
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. Description of Business and Summary of Significant Accounting Policies --
(Continued)
relate primarily to manufacturer incentives and certain other amounts that have
been reclassed from sales revenues to cost of sales. Additionally, all finance
and insurance sales commissions have been reclassed from cost of sales to
selling, general and administrative expenses to conform with the industry
classification of such amounts.
2. Business Acquisitions and Dispositions
Completed Acquisitions
During 2001, Sonic acquired 12 dealerships for approximately $129.9
million in cash. The material acquisitions completed subsequent to the adoption
of SFAS 141 on July 1, 2001 were as follows:
. On October 8, 2001, Sonic acquired Buena Park Honda, Harbor City
Honda and Coast Cadillac as part of its acquisition of the Salta
dealership group located in Los Angeles, California. On November
19, 2001 Sonic acquired West Covina Toyota also as part of this
dealership group. These dealerships had combined estimated annual
revenues of approximately $171 million.
. On October 29, 2001 Sonic acquired Lawrence Marshall Chevrolet,
located in Houston, Texas, which had estimated annual revenues of
approximately $233 million.
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
$52.0 million, and 6,784,347 shares of Class A common stock recorded at a value
of approximately $75.8 million.
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 the 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 2001 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.
1999 2000 2001
--------- --------- ---------
Inventories $ 321,941 $ 95,160 $ 119,186
Floor plan notes payable (242,238) (84,413) (113,839)
Other working capital 23,866 1,241 19,935
Property and equipment 38,497 4,459 17,710
Goodwill 417,251 88,070 88,155
Non-current liabilites assumed (11,033) (943) (1,266)
--------- --------- ---------
Total purchase price $ 548,284 $ 103,574 $ 129,881
========= ========= =========
Pro Forma Results of Operations
The following unaudited pro forma financial information presents a
summary of consolidated results of operations as if the above acquisitions had
occurred at 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 actually been completed at the beginning of the periods
presented. These results are also not necessarily indicative of the results of
future operations.
F-10
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. Business Acquisitions And Dispositions-(Continued)
Year Ended December 31,
-----------------------------
2000 2001
------------ ------------
Total revenues $ 7,223,746 $ 6,828,165
Gross profit $ 1,023,869 $ 1,027,501
Net income $ 78,256 $ 81,728
Diluted net income per share $ 1.79 $ 1.96
Sale of Dealership Subsidiaries
In the ordinary course of business, we evaluate dealerships or
dealership franchises for possible disposition based on various performance
criteria. During 2001, we sold or otherwise disposed of assets from 15 of our
franchises, resulting in the closing of nine dealerships, which contributed
approximately $81.6 million in revenues for the year ended December 31, 2001. In
addition, in connection with General Motor's decision to discontinue its
Oldsmobile brand and Chrysler's decision to discontinue its Plymouth brand, we
terminated four Oldsmobile and seven Plymouth franchises in 2001. During 2000,
we sold or otherwise disposed of assets from eight dealership franchises which
contributed approximately $65.5 million in revenues for the year ended December
31, 2000. Net proceeds for our 2001 dealership dispositions were approximately
$14.1 million and for our 2000 dispositions were approximately $7.1 million.
There were no material gains or losses on these dispositions. As of December 31,
2001, we had three remaining Oldsmobile franchises which may be terminated with
30 days notice any time between now and 2005.
Subsequent Acquisitions
Subsequent to December 31, 2001, we have closed on six dealership
acquisitions for approximately $26.4 million in cash. In addition, we have
entered into an agreement to purchase 16 dealerships. This acquisition is
expected to close by the end of the first quarter 2002 and will be paid for in
cash and 1,470,588 shares of Sonic's Class A common stock.
3. Inventories and Related Notes Payable - Floor Plan
Inventories consist of the following:
December 31,
-----------------------
2000 2001
--------- ---------
New vehicles $ 591,583 $ 478,077
Used vehicles 116,836 111,656
Parts and accessories 48,916 48,705
Other 16,450 25,820
--------- ---------
Total $ 773,785 $ 664,258
--------- ---------
We finance all of our new and certain of our used vehicle inventory
through standardized floor plan credit facilities with the following:
2001 Outstanding Balance
--------------------------------------
Lender Availability December 31, 2001 December 31, 2000
- ------------------------------------------------------------ ------------------ ----------------- -----------------
Chrysler Financial Company, LLC ("Chrysler Financial") $750 million $ 142.6 million $ 143.0 million
General Motors Acceptance Corporation ("GMAC") $ 94 million $ 51.7 million $ 70.8 million
Ford Motor Credit Company ("Ford Motor Credit") $650 million $ 377.2 million $ 470.9 million
Toyota Motor Credit Corporation ("Toyota Credit") $100 million $ 16.4 million ----
F-11
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. Inventories and Related Notes Payable - Floor Plan - (Continued)
Amounts outstanding under the Chrysler Financial and Toyota Credit
floor plan facilities bear interest at 1.25% above LIBOR (LIBOR was 1.87% at
December 31, 2001). Amounts outstanding under the Ford Motor Credit and GMAC
floor plan facilities bear interest at the prime rate (prime was 4.75% at
December 31, 2001), subject to certain incentives and other adjustments. The
weighted average interest rate for our floor plan facilities was 5.63% for the
year ended December 31, 2001 and 7.93% for the year ended December 31, 2000. Our
floor plan interest expenses are substantially offset by amounts received from
manufacturers, in the form of floor plan assistance, which is recorded as a
reduction of cost of sales. In 2001 we received approximately $33.8 million in
manufacturer assistance, which resulted in an effective borrowing rate under our
floor plan facilities of approximately 0.3%. 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, 2001.
4. Property and Equipment
Property and equipment is comprised of the following:
December 31,
------------------------------
2000 2001
--------- ---------
Land $ 53 $ 10,863
Building and improvements 25,771 34,387
Office equipment and fixtures 23,599 29,492
Parts and service equipment 20,132 21,917
Company vehicles 5,812 7,078
Construction in progress 12,244 16,003
--------- ---------
Total, at cost 87,611 119,740
Less accumulated depreciation (14,645) (20,768)
--------- ---------
Property and equipment, net $ 72,966 $ 98,972
========= =========
In addition to the amounts classified as construction in progress at
December 31, 2001 and December 31, 2000, Sonic incurred approximately $18.0
million in construction costs in 2001 and $5.2 million in 2000 on facilities
that are or were expected to be completed and sold within one year in
sale-leaseback transactions. Accordingly, these costs are included in other
current assets on the accompanying consolidated balance sheets. Under the terms
of the sale-leaseback transactions, Sonic sells the properties to a third party
entity and enters into long-term operating leases on the facilities. Sonic has
no obligations under these arrangements other than lease payments.
F-12
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. Long-Term Debt
Long-term debt consists of the following:
December 31
---------------------------
2000 2001
-------------- ------------
Senior Subordinated Notes bearing interest at 11%, maturing
August 1, 2008 ..................................................................... $ 125,000 $ 200,000
$600 million revolving credit facility with Ford Motor Credit, Chrysler
Financial and Toyota Credit bearing interest at 2.50% above LIBOR and
maturing in October 2004, collaterized by all assets of Sonic ...................... 353,787 299,193
$50 million revolving construction line of credit with Ford Motor Credit bearing
interest at 2.25% above LIBOR and maturing in September 2005, collateralized by the
underlying real estate and other assets ............................................ 4,559 8,533
$50 million revolving real estate acquisition line of credit with Ford Motor Credit
bearing interest at 2.00% above LIBOR and maturing in June 2010, collateralized
by the underlying real estate and other assets ..................................... - 4,735
Other notes payable (primarily equipment notes) ....................................... 8,181 6,306
--------- ---------
491,527 518,767
Less unamortized discount on Senior Subordinated Notes ................................ (3,718) (4,304)
Less current maturities ............................................................... (2,597) (2,586)
--------- ---------
Long-term debt ........................................................................ $ 485,212 $ 511,877
========= =========
Future maturities of debt are as follows:
Year ending December 31,
------------------------
2002 ................................ $ 2,586
2003 ................................ 1,932
2004 ................................ 300,676
2005 ................................ 8,605
2006 ................................ 72
Thereafter .......................... 204,896
--------
Total ............................... $518,767
========
Senior Subordinated Notes
At December 31, 2000 and 2001, Sonic had $125,000,000 and $200,000,000,
respectively, 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 indentures governing the senior subordinated notes contain 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, 2001.
F-13
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. Long-term Debt -(Continued)
The Revolving Facility
On June 20, 2001 we entered into a new revolving credit facility (the
"Revolving Facility") with Ford Motor Credit, Chrysler Financial and Toyota
Credit with a borrowing limit of $600 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 $456.0 million at December 31, 2001). The Revolving Facility
replaced our prior revolving credit facility with Ford Motor Credit and Chrysler
Financial, which had a borrowing limit of $500 million, subject to a similar
borrowing base. The amounts outstanding under the Revolving Facility bear
interest at 2.50% above LIBOR (LIBOR was 1.87% at December 31, 2001) and will
mature on October 31, 2004 (but may be extended for a number of additional one
year terms to be negotiated with Ford Motor Credit, Chrysler Financial and
Toyota Credit). The Revolving Facility includes a commitment fee equal to .25%
of the unused portion of the facility. This fee was approximately $0.5 million
in 2000 and approximately $0.2 million in 2001. The total outstanding balance
was approximately $353.8 million as of December 31, 2000 and approximately
$299.2 million as of December 31, 2001.
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:
Covenant Required Actual
----------------------- ---------- --------
Current ratio **1.23 1.30
Fixed charge coverage **1.41 1.66
Interest coverage **2.00 3.18
Adjusted debt to EBITDA *2.25 1.40
* denotes less than.
** denotes greater than.
In addition, the loss of voting control over Sonic by Bruton Smith,
Chairman and Chief Executive Office, 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, 2001.
The Mortgage Facility
We currently have a revolving real estate acquisition and construction line
of credit (the "Construction Loan") and a related mortgage refinancing facility
(the "Permanent Loan" and collectively 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 will mature on September 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.
Borrowings, net of repayments, under the Construction Loan in 2001 were
approximately $4.0 million and were primarily used in construction of dealership
facilities. The total outstanding balance under the Construction Loan as of
December 31, 2001 was approximately $8.5 million.
Under the Permanent Loan, we can refinance up to $50.0 million in advances
under the Construction Loan once the projects are completed and can finance real
estate acquisition costs to the extent these costs were not previously financed
under the Construction Loan. 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. Borrowings under the Permanent Loan in 2001 were
approximately $4.8 million and were used to finance the acquisition of real
estate. The total outstanding balance as of December 31, 2001 was approximately
$4.7 million.
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
by Bruton Smith, Scott Smith and their spouses or immediate
F-14
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. Long-term Debt -(Continued)
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, 2001.
Subsidiary Guarantees
Balances outstanding under Sonic's revolving credit facilities and 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:
1999 2000 2001
------- ------- -------
Current:
Federal ................................. $24,198 $29,177 $34,426
State ................................... 2,052 4,139 4,501
------- ------- -------
26,250 33,316 38,927
Deferred ..................................... 2,075 12,384 11,788
------- ------- -------
Total provision for income taxes ........ $28,325 $45,700 $50,715
======= ======= =======
The reconciliation of the statutory federal income tax rate with
Sonic's federal and state overall effective income tax rate is as follows:
1999 2000 2001
------- ------- ---------
Statutory federal rate ........................ 35.00 % 35.00 % 35.00 %
Effective state income tax rate ............... 2.26 1.87 1.79
Nondeductible goodwill amortization ........... 1.20 1.36 1.57
Other ......................................... 0.36 (0.11) 0.64
------- ------- --------
Effective tax rate ............................ 38.82 % 38.12 % 39.00 %
======= ======= ========
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:
2000 2001
-------- --------
Deferred tax assets:
Allowance for bad debts ........................... $ 918 $ 720
Inventory ......................................... 972 829
Accrued severance ................................. 281 345
Net operating loss carryforwards .................. 2,949 6,028
Other ............................................. 1,894 3,704
-------- --------
Total deferred tax assets ...................... 7,014 11,626
Deferred tax liabilities:
Basis difference in property and equipment ........ (6,387) (5,913)
Basis difference in goodwill ...................... (13,116) (28,315)
Other ............................................. (1,590) (3,265)
-------- --------
Total deferred tax liability ................... (21,093) (37,493)
-------- --------
Net deferred tax liability ..................... $(14,079) $(25,867)
-------- --------
Net current deferred tax assets are recorded in other current assets on the
accompanying consolidated balance sheets. At December 31, 2001, Sonic had state
net operating loss carryforwards of $98.5 million that will expire between 2012
and 2021.
F-15
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. Related Parties
Registration Rights Agreement
Prior to its initial public offering, 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, 2,171,250 shares; Scott Smith, 956,250 shares; and
Egan Group, LLC, an assignee of Mr. Egan (the "Egan Group"), 20,625 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 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 Bruton 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 4.75% at December
31, 2001) and has a stated maturity date of November 30, 2000. Under the terms
of certain subordination agreements currently in effect, however, all amounts
owed by Sonic to Mr. Smith under the Subordinated Smith Loan are to be paid only
after all amounts owed by Sonic under its revolving credit facilities, floor
plan financing facilities and 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:
Sonic leases three dealership properties in Northern California from the
Price Trust. Tom Price, Sonic's Vice Chairman, and his wife are the sole
beneficiaries of the Price Trust. Lease expense associated with these leases was
approximately $2.2 million in 2000, $2.8 million 2001 and nothing in 1999.
Sonic leases three dealership properties in Northern California from Bay
Automotive, LLC, in which Mr. Price owns a 50% interest. Annual aggregate rent
under these leases was approximately $872,260 in 2000, $2.2 million in 2001 and
nothing in 1999.
Sonic leases office space in Charlotte from a subsidiary of SFC for a
majority of its headquarters personnel. Annual aggregate rent under this lease
was approximately $50,000 in 1999, $210,000 in 2000 and $268,000 in 2001.
Sale of Land Rover of Marin:
Pursuant to the terms of an Asset Purchase Agreement dated November 22,
2000, Sonic sold substantially all of the assets of its Land Rover of Marin
dealership to Marin Luxury Cars, LLC, an entity owned by Mr. Price. The Land
Rover of Marin dealership, along with certain other smaller dealerships owned by
Sonic, had previously been identified for disposition during the 2000 calendar
year by Sonic's management. Marin Luxury Cars paid Sonic approximately $5.0
million to acquire the Land Rover of Marin assets. No material gain or loss was
recognized on this sale. This disposition was consummated by Sonic on January 4,
2001 following the respective determinations by Sonic's board, disinterested
directors and independent directors that the terms of the transaction were no
less favorable to Sonic than could be obtained in an arms-length transaction
with an unrelated third party.
Other Transactions:
Sonic rents various aircraft owned by SFC, subject to their availability,
for business-related travel by Sonic executives. Sonic paid SFC approximately
$1.1 million in 2000 and $562,000 in 2001 for the use of these aircrafts.
F-16
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. Related Parties -- (Continued)
Certain of Sonic's dealerships purchase the Z-Max oil additive product from Oil
Chem Research Company, a subsidiary of SMI, for resale to service customers of
the dealerships in the ordinary course of business. Total purchases from Oil
Chem by Sonic dealerships totaled approximately $389,000 in 2000 and
approximately $665,000 in 2001.
Sonic and its dealerships frequently purchase apparel items, which are
screen-printed with Sonic and dealership logos, as part of internal marketing
and sales promotions. Sonic and its dealerships purchase such items from several
companies, including Speedway Systems, LLC, a company owned by SMI. Total
purchases from Speedway Systems by Sonic and its dealerships totaled
approximately $160,000 in 2000 and $218,000 in 2001.
In 2001, Las Vegas MotorSpeedway leased a fleet of new vehicles for use by
its employees from a Sonic dealership, a subsidiary of SAI, for approximately
$217,000.
In connection with the supervision and management of significant
construction and renovation projects at Sonic dealerships in 2000, Sonic paid
approximately $110,000 to SMI in 2000 for project management services provided
to Sonic by SMI employees.
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, 2000 there were 250.5 shares of Series II Preferred Stock issued
and outstanding. There were no shares of Preferred Stock issued or outstanding
at December 31, 2001.
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 that 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 that 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. Through December 31,
2001, we had redeemed 13,800 shares of Preferred Stock at a total cost of
approximately $13.8 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.
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
33,291,933 and 34,850,738 shares of Class A common stock issued at December 31,
2000 and 2001, respectively. Of these issued shares, there were 29,715,570 and
28,520,474 shares outstanding at December 31, 2000 and 2001, 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 and 12,029,375 shares of Class B common stock at December 31, 2000
and 2001, respectively.
Treasury Stock - Sonic's Board of Directors has authorized Sonic to expend
up to $100 million to repurchase shares of its Class A common stock or redeem
securities convertible into Class A common stock. Through December 31, 2001,
Sonic has repurchased 6,330,264 shares of Class A common stock at an average
price per share of approximately $9.38. Through December 31, 2000, Sonic had
repurchased 3,576,363 shares of Class A common stock at an average price per
share of $9.18. Sonic will continue to repurchase shares in the open market from
time to time subject to market conditions.
F-17
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. Capital Structure and Per Share Data-(continued)
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. As of December 31, 2001 all but 4,000 of these warrants had been
exercised.
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, 1999 December 31, 2000 December 31, 2001
--------------------------- ------------------------ --------------------------
Net Per-Share Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
-------- ------- --------- -------- ------- ---------- ------ --------- ---------
Basic Net Income Per Share $ 44,649 31,744 $ 1.41 $74,172 42,518 $ 1.74 $ 79,329 40,541 $ 1.96
====== ====== ======
Effect of Dilutive Securities
Stock compensation plans - 949 - 455 - 1,048
Warrants - 78 - 31 - 14
Convertible Preferred - 2,477 - 822 - 6
- ----- - --- - -
Stock
-------- ------ -------- ------ -------- ------
Diluted Net Income Per Share $ 44,649 35,248 $ 1.27 $ 74,172 43,826 $ 1.69 $ 79,329 41,609 $ 1.91
======== ====== ====== ======== ====== ====== ======== ====== ======
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 (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. Subsequent to December 31, 2001 the Board of
Directors approved an increase in the shares authorized for issuance from 6.0
million shares to 8.0 million shares under the Stock Option Plan. The increase
is pending stockholder approval at Sonic's Annual Meeting. 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, directors,
consultants and other individuals providing services to Sonic. The options 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.
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 after six months, and expire ten years from their date of
grant.
F-18
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS -- (Continued)
In connection with its acquisition of FirstAmerica Automotive, Inc.,
Sonic agreed to assume the FirstAmerica Plan. The FirstAmerica Plan was amended
and restated 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, 1999, 2000 and 2001 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, 1998........ 2,537 $6.00-9.19 $7.48
Granted ............................. 1,643 10.06-15.44 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 2.85-15.44 10.35
Granted ............................... 1,868 7.94-11.19 9.15
Exercised ............................. (300) 2.85-13.12 5.95
Forfeited ............................. (694) 2.85-15.44 10.33
------------------
Outstanding at December 31, 2000 ......... 5,061 2.85-15.44 10.06
Granted ............................... 1,156 7.01-16.51 12.79
Exercised ............................. (990) 2.85-15.44 8.88
Forfeited ............................. (379) 7.94-15.44 10.57
------------------
Outstanding at December 31, 2001 ......... 4,848 2.85-16.51 10.91
------------------
The following table summarizes information about stock options outstanding at
December 31, 2001:
Shares Weighted Average Shares
Outstanding at Remaining Weighted Average Exercisable Weighted Average
Range of Exercise Prices 12/31/01 Contractual Life Exercise Price at 12/31/01 Exercise Price
- ------------------------ ----------------------------------------------------------------------------------------------
(shares in thousands)
$2.85........... 60 5.5 years $ 2.85 60 $ 2.85
$2.86-7.25 ......... 439 5.8 6.30 429 6.28
$7.26-8.19 ......... 959 8.5 8.05 527 7.99
$8.20-13.12......... 2,046 8.1 10.31 999 9.87
$13.13-15.44 ....... 865 7.3 15.29 543 15.30
$16.51.......... 479 9.8 16.51 0 0.00
----------------------------------------------------------------------------------------------
4,848 8.0 years $10.91 2,558 $ 9.86
==============================================================================================
F-19
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS -- (Continued)
The weighted average fair value of options granted or assumed was
$6.76, $4.41, and $3.79 per share in 1999, 2000 and 2001, respectively. The fair
value of each option granted during 1999, 2000 and 2001 was estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions.
1999 2000 2001
------------- ------------ ---------
Employee Stock Purchase Plan
Dividend yield...................................... n/a n/a n/a
Risk free interest rates............................ 4.49%-6.15% 5.32-6.74% 2.17-4.30%
Expected lives...................................... .25-1.0 year 0.25-1.0 year 0.25-1.0 year
Volatility.......................................... 53.15% 44.85% 55.21%
Stock Option Plans
Dividend yield...................................... n/a n/a n/a
Risk free interest rates............................ 4.53%-6.15% 5.92%-6.53% 3.47-5.07%
Expected lives...................................... 3-5 years 5 years 5 years
Volatility.......................................... 53.15% 44.85% 55.21%
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.
Subsequent to December 31, 2001, the Board of Directors, pursuant to
Sonic's ESPP and pending the approval of the stockholders at Sonic's Annual
Meeting, increased the authorized shares from 1.8 million to 3.0 million.
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 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 for
300,000 shares of Class A common stock to be granted under the Nonqualified
ESPP.
Under both the ESPP and the Nonqualified ESPP, we issued options
exercisable for approximately 420,000, 524,000 and 456,000 shares in 1999, 2000
and 2001, respectively. We issued approximately 93,600, 147,800 and 282,076
shares to employees in 1999, 2000 and 2001 at a weighted average purchase price
of $10.70, $7.27 and $5.84 per share, respectively. The weighted average fair
value of shares granted under both plans was $2.91, $2.95 and $10.94 per share
in 1999, 2000 and 2001, respectively.
F-20
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE BENEFIT PLANS -- (Continued)
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 $39.9 million and $1.13, respectively for 1999, $70.4
million and $1.61, respectively for 2000 and $72.1 million and $1.73,
respectively, for 2001.
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:
Year Ending December 31, Related Parties Third Parties Total
--------------- ------------- --------
2002 $ 5,133 $ 57,936 $ 63,069
2003 4,956 57,912 62,868
2004 4,865 57,415 62,280
2005 4,865 56,824 61,689
2006 4,865 55,086 59,951
Thereafter 26,920 308,514 335,434
------- -------- --------
Total $51,604 $593,687 $645,291
======= ======== =========
Total rent expense for the years ended December 31, 1999, 2000 and 2001
was approximately $26.4 million, $54.7 million and $64.4 million, respectively.
Of these amounts, approximately $7.7 million, $3.3 million, and $5.3,
respectively, were paid to related parties.
Other Contingencies
Sonic is involved, and will continue to be involved, in numerous legal
proceedings arising in the ordinary course of our business, including litigation
with customers, employment related lawsuits, contractual disputes and actions
brought by governmental authorities. Currently, no legal proceedings are pending
against or involve Sonic 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. However, the results of these proceedings cannot be
predicted with certainty, and an unfavorable resolution of one or more of these
proceedings could have a material adverse effect on our business, financial
condition, results of operations, cash flows and prospects.
F-21
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. Summary of Quarterly Financial Data (Unaudited)
The following table summarizes Sonic's results of operations as presented in the
Consolidated Statements of Income by quarter for 2000 and 2001.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ----------------- -------------- -------------
Year Ended December 31, 2000:
Total revenues (3) ........................... $1,441,676 $1,523,331 $1,569,781 $1,420,657
Gross profit (3) ............................. $ 214,268 $ 226,139 $ 235,438 $ 215,095
Operating income ............................. $ 49,001 $ 58,655 $ 57,328 $ 44,133
Income before taxes .......................... $ 28,416 $ 36,347 $ 35,119 $ 19,990
Net income ................................... $ 17,371 $ 22,452 $ 22,059 $ 12,290
Diluted net income per share (2) ............. $ 0.39 $ 0.51 $ 0.51 $ 0.29
Year Ended December 31, 2001:
Total revenues (3) ........................... $1,511,848 $1,610,523 $1,535,702 $1,679,285
Gross profit (3) ............................. $ 228,251 $ 249,145 $ 241,832 $ 255,507
Operating income ............................. $ 44,296 $ 55,778 $ 52,205 $ 49,010
Income before taxes .......................... $ 22,108 $ 36,836 $ 36,278 $ 34,822
Net income (1) ............................... $ 13,483 $ 22,486 $ 22,118 $ 21,241
Diluted net income per share (2) ............. $ 0.33 $ 0.55 $ 0.53 $ 0.51
(1) Our operations are subject to seasonal variations. The first and fourth
quarters generally contribute less revenue and operating profits than the
second and third quarters. Weather conditions, the timing of manufacturer
incentive programs and model changeovers cause seasonality in new vehicle
demand. Parts and service demand remains more stable throughout the year.
(2) The sum of diluted net income per share for the quarters may not equal the
full year amount due to weighted average common stock equivalents being
calculated on a quarterly versus annual basis.
(3) Amounts reflect certain reclassifications in order to make Sonic's
presentation more consistent with our peer group and revised accounting
standards regarding manufacturer incentives.
F-22