-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
TKrUhx5uks26ImIQr7FQKMWjkmvVgng8CgaroonDtC6BJUdzf9Er+TWXFN3DrX+V
yMY1n/HhbMT46CmXOars7w==
<SEC-DOCUMENT>0001021408-02-004207.txt : 20020415
<SEC-HEADER>0001021408-02-004207.hdr.sgml : 20020415
ACCESSION NUMBER: 0001021408-02-004207
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020327
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SONIC AUTOMOTIVE INC
CENTRAL INDEX KEY: 0001043509
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO DEALERS & GASOLINE STATIONS [5500]
IRS NUMBER: 562010790
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-13395
FILM NUMBER: 02588867
BUSINESS ADDRESS:
STREET 1: 5401 EAST INDEPENDENCE BLVD
STREET 2: PO BOX 18747
CITY: CHARLOTTE
STATE: NC
ZIP: 28212
BUSINESS PHONE: 7045323354
MAIL ADDRESS:
STREET 1: 5401 EAST INDEPENDENCE BLVD
CITY: CHARLOTTE
STATE: NC
ZIP: 28212
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>SONIC AUTOMOTIVE FORM 10-K
<TEXT>
<PAGE>
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.
=========================================================
<PAGE>
FORM 10-K TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
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
<PAGE>
. 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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]
<TABLE>
<S> <C>
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%
</TABLE>
(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
<PAGE>
The following table presents information regarding Sonic's new vehicle sales:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1999 2000 2001
------------- --------------- ------------
(dollars in thousands, except per vehicle selling prices)
<S> <C> <C> <C>
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%
</TABLE>
(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:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1999 2000 2001
---------------- --------------- -------------
(dollars in thousands, except per vehicle selling prices)
<S> <C> <C> <C>
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%
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
. 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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH SONIC
- ---- --- ----------------------
<S> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(dollars and shares in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
___________________________
(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
<PAGE>
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:
<TABLE>
<CAPTION>
Percentage of New Vehicle Revenues
Year Ended December 31,
--------------------------------
1999 2000 2001
------- -------- -------
<S> <C> <C> <C>
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%
======= ======= =======
</TABLE>
(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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Percentage of Total Revenues for
the Year ended December 31,
----------------------------------------
1999 2000 2001
-------- ------- --------
<S> <C> <C> <C>
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%
======= ======= =======
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
2001 Outstanding Balance
--------------------------------------
Lender Availability December 31, 2001 December 31, 2000
- ------------------------------------------------------------- ------------ ----------------- -----------------
<S> <C> <C> <C>
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 ----
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Future Liquidity Outlook:
Our obligations under our existing credit facilities, indentures and
leasing programs are as follows:
<TABLE>
<CAPTION>
2002 2003 2004 2005 2006 Thereafter Total
-------------- ------------ ------------- -------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/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
</TABLE>
36
<PAGE>
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
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 2001
------------ ------------
ASSETS
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
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)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 2000 2001
---------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 2000 and 2001
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Preferred Class A Class B
Stock Common Stock Common Stock
Shares Amount Shares Amount Shares Amount
------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========= ========
</TABLE>
F-4
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years Ended December 31, 1999, 2000 and 2001
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Total
Paid-In Retained Treasury Stockholders'
Capital Earnings Stock Equity
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 2000 and 2001
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 2000 2001
---- ---- ----
<S> <C> <C> <C>
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 $ - $ -
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C>
Building and improvements..................................... 5-40 years
Office equipment and fixtures................................. 5-15 years
Parts and service equipment................................... 15 years
Company vehicles.............................................. 5 years
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1999 2000 2001
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
2001 Outstanding Balance
--------------------------------------
Lender Availability December 31, 2001 December 31, 2000
- ------------------------------------------------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C>
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 ----
</TABLE>
F-11
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
------------------------------
2000 2001
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
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
<PAGE>
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
---------------------------
2000 2001
-------------- ------------
<S> <C> <C>
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
========= =========
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1999 2000 2001
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
The reconciliation of the statutory federal income tax rate with
Sonic's federal and state overall effective income tax rate is as follows:
<TABLE>
<CAPTION>
1999 2000 2001
------- ------- ---------
<S> <C> <C> <C>
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 %
======= ======= ========
</TABLE>
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:
<TABLE>
<CAPTION>
2000 2001
-------- --------
<S> <C> <C>
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)
-------- --------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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
-------- ------- --------- -------- ------- ---------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ====== ====== ======== ====== ====== ======== ====== ======
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Exercise Price Weighted average
Number of Options Per Share Exercise Price
-------------------------------------------------------------
(shares in thousands)
<S> <C> <C> <C>
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
------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 2001:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
$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
==============================================================================================
</TABLE>
F-19
<PAGE>
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.
<TABLE>
<CAPTION>
1999 2000 2001
------------- ------------ ---------
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ending December 31, Related Parties Third Parties Total
--------------- ------------- --------
<S> <C> <C> <C>
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
======= ======== =========
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
(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
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.4
<SEQUENCE>3
<FILENAME>dex34.txt
<DESCRIPTION>BYLAWS
<TEXT>
<PAGE>
EXHIBIT 3.4
BYLAWS
OF
SONIC AUTOMOTIVE, INC.
(amended through December 14, 2001)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 - REGISTERED AND OTHER OFFICES
SECTION 1.01. REGISTERED OFFICE .......................................... 1
SECTION 1.02. OTHER OFFICES .............................................. 1
ARTICLE 2 - MEETINGS OF STOCKHOLDERS
SECTION 2.01. ANNUAL MEETINGS ............................................ 1
SECTION 2.02. SPECIAL MEETINGS ........................................... 1
SECTION 2.03. NOTICE OF MEETINGS ......................................... 2
SECTION 2.04. STOCKHOLDER LIST ........................................... 2
SECTION 2.06. VOTING ..................................................... 2
SECTION 2.07. NO ACTION WITHOUT A MEETING ................................ 3
SECTION 2.08. ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND OTHER BUSINESS .. 3
ARTICLE 3 - DIRECTORS
SECTION 3.01. POWERS ..................................................... 4
SECTION 3.02. NUMBER AND TERM ............................................ 4
SECTION 3.03. RESIGNATIONS ............................................... 5
SECTION 3.04. VACANCIES .................................................. 5
SECTION 3.05. REMOVAL .................................................... 5
SECTION 3.06. MEETINGS; PLACE AND TIME ................................... 5
SECTION 3.07. REGULAR ANNUAL MEETING ..................................... 5
SECTION 3.08. OTHER REGULAR MEETINGS ..................................... 5
SECTION 3.09. SPECIAL MEETINGS; NOTICE ................................... 6
SECTION 3.10. QUORUM ..................................................... 6
SECTION 3.11. ACTION WITHOUT MEETING ..................................... 6
SECTION 3.12. TELEPHONE MEETINGS ......................................... 6
SECTION 3.13. COMMITTEES OF DIRECTORS .................................... 6
SECTION 3.14. COMPENSATION OF DIRECTORS .................................. 6
SECTION 3.15. DIRECTOR CONFLICTS OF INTEREST ............................. 7
ARTICLE 4 - OFFICERS
SECTION 4.01. OFFICERS ................................................... 7
SECTION 4.02. CHAIRMAN; CHIEF EXECUTIVE OFFICER .......................... 8
SECTION 4.03. PRESIDENT .................................................. 8
SECTION 4.04. CHIEF OPERATING OFFICER .................................... 8
SECTION 4.05. CHIEF FINANCIAL OFFICER .................................... 8
SECTION 4.07. TREASURER .................................................. 8
SECTION 4.08. SECRETARY .................................................. 9
SECTION 4.09. CONTROLLER, ASSISTANT TREASURERS AND ASSISTANT SECRETARIES . 9
SECTION 4.10. REMOVAL; RESIGNATIONS; VACANCIES ........................... 9
SECTION 4.11. COMPENSATION ............................................... 9
SECTION 4.12. MECHANICAL ENDORSEMENT ..................................... 9
ARTICLE 5 - MISCELLANEOUS
SECTION 5.01. STOCK CERTIFICATES ......................................... 10
SECTION 5.02. STOCKHOLDERS RECORD DATE ................................... 11
SECTION 5.03. REGISTERED STOCKHOLDERS .................................... 11
SECTION 5.04. DIVIDENDS .................................................. 11
SECTION 5.05. SEAL ....................................................... 11
SECTION 5.06. FISCAL YEAR ................................................ 11
SECTION 5.07. CHECKS ..................................................... 12
SECTION 5.08. NOTICE AND WAIVER OF NOTICE ................................ 12
SECTION 5.09. BOOKS AND RECORDS .......................................... 12
ARTICLE 6 - INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND
AGENTS
SECTION 6.01. INDEMNIFICATION ............................................ 12
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 6.02. PROCEDURE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS ... 13
SECTION 6.03. PAYMENT OF EXPENSES IN ADVANCE ............................ 14
SECTION 6.04. INDEMNIFICATION NOT EXCLUSIVE ............................. 14
SECTION 6.05. OTHER ..................................................... 14
SECTION 6.06. INDEMNIFICATION AGREEMENTS ................................ 14
SECTION 6.07. INSURANCE ................................................. 14
SECTION 6.08. CONTINUED COVERAGE ........................................ 14
ARTICLE 7- AMENDMENTS
ARTICLE 8- CONFLICT OF TERMS
</TABLE>
ii
<PAGE>
BYLAWS
OF
SONIC AUTOMOTIVE, INC.
ARTICLE 1 - REGISTERED AND OTHER OFFICES
----------------------------------------
SECTION 1.01. REGISTERED OFFICE.
The address of the initial registered office in the State of Delaware
and the name of the initial registered agent of Sonic Automotive, Inc. (the
"Corporation") at such address are set forth in the Amended and Restated
-----------
Certificate of Incorporation of the Corporation (the "Certificate of
--------------
Incorporation"). The Corporation may, from time to time, designate a different
- -------------
address as its registered office or a different person as its registered agent,
or both; provided, however, that such designation shall become effective upon
-------- -------
the filing of a statement of such change with the Department of State of the
State of Delaware as is required by law.
SECTION 1.02. OTHER OFFICES.
The Corporation may have other offices, either within or without the
State of Delaware, at such place or places as the Board of Directors (the
"Board") may from time to time determine or the business of the Corporation may
-----
require.
ARTICLE 2 - MEETINGS OF STOCKHOLDERS
------------------------------------
SECTION 2.01. ANNUAL MEETINGS.
Annual meetings of stockholders for the election of directors and for
the transaction of any other business properly brought before the stockholders
in accordance with Section 2.08 hereof shall be held at such place, either
within or without the State of Delaware, and at such time and date as the Board,
by resolution, shall determine and as set forth in the notice of the meeting.
If the date of the annual meeting shall fall upon a legal holiday, the
meeting shall be held on the next succeeding business day. At each annual
meeting, the stockholders entitled to vote shall elect directors to succeed
those directors whose term expires at such annual meeting and may transact such
other business as is properly brought before the stockholders in accordance with
Section 2.08 hereof.
SECTION 2.02. SPECIAL MEETINGS.
Special meetings of the stockholders, for any purpose, unless otherwise
prescribed by statute or by the Certificate of Incorporation, may be called only
by the Chairman of the Board and shall be called by the Secretary or any
Assistant Secretary, at the request in writing of a majority of the directors.
Such request shall state the purpose of the proposed meeting. At each
1
<PAGE>
special meeting, the stockholders may transact only the business that is
properly brought before the stockholders in accordance with Section 2.08 hereof.
If a special meeting is adjourned to another time or place, the stockholders may
only transact business at the adjourned meeting that may have properly been
transacted at the original meeting.
SECTION 2.03. NOTICE OF MEETINGS.
Written notice, stating the place, date and time of any annual or
special meeting, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, shall be given to each stockholder entitled to
vote at such meeting in accordance with Delaware law, by or at the direction of
the Board or the person or persons calling the meeting, not less than ten (10)
nor more than sixty (60) days before the date of the meeting. If mailed, then
such notice shall be deemed to be given when deposited in the United States
mail, postage prepaid, addressed to the stockholder at his address as it appears
on the stock transfer books of the Corporation.
SECTION 2.04. STOCKHOLDER LIST.
The officer or agent who has charge of the stock ledger of the
Corporation shall, at least ten (10) days before each meeting of stockholders,
prepare a complete alphabetical list of the stockholders entitled to vote at the
ensuing meeting, with the address and the number and class and series, if any,
of shares held by each. Said list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall be available for inspection at
the meeting.
SECTION 2.05. QUORUM.
Except as otherwise required by the General Corporation Law of the
State of Delaware (the "Act"), by the Certificate of Incorporation or by these
---
Bylaws, a majority of the shares entitled to vote, represented in person or by
proxy, shall constitute a quorum at a meeting of stockholders. When a specified
item of business is required to be voted on by a class or series of stock, a
majority of the shares of such class or series, represented in person or by
proxy, shall constitute a quorum for the transaction of such item of business by
that class or series. After a quorum has been established at a stockholders'
meeting, the subsequent withdrawal of stockholders, so as to reduce the number
of shares entitled to vote at the meeting below the number required for a
quorum, shall not affect the validity of any action taken at the meeting or any
adjournment thereof.
SECTION 2.06. VOTING.
If a quorum is present, the affirmative vote of a majority of the votes
cast by shares entitled to vote on the subject matter shall be the act of the
stockholders, unless the vote of a greater number or voting by class is required
by the Act, the Certificate of Incorporation or these Bylaws. Where a separate
vote by class is required, the affirmative vote of a majority of the votes cast
by shares of such class shall be the act of such class unless the vote of a
greater
2
<PAGE>
number is required by the Act, the Certificate of Incorporation or these Bylaws.
Each outstanding share, regardless of class, shall be entitled to one vote on
each matter submitted to a vote at a meeting of stockholders, except as may
otherwise be provided by the Act or by the Certificate of Incorporation. The
affirmative vote of a plurality of the votes cast by shares entitled to vote on
the election of directors shall be sufficient to elect directors. Cumulative
voting of shares is prohibited. A stockholder may vote either in person or by
proxy executed in writing by the stockholder or his duly authorized
attorney-in-fact.
SECTION 2.07. NO ACTION WITHOUT A MEETING.
No action required to be taken or that may be taken at an annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, and the power of stockholders to consent in writing, without a meeting,
to the taking of any action is specifically denied.
SECTION 2.08. ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND OTHER BUSINESS.
(a) Director Nominations. Subject to any rights of holders of Preferred
--------------------
Stock, only persons who are selected and recommended by the Board of Directors
or a committee of the Board of Directors established to make nominations, or who
are nominated by stockholders in accordance with the procedures set forth in
this Section 2.08, shall be eligible for election at any annual or special
stockholders meeting. Nominations of individuals for election to the Board of
Directors of the Corporation at any annual meeting or any special meeting of
stockholders at which directors are to be elected may be made by a stockholder
of the Corporation entitled to vote for the election of directors at that
meeting as hereinafter set forth. Nominations by stockholders shall be delivered
to the Corporation in accordance with subsection 2.08(c) hereof and shall be
made by written notice (a "Nomination Notice"), which shall set forth, (i) as to
-----------------
each individual nominated, (A) the name, date of birth, business address and
residence address of such individual and (B) such other information regarding
each individual nominated that is to be disclosed in solicitations of proxies
for an election of directors, or is otherwise required, in each case pursuant to
the Securities Exchange Act of 1934, as amended, and the rules promulgated
thereunder, and, (ii) as to the stockholder submitting the Nomination Notice and
any person acting in concert with such stockholder, (w) the name and business
address of such stockholder and each such person, (x) the name and business
address of such stockholder and each such person as they appear on the
Corporation's books along with a representation that such stockholder is a
stockholder of record of shares of the Corporation's capital stock entitled to
vote at the meeting to which the notice pertains and intends to appear in person
or by proxy at the meeting to nominate the person(s) in the notice, (y) a
description of all arrangements, understandings or relationships between the
stockholder and each nominee and any other person or persons (naming such
person(s)) pursuant to which the nomination(s) are to be made by the stockholder
and (z) the class and number of shares of the Corporation which are beneficially
owned by such stockholder and each such person. A written consent to being named
in the proxy statement as a nominee and to serving as a director of the
Corporation if elected, signed by each nominee, shall be filed with any
Nomination Notice. If the presiding officer at any meeting of the stockholders
determines that any nomination was not made in accordance with the procedures
prescribed by these Bylaws, then he shall so declare to the stockholders at the
meeting, and the defective nomination shall be disregarded.
3
<PAGE>
(b) Stockholder Business. At any meeting of the stockholders, only such
--------------------
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before a meeting, business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) otherwise properly brought before the
meeting by or at the direction of the Board of Directors or (c) properly brought
before the meeting by a stockholder of record (who was also a stockholder of
record at the time of giving of the notice) in accordance with the procedures
set forth in this Section 2.08. A stockholder's written notice (a "Business
--------
Notice") shall set forth, as to each matter the stockholder proposes to bring
- ------
before the meeting: (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (ii) the name and business address of record of the stockholder
proposing such business, (iii) the class and number of shares of the Corporation
which are beneficially owned by the stockholder and (iv) any material interest
of the stockholder in such business. If the presiding officer at any meeting of
stockholders determines that business was not properly brought before the
meeting, then he shall so declare to the stockholders at the meeting, and any
such business not properly brought before the meeting shall not be transacted.
(c) Delivery of Notices. To be timely, any Nomination Notice or
-------------------
Business Notice must be delivered to, or mailed and received at, the principal
executive office of the Corporation, (i) in the case of an annual meeting that
is called for a date that is within thirty (30) days before or after the
anniversary date of the immediately preceding annual meeting of stockholders,
not less than sixty (60) days nor more than ninety (90) days prior to such
anniversary date, and (ii) in the case of an annual meeting that is called for a
date that is not within thirty (30) days before or after the anniversary date of
the immediately preceding annual meeting, or in the case of a special meeting of
stockholders called for the purpose of electing directors, not later than the
close of business on the tenth day following the day on which notice of the date
of the meeting was mailed or public disclosure of the date of the meeting was
made, whichever occurs first.
ARTICLE 3 - DIRECTORS
---------------------
SECTION 3.01. POWERS.
The business of the Corporation shall be managed by or under the
direction of the Board, which may exercise all such powers of the Corporation
and do all such lawful acts and things as are not by statute or by the
Certificate of Incorporation or by these Bylaws specifically reserved to the
shareholders.
SECTION 3.02. NUMBER AND TERM.
The Board shall consist of not less than three (3) nor more than
thirteen (13) directors as a majority of the Board shall from time to time
specify. No reduction in the number of directors shall have the effect of
shortening the term of any incumbent director and when so fixed such number
shall continue to be the authorized number of directors until changed in
accordance herewith. The Board shall be divided into three classes, as nearly
equal in number as possible. Each of the Class I, Class II and Class III
directors shall initially be elected to serve until the 1998, 1999 and 2000
annual meetings of stockholders, respectively, and, thereafter, the
4
<PAGE>
successors in each class of directors shall be elected to serve until the third
(3rd) annual meeting of stockholders following his election and qualification.
Each director shall serve until his successor shall have been elected and
qualified or until his earlier resignation, removal or death.
SECTION 3.03. RESIGNATIONS.
Any director or member of a committee may resign at any time. Such
resignation shall be made in writing, and shall take effect at the time
specified therein, and, if no time be specified, at the time of its receipt by
the Chairman of the Board, the President or the Secretary. The acceptance of a
resignation shall not be necessary to make it effective, unless otherwise
specified therein.
SECTION 3.04. VACANCIES.
Subject to any rights of holders of Preferred Stock, any vacancy
occurring in the Board of Directors, including any vacancy created by reason of
an increase in the number of directors, removal, resignation or death, may only
be filled by the affirmative vote of a majority of the remaining directors then
in office though less than a quorum of the Board of Directors, or by a sole
remaining director, as the case may be, and the director(s) so chosen shall hold
office until the next election of the class for which such director(s) has(have)
been chosen, and until his(their) successors are duly elected and qualified, or
until his(their) earlier resignation or removal. In the event of any increase or
decrease in the number of directors, the additional or eliminated directors
shall be classified or chosen so that all classes of directors shall remain or
become as nearly equal in number as possible.
SECTION 3.05. REMOVAL.
Notwithstanding any other provision of these Bylaws to the contrary, a
director may not be removed during his term except for cause.
SECTION 3.06. MEETINGS; PLACE AND TIME.
The Board may hold meetings, both regular and special, either within or
without the State of Delaware, as it may from time to time determine.
SECTION 3.07. REGULAR ANNUAL MEETING.
A regular annual meeting of the Board shall be held immediately
following the annual meeting of stockholders at the same place or at such time
and place as shall be fixed by the vote of the stockholders at the annual
meeting and no notice of such meeting shall be necessary to the newly elected
directors in order legally to constitute the meeting, provided a majority of
such Board shall be present.
SECTION 3.08. OTHER REGULAR MEETINGS.
Regular meetings of the Board may be held without notice at such time
and at such place as shall from time to time be determined by the Board.
5
<PAGE>
SECTION 3.09. SPECIAL MEETINGS; NOTICE.
Special meetings of the Board may be called by the Chairman of the
Board or the President or by the written request of two (2) directors. Written
notice of the time and place of special meetings shall be given to each director
by either personal delivery, telegram, cablegram or telefax at least seven (7)
days before the meeting, or by notice mailed to each director at least ten (10)
days before the meeting. Notice of a meeting need not be given to any director
who submits a waiver of notice, whether before or after the meeting, or who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to him.
SECTION 3.10. QUORUM.
At all meetings of the Board, a majority of the directors then serving
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board, except as may be otherwise specifically provided
by statute or by the Certificate of Incorporation. If a quorum shall not be
present at any meeting of the Board, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
SECTION 3.11. ACTION WITHOUT MEETING.
Unless otherwise restricted by the Certificate of Incorporation, any
action required or permitted to be taken at any meeting of the Board, or of any
committee thereof, may be taken without a meeting, if all members of the Board
or committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
SECTION 3.12. TELEPHONE MEETINGS.
Unless otherwise restricted by the Certificate of Incorporation,
members of the Board, or of any committee thereof, may participate in a meeting
of the Board or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
SECTION 3.13. COMMITTEES OF DIRECTORS.
The Board may, by resolution passed by a majority of the whole Board,
designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. Each such committee may be terminated by the
Board at such time as the Board may determine.
SECTION 3.14. COMPENSATION OF DIRECTORS.
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, the Board shall have the authority to fix the compensation of
directors. By resolution of the Board, the
6
<PAGE>
directors may be paid their expenses, if any, of attendance at each meeting of
the Board (and any committee thereof), a fixed sum for attendance at each
meeting of the Board (and any committee thereof), and a stated salary as
director. Nothing herein contained shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
SECTION 3.15. DIRECTOR CONFLICTS OF INTEREST.
No contract or other transaction between the Corporation and one or
more of its directors or between the Corporation and any other corporation,
firm, association or entity in which one or more of the directors of this
Corporation are directors or officers or are financially interested, shall be
void or voidable solely because of such relationship or interest or solely
because such director or directors are present at or participate in the meeting
of the Board or a committee thereof which authorizes, approves or ratifies such
contract or transaction or solely because his or their votes are counted for
such purpose, if:
A. The material facts as to his or their relationship or interest and
as to the contract or transaction are disclosed or are known to the Board or
committee, and the Board or committee in good faith authorizes, approves or
ratifies the contract or transaction by the affirmative votes of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or
B. The material facts as to his or their relationship or interest and
as to the contract or transaction are disclosed or known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of such stockholders, or
C. The contract or transaction is fair as to the corporation at the
time it is authorized, approved or ratified by the Board, a committee or the
stockholders.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board or a committee thereof which
authorizes, approves or ratifies such contract or transaction.
ARTICLE 4 - OFFICERS
--------------------
SECTION 4.01. OFFICERS.
The officers of the Corporation shall consist of a President, a
Treasurer and a Secretary, shall be elected by the Board and shall hold office
until their successors are elected and qualified, unless such officers resign,
die or are removed prior thereto. In addition, the Board may elect a Chairman, a
Vice Chairman, a Chief Executive Officer, a Chief Operating Officer, a Chief
Financial Officer, a Controller, one or more Vice Presidents or Executive Vice
Presidents, and such Assistant Secretaries and Assistant Treasurers or other
officers as it may deem proper. None of the officers of the Corporation need be
stockholders. The officers shall be elected at the first meeting of the Board
after each annual meeting. More than two offices may be held by the same person,
except the offices of President and Secretary, unless the Certificate of
Incorporation or these Bylaws otherwise provide. The Board shall designate the
Chairman of the Board or the President as the Chief Executive Officer of the
Corporation.
7
<PAGE>
SECTION 4.02. CHAIRMAN; CHIEF EXECUTIVE OFFICER.
The Chairman of the Board, if one is elected, shall preside at all
meetings of the shareholders and of the Board. The Chairman shall also have and
perform such other duties as from time to time may be assigned to him by the
Board. The Chief Executive Officer of the Corporation shall, subject to the
direction of the Board, supervise and control the business and management of the
Corporation. The Chief Executive Officer shall also have and perform such other
duties as from time to time may be assigned to him by the Board.
SECTION 4.03. PRESIDENT.
The President shall have and perform all duties incident to the office
of President and such other duties as from time to time may be assigned to him
by the Board. If designated as the Chief Executive Officer by the Board, the
President shall, subject to the direction of the Board, supervise and control
the business and management of the Corporation. If there is no Chairman, or in
his absence, the President shall preside at all meetings of the stockholders.
SECTION 4.04. CHIEF OPERATING OFFICER.
The Chief Operating Officer, if one is elected, shall have and perform
such duties as from time to time may be assigned to him by the Chief Executive
Officer.
SECTION 4.05. CHIEF FINANCIAL OFFICER.
The Chief Financial Officer, if one is elected, shall have and perform
such duties as from time to time may be assigned to him by the Chief Executive
Officer.
SECTION 4.06. VICE PRESIDENTS OR EXECUTIVE VICE PRESIDENTS.
If Vice Presidents or Executive Vice Presidents be elected, they shall
have such powers and shall perform such duties as shall be assigned to them by
the President.
SECTION 4.07. TREASURER.
The Treasurer shall be responsible for the administration of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the Corporation. The Treasurer
shall disburse the funds of the Corporation as may be ordered by the President,
taking proper vouchers for such disbursements. He shall render to the Chairman,
the President and the Board at the regular meetings of the Board, or whenever
they may request it, an account of all his transactions as Treasurer and of the
financial condition of the Corporation. If required by the Board, he shall give
the Corporation a bond for the faithful performance of his duties in such amount
and with such surety as the Board shall prescribe.
8
<PAGE>
SECTION 4.08. SECRETARY.
The Secretary shall give, or cause to be given, notice of all meetings
of stockholders and directors, and all other notices required by law or by these
Bylaws, and in case of his absence or refusal or neglect so to do, any such
notice may be given by any person thereunto directed by the Chairman of the
Board, the President or the Board. He shall record all the proceedings of the
meetings of the Corporation and of the Board in a book to be kept for that
purpose. He shall keep in safe custody the seal of the Corporation, and, when
authorized by the Board, shall affix the same to any instrument requiring it,
and when so affixed, it shall be attested by his signature or by the signature
of any Assistant Secretary.
SECTION 4.09. CONTROLLER, ASSISTANT TREASURERS AND ASSISTANT
SECRETARIES.
Controller, Assistant Treasurers and Assistant Secretaries, if any be
elected, shall have such powers and shall perform such duties as shall be
assigned to them, respectively, by the Chairman of the Board or the President.
SECTION 4.10. REMOVAL; RESIGNATIONS; VACANCIES.
Any officer elected or appointed by the Board may be removed at any
time, either for or without cause, by the affirmative vote of a majority of the
Board. Section 3.03 shall apply similarly to resignations of officers. Any
vacancy occurring in any office of the Corporation may be filled by the Board.
SECTION 4.11. COMPENSATION.
The compensation of officers of the Corporation shall be established by
the Board or any compensation committee thereof. The fact that an officer is
also a director shall not preclude such person from receiving compensation as
either a director or officer, nor shall it affect the validity of any resolution
by the Board fixing such compensation. If the Chairman of the Board is also the
Chief Executive Officer of the Corporation, the Chairman shall have authority to
establish the salaries of all other employees of the Corporation. If the
Chairman of the Board is not the Chief Executive Officer of the Corporation, the
President shall have authority to establish the salaries of all other employees
of the Corporation.
SECTION 4.12. MECHANICAL ENDORSEMENT.
The Chairman of the Board, the President, any Executive Vice President,
any Vice President, or the Secretary may authorize any endorsement on behalf of
the Corporation to be made by such mechanical means or stamps as any of such
officers may deem appropriate.
9
<PAGE>
ARTICLE 5 - MISCELLANEOUS
-------------------------
SECTION 5.01. STOCK CERTIFICATES.
(a) Issuance. The Corporation may issue the shares of stock authorized
--------
by its Certificate of Incorporation and none other. Shares may be issued only
pursuant to a resolution adopted by the Board. Every holder of shares in the
Corporation shall be entitled to have a certificate representing all shares to
which he is entitled. No certificate shall be issued for any share until such
share is fully paid.
(b) Signatures. Certificates representing shares in the Corporation
----------
shall be signed by or in the name of the Corporation by the Chairman or Vice
Chairman, or the President, Executive Vice President or Vice President, and by
the Secretary or an Assistant Secretary, or the Treasurer or an Assistant
Treasurer, and may be sealed with the seal of the Corporation or a facsimile
thereof. Any or all of the signatures on a certificate may be facsimile. In case
any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
(c) Form. Each certificate representing shares shall state upon the
----
face thereof: the name of the Corporation; that the Corporation is organized
under the laws of Delaware; the name of the person or persons to whom it is
issued; the number and class of shares, and the designation of the series, if
any, which such certificate represents; and the par value of each share
represented by such certificate, or a statement that the shares are without par
value. Each certificate shall otherwise comply, in all respects, with the
requirements of the Act.
(d) Transfer of Stock. The Corporation shall register a stock
-----------------
certificate presented to it for transfer if the certificate is properly endorsed
by the holder of record or by his duly authorized attorney; provided, however,
-------- -------
that the Corporation or its transfer agent may require the signature of such
person to be guaranteed by a commercial bank or trust company or by a member of
the New York or American Stock Exchange.
(e) Lost, Stolen or Destroyed Certificates. The Board may authorize the
--------------------------------------
Corporation to issue a new stock certificate in the place of any certificate
previously issued if the holder of record of the certificate (i) makes proof in
affidavit form that it has been lost, destroyed or wrongfully taken; (ii)
requests the issue of a new certificate before the Corporation has notice that
the certificate has been acquired by a purchaser for value in good faith and
without notice of any adverse claim; (iii) gives bond in such form, if any, as
the Corporation may direct, to indemnify the Corporation, the transfer agent and
registrar against any claim that may be made on account of the alleged loss,
destruction or theft of a certificate; and (iv) satisfies any other reasonable
requirements imposed by the Corporation.
(f) Transfer Agents; Registrars; Rules Respecting Certificate. The
---------------------------------------------------------
Board may appoint, or authorize any officer or officers to appoint, one or more
transfer agents and one or
10
<PAGE>
more registrars. The Board may make such further rules and regulations as it may
deem expedient concerning the issue, transfer and registration of stock
certificates of the Corporation.
SECTION 5.02. STOCKHOLDERS RECORD DATE.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
and, with respect to record dates to be established in connection with
stockholders meetings, which shall not be more than sixty (60) nor less than ten
(10) days before the date of such meeting, or, with respect to record dates to
be established in connection with other actions, which shall not be more than
sixty (60) days prior to such other action. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board may fix a
-------- -------
new record date for the adjourned meeting.
SECTION 5.03. REGISTERED STOCKHOLDERS.
The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Delaware.
SECTION 5.04. DIVIDENDS.
Subject to the provisions of the Certificate of Incorporation, the
Board may, out of funds legally available therefor at any regular or special
meeting, declare dividends upon the capital stock of the Corporation as and when
they deem expedient. Dividends may be paid in cash, in property or in shares of
the capital stock, subject to the provisions of the Certificate of
Incorporation. Before declaring any dividends, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the Board
from time to time in its discretion deems proper for working capital or as a
reserve fund to meet contingencies or for such other purpose as the Board shall
deem conducive to the interests of the Corporation, and the Board may modify or
abolish any such reserve.
SECTION 5.05. SEAL.
The corporate seal shall be circular in form and shall contain the name
of the Corporation and the words "CORPORATE SEAL, DELAWARE." Said seal may be
used by causing it or a facsimile thereof to be impressed or affixed or
otherwise reproduced.
SECTION 5.06. FISCAL YEAR.
The fiscal year of the Corporation shall be determined by the Board.
11
<PAGE>
SECTION 5.07. CHECKS.
All checks, drafts, or other orders for the payment of money and notes
or other evidences of indebtedness issued in the name of the Corporation shall
be signed by such officer or officers, agent or agents of the Corporation, and
in such manner as shall be determined from time to time by resolution of the
Board. The Treasurer shall deposit all moneys and other valuables in the name
and to the credit of the Corporation in such depositories as may be authorized
by the Chairman of the Board or the President.
SECTION 5.08. NOTICE AND WAIVER OF NOTICE.
Whenever any notice is required by these Bylaws to be given, personal
notice is not meant unless expressly stated, and any notice so required shall be
deemed to be sufficient if given by depositing the same in the United States
mail, airmail postage prepaid, addressed to the person entitled thereto at his
address as it appears on the records of the Corporation, and such notice shall
be deemed to have been given on the day of such mailing. Stockholders not
entitled to vote shall not be entitled to receive notice of any meetings except
as otherwise provided by statute.
Whenever any notice whatever is required to be given under the
provisions of any law, or under the provisions of the Certificate of
Incorporation or these Bylaws, a waiver thereof in writing signed by the person
or person entitled to said notice, whether before or after the time stated
therein, shall be deemed proper notice.
SECTION 5.09. BOOKS AND RECORDS.
The Corporation shall keep correct and complete books and records of
accounts and shall keep minutes of the proceedings of its stockholders, the
Board and committees thereof.
ARTICLE 6 - INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
------------------------------------------------------------------------
SECTION 6.01. INDEMNIFICATION.
Any person who has been made or is made a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (including an action by
or in the right of the Corporation) (hereinafter a "proceeding"), by reason of
----------
the fact that he is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, fiduciary or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Act, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against all
expenses (including attorneys' fees),
12
<PAGE>
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection therewith; provided, however, that the Corporation shall
-------- -------
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) that was initiated by such person only if such
proceeding (or part thereof) was authorized or ratified by the Board. The right
to indemnification conferred in this Section 6.01 shall be a contract right.
For purposes of this Section 6.01, reference to the "Corporation" shall
-----------
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, fiduciaries and agents so that
any person who is or was a director, officer, fiduciary or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, fiduciary or agent of another corporation,
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, shall stand in the same position under the
provisions of this Section 6.01, with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
SECTION 6.02. PROCEDURE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Any indemnification of a director or officer of the Corporation under
Section 6.01 above or advance of expenses under Section 6.03 below shall be made
promptly, and in any event within thirty (30) days, upon the written request of
the director or officer subject to the following provisions. If a determination
by the Board that the director or officer is entitled to indemnification
pursuant to this Article 6 is required, and the Corporation fails to respond
within sixty (60) days to a written request for indemnity, the Corporation shall
be deemed to have approved the request. If the Corporation denies a written
request for indemnification or advancing of expenses, in whole or in part, or if
payment in full pursuant to such request is not made within thirty (30) days,
the right to indemnification or advances as granted by this Article 6 shall be
enforceable by the director or officer in any court of competent jurisdiction.
Such person's costs and expenses incurred in connection with successfully
establishing his or her right to indemnification, in whole or in part, in any
such action shall also be indemnified by the Corporation. It shall be a defense
to any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Act for the Corporation to indemnify the claimant for the amount claimed,
but the burden of such defense shall be on the Corporation. Neither the failure
of the Corporation (including the Board, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the Act, nor
an actual determination by the Corporation (including the Board, independent
legal counsel, or its stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable standard of conduct.
13
<PAGE>
SECTION 6.03. PAYMENT OF EXPENSES IN ADVANCE.
Expenses (including attorneys' fees) incurred by any person described
in Section 6.01 in defending an action, suit or proceeding referred to in
Section 6.01 above may be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding as authorized by the Board in the
specific case upon receipt of an undertaking by or on behalf of the director or
officer to repay such amount if it shall ultimately be determined that he or she
is not entitled to be indemnified by the Corporation as authorized in Section
6.01.
SECTION 6.04. INDEMNIFICATION NOT EXCLUSIVE.
The indemnification and right to payment of expenses in advance of
final disposition provided for under this Article 6 shall not be deemed
exclusive of (i) any other rights to which those seeking indemnification may be
entitled under any bylaw, any agreement, any insurance purchased by the
Corporation, vote of stockholders or disinterested directors or otherwise, both
as to action in his or her official capacity and as to action in another
capacity while holding such office or (ii) the power of the Corporation to
indemnify any person who is or was an employee or agent of the Corporation or of
another corporation, joint venture, trust or enterprise that he is serving or
has served at the request of the Corporation, to the same extent and in the same
situations and subject to the same determinations with respect to directors and
officers.
SECTION 6.05. OTHER.
Any repeal or modification of this Article 6 by the stockholders of the
Corporation shall be prospective only, and shall not adversely affect the
indemnification of any officer or director of the Corporation existing at the
time of such repeal or modification.
SECTION 6.06. INDEMNIFICATION AGREEMENTS.
The Corporation may enter into indemnification agreements with its
officers and Directors.
SECTION 6.07. INSURANCE.
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a Director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such and which insurance
coverage may extend indemnification protection that is broader and more
comprehensive than the indemnification benefits granted under this Article.
SECTION 6.08. CONTINUED COVERAGE.
Unless otherwise provided herein, the indemnification extended to a
person that has qualified for indemnification under the provisions of this
Article shall not be terminated when
14
<PAGE>
the person has ceased to be a director, officer, employee or agent for all
causes of action against the indemnified party based on acts and events
occurring prior to the termination of the relationship with the Corporation and
shall inure to the benefit of the heirs, executors and administrators of such
person.
ARTICLE 7- AMENDMENTS
---------------------
In furtherance and not in limitation of the powers conferred by
statute, the Board is expressly authorized to adopt, amend or repeal these
Bylaws by a majority vote at any regular or special meeting of the Board or by
written consent, subject to the power of the stockholders of the Corporation to
amend or repeal any Bylaw whether adopted by the Board or the stockholders.
ARTICLE 8- CONFLICT OF TERMS
----------------------------
Except as otherwise explicitly provided in these Bylaws, if any
provision contained in these Bylaws is in conflict with, inconsistent with, or
imposes greater obligations or burdens than any provision in the Certificate of
Incorporation, the provision contained in the Certificate of Incorporation shall
govern and control to the extent of such conflict, inconsistency or obligation
or burden.
15
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>4
<FILENAME>dex1022.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT OF JEFFERY RACHOR
<TEXT>
<PAGE>
Exhibit 10.22
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement") made this 1st day of November, 1997
between SONIC AUTOMOTIVE, INC. (formerly named Sonic Auto World, Inc.), its
successors or assigns, subsidiary corporations or affiliates (collectively, the
"Employer") and JEFFREY C. RACHOR ("Employee") and SONIC FINANCIAL CORP
("Guarantor").
RECITALS
--------
WHEREAS, Employer desires to acquire certain of the automobile dealership
assets of Employee within the State of Tennessee; and
WHEREAS, Employer desires to retain the services of Employee in order to
manage the existing dealerships and acquire and manage additional dealerships in
the states of Kentucky, Tennessee, Alabama and Georgia (the "Region").
WHEREAS, Employee is prepared to perform those duties as set forth in this
Agreement.
NOW, THEREFORE, the parties intending to be legally bound agree as follows:
1. Term of Employment. Employer hereby employs Employee, and Employee
------------------
hereby accepts employment from Employer for the period commencing with the
closing of the sale transferring those assets in which Employee has an interest
in various dealerships in the State of Tennessee to Employer (the "Commencement
Date") and ending five (5) years thereafter, unless sooner terminated pursuant
to the provisions of paragraph 5 hereof (the "Employment Period"), It is the
intention of Employer and Employee that the term of this employment coincide
with the term of the Non-Competition Agreement executed in connection with that
certain Asset Purchase Agreement dated June 24, 1997 pursuant to which Employer
shall acquire certain of the automobile dealership assets of Employee.
<PAGE>
2. Duties of Employee. Employee shall be employed by Employer as
------------------
Regional Vice President over all of the automobile dealerships in which Employer
acquires a controlling ownership interest and which are located in the Region.
Employee's duties shall include, but not be limited to, acquisitions of
additional automobile dealerships within the Region for Employer. Employee shall
manage and supervise all Employer-owned dealerships within the Region and shall
report directly to the President. Employee shall serve Employer faithfully and
exclusively in the performance of Employee's duties and shall devote his full
time and best efforts to his employment, including the regularly established
working hours and such additional time as the requirements of Employer and the
performance of the Employee's duties require. Employee agrees to observe and
comply with all the rules and regulations of Employer as adopted and furnished
to Employee by Employer's Board of Directors from time to time. Employee
specifically understands that Employer shall have final authority over the terms
and conditions of all acquisitions.
3. Compensation. For all services rendered by Employee under
------------
this Agreement, he shall be entitled to compensation in accordance with the
following:
(a) Base Salary. During the Employment Period, the Employee
-----------
shall receive an annual base salary ("Annual Base Salary") of ONE
HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($150,000.00) which shall be
paid in equal monthly installments in the amount of TWELVE THOUSAND
FIVE HUNDRED AND NO/100 DOLLARS ($12,500.00).
(b) Special Bonus. In addition to the Annual Base Salary as
-------------
hereinabove provided, as long as Employee remains employed with
Employer, the Employer shall pay to the Employee a special bonus
(the "Special Bonus") in recognition of the Employee's
2
<PAGE>
services. Said Special Bonus shall be two and eight tenths percent
(2.8%) of the annual net profit based on pre-tax earnings of all
dealerships owned by the Employer within the Region, exclusive of any
group or groups of commonly owned dealerships with gross revenues in
excess of three hundred million dollars ($300,000,000) in sales
acquired in a single transaction and/or as a part of a single
transaction by Employer after the Commencement Date (the "Subsequently
Acquired Large Dealerships"). The Special Bonus shall be paid in
monthly installments based on 2.8% of net profit based on pre-tax
earnings as determined from the prior month's manufacturer's monthly
financial statement for each dealership owned by the Employer in the
Region, exclusive of the Subsequently Acquired Large Dealerships. Such
monthly installments shall be subject to a fifteen percent (15%)
retainage which shall be held by Employer. Following the close of
Employer's fiscal year, but in no event later than ninety (90) days
after the close of Employer's fiscal year, payments from or
withholding of such retainage shall be used, in addition to other
funds if necessary, to settle any overpayment or underpayment of
Employee's Special Bonus.
c. Override For Subsequently Acquired Large Dealerships. With
----------------------------------------------------
respect to the Subsequently Acquired Large Dealerships, Employee shall
receive an override of one percent (1%) of the annual net profit for
each such dealership (the "Subsequently Acquired Large Dealership
Override"). The Subsequently Acquired Large Dealership Override shall
be paid in monthly installments based on one percent (1%) of net
profit based on pre-tax earnings as determined from the prior month's
manufacturer's monthly financial statement for such dealerships. Such
monthly installments shall be subject to a fifteen percent (15%)
retainage which shall be held by Employer. Following the close of
3
<PAGE>
Employer's fiscal year, but in no event later than ninety (90)
days after the close of Employer's fiscal year, payments from or
withholding of such retainage shall be used, in additional to other
funds, if necessary, to settle any overpayment or underpayment of the
Subsequently Acquired Large Dealership Override.
(d) Initial Year Bonus. For the twelve months immediately
------------------
following the Commencement Date, Employee shall have the opportunity to
earn an initial year bonus (the "Initial Year Bonus"), calculated as
set forth below. If the net profit based on pre-tax earnings for such
twelve month period for the Region, exclusive of Subsequently Acquired
Large Dealerships, exceeds five million five hundred thousand dollars
($5,500,000), the Employee shall be entitled to an Initial Year Bonus
in the amount of fifty thousand dollars ($50,000). If the net profit
based on pre-tax earnings for such twelve month period for the Region,
exclusive of Subsequently Acquired Large Dealerships, exceeds six
million dollars ($6,000,000), then Employee shall be entitled to an
Initial Year Bonus in the total amount of one hundred thousand dollars
($100,000). Any initial Year Bonus earned by Employee shall be payable
within sixty (60) days of the close of such twelve month period.
(e) In determining pre-tax earning for the purpose of
computing Employee's Special Bonus, the Subsequently Acquired Large
Dealership Override and the Initial Year Bonus, the following shall
apply:
(1) No deduction shall be taken for federal and state
income taxes owed by the dealerships;
(2) No deduction shall be taken for bad debts which have
not been processed through the company's customary credit
approval procedures;
4
<PAGE>
(3) Pre-tax profits shall be determined before any
management fee expense allocation from Employer;
(4) Overhead expenses or other expenses which have
been incurred by any dealership which are allocated to said
dealership but do not directly relate to the operation of said
dealership or that portion so allocated which is not
reasonably related to the operation of the dealership shall
not be deducted in determining pre-tax profits. To illustrate,
expenses incurred by a parent corporation or an affiliate
which do not have a direct bearing on the operation of the
dealership would be deducted in arriving at Employee's Special
Bonus.
(5) Pre-tax profits shall be determined before
Employee's Special Bonus, the Subsequently Acquired Large
Dealership Override and the Initial Year Bonus.
4. Fringe Benefits. During the Employment Period, Employee shall
---------------
receive with other similarly situated employees of the Employer, all
the fringe benefits of Employer, together with the following additional
fringe benefits;
(a) The use of two luxury demonstrator vehicles annually of
Employee's choice, including all reasonable related expenses such as
insurance, maintenance and gasoline.
(b) Medical insurance coverage for Employee and his
dependents and reimbursement of the Employee for the reasonable costs
of disability insurance with a reasonable monthly benefit for life and
with a waiting period of no more than ninety (90) days. This disability
insurance shall contain other provisions so that it will replace to the
5
<PAGE>
extent reasonably possible Employee's Base Salary in case Employer
terminates this Agreement upon Employee's disability as set forth
herein.
(c) Prompt reimbursement for all reasonable employment,
travel, entertainment and other business related expenses incurred by
the Employee in accordance with the most favorable policies, practices
and procedures of the Employer and its affiliated companies in effect
for the Employee at any time during the ninety (90) day period
immediately preceding the Commencement Date or, if more favorable to
the Employee, as in effect generally at any time thereafter with
respect to other peer executives of the Employer and its affiliated
companies.
(d) An office of a size and with furnishings and other
appointments, and an exclusive personal secretary and other assistants
at least equal to the most favorable policies, practices and procedures
of the Employer and its affiliated companies in effect for the Employee
at any time during the ninety (90) day period immediately preceding the
Commencement Date or, if more favorable to the Employee, as provided
generally at any time thereafter with respect to other peer executives
of the Employer and its affiliated companies.
(e) An annual paid vacation in accordance with the most
favorable policies, practices and procedures of the Employer and its
affiliated companies as in effect for the Employee at any time during
the ninety (90) day period immediately preceding the Commencement Date
or, if more favorable to the Employee, as in effect generally at any
time thereafter with respect to other peer executives of the Employer
and its affiliated companies.
5. Termination of Employment. This Agreement shall terminate as
-------------------------
follows:
6
<PAGE>
(a) Death or Disability. The Employee's employment shall terminate
-------------------
automatically upon the Employee's death during the Employment Period. If the
Employer determines in good faith that the Employee becomes unable to perform
the essential functions of his position, with or without reasonable
accommodation, then Employer shall give to the Employee written notice of its
intention to terminate the Employee's employment. In such event, the Employee's
employment with the Employer shall terminate effective on the thirtieth (30th)
day after receipt of such notice by the Employee (the "Disability Effective
Date") provided that, within the thirty (30) days after such receipt, the
Employee shall not have returned to full time performance of the Employee's
duties.
(b) Cause. The Employer may terminate the Employee's employment at any
-----
time, without notice and with immediate effect for Cause. For purposes of this
Agreement "Cause" shall mean
(i) a material breach by the Employee of the Employee's obligations
as set forth herein (other than due to disability) which material breach is
not remedied within five (5) business days after receipt of written notice
from the Employer specifying such a breach;
(ii) the conviction of the Employee of a felony;
(iii) actions by Employee involving moral turpitude;
(iv) willful failure of Employee to comply with reasonable directives
of Employer's Board of Directors;
(v) chronic absenteeism of Employee;
(vi) willful misconduct of Employee resulting in damage to Employer;
7
<PAGE>
(vii) Employee's illegal use of controlled substances.
(c) Good Reason. The Employee's employment may be terminated by the
-----------
Employee during the Employment Period for good reason. For purposes of this
Agreement, "Good Reason" shall mean:
(i) the assignment to the Employee of any duties materially
inconsistent in any respect with the Employee's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by this Agreement or any other action by
the Employer which results in a substantial diminution in such position,
authority, duties or responsibilities, excluding for this purpose,
isolated, unsubstantial arid inadvertent action not taken in bad faith and
which is remedied by the Employer promptly after receipt of written notice
thereof given by the Employee;
(ii) any failure by the Employer to comply with any of the material
provisions of this Agreement other than isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Employer promptly after receipt of notice thereof given by the Employee;
(iii) the Employer's requiring the Employee to be based at any office
or location other than in Tennessee;
(iv) any failure of the Employer to comply with and satisfy the
provisions of paragraph 7 of this Agreement.
(d) Without Cause. Either Employee or Employer may terminate this
-------------
Agreement at any time, for any reason or without any reason. Such a termination
shall be deemed a termination "without cause".
8
<PAGE>
6. Obligations of the Employer Upon Termination. The parties agree
--------------------------------------------
as follows:
(a) Death or Disability. If the Employee's employment is
-------------------
terminated by reason of the Employee's death or disability during the
Employment Period, Employee or Employee's estate shall be paid the
Employee's Annual Base Salary together with those fringe benefits
described in paragraphs 4(a) and 4(b) hereof through the remaining term
of this Agreement.
(b) Cause. If the Employee's employment shall be terminated
-----
for Cause during the Employment Period, Employee shall be paid the
Employee's Annual Base Salary together with those fringe benefits
described in paragraph 4(a) and 4(b) hereof throughout the remaining
term of this Agreement.
(c) Reason. If, during the Employment Period, the Employee
------
shall terminate employment for Good Reason, he shall be paid his Annual
Base Salary together with those fringe benefits described in paragraphs
4(a) and 4(b) hereof throughout the remaining term of this Agreement.
(d) Without Cause. If Employee's employment is terminated
-------------
without cause, then Employer shall continue to pay Employee his Annual
Base Salary together with those fringe benefits described in paragraphs
4(a) and 4(b) hereof throughout the remaining term of this Agreement.
7. Stock Option. If and when Employer completes an initial public
------------
offering of its common stock pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "IPO"), Employee shall be
eligible to participate in a stock option plan to be adopted by Employer for its
employees at such time (the "Stock Option Plan"). Employee's initial grant under
the Stock Option Plan shall be in an amount equal to at least
9
<PAGE>
forty percent (40%) of the highest number of options granted to any employee of
Employer pursuant to Employer's initial round of grants under the Stock Option
Plan. The exercise price of such initial options shall be the fair market value
of the shares of the common stock on the date of such initial grant, it being
the intention of Employer to set such initial exercise price at the same price
per share of Employer's common stock sold in the IPO. Any grants of options
thereafter under the Stock Option Plan shall be at the discretion of Employer's
Board of Directors. The terms and conditions of any options granted to Employee
pursuant to the Stock Option Plan shall otherwise be governed by the provisions
of the Stock Option Plan.
8. Restrictive Covenants. For purposes of this Agreement, "Restrictive
---------------------
Covenants" mean the provisions of this paragraph 8. It is stipulated and agreed
that Employer is engaged in the business of owning and operating automobile
and/or truck dealerships, which business includes, without limitation, the
marketing and selling of new and used vehicles and the servicing of automobiles
and trucks (the "Business"). It is further stipulated and agreed that as a
result of Employee's employment by Employer, and as a result of Employee's
continued employment hereunder, Employee has and will have access to valuable,
highly confidential, privileged and proprietary information relating to
Employer's Business, including, without limitation, existing and future
inventory information, customer lists, sales methods and techniques, costs and
costing methods, pricing techniques and strategies, sales agreements with
customers, profits and product line profitability information, unpublished
present and future marketing strategies and promotional programs, and other
information regarded by Employer as proprietary and confidential (the
"Confidential Information"). It is further acknowledged that the unauthorized
use or disclosure by Employee of any of the Confidential Information would
seriously damage Employer in its Business.
10
<PAGE>
In consideration of the provisions of this paragraph 8, the compensation
and benefits referred to in paragraphs 3 and 4 hereof, which Employee
acknowledges are legally sufficient to support enforceability by the Employer of
the Restrictive Covenants against Employee, Employee agrees as follows:
(a) During the term of this Agreement and after its termination or
expiration for any reason, Employee will not, without Employer's prior
written consent, use, divulge, disclose, furnish or make accessible to any
third person, company or other entity, any aspect of the Confidential
Information (other than as required in the ordinary discharge of Employee's
duties hereunder).
(b) During the term of this Agreement and for a period of two years
after the date of the expiration or termination of this Agreement for any
reason (the "Restrictive Period"), Employee shall not, directly or
indirectly:
(i) Employ or solicit the employment of any person who at any
time during the twelve (12) calendar months immediately preceding the
termination or expiration of this Agreement for any reason was
employed by Employer;
(ii) Provide or solicit the provision of products or services,
similar to those provided by Employer to any person or entity within
the "Restricted Territory," as hereinafter defined, who purchased or
leased automobiles, trucks, or services from Employer at any time
during the twelve (12) calendar months immediately preceding the
termination or expiration of this Agreement for any reason;
(iii) Interfere or attempt to interfere with the terms or other
aspects of the relationship between Employer and any person or entity
from whom
11
<PAGE>
Employer has purchased automobiles, trucks, parts, supplies, inventory
or services at any time during the twelve (12) calendar months
immediately preceding the termination or expiration of this Agreement
for any reason;
(iv) Engage in competition with Employer or its respective
successors and assigns by engaging, directly or indirectly, in a
business involving the sale or leasing of automobiles or trucks or
which is otherwise substantially similar to the Business, within the
"Restricted Territory," as hereinafter defined; or
(v) Provide information to, solicit or sell for, organize or own
any interest in (either directly or thorough any parent, affiliate or
subsidiary corporation, partnership, or other entity), or become
employed or engaged by, or act as agent for, any person, corporation
or other entity that is directly or indirectly engaged in a business
in the "Restricted Territory," as hereinafter defined, which is
substantially similar to the Business or competitive with Employer's
business; provided, however, that nothing herein shall preclude the
Employee from holding not more than three percent (3%) of the
outstanding shares of any publicly held company which may be so
engaged in a trade or business identical or similar to the Business of
the Employer. As used herein, "Restricted Territory" means the
Standard Metropolitan Statistical Areas, as determined by the United
States Office of Management and Budget, for Houston, Texas; Charlotte,
North Carolina; Chattanooga, Tennessee; and Nashville, Tennessee. (c)
Notwithstanding anything to the contrary contained in this Agreement,
paragraphs 8(b)(ii), 8(b)(iv) and 8(b)(v) shall not preclude Employee
from maintaining his investment in NEBCO of Cleveland, L.L,C. d/b/a
Toyota of
12
<PAGE>
Cleveland and Abra Auto Body and Glass, L.L.C., so long as Employee
does not, directly or indirectly, engage in the active management of
or participate in the operation of such entities during the term of
this Agreement or the Restrictive Period, subject to the last sentence
of this paragraph 8(c). Notwithstanding the foregoing sentence,
Employee shall be permitted to engage in the active management and/or
participate in the operation of NEBCO of Cleveland, L.L.C. d/b/a
Toyota of Cleveland and Abra Auto Body and Glass, LL.C. in the event
that Employee's employment with Employer is terminated "without cause"
by Employer.
9. Remedies. It is stipulated that a breach by Employee of the
--------
Restrictive Covenants would cause irreparable damage to Employer. Employer, in
addition to any other rights or remedies which Employer may have, shall be
entitled to an injunction restraining Employee from violating or continuing any
violation of such Restrictive Covenants. Such right to obtain injunctive relief
may be exercised at the option of Employer, concurrently with, prior to, after
or in lieu of, the exercise of any other rights or remedies which Employer may
have as a result of any such breach or threatened breach. Employee agrees that
upon breach of any of the Restrictive Covenants, Employer shall be entitled to
an accounting and repayment of all profits, royalties, compensation, and/or
other benefits that Employee directly or indirectly has realized or may realize
as a result of, or in connection with, any such breach. Employee further agrees
that the Restrictive Period shall be extended by a period of time equal to any
period of time in which any Employee is in violation of the Restrictive
Covenants.
10. Acknowledgment of Reasonableness. Employee has carefully read and
--------------------------------
considered the provisions of this Agreement and has had the opportunity for
consultation with an
13
<PAGE>
attorney of Employee's choice and agrees that the restrictions set forth herein
are fair and reasonably required for the protection of Employer. In the event
that any provision relating to the Restrictive Period, the Restricted Territory
or the scope of the restrictions shall be declared by a court of competent
jurisdiction to exceed the maximum period of time, geographical area or scope
that such court deems reasonable and enforceable under applicable law, such time
period, geographical area or scope of restriction held reasonable and
enforceable by the court shall thereafter be the Restricted Period, Restricted
Territory and/or scope under this Agreement.
11. Surrender of Books and Records. Employee acknowledges that all files,
------------------------------
records, lists, designs, specifications, books, products, plans and other
materials owned or used by Employer in connection with conduct of its business
shall at all times remain the property of Employer, and that upon termination or
expiration of this Agreement for any reason, Employee will immediately surrender
to Employer all such materials.
12. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties hereto, and shall not be modified or changed in any respect except by a
writing executed by the parties hereto.
13. Successors and Assigns. The rights and obligations of Employee under
----------------------
this Agreement shall inure to the benefit of Employer, its successors and
assigns, and shall be binding upon Employee and his respective successors, heirs
and assigns. Employer shall have the right to assign, transfer, or convey this
Agreement to its affiliated companies, successor entities, or assignees or
transferees of substantially all of Employer's business activities. This
Agreement, being personal in nature to the Employee, may not be assigned by
Employee without Employer's prior written consent.
14
<PAGE>
14. Notice. All notices required and permitted to be give hereunder shall
------
be in writing and shall be deemed to have been given when mailed by certified or
registered mail, return receipt requested, addressed to the intended recipient
as follows or at such other address as is provided by either party to the other:
If to Employer: With a copy to:
Sonic Automotive, Inc. Edward W. Wellman, Jr.
Attention: Bryan Scott Smith, CEO Parker, Poe, Adams & Bernstein, L.L.P.
P.O. Box 18747 2500 Charlotte Plaza
Charlotte, NC 28218 201 South College Street
Charlotte, NC 28244
If to Employee: With a copy to:
Jeffrey C. Rachor H. Wayne Grant, Esq.
c/o John Konvalinka, Esq. Grant, Konvalinka & Harrison, P.C.
Grant, Konvalinka & Harrison, P.C. 9th Floor, Republic Centre
9th Floor, Republic Centre 633 Chestnut Street
633 Chestnut Street Chattanooga, TN 37450
Chattanooga, TN 37450
15. Governing Law; Forum. This Agreement shall, in all respects, be
--------------------
governed by and construed according to the laws of the State of North Carolina.
Any dispute or controversy arising out of or relating to this Agreement shall
also be governed by the laws of the State of North Carolina. Any suit or other
proceeding arising out of or relating to this Agreement shall be instituted and
maintained in the state courts of Mecklenburg County, North Carolina, and the
parties hereby waive any objection to such jurisdiction and venue and
irrevocably submit to the jurisdiction of such court in any such action or
proceeding. Each party shall bear its own costs and expenses, including without
limitation, attorneys' fees, in connection with any such suit or proceeding.
16. Guaranty. Guarantor joins in this Agreement for the purpose of
--------
temporarily guaranteeing the obligations of Employer as set forth herein.
Guarantor shall be irrevocably
15
<PAGE>
released from this guaranty at such time as (i) Sonic Auto World, Inc. shall
have a net worth of $20 million, or (ii) Sonic Auto World, Inc. shall complete
an initial public offering of its common stock pursuant to an effective
registration statement under the Securities Act of 1993, as amended, which
initial public offering results in net proceeds to the issuer of not less than
$50 million.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the date first above written.
EMPLOYEE:
/s/ Jeffrey C. Rachor (SEAL)
-----------------------------------
Jeffrey C. Rachor
EMPLOYER:
SONIC AUTOMOTIVE, INC.
By: /s/ B. Scott Smith
-------------------------------------
Title: B. Scott Smith
----------------------------------
16
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>5
<FILENAME>dex211.txt
<DESCRIPTION>SUBSIDIARIES
<TEXT>
<PAGE>
Exhibit 21.1
------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Name of Entity Domestic State Certificate of Assumed Name
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Autobahn, Inc. California Autobahn Motors
Mercedes-Benz of Belmont
- ----------------------------------------------------------------------------------------------------------------------------------
Avalon Ford, Inc. Delaware Don Kott Chrysler Jeep
Don Kott Mazda
Don Kott Kia
Don Kott Hino
- ----------------------------------------------------------------------------------------------------------------------------------
Capitol Chevrolet and Imports, Inc. Alabama Capitol Kia
Capitol Chevrolet
Capitol Hyundai
Capitol Mitsubishi
- ----------------------------------------------------------------------------------------------------------------------------------
Casa Ford of Houston, Inc. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
Cobb Pontiac Cadillac, Inc. Alabama Classic Cadillac Pontiac
- ----------------------------------------------------------------------------------------------------------------------------------
FA Service Corporation California First Automotive Service Corp.
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Auto Factory, Inc. California
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Beverly Hills, Inc. California Beverly Hills BMW
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Capitol F, Inc. California Capitol Ford
Friendly Ford
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Capitol N, Inc. California Capitol Nissan
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Concord H, Inc. California Concord Honda
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Concord N, Inc. California Concord Nissan
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Concord T, Inc. California Concord Toyota
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Dublin N, Inc. California Dublin Nissan
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Dublin VWD, Inc. California Dublin Volkswagen
Dublin Dodge
Hyundai of Dublin
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Holding Corp. California
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Las Vegas H, Inc. Nevada Honda West
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Marin D, Inc. California First Dodge - Marin
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Marin F, Inc. California Ford of San Rafael
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Marin LR, Inc. California
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Monterey F, Inc. California
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Poway D, Inc. California Poway Dodge
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Poway G, Inc. California Ritchey Fipp Poway Chevrolet
Poway Chevrolet
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Poway H, Inc. California Poway Honda
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Poway T, Inc. California Poway Toyota
- ----------------------------------------------------------------------------------------------------------------------------------
FAA San Bruno, Inc. California Melody Toyota
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Santa Monica V, Inc. California Volvo of Santa Monica
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Serramonte H, Inc. California Honda of Serramonte
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Serramonte L, Inc. California Lexus of Serramonte
Lexus of Marin
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Name of Entity Domestic State Certificate of Assumed Name
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FAA Serramonte, Inc. California Serramonte Auto Plaza
Dodge of Serramonte
Serramonte Isuzu
Serramonte Mitsubishi
Serramonte Nissan
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Stevens Creek, Inc. California Stevens Creek Nissan
- ----------------------------------------------------------------------------------------------------------------------------------
FAA Torrance CPJ, Inc. California South Bay Chrysler Plymouth Jeep
- ----------------------------------------------------------------------------------------------------------------------------------
FirstAmerica Automotive, Inc. Delaware
- ----------------------------------------------------------------------------------------------------------------------------------
Fort Mill Ford, Inc. South Carolina
- ----------------------------------------------------------------------------------------------------------------------------------
Franciscan Motors, Inc. California Acura of Serramonte
- ----------------------------------------------------------------------------------------------------------------------------------
Freedom Ford, Inc. Florida
- ----------------------------------------------------------------------------------------------------------------------------------
Frontier Oldsmobile-Cadillac, Inc. North Carolina Frontier Hyundai
Freedom Chevrolet-Oldsmobile-Cadillac
- ----------------------------------------------------------------------------------------------------------------------------------
HMC Finance Alabama, Inc. Alabama HMC Finance
- ----------------------------------------------------------------------------------------------------------------------------------
Kramer Motors Incorporated California Honda of Santa Monica
- ----------------------------------------------------------------------------------------------------------------------------------
L Dealership Group, Inc. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
Marcus David Corporation North Carolina Town & Country Toyota
- ----------------------------------------------------------------------------------------------------------------------------------
Philpott Motors, Ltd. Texas Philpott Ford
Philpott Toyota
- ----------------------------------------------------------------------------------------------------------------------------------
Riverside Nissan, Inc. Oklahoma
- ----------------------------------------------------------------------------------------------------------------------------------
Royal Motor Company, Inc. Alabama City Chrysler Plymouth Jeep
- ----------------------------------------------------------------------------------------------------------------------------------
Santa Clara Imported Cars, Inc. California Honda of Stevens Creek
Stevens Creek Used Cars
- ----------------------------------------------------------------------------------------------------------------------------------
Smart Nissan, Inc. California First Nissan-Marin
Marin Nissan
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - Bondesen, Inc. Florida Fred Bondesen Chevrolet, Oldsmobile, Cadillac
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive of Chattanooga, LLC Tennessee Town and Country Volvo of Chattanooga
BMW of Chattanooga
Volvo of Chattanooga
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive-Clearwater, Inc. Florida Clearwater Toyota
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive Collision Center of Clearwater, Inc. Florida
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive F&I, LLC Nevada
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive of Georgia, Inc. Georgia
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive of Nashville, LLC Tennessee Town and Country of Nashville
BMW of Nashville
Town and Country Volkswagen of Nashville
Volkswagen of Nashville
Sonic Automotive Body Shop
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive of Nevada, Inc. Nevada
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive Servicing Company, LLC Nevada
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive of Tennessee, Inc. Tennessee
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive of Texas, L.P. Texas Lone Star Ford
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive West, LLC Nevada
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Name of Entity Domestic State Certificate of Assumed Name
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sonic Automotive - 1307 N. Dixie Hwy., NSB, Inc. Florida Halifax Ford-Mercury
Halifax Ford Truck Center
Halifax Ford Used Cars
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive-1400 Automall Drive, Columbus, Inc. Ohio Hatfield Hyundai
Hatfield Isuzu
Hatfield Subaru
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive-1455 Automall Drive, Columbus, Inc. Ohio Volkswagen West
Hatfield Kia
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive-1495 Automall Drive, Columbus, Inc. Ohio Hatfield Lincoln Mercury
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive-1500 Automall Drive, Columbus, Inc. Ohio Toyota West
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 1720 Mason Ave., DB, Inc. Florida
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 1720 Mason Ave., DB, LLC Florida Mercedes-Benz of Daytona Beach
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 1919 N. Dixie Hwy., NSB, Inc. Florida Halifax Chevrolet-Oldsmobile
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 21699 U.S. Hwy 19 N., Inc. Florida Clearwater Mitsubishi
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 241 Ridgewood Ave., HH, Inc. Florida Sunrise Auto World
Sunrise Fleet Sales
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive 2424 Laurens Rd., Greenville, Inc. South Carolina
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 2490 South Lee Highway, LLC Tennessee Town and Country Honda of Cleveland
Racetrack Motors
Cleveland Honda
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive 2752 Laurens Rd., Greenville, Inc. South Carolina Century BMW
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 3401 N. Main, TX, L.P. Texas Ron Craft Chevrolet Cadillac
Baytown Auto Collision Center
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive-3700 West Broad Street, Columbus, Inc. Ohio Trader Bud's Westside Chrysler Jeep
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 3741 S. Nova Rd., PO, Inc. Florida HMC Finance (FL)
HMC Finance (TX)
HMC Finance (AL)
HMC Finance (OK)
HMC Finance (GA)
HMC Finance (TN)
HMC Finance (OH)
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive-4000 West Broad Street, Columbus, Inc. Ohio Trader Bud's Westside Dodge
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 4701 I-10 East, TX, L.P. Texas Baytown Ford
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 5221 I-10 East, TX, L.P. Texas Casa Chrysler-Plymouth-Jeep
Baytown Chrysler-Jeep
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive 5260 Peachtree Industrial Blvd., LLC Georgia Dyer and Dyer Volvo (Chamblee location)
Dyer & Dyer Volvo of Southlake
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive-5585 Peachtree Industrial Blvd., LLC Georgia
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Name of Entity Domestic State Certificate of Assumed Name
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sonic Automotive - 6008 N. Dale Mabry, FL, Inc. Florida Volvo of Tampa
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 6025 International Drive, LLC Tennessee Town and Country KIA of Chattanooga
Town and Country Volkswagen of Chattanooga
Volkswagen of Chattanooga
Kia of Chattanooga
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Automotive - 9103 E. Independence, NC, LLC North Carolina Infiniti of Charlotte
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - 2185 Chapman Rd., Chattanooga, LLC Tennessee Economy Honda Cars
Sonic Automotive Collision Center
Economy Honda Superstore
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Bethany H, Inc. Oklahoma Steve Bailey Honda
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Buena Park H, Inc. California Buena Park Honda
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Cadillac D, L.P. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Camp Ford, L.P. Texas LaPorte Ford
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Capital Chevrolet, Inc. Ohio Capital Chevrolet
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Capitol Cadillac, Inc. Michigan
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Carson F, Inc. California
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Carson LM, Inc. California
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Carrollton V, L.P. Texas Volvo of Dallas
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Chattanooga D East, LLC Tennessee Airport Dodge
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Classic Dodge, Inc. Alabama Classic Dodge
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Coast Cadillac, Inc. California Coast Cadillac
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Crest Cadillac, LLC Tennessee Cleveland Chrysler-Plymouth-Jeep
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Crest H, LLC Tennessee Dodge of Chattanooga
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Development, LLC North Carolina Not New Car Store
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Downey Cadillac, Inc. California
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Englewood M, Inc. Colorado
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic eStore, Inc. North Carolina
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - FM Automotive, LLC Florida Mercedes-Benz of Fort Myers
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - FM, Inc. Florida BMW of Fort Myers
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - FM VW, Inc. Florida Volkswagen of Fort Myers
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Fort Mill Chrysler Jeep, Inc. South Carolina Town and Country Hyundai
Fort Mill Chrysler Jeep
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Fort Mill Dodge, Inc. South Carolina Fort Mill Dodge
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Fort Worth T, L.P. Texas Garry McKinney Toyota
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Freeland, Inc. Florida Honda of Fort Myers
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Global Imports, L.P. Georgia
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic-Glover, Inc. Oklahoma Expressway Dodge
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Harbor City H, Inc. California Harbor City Honda
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Houston V, L.P. Texas Volvo of Houston
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Integrity Dodge LV, LLC Nevada Nevada Dodge
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - LS, LLC Delaware
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - LS Chevrolet, L.P. Texas Lone Star Chevrolet
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Name of Entity Domestic State Certificate of Assumed Name
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sonic - Lake Norman Chrysler Jeep, LLC North Carolina Lake Norman Chrysler-Plymouth-Jeep
Lake Norman Used Car Center
Lake Norman Pre-Owned
Lake Norman Collision Center
Lake Norman Chrysler Jeep
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Lake Norman Dodge, LLC North Carolina Lake Norman Dodge
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Las Vegas C East, LLC Nevada Cadillac of Las Vegas
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Las Vegas C West, LLC Nevada Cadillac of Las Vegas - West
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Lloyd Nissan, Inc. Florida Lloyd Nissan
Lloyd Automotive
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Lloyd Pontiac - Cadillac, Inc. Florida Lloyd Pontiac-Cadillac-GMC
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Lone Tree Cadillac, Inc. Colorado
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Lute Riley, L. P. Texas Lute Riley Honda
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Manhattan Fairfax, Inc. Virginia BMW of Fairfax
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Manhattan Waldorf, Inc. Maryland
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Massey Cadillac, L.P. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Massey Pontiac Buick GMC, Inc. Colorado
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Massey Chevrolet, Inc. California
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic-Montgomery FLM, Inc. Alabama Friendly Ford Lincoln Mercury
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Newsome Chevrolet World, Inc. South Carolina Newsome Chevrolet World
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Newsome of Florence, Inc. South Carolina Newsome Automotive (Mercedes)
Imports of Florence (BMW)
Newsome Chevrolet
Isuzu of Florence (Isuzu)
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - North Cadillac, Inc. Florida Nissan of Fort Myers
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - North Charleston, Inc. South Carolina Altman Lincoln- Mercury
Altman Hyundai
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - North Charleston Dodge, Inc. South Carolina Altman Dodge
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Peachtree Industrial Blvd., L.P. Georgia
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Plymouth Cadillac, Inc. Michigan
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Reading, L.P. Texas Reading Buick-Pontiac-GMC
Reading Toyota
Toyota of Baytown
Baytown Pontiac-GMC-Buick
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic Resources, Inc. Nevada
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Richardson F, L.P. Texas North Central Ford
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic-Riverside, Inc. Oklahoma Riverside Chevrolet
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Riverside Auto Factory, Inc. Oklahoma
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Rockville Imports, Inc. Maryland Rockville Porsche-Audi
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Rockville Motors, Inc. Maryland Lexus of Rockville
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Sam White Nissan, L.P. Texas Lone Star Nissan
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Sam White Oldsmobile, L.P. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Sanford Cadillac, Inc. Florida
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Shottenkirk, Inc. Florida Pensacola Honda
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - South Cadillac, Inc. Florida
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Name of Entity Domestic State Certificate of Assumed Name
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sonic - Stevens Creek B, Inc. California Stevens Creek BMW
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Superior Oldsmobile, LLC Tennessee
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic of Texas, Inc. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - University Park A, L.P. Texas University Park Audi
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic-Volvo LV, LLC Nevada Volvo of Las Vegas
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - West Covina T, Inc. California West Covina Toyota
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - West Reno Chevrolet, Inc. Oklahoma City Chevrolet
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Williams Buick, Inc. Alabama Montgomery Auto Factory
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Williams Cadillac, Inc. Alabama Tom Williams Cadillac
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Williams Imports, Inc. Alabama Tom Williams Imports
- ----------------------------------------------------------------------------------------------------------------------------------
Sonic - Williams Motors, LLC Alabama Tom Williams Lexus
- ----------------------------------------------------------------------------------------------------------------------------------
Speedway Chevrolet, Inc. Oklahoma
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Alabama - 2, LLC Alabama
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Alabama - 3, LLC Alabama
- ----------------------------------------------------------------------------------------------------------------------------------
SRealEstate Arizona - 1, LLC Arizona
- ----------------------------------------------------------------------------------------------------------------------------------
SRealEstate Arizona - 2, LLC Arizona
- ----------------------------------------------------------------------------------------------------------------------------------
SRealEstate Arizona - 3, LLC Arizona
- ----------------------------------------------------------------------------------------------------------------------------------
SRealEstate Arizona - 4, LLC Arizona
- ----------------------------------------------------------------------------------------------------------------------------------
SRE California - 1, LLC California
- ----------------------------------------------------------------------------------------------------------------------------------
SRE California - 2, LLC California
- ----------------------------------------------------------------------------------------------------------------------------------
SRE California - 3, LLC California
- ----------------------------------------------------------------------------------------------------------------------------------
SRE California - 4, LLC California
- ----------------------------------------------------------------------------------------------------------------------------------
SRE California - 5, LLC California
- ----------------------------------------------------------------------------------------------------------------------------------
SRE California - 6, LLC California
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Florida - 1, LLC Florida
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Florida - 2, LLC Florida
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Florida - 3, LLC Florida
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Georgia - 1, L.P. Georgia
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Georgia - 2, L.P. Georgia
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Georgia - 3, L.P. Georgia
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Holding, LLC North Carolina
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Michigan - 1, LLC Michigan
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Michigan - 2, LLC Michigan
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Michigan - 3, LLC Michigan
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Nevada - 1, LLC Nevada
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Nevada - 2, LLC Nevada
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Nevada - 3, LLC Nevada
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Nevada - 4, LLC Nevada
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Nevada - 5, LLC Nevada
- ----------------------------------------------------------------------------------------------------------------------------------
SRE South Carolina - 2, LLC South Carolina
- ----------------------------------------------------------------------------------------------------------------------------------
SRE South Carolina - 3, LLC South Carolina
- ----------------------------------------------------------------------------------------------------------------------------------
SRE South Carolina - 4, LLC South Carolina
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Name of Entity Domestic State Certificate of Assumed Name
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SRE Tennessee - 1, LLC Tennessee
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Tennessee - 2, LLC Tennessee
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Tennessee - 3, LLC Tennessee
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Texas - 1, L.P. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Texas - 2, L.P. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Texas - 3, L.P. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Texas - 4, L.P. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Texas - 5, L.P. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Texas - 6, L.P. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Texas - 7, L.P. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Texas - 8, L.P. Texas
- ----------------------------------------------------------------------------------------------------------------------------------
SRE Virginia - 1, LLC Virginia
- ----------------------------------------------------------------------------------------------------------------------------------
Stevens Creek Cadillac, Inc. California St. Claire Cadillac
- ----------------------------------------------------------------------------------------------------------------------------------
Town and Country Ford, Incorporated North Carolina
- ----------------------------------------------------------------------------------------------------------------------------------
Town and Country Ford of Cleveland, LLC Tennessee
- ----------------------------------------------------------------------------------------------------------------------------------
Town and Country Jaguar, LLC Tennessee Town and Country Infiniti of Chattanooga
Town and Country Jaguar of Chattanooga
Jaguar of Chattanooga
Infiniti of Chattanooga
- ----------------------------------------------------------------------------------------------------------------------------------
Transcar Leasing, Inc. California
- ----------------------------------------------------------------------------------------------------------------------------------
Village Imported Cars, Inc. Maryland Village Volvo
- ----------------------------------------------------------------------------------------------------------------------------------
Windward, Inc. Hawaii Honda of Hayward
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>6
<FILENAME>dex231.txt
<DESCRIPTION>AUDITOR'S CONSENT
<TEXT>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of Sonic Automotive, Inc.:
. Registration Statement No. 333-82615 on Form S-3;
. Registration Statement No. 333-81059 on Form S-8;
. Registration Statement No. 333-81053 on Form S-8;
. Registration Statement No. 333-71803 on Form S-3;
. Registration Statement No. 333-69907 on Form S-8;
. Registration Statement No. 333-69899 on Form S-8;
. Registration Statement No. 333-68183 on Form S-3;
. Registration Statement No. 333-65447 on Form S-8;
. Registration Statement No. 333-49113 on Form S-8;
. Registration Statement No. 333-96023 on Form S-3;
. Registration Statement No. 333-51978 on Form S-4;
. Registration Statement No. 333-50430 on Form S-3;
. Post-Effective Amendment No. 2 to the Registration Statement No. 333-69901
on Form S-8;
. Post-Effective Amendment No. 1 to the Registration Statement No. 333-95791
on Form S-8;
. Post-Effective Amendment No. 1 to the Registration Statement No. 333-46272
on Form S-8;
. Post-Effective Amendment No. 1 to the Registration Statement No. 333-46274
on Form S-8; and
. Amendment No. 1 to the Registration Statement No. 333-75520 and Nos.
333-75220-01 through 333-75220-12 on Form S-4,
of our report dated February 25, 2002, appearing in this Annual Report on
Form 10-K of Sonic Automotive, Inc. for the year ended December 31, 2001.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 25, 2002
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>7
<FILENAME>dex991.txt
<DESCRIPTION>RISK FACTORS
<TEXT>
<PAGE>
Exhibit 99.1
RISK FACTORS
Our significant indebtedness could materially adversely affect our
financial health and prevent us from fulfilling our financial obligations.
As of December 31, 2001, our total outstanding indebtedness was
approximately $1,102.4 million, including the following:
. $287.8 million under a revolving credit agreement (the
"Revolving Facility") with Ford Motor Credit Company ("Ford
Motor Credit"), Chrysler Financial Company, LLC ("Chrysler
Financial") and Toyota Motor Credit Corporation ("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;
. $377.2 million under a standardized secured inventory floor
plan facility (the "Ford Floor Plan Facility") with Ford Motor
Credit;
. $142.6 million under a standardized secured floor plan
facility (the "Chrysler Floor Plan Facility") with Chrysler
Financial;
. $16.4 million under a standardized secured floor plan facility
(the "Toyota Floor Plan Facility") with Toyota Credit;
. $51.7 million under a standardized secured floor plan facility
(the "GMAC Floor Plan Facility" and together with the Ford
Floor Plan Facility, the Toyota Floor Plan Facility and the
Chrysler Floor Plan Facility, the "Floor Plan Facilities")
with General Motors Acceptance Corporation ("GMAC");
. $195.7 million in 11% Senior Subordinated Notes due 2008
representing $200.0 million in aggregate principal amount less
unamortized discount of approximately $4.3 million; and
. $31.0 million of other secured debt, including $13.3 million
under a revolving real estate acquisition and new dealership
construction line of credit (the "Construction Loan") and a
related mortgage refinancing facility (the "Permanent Loan"
and together with the Construction Loan, the "Mortgage
Facility") with Ford Motor Credit.
As of December 31, 2001, we had approximately $168.2 million available
for additional borrowings under the Revolving Facility, based on a borrowing
base calculated on the basis of our receivables, inventory and equipment and
certain additional collateral pledged by an affiliate of Sonic. We also had
approximately $86.7 million available for additional borrowings under the
Mortgage Facility for real estate acquisitions and new dealership construction.
We also have significant additional capacity under the Floor Plan Facilities. In
addition, the indentures relating to our senior subordinated notes and other
debt instruments allow us to incur additional indebtedness, including secured
indebtedness.
The degree to which we are leveraged could have important consequences
to the holders of our securities, including the following:
. our ability to obtain additional financing for acquisitions,
capital expenditures, working capital or general corporate
purposes may be impaired in the future;
. a substantial portion of our current cash flow from operations
must be dedicated to the payment of principal and interest on
our senior subordinated notes, borrowings under the
1
<PAGE>
Revolving Facility and the Floor Plan Facilities and other
indebtedness, thereby reducing the funds available to us for
our operations and other purposes;
. some of our borrowings are and will continue to be at variable
rates of interest, which exposes us to the risk of increasing
interest rates;
. the indebtedness outstanding under our credit facilities is
secured by a pledge of substantially all the assets of our
dealerships; and
. we may be substantially more leveraged than some of our
competitors, which may place us at a relative competitive
disadvantage and make us more vulnerable to changing market
conditions and regulations.
In addition, our debt agreements contain numerous covenants that limit
our discretion with respect to business matters, including mergers or
acquisitions, paying dividends, incurring additional debt, making capital
expenditures or disposing of assets.
Our future operating results depend on our ability to integrate acquisitions
into our operations.
Our future operating results depend on our ability to integrate the
operations of our recently acquired dealerships, as well as dealerships we
acquire in the future, with our existing operations. In particular, we need to
integrate our systems, procedures and structures, which can be difficult. Our
growth strategy has focused on the pursuit of strategic acquisitions that either
expand or complement our business. We acquired 72 dealerships in 1999, 11 in
2000, and 12 in 2001.
We cannot assure you that we will effectively and profitably integrate
the operations of these dealerships without substantial costs, delays or
operational or financial problems, due to:
. the difficulties of managing operations located in geographic
areas where we have not previously operated;
. the management time and attention required to integrate and
manage newly acquired dealerships;
. the difficulties of assimilating and retaining employees; and
. the challenges of keeping customers.
These factors could have a material adverse effect on our financial
condition and results of operations.
Risks associated with acquisitions may hinder our ability to increase revenues
and earnings.
The automobile retailing industry is considered a mature industry in
which minimal growth is expected in industry unit sales. Accordingly, our future
growth depends in large part on our ability to acquire additional dealerships,
as well as on our ability to manage expansion, control costs in our operations
and consolidate both past and future dealership acquisitions into existing
operations. In pursuing a strategy of acquiring other dealerships, we face risks
commonly encountered with growth through acquisitions. These risks include, but
are not limited to:
. incurring significantly higher capital expenditures and
operating expenses;
. failing to assimilate the operations and personnel of the
acquired dealerships;
. entering new markets with which we are unfamiliar;
2
<PAGE>
. potential undiscovered liabilities at acquired dealerships;
. disrupting our ongoing business;
. diverting our limited management resources;
. failing to maintain uniform standards, controls and policies;
. impairing relationships with employees, manufacturers and
customers as a result of changes in management;
. causing increased expenses for accounting and computer
systems, as well as integration difficulties; and
. failure to obtain a manufacturer's consent to the acquisition
of one or more of its dealership franchises.
We may not adequately anticipate all of the demands that our growth
will impose on our systems, procedures and structures, including our financial
and reporting control systems, data processing systems and management structure.
If we cannot adequately anticipate and respond to these demands, our business
could be materially harmed.
Failure to retain qualified management personnel at any acquired
dealership may increase the risk associated with integrating the acquired
dealership.
Installing new computer systems has disrupted existing operations in
the past as management and salespersons adjust to new technologies. We cannot
assure you that we will overcome these risks or any other problems encountered
with either our past or future acquisitions.
Automobile manufacturers exercise significant control over our operations and we
are dependent on them to operate our business.
Each of our dealerships operates pursuant to a franchise agreement with
the applicable automobile manufacturer or manufacturer authorized distributor.
We are significantly dependent on our relationships with these manufacturers.
Without a franchise agreement, we cannot obtain new vehicles from a
manufacturer.
Vehicles manufactured by the following manufacturers accounted for the
indicated approximate percentage of our new vehicle revenue for the year ended
December 31, 2001:
Percentage of Historical
New Vehicle Revenues for
the Year Ended
Manufacturer December 31, 2001
------------ -----------------
Ford 18.6%
Honda 13.0%
General Motors 12.2%
Toyota 11.3%
BMW 10.7%
Chrysler 8.3%
Lexus 5.3%
Nissan 5.3%
3
<PAGE>
No other manufacturer accounted for more than 5% of our new vehicle
sales during 2001. A significant decline in the sale of Ford, Honda, Chrysler,
General Motors, BMW, Toyota, Nissan or Lexus new vehicles could have a material
adverse effect on our revenue and profitability.
Manufacturers exercise a great degree of control over the operations of
our dealerships. Each of our franchise agreements provides for termination or
non-renewal for a variety of causes, including any unapproved change of
ownership or management and other material breaches of the franchise agreements.
Manufacturers may also have a right of first refusal if we seek to sell
dealerships. We believe that we will be able to renew at expiration all of our
existing franchise agreements, other than our Oldsmobile and Plymouth franchise
agreements. DaimlerChrysler phased out the Plymouth division effective October
1, 2001 and General Motors is in the process of phasing out the Oldsmobile
division. Neither of these actions will materially affect us.
. We cannot assure you that any of our existing franchise
agreements will be renewed or that the terms and conditions of
such renewals will be favorable to us.
. If a manufacturer is allowed under state franchise laws to
terminate or decline to renew one or more of our significant
franchise agreements, this action could have a material
adverse effect on our results of operations.
. Actions taken by manufacturers to exploit their superior
bargaining position in negotiating the terms of renewals of
franchise agreements or otherwise could also have a material
adverse effect on our results of operations.
. Manufacturers allocate their vehicles among dealerships
generally based on the sales history of each dealership.
Consequently, we also depend on the manufacturers to provide
us with a desirable mix of popular new vehicles. These popular
vehicles produce the highest profit margins and tend to be the
most difficult to obtain from the manufacturers.
. Our dealerships depend on the manufacturers for certain sales
incentives, warranties and other programs that are intended to
promote and support dealership new vehicle sales.
Manufacturers have historically made many changes to their
incentive programs during each year. A reduction or
discontinuation of a manufacturer's incentive programs may
materially adversely affect our profitability. Some of these
programs include:
. customer rebates on new vehicles;
. dealer incentives on new vehicles;
. special financing or leasing terms;
. warranties on new and used vehicles; and
. sponsorship of used vehicle sales by authorized new
vehicle dealers.
Adverse conditions affecting one or more manufacturers may negatively impact our
profitability.
The success of each of our dealerships depends to a great extent on the
manufacturers':
. financial condition;
. marketing;
. vehicle design;
4
<PAGE>
. production capabilities;
. management; and
. labor relations.
Nissan, Chrysler and Volvo have had significant difficulty in the U.S.
market in the recent past. If any of our manufacturers, particularly Ford,
Honda, Chrysler, General Motors, BMW, Toyota, Nissan, or Lexus were unable to
design, manufacture, deliver and market their vehicles successfully, the
manufacturer's reputation and our ability to sell the manufacturer's vehicles
could be adversely affected.
Events such as strikes and other labor actions by unions, or negative
publicity concerning a particular manufacturer or vehicle model, may materially
and adversely affect our results of operations. Similarly, the delivery of
vehicles from manufacturers later than scheduled, which may occur particularly
during periods when new products are being introduced, can reduce our sales.
Although we have attempted to lessen our dependence on any one manufacturer by
establishing dealer relationships with a number of different domestic and
foreign automobile manufacturers, adverse conditions affecting manufacturers,
Ford, Honda, Chrysler, General Motors, BMW, Toyota, Nissan or Lexus in
particular, could have a material adverse effect on our results of operations.
In the event of a strike, we may need to purchase inventory from other
automobile dealers at prices higher than we would be required to pay to the
affected manufacturer in order to carry an adequate level and mix of inventory.
Consequently, strikes or other adverse labor actions could materially adversely
affect our profitability.
Manufacturer stock ownership/issuance restrictions limit our ability to issue
additional equity to meet our financing needs.
Standard automobile franchise agreements prohibit transfers of any
ownership interests of a dealership and its parent and, therefore, often do not
by their terms accommodate public trading of the capital stock of a dealership
or its parent. Our manufacturers have agreed to permit trading in Sonic's Class
A common stock. A number of manufacturers impose restrictions on the
transferability of the Class A common stock.
. Honda may force the sale of our 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.
. Ford may cause us to sell or resign from one or more of our
Ford, Lincoln or Mercury franchises if any person or entity
(other than O. Bruton Smith and any entity controlled by him)
acquires 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% of 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
5
<PAGE>
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.
. Chrysler requires prior approval of any future sales that
would result in a change in voting or managerial control of
Sonic.
. Mercedes requires 60 days advance notice to approve any
acquisition of 20% or more of Sonic's voting securities.
. 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
affect the voting or managerial control of Sonic's Volkswagen
franchise subsidiaries requires the prior approval of
Volkswagen.
Other manufacturers may impose similar or more limiting restrictions.
Our lending arrangements also require that holders of Sonic's Class B
common stock maintain voting control over Sonic. We are unable to prevent our
stockholders from transferring shares of our common stock, including transfers
by holders of the Class B common stock. If such transfer results in a change in
control of Sonic, it could result in the termination or non-renewal of one or
more of our franchise agreements and a default under our credit arrangements.
Moreover, these issuance limitations may impede our ability to raise capital
through additional equity offerings or to issue our stock as consideration for
future acquisitions.
Manufacturers' restrictions on acquisitions could limit our future growth.
We are required to obtain the consent of the applicable manufacturer
before the acquisition of any additional dealership franchises. We cannot assure
you that manufacturers will grant such approvals, although the denial of such
approval may be subject to certain state franchise laws.
Obtaining manufacturer consent for acquisitions could also take a
significant amount of time. Obtaining manufacturer approval for our completed
acquisitions has taken approximately three to five months. We believe that
manufacturer approvals of subsequent acquisitions from manufacturers with which
we have previously completed applications and agreements may take less time,
although we cannot provide you with assurances to that effect. In addition,
under an applicable franchise agreement or under state law, a manufacturer may
have a right of first refusal to acquire a dealership in the event we seek to
acquire that dealership franchise.
If we experience delays in obtaining, or fail to obtain, manufacturer
approvals for dealership acquisitions, our growth strategy could be materially
adversely affected. In determining whether to approve an acquisition, the
manufacturers may consider many factors, including:
. our management's moral character;
. the business experience of the post-acquisition dealership
management;
. our financial condition;
. our ownership structure; and
6
<PAGE>
. manufacturer-determined consumer satisfaction index scores.
In addition, a manufacturer may seek to limit the number of its
dealerships that we may own, our national market share of that manufacturer's
products or the number of dealerships we may own in a particular geographic
area. These restrictions may not be enforceable under state franchise laws.
. Our framework agreement with Ford places the following
restrictions on our ability to acquire Ford or Lincoln Mercury
dealerships:
. We may not acquire additional Ford or Lincoln Mercury
dealerships unless we continue to satisfy Ford's
requirement that 80% of our Ford dealerships meet
Ford's performance criteria. Beyond that, we may not
make an acquisition that would result in our owning
Ford or Lincoln Mercury dealerships with sales
exceeding 5% of the total Ford or total Lincoln
Mercury retail sales of new vehicles in the United
States for the preceding calendar year.
. We may not acquire additional Ford or Lincoln Mercury
dealerships in a particular state if such an
acquisition would result in our owning Ford or
Lincoln Mercury dealerships with sales exceeding 5%
of the total Ford or total Lincoln Mercury retail
sales of new vehicles in that state for the preceding
calendar year.
. We may not acquire additional Ford dealerships in a
Ford-defined market area if such an acquisition would
result in our owning more than one Ford dealership in
a market having a total of three or less Ford
dealerships or owning more than 25% of the Ford
dealerships in a market having a total of four or
more Ford dealerships. An identical market area
restriction applies for Lincoln Mercury dealerships.
. Our framework agreement with Toyota limits the number of
Toyota and Lexus dealerships that we may own on a national
level, in each Toyota-defined geographic region or distributor
area, and in each Toyota or Lexus-defined metropolitan market.
Nationally, the limitations on Toyota dealerships owned by us
are for specified time periods and are based on specified
percentages of total Toyota unit sales in the United States.
In Toyota-defined geographic regions or distributor areas, the
limitations on Toyota dealerships owned by us are specified by
the applicable Toyota regional limitations policy or
distributor's policy in effect at such time. In Toyota-defined
metropolitan markets, the limitations on Toyota dealerships
owned by us are based on Toyota's metro markets limitation
policy then in effect, which currently provides a limitation
based on the total number of Toyota dealerships in the
particular market. For Lexus, we may own no more than one
Lexus dealership in any one Lexus-defined metropolitan market
and no more than three Lexus dealerships nationally.
. Our framework agreement with Honda limits the number of Honda
and Acura dealerships that we may own on a national level, in
each Honda and Acura-defined geographic zone, and in each
Honda-defined metropolitan market. Nationally, the limitations
on Honda dealerships owned by us are based on specified
percentages of total Honda unit sales in the United States. In
Honda-defined geographic zones, the limitations on Honda
dealerships owned by us are based on specified percentages of
total Honda unit sales in each of 10 Honda-defined geographic
zones. In Honda-defined metropolitan markets, the limitations
on Honda dealerships owned by us are specified numbers of
dealerships in each market, which numerical limits vary based
mainly on the total number of Honda dealerships in a
particular market. For Acura, we may own no more than (A) two
Acura dealerships in a Honda-defined metropolitan market, (B)
three Acura dealerships in any
7
<PAGE>
one of six Honda-defined geographic zones and (C) five Acura
dealerships nationally. Honda also prohibits ownership of
contiguous dealerships.
. Mercedes restricts any company from owning Mercedes
dealerships with sales of more than 3% of total sales of
Mercedes vehicles in the U.S. during the previous calendar
year.
. General Motors currently limits the maximum number of General
Motors dealerships that we may acquire to 50% of the General
Motors dealerships, by brand line, in a General Motors-defined
geographic market area having multiple General Motors dealers.
. Subaru limits us to no more than two Subaru dealerships within
certain designated market areas, four Subaru dealerships
within its Mid-America region and 12 dealerships within
Subaru's entire area of distribution.
. BMW currently prohibits publicly held companies from owning
BMW dealerships representing more than 10% of all BMW sales in
the U.S. or more than 50% of BMW dealerships in a given
metropolitan market.
. Toyota, Honda and Mercedes also prohibit the coupling of a
franchise with any other brand without their consent.
As a condition to granting their consent to our acquisitions, a number
of manufacturers required additional restrictions. These agreements principally
restrict:
. material changes in our company or extraordinary corporate
transactions such as a merger, sale of a material amount of
assets or change in our board of directors or management that
could have a material adverse effect on the manufacturer's
image or reputation or could be materially incompatible with
the manufacturer's interests;
. the removal of a dealership general manager without the
consent of the manufacturer; and
. the use of dealership facilities to sell or service new
vehicles of other manufacturers.
In addition, manufacturer consent to our acquisitions may impose
conditions, such as requiring facilities improvements by us at the acquired
dealership.
If we are unable to comply with these restrictions, we generally:
. must sell the assets of the dealerships to the manufacturer or
to a third party acceptable to the manufacturer; or
. terminate the dealership agreements with the manufacturer.
Other manufacturers may impose other and more stringent restrictions in
connection with future acquisitions.
As of March 15, 2002, we owned the following number of franchises for the
following manufacturers:
8
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Manufacturer Franchises Manufacturer Franchises
- ------------ ---------- ------------ ----------
<S> <C> <C> <C>
Honda 14 Lincoln 4
Chevrolet 13 Mercedes 4
Ford 13 Hyundai 3
BMW 10 Oldsmobile 3
Cadillac 10 Mitsubishi 3
Toyota 10 Kia 3
Nissan 9 Audi 3
Chrysler 8 Porsche 2
Dodge 8 Pontiac 2
Volvo 8 Infiniti 1
Jeep 7 GMC 1
Mercury 5 Acura 1
Isuzu 4 Land Rover 1
Volkswagen 4 Subaru 1
Lexus 4 Mazda 1
</TABLE>
Our failure to meet a manufacturer's consumer satisfaction requirements may
adversely affect our ability to acquire new dealerships and our profitability.
Many manufacturers attempt to measure customers' satisfaction with
their sales and warranty service experiences through systems which vary from
manufacturer to manufacturer, but which are generally known as customer
satisfaction index, or scores. These manufacturers may use a dealership's CSI
scores as a factor in evaluating applications for additional dealership
acquisitions. The components of CSI have been modified by various manufacturers
from time to time in the past, and we cannot assure you that these components
will not be further modified or replaced by different systems in the future. To
date, we have not been materially adversely affected by these standards and have
not been denied approval of any acquisition based on low CSI scores, except for
Jaguar's refusal to approve our acquisition of a Chattanooga Jaguar franchise in
1997. However, we cannot assure you that we will be able to comply with these
standards in the future. A manufacturer may refuse to consent to an acquisition
of one of its franchises if it determines our dealerships do not comply with the
manufacturer's CSI standards. This could materially adversely affect our
acquisition strategy. In addition, we receive payments from the manufacturers
based, in part, on CSI scores, which could be materially adversely affected if
our CSI scores decline.
There are limitations on our financial resources available for acquisitions.
We intend to finance our acquisitions with cash generated from
operations, through issuances of our stock or debt securities and through
borrowings under credit arrangements.
. We cannot assure you that we will be able to obtain additional
financing by issuing stock or debt securities.
. Using cash to complete acquisitions could substantially limit
our operating or financial flexibility.
If we are unable to obtain financing on acceptable terms, we may be
required to reduce the scope of our presently anticipated expansion, which could
materially adversely affect our growth strategy.
We estimate that as of December 31, 2001, we had approximately $268.1
million available for additional borrowings under the Revolving Facility, based
on a borrowing base calculated on the basis of
9
<PAGE>
our receivables, inventory and equipment and a pledge of certain additional
collateral by an affiliate of Sonic (which borrowing base was $456.0 million of
the $600.0 million facility at December 31, 2001).
In addition, we are dependent to a significant extent on our ability to
finance our inventory with "floor plan financing." Floor plan financing is how a
dealership finances its purchase of new vehicles from a manufacturer. The
dealership borrows money to buy a particular vehicle from the manufacturer and
pays off the loan when it sells that particular vehicle, paying interest during
this period. We must obtain new floor plan financing or obtain consents to
assume existing floor plan financing in connection with our acquisition of
dealerships.
Substantially all the assets of our dealerships are pledged to secure
our floor plan indebtedness and the indebtedness under the Revolving Facility.
In addition, substantially all the real property and assets of our subsidiaries
that are constructing new dealerships are pledged under our Mortgage Facility
with Ford Motor Credit. These pledges may impede our ability to borrow from
other sources.
Finally, because Ford Motor Credit is associated with Ford, any
deterioration of our relationship with one could adversely affect our
relationship with the other. The same is true of our relationships with Chrysler
and Chrysler Financial, GM and GMAC, and Toyota and Toyota Credit.
Although O. Bruton Smith, our Chairman and Chief Executive Officer, has
previously facilitated our acquisition financing, we cannot assure you that he
will be willing or able to assist in our financing needs in the future.
Mr. Smith initially guaranteed obligations under the Revolving
Facility. Such obligations were further secured with a pledge of shares of
common stock of Speedway Motorsports, Inc. ("SMI") owned by Sonic Financial
Corporation ("SFC"), a corporation controlled by Mr. Smith having an estimated
value at the time of the pledge of approximately $50.0 million (the "Revolving
Pledge"). When the Revolving Facility's borrowing limit was increased to $75.0
million in 1997, Mr. Smith's personal guarantee of Sonic's obligations under the
Revolving Facility was released, although the Revolving Pledge remained in
place. Mr. Smith was also required by Ford Motor Credit to lend $5.5 million
(the "Subordinated Smith Loan") to Sonic to increase our capitalization because
the net proceeds from our November 1997 initial public offering were
significantly less than expected. In August 1998, Ford Motor Credit released the
Revolving Pledge. In November 1999, Ford Motor Credit further increased the
borrowing limit under the Revolving Facility to $350.0 million subject to a
borrowing base calculated on the basis of our receivables, inventory and
equipment and a continuing pledge by SFC of five million shares of SMI common
stock. Presently, the borrowing limit of the Revolving Facility is $600.0
million, subject to a similar borrowing base, including SFC's continuing pledge
of SMI stock.
Before our acquisition of FirstAmerica Automotive, Inc.
("FirstAmerica") Mr. Smith guaranteed the obligations of FirstAmerica under
FirstAmerica's new acquisition line of credit with Ford Motor Credit.
FirstAmerica obtained this new financing to enable it to complete its then
pending acquisitions. The borrowing limit on this credit facility was
approximately $138 million. Mr. Smith had guaranteed approximately $107 million
of this amount, which guarantee was secured by a pledge of five million shares
of SMI common stock owned by SFC. We assumed FirstAmerica's obligations to Ford
Motor Credit under our Revolving Facility when we acquired FirstAmerica. Mr.
Smith's secured guarantee in favor of Ford Motor Credit guaranteed a portion of
our obligations under the Revolving Facility until August 2000. After August
2000, Mr. Smith did not provide a guarantee in favor of the Revolving Facility
lenders, but SFC continues to pledge SMI stock as collateral. We cannot assure
you that Mr. Smith will be willing or able to provide similar guarantees or
credit support in the future to facilitate Sonic's future acquisitions.
Automobile retailing is a mature industry with limited growth potential in new
vehicle sales, and our acquisition strategy will affect our revenues and
earnings.
The United States automobile dealership industry is considered a mature
industry in which minimal growth is expected in unit sales of new vehicles. As a
consequence, growth in our revenues and
10
<PAGE>
earnings is likely to be significantly affected by our success in acquiring and
integrating dealerships and the pace and size of such acquisitions.
High competition in automobile retailing reduces our profit margins on vehicle
sales. Further, the use of the Internet in the car purchasing process could
materially adversely affect us.
Automobile retailing is a highly competitive business. Our competition
includes:
. Franchised automobile dealerships selling the same or similar
makes of new and used vehicles that we offer in our markets and
sometimes at lower prices than we offer. Some of these dealer
competitors may be larger and have greater financial and
marketing resources than we do;
. Other franchised dealers;
. Private market buyers and sellers of used vehicles;
. Used vehicle dealers;
. Internet-based vehicle brokers that sell vehicles obtained from
franchised dealers directly to consumers;
. Service center chain stores; and
. Independent service and repair shops.
Our financing and insurance ("F&I") business and other related
businesses, which provide higher contributions to our earnings than sales of new
and used vehicles, are subject to strong competition from various financial
institutions and other third parties. This competition is increasing as these
products are now being marketed and sold over the Internet.
Gross profit margins on sales of new vehicles have been generally
declining since 1986. We do not have any cost advantage in purchasing new
vehicles from manufacturers, due to economies of scale or otherwise. We
typically rely on advertising, merchandising, sales expertise, service
reputation and dealership location to sell new vehicles. The following factors
could have a significant impact on our business:
. The Internet has become a significant part of the sales process
in our industry. Customers are using the Internet to compare
pricing for cars and related F&I services, which may further
reduce margins for new and used cars and profits for related F&I
services. If Internet new vehicle sales are allowed to be
conducted without the involvement of franchised dealers, our
business could be materially adversely affected. In addition,
other franchise groups have aligned themselves with Internet car
sellers or are spending significant sums on developing their own
Internet capabilities, which could materially adversely affect
our business.
. Our revenues and profitability could be materially adversely
affected should manufacturers decide to enter the retail market
directly .
. The increased popularity of short-term vehicle leasing also has
resulted, as these leases expire, in a large increase in the
number of late model vehicles available in the market, which
puts added pressure on new and used vehicle margins.
. Some of our competitors may be capable of operating on smaller
gross margins than we are, and the on-line auto brokers have
been operating at a loss.
11
<PAGE>
. As we seek to acquire dealerships in new markets, we may face
increasingly significant competition as we strive to gain market
share through acquisitions or otherwise. This competition
includes other large dealer groups and dealer groups that have
publicly traded equity.
Our franchise agreements do not grant us the exclusive right to sell a
manufacturer's product within a given geographic area. Our revenues or
profitability could be materially adversely affected if any of our manufacturers
award franchises to others in the same markets where we operate, although
certain state franchise laws may limit such activities by the manufacturers. A
similar adverse effect could occur if existing competing franchised dealers
increase their market share in our markets. Our gross margins may decline over
time as we expand into markets where we do not have a leading position. These
and other competitive pressures could materially adversely affect our results of
operations.
The cyclical and local nature of automobile sales may adversely affect our
profitability.
The automobile industry is cyclical and historically has experienced
periodic downturns characterized by oversupply and weak demand. Many factors
affect the industry, including general economic conditions and consumer
confidence, fuel prices, the level of discretionary personal income,
unemployment rates, interest rates and credit availability. We are in the midst
of an industry and general economic slowdown that could materially adversely
effect our business.
Local economic, competitive and other conditions also affect the
performance of dealerships. We intend to pursue acquisitions outside of these
markets, but our operational focus is on our current markets. As a result, our
current results of operations depend substantially on general economic
conditions and consumer spending habits in the Southeast and Northern California
and, to a lesser extent, the Houston and Columbus markets. Sales in our Northern
California market represented 20% of our sales for the year ended December 31,
2001. Our results of operations also depend on other factors, such as tax rates
and state and local regulations specific to the states in which we currently
operate. Sonic may not be able to expand geographically and any such expansion
may not adequately insulate it from the adverse effects of local or regional
economic conditions.
We can offer you no assurances that we will be able to continue executing our
acquisition strategy without the costs of future acquisitions escalating.
Although there are many potential acquisition candidates that fit our
acquisition criteria, we cannot assure you that we will be able to consummate
any such transactions in the future or identify those candidates that would
result in the most successful combinations, or that future acquisitions will be
able to be consummated at acceptable prices and terms. In addition, increased
competition for acquisition candidates could result in fewer acquisition
opportunities for us and higher acquisition prices. The magnitude, timing,
pricing and nature of future acquisitions will depend upon various factors,
including:
. the availability of suitable acquisition candidates;
. competition with other dealer groups for suitable acquisitions;
. the negotiation of acceptable terms;
. our financial capabilities;
. our stock price;
. the availability of skilled employees to manage the acquired
companies; and
. general economic and business conditions.
12
<PAGE>
We may be required to file applications and obtain clearances under
applicable federal antitrust laws before completing an acquisition. These
regulatory requirements may restrict or delay our acquisitions, and may increase
the cost of completing acquisitions.
The operating condition of acquired businesses cannot be determined accurately
until we assume control.
Although we conduct what we believe to be a prudent level of
investigation regarding the operating condition of the businesses we purchase,
in light of the circumstances of each transaction, an unavoidable level of risk
remains regarding the actual operating condition of these businesses. Until we
actually assume operating control of such business assets, we may not be able to
ascertain the actual value of the acquired entity.
Potential conflicts of interest between Sonic and its officers could adversely
affect our future performance.
O. Bruton Smith serves as the chairman and chief executive officer of
Speedway Motorsports, Inc. ("SMI"). Accordingly, Sonic competes with SMI for the
management time of Mr. Smith.
Sonic has in the past and will likely in the future enter into
transactions with Mr. Smith, entities controlled by Mr. Smith or other
affiliates of Sonic. We believe that all of our existing arrangements with
affiliates are as favorable to us as if the arrangements were negotiated between
unaffiliated parties, although the majority of such transactions have neither
been independently verified in that regard nor are likely to be so verified in
the future. Potential conflicts of interest could arise in the future between
Sonic and its officers or directors in the enforcement, amendment or termination
of arrangements existing between them.
Under Delaware law generally, a corporate insider is precluded from
acting on a business opportunity in his individual capacity if that opportunity
is
(1) one which the corporation is financially able to undertake,
(2) is in the line of the corporation's business,
(3) is of practical advantage to the corporation, and
(4) is one in which the corporation has an interest or reasonable
expectancy.
Accordingly, our corporate insiders are generally prohibited from
engaging in new dealership-related business opportunities outside of Sonic
unless a majority of Sonic's disinterested directors decide that such
opportunities are not in our best interest.
Sonic's charter contains provisions providing that transactions between
Sonic and its affiliates must be no less favorable to Sonic than would be
available in similar transactions with an unrelated third party. Moreover, any
such transactions involving aggregate payments in excess of $500,000 must be
approved by a majority of Sonic's directors and a majority of Sonic's
independent directors. If not so approved, Sonic must obtain an opinion as to
the financial fairness of the transaction to be issued by an investment banking
or appraisal firm of national standing. In addition, the terms of the Revolving
Facility and Sonic's existing senior subordinated notes restrict transactions
with affiliates in a manner similar to Sonic's charter restrictions.
The loss of key personnel and limited management and personnel resources could
adversely affect our operations and growth.
Our success depends to a significant degree upon the continued
contributions of Sonic's management team, particularly its senior management,
and service and sales personnel. Additionally,
13
<PAGE>
manufacturer franchise agreements may require the prior approval of the
applicable manufacturer before any change is made in franchise general managers.
We do not have employment agreements with most of our dealership managers and
other key dealership personnel. Consequently, the loss of the services of one or
more of these key employees could have a material adverse effect on our results
of operations.
In addition, as we expand we may need to hire additional managers. The
market for qualified employees in the industry and in the regions in which we
operate, particularly for general managers and sales and service personnel, is
highly competitive and may subject us to increased labor costs during periods of
low unemployment. The loss of the services of key employees or the inability to
attract additional qualified managers could have a material adverse effect on
our results of operations. In addition, the lack of qualified management or
employees employed by potential acquisition candidates may limit our ability to
consummate future acquisitions.
Seasonality of the automotive retail business adversely affects first quarter
revenues.
Our business is seasonal, with a disproportionate amount of revenues
received generally in the second, third and fourth fiscal quarters.
Import product restrictions and foreign trade risks may impair our ability to
sell foreign vehicles profitably.
Some of the vehicles and major components of vehicles we sell are
manufactured in foreign countries. Accordingly, we are subject to the import and
export restrictions of various jurisdictions and are dependent to some extent
upon general economic conditions in, and political relations with, a number of
foreign countries, particularly Germany, Japan and Sweden. Fluctuations in
currency exchange rates may also adversely affect our sales of vehicles produced
by foreign manufacturers. Imports into the United States may also be adversely
affected by increased transportation costs and tariffs, quotas or duties.
We are subject to numerous legal and administrative proceedings.
We are involved, and will continue to be involved, in numerous legal
proceedings arising out of the conduct of our business, including litigation
with customers, employment related lawsuits and actions brought by governmental
authorities. A significant judgment against us or the imposition of a
significant fine could have material adverse effect on our business, financial
condition, results of operations, cash flows and prospects. We cannot assure you
with respect to the outcome of these administrative and legal proceedings and
the effect such outcomes may have on us.
Governmental regulation and environmental regulation compliance costs may
adversely affect our profitability.
We are subject to a wide range of federal, state and local laws and
regulations, such as local licensing requirements, retail financing and consumer
protection laws and regulations, and federal and state environmental, health and
safety, wage-hour, anti-discrimination, and other employment practices laws and
regulations. The violation of these laws and regulations can result in
administrative, civil or criminal penalties against us or in a cease and desist
order against our operations if we are not in compliance. Our future
acquisitions may also be subject to regulation, including antitrust reviews. We
believe that we comply in all material respects with all laws and regulations
applicable to our business, but future regulations may be more stringent and
require us to incur significant additional costs.
Our facilities and operations are also subject to federal, state and
local laws and regulations relating to environmental protection and human health
and safety, including those governing wastewater discharges, air emissions, the
operation and removal of underground and aboveground storage tanks, the use,
storage, treatment, transportation, release, recycling and disposal of solid and
hazardous materials and wastes and the cleanup of contaminated property or
water. We may be required by these laws to pay the full amount of the costs of
investigation and/or remediation of contaminated properties, even if we are not
at fault for disposal of the materials or if such disposal was legal at the
time. People who may be found
14
<PAGE>
liable under these laws and regulations include the present or former owner or
operator of a contaminated property and companies that generated, transported,
disposed of or arranged for the transportation or disposal of hazardous
substances found at the property.
Our past and present business operations are subject to environmental
laws and regulations governing the use, storage, handling, recycling and
disposal of hazardous or toxic substances such as new and waste motor oil, oil
filters, transmission fluid, antifreeze, freon, new and waste paint and lacquer
thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel
fuels. We are also subject to laws and regulations relating to underground
storage tanks that exist or used to exist at many of our properties. Like many
of our competitors, we have incurred, and will continue to incur, capital and
operating expenditures and other costs in complying with such laws and
regulations. In addition, soil and groundwater contamination exists at certain
of our properties. We cannot assure you that our other properties have not been
or will not become similarly contaminated. In addition, we could become subject
to potentially material new or unforeseen environmental costs or liabilities
because of our acquisitions.
Environmental laws and regulations, including those governing air
emissions and underground storage tanks, could require compliance with new or
more stringent standards that are imposed in the future. We cannot predict what
other environmental legislation or regulations will be enacted in the future,
how existing or future laws or regulations will be administered or interpreted
or what environmental conditions may be found to exist in the future.
Consequently, we may be required to make substantial expenditures in the future.
Concentration of voting power and antitakeover provisions of our charter,
Delaware law and our dealer agreements may reduce the likelihood of any
potential change of control of Sonic.
Sonic's common stock is divided into two classes with different voting
rights. This dual class stock ownership allows the present holders of the Class
B common stock to control Sonic. Holders of Class A common stock have one vote
per share on all matters. Holders of Class B common stock have 10 votes per
share on all matters, except that they have only one vote per share on any
transaction proposed by the Board of Directors or a Class B common stockholder
or otherwise benefiting the Class B common stockholders constituting a:
(1) "going private" transaction;
(2) disposition of substantially all of our assets;
(3) transfer resulting in a change in the nature of our business; or
(4) merger or consolidation in which current holders of common stock
would own less than 50% of the common stock following such
transaction.
The holders of Class B common stock currently hold less than a majority
of Sonic's outstanding common stock, but a majority of Sonic's voting power.
This may prevent or discourage a change of control of Sonic even if such action
were favored by holders of Class A common stock.
Sonic's charter and bylaws make it more difficult for its stockholders
to take corporate actions at stockholders' meetings. In addition, options under
our 1997 Stock Option Plan become immediately exercisable on a change in
control. Also, Delaware law makes it difficult for stockholders who have
recently acquired a large interest in a company to consummate a business
transaction with the company against its directors' wishes. Finally,
restrictions imposed by our dealer agreements may impede or prevent any
potential takeover bid. Generally, our franchise agreements allow the
manufacturers the right to terminate the agreements upon a change of control of
our company and impose restrictions upon the transferability of any significant
percentage of our stock to any one person or entity who may be unqualified, as
defined by the manufacturer, to own one of its dealerships. The inability of a
person or entity to qualify with one or more of our manufacturers may prevent or
seriously impede a potential takeover bid. These agreements, corporate documents
and laws, as well as provisions of our lending
15
<PAGE>
arrangements creating an event of default on a change in control, may have the
effect of delaying or preventing a change in control or preventing stockholders
from realizing a premium on the sale of their shares upon an acquisition of
Sonic.
New accounting pronouncements on business combinations and goodwill could affect
future earnings.
Recent Accounting Pronouncements: In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("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 (with an initial review within six months of adopting the new standard)
and reduced against operations if it is found to be impaired. This review must
be performed on at least an annual basis, 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
have not yet determined its full 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 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.
16
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----