Exhibit 99.1
RISK FACTORS
RISKS RELATED TO OUR INDEBTEDNESS
OUR SIGNIFICANT INDEBTEDNESS COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL
HEALTH, LIMIT OUR ABILITY TO FINANCE FUTURE ACQUISITIONS AND CAPITAL
EXPENDITURES AND PREVENT US FROM FULFILLING OUR FINANCIAL OBLIGATIONS.
As of June 30, 2002, our total outstanding indebtedness was approximately
$1,390.6 million, including the following:
. $239.0 million under a revolving credit facility;
. $793.2 million under standardized secured inventory floor plan facilities;
. $145.1 million in 5 1/4% convertible senior subordinated notes due 2009
representing $149.5 million in aggregate principal amount less unamortized
discount of approximately $4.4 million;
. $195.9 million in 11% senior subordinated notes due 2008 representing
$200.0 million in aggregate principal amount less unamortized discount of
approximately $4.1 million; and
. $17.4 million of other secured debt, including $11.8 million under a
revolving real estate acquisition and new dealership construction line of
credit and a related mortgage refinancing facility.
As of June 30, 2002, we had approximately $280.1 million available for
additional borrowings under the revolving credit facility. We also had
approximately $42.2 million available 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, convertible 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 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
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. 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.
AN ACCELERATION OF OUR OBLIGATION TO REPAY ALL OF OUR OUTSTANDING INDEBTEDNESS
WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS.
Our revolving credit facility, floor plan facilities and the indenture
governing our senior subordinated notes contain numerous financial and
operating covenants. A breach of any of these covenants could result in a
default under the applicable agreement or indenture. If a default were to
occur, we may be unable to adequately finance our operations and the value of
our common stock would be materially adversely affected. In addition, a default
under one agreement or indenture could result in a default and acceleration of
our repayment obligations under the other agreements or indentures, including
the indenture governing our outstanding convertible senior subordinated notes,
under the cross default provisions in those agreements or indentures. If a
cross default were to occur, we may not be able to pay our debts or borrow
sufficient funds to refinance them. Even if new financing were available, it
may not be on terms acceptable to us. As a result of this risk, we could be
forced to take actions that we otherwise would not take, or not take actions
that we otherwise might take, in order to comply with the covenants in these
agreements and indentures.
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OUR ABILITY TO MAKE INTEREST AND PRINCIPAL PAYMENTS WHEN DUE TO HOLDERS OF OUR
DEBT SECURITIES DEPENDS UPON THE RECEIPT OF SUFFICIENT FUNDS FROM OUR
SUBSIDIARIES.
Substantially all of our consolidated assets are held by our subsidiaries
and substantially all of our consolidated cash flow and net income are
generated by our subsidiaries. Accordingly, our cash flow and ability to
service debt depends to a substantial degree on the results of operations of
subsidiaries and upon the ability of our subsidiaries to provide us with cash.
We may receive cash from our subsidiaries in the form of dividends, loans or
otherwise. We may use this cash to service our debt obligations or for working
capital. Our subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to distribute cash to us or to make funds
available to service debt. In addition, the ability of our subsidiaries to pay
dividends or make loans to us are subject to contractual limitations under the
floor plan facilities, minimum net capital requirements under dealership
agreements and laws of the state in which a subsidiary is organized and depend
to a significant degree on the results of operations of our subsidiaries and
other business considerations.
RISKS RELATED TO OUR RELATIONSHIPS WITH VEHICLE MANUFACTURERS
OUR OPERATIONS MAY BE ADVERSELY AFFECTED IF ONE OR MORE OF OUR MANUFACTURER
FRANCHISE AGREEMENTS IS TERMINATED OR NOT RENEWED.
Each of our dealerships operates under a franchise agreement with the
applicable automobile manufacturer or distributor. Without a franchise
agreement, we cannot obtain new vehicles from a manufacturer. As a result, we
are significantly dependent on our relationships with these manufacturers.
Manufacturers exercise a great degree of control over the operations of our
dealerships through the franchise agreements. The franchise agreements govern,
among other things, our ability to purchase vehicles from the manufacturer and
to sell vehicles to customers. Each of our franchise agreements provides for
termination or non-renewal for a variety of causes, including any unapproved
change of ownership or management. Manufacturers may also have a right of first
refusal if we seek to sell dealerships.
Actions taken by manufacturers to exploit their superior bargaining
position in negotiating the terms of franchise agreements or renewals of these
agreements or otherwise could also have a material adverse effect on our results
of operations. 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.
OUR SALES VOLUME AND PROFIT MARGIN ON EACH SALE MAY BE MATERIALLY AND ADVERSELY
AFFECTED IF MANUFACTURERS DISCONTINUE OR CHANGE THEIR INCENTIVE PROGRAMS.
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 routinely modify their incentive programs in response to
changing market conditions.
Some of the key incentive programs include:
. customer rebates or below market financing on new vehicles;
. dealer incentives on new vehicles;
. warranties on new and used vehicles; and
. sponsorship of used vehicle sales by authorized new vehicle dealers.
A reduction or discontinuation of a manufacturer's incentive programs may
materially adversely affect our profitability.
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WE DEPEND ON MANUFACTURERS TO SUPPLY US WITH SUFFICIENT NUMBERS OF POPULAR AND
PROFITABLE NEW MODELS.
Manufacturers typically allocate their vehicles among dealerships based on
the sales history of each dealership. Supplies of popular new vehicles may be
limited by the applicable manufacturer's production capabilities. Popular new
vehicles that are in limited supply typically produce the highest profit
margins. We depend on manufacturers to provide us with a desirable mix of
popular new vehicles. Our operating results may be materially adversely
affected if we do not obtain a sufficient supply of these vehicles.
ADVERSE CONDITIONS AFFECTING ONE OR MORE KEY MANUFACTURERS MAY NEGATIVELY
IMPACT OUR PROFITABILITY.
Approximately 87.7% of our new vehicle revenue (based on new vehicle
revenue for the three months ended June 30, 2002) is derived from the sale of
new vehicles manufactured by Ford, Honda, Chrysler, General Motors, BMW,
Toyota, Nissan and Lexus. Our success depends to a great extent on these
manufacturers':
. financial condition;
. marketing;
. vehicle design;
. publicity concerning a particular manufacturer or vehicle model;
. production capabilities;
. management; and
. labor relations.
Adverse conditions affecting these and other important aspects of
manufacturers' operations and public relations may adversely affect our ability
to sell their automobiles and, as a result, significantly and detrimentally
affect our profitability.
MANUFACTURER STOCK OWNERSHIP RESTRICTIONS MAY IMPAIR OUR ABILITY TO MAINTAIN OR
RENEW FRANCHISE AGREEMENTS OR ISSUE ADDITIONAL EQUITY.
Some of our franchise agreements prohibit transfers of any ownership
interests of a dealership and, in some cases, its parent. A number of
manufacturers impose restrictions on the transferability of our Class A common
stock and our ability to maintain franchises if a person acquires a significant
percentage of the voting power of our common stock. Our existing franchise
agreements could be terminated if a person or entity acquires a substantial
ownership interest in us or acquires voting power above certain levels without
the applicable manufacturer's approval. Violations of these levels by an
investor are generally outside of our control and may result in the termination
or non-renewal of existing franchise agreements or impair our ability to
negotiate new franchise agreements for dealerships we acquire. In addition, if
we cannot obtain any requisite approvals on a timely basis, we may not be able
to issue additional equity or otherwise raise capital on terms acceptable to
us. These restrictions may also prevent or deter a prospective acquiror from
acquiring control of us. This could adversely affect the market price of our
Class A common stock.
The current holders of Sonic's Class B common stock maintain voting control
over Sonic. However, 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
existing franchise agreements, the triggering of provisions in our agreements
with certain manufacturers requiring us to sell our dealerships franchised with
such manufacturers, and/or a default under our credit arrangements.
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MANUFACTURERS' RESTRICTIONS ON ACQUISITIONS COULD LIMIT OUR FUTURE GROWTH.
We are required to obtain the approval of the applicable manufacturer before
we can acquire an additional dealership franchise of that manufacturer. In
determining whether to approve an acquisition, manufacturers may consider many
factors such as our financial condition and manufacturer-determined consumer
satisfaction index, or "CSI" scores. Obtaining manufacturer approval of
acquisitions also takes a significant amount of time, typically three to five
months. We cannot assure you that manufacturers will approve future
acquisitions or do so on a timely basis, which could impair the execution of
our growth strategy.
Certain manufacturers also 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. In addition, under an
applicable franchise agreement or under state law, a manufacturer may have a
right of first refusal to acquire a dealership that we seek to acquire.
A manufacturer may condition approval of an acquisition on the
implementation of material changes in our operations or extraordinary corporate
transactions, facilities improvements or other capital expenditures. If we are
unable or unwilling to comply with these conditions, we may be required to sell
the assets of that manufacturer's dealerships or terminate our franchise
agreement.
OUR FAILURE TO MEET A MANUFACTURER'S CONSUMER SATISFACTION, FINANCIAL AND SALES
PERFORMANCE 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 generally known as "CSI"
scores. The components of CSI vary from manufacturer to manufacturer and are
modified periodically. Franchise agreements also may impose financial and sales
performance standards. Under our agreements with certain manufacturers, a
dealership's CSI scores and financial performance may be considered a factor in
evaluating applications for additional dealership acquisitions. From time to
time, some of our dealerships have had difficulty meeting various manufacturers'
CSI requirements or performance standards. We cannot assure you that our
dealerships will be able to comply with these requirements 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 its CSI requirements or
performance standards, which could impair the execution of our growth strategy.
In addition, we receive incentive payments from the manufacturers based, in
part, on CSI scores, which could be materially adversely affected if our CSI
scores decline.
RISKS RELATED TO OUR ACQUISITION STRATEGY
FAILURE TO EFFECTIVELY INTEGRATE ACQUIRED DEALERSHIPS WITH OUR EXISTING
OPERATIONS COULD ADVERSELY AFFECT OUR FUTURE OPERATING RESULTS.
Our future operating results depend on our ability to integrate the
operations of recently acquired dealerships, as well as dealerships we acquire
in the future, with our existing operations. In particular, we need to
integrate our management information systems, procedures and organizational
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, 12 in 2001 and 27 to
date in 2002.
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;
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. 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.
WE MAY NOT ADEQUATELY ANTICIPATE ALL OF THE DEMANDS THAT GROWTH THROUGH
ACQUISITIONS WILL IMPOSE.
The automobile retailing industry is considered a mature industry in which
minimal growth is expected in total unit sales. Accordingly, our ability to
generate higher revenue and earnings in future periods depends in large part on
our ability to acquire additional dealerships, manage geographic 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 acquired dealerships;
. entering new markets with which we are unfamiliar;
. potential undiscovered liabilities and operational difficulties 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;
. increased expenses for accounting and computer systems, as well as
integration difficulties;
. failure to obtain a manufacturer's consent to the acquisition of one or
more of its dealership franchises or renew the franchise agreement on
terms acceptable to us; and
. incorrectly valuing entities to be acquired.
We may not adequately anticipate all of the demands that growth will impose
on our systems, procedures and structures.
WE MAY NOT BE ABLE TO CAPITALIZE ON ACQUISITION OPPORTUNITIES BECAUSE OUR
FINANCIAL RESOURCES AVAILABLE FOR ACQUISITIONS ARE LIMITED.
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 may not be able to obtain additional financing by
issuing stock or debt securities due to the market price of our Class A common
stock, overall market conditions or the need for manufacturer consent to the
issuance of equity 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 overall growth strategy.
In addition, we are dependent to a significant extent on our ability to
finance our new vehicle inventory with "floor plan financing." Floor plan
financing arrangements allow us to borrow money to buy a particular vehicle
from the manufacturer and pay off the loan when we sell that particular
vehicle. We must obtain new floor plan financing or obtain consents to assume
existing floor plan financing in connection with our acquisition of dealerships.
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Substantially all the assets of our dealerships are pledged to secure our
floor plan indebtedness and the indebtedness under the revolving credit
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. Moreover, because Ford Motor Credit is associated
with Ford Motor Company, any deterioration of our relationship with one could
adversely affect our relationship with the other. The same is true of our
relationships with Chrysler, GM and Toyota and the floor plan financing
divisions of each of these manufacturers.
WE MAY NOT BE ABLE TO CONTINUE EXECUTING OUR ACQUISITION STRATEGY WITHOUT THE
COSTS OF FUTURE ACQUISITIONS ESCALATING.
We have grown our business primarily through acquisitions. We may not be
able to consummate any future acquisitions at acceptable prices and terms or
identify suitable candidates. 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; and
. the availability of skilled employees to manage the acquired companies.
WE MAY NOT BE ABLE TO DETERMINE THE ACTUAL FINANCIAL CONDITION OF DEALERSHIPS
WE ACQUIRE UNTIL AFTER WE COMPLETE THE ACQUISITION AND TAKE CONTROL OF THE
DEALERSHIPS.
The operating and financial 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 and
financial 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. Similarly, many
of the dealerships we acquire, including our largest acquisitions, do not have
financial statements audited or prepared in accordance with generally accepted
accounting principles. We may not have an accurate understanding of the
historical financial condition and performance of our acquired entities. Until
we actually assume control of business assets and their operations, we may not
be able to ascertain the actual value or understand the potential liabilities of
the acquired entities and their operations.
ALTHOUGH O. BRUTON SMITH, OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER, HAS
PREVIOUSLY ASSISTED US WITH OBTAINING ACQUISITION FINANCING, WE CANNOT ASSURE
YOU THAT HE WILL BE WILLING OR ABLE TO DO SO IN THE FUTURE.
Our obligations under the revolving credit facility are secured with a
pledge of shares of common stock of Speedway Motorsports, Inc., which are
beneficially owned by Sonic Financial Corporation, an entity controlled by Mr.
Smith. Presently, the $600 million borrowing limit of the revolving credit
facility is subject to a borrowing base calculation that is based, in part, on
the value of the Speedway Motorsports, Inc. shares pledged by Sonic Financial.
Consequently, a withdrawal of this pledge by Sonic Financial or a significant
decrease in the value of Speedway Motorsports, Inc. common stock could reduce
the amount we can currently borrow under the revolving credit facility.
Mr. Smith has also guaranteed additional indebtedness incurred to complete
certain dealership acquisitions. Mr. Smith may not be willing or able to
provide similar guarantees or credit support in the future. This could impair
our ability to obtain acquisition financing on favorable terms.
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RISKS RELATED TO THE AUTOMOTIVE RETAIL INDUSTRY
INCREASING COMPETITION IN AUTOMOTIVE RETAILERS REDUCES OUR PROFIT MARGINS ON
VEHICLE SALES AND RELATED BUSINESSES. FURTHER, THE USE OF THE INTERNET IN THE
CAR PURCHASING PROCESS COULD MATERIALLY ADVERSELY AFFECT US.
Automobile retailing is a highly competitive business. Our competitors
include publicly and privately owned dealerships, some of which are larger and
have greater financial and marketing resources than we do. Many of our
competitors sell the same or similar makes of new and used vehicles that we
offer in our markets at competitive prices. We do not have any cost advantage
in purchasing new vehicles from manufacturers due to economies of scale or
otherwise. In addition, 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 used vehicles available in the market, which puts added pressure on
new and used vehicle margins. We typically rely on advertising, merchandising,
sales expertise, service reputation and dealership location to sell new
vehicles. Our revenues and profitability could be materially adversely affected
if manufacturers decide to enter the retail market directly.
Our financing and insurance ("F&I") business and other related businesses,
which have higher margins 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.
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 investing heavily in
the development of their own Internet capabilities, which could materially
adversely affect our business.
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
or if existing franchised dealers increase their market share in our markets.
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. Our gross margins may decline over time as we expand into markets
where we do not have a leading position.
OUR BUSINESS WILL BE HARMED IF OVERALL CONSUMER DEMAND SUFFERS FROM A SEVERE OR
SUSTAINED DOWNTURN.
Our business is heavily dependent on consumer demand and preferences. Our
revenues will be materially and adversely affected if there is a severe or
sustained downturn in overall levels of consumer spending. Retail vehicle sales
are cyclical and historically have experienced periodic downturns characterized
by oversupply and weak demand. These cycles are often dependent on general
economic conditions and consumer confidence, as well as the level of
discretionary personal income and credit availability. The economic outlook
appears uncertain in the aftermath of the terrorist attacks in the U.S. on
September 11, 2001, and the subsequent war on terrorism. Future recessions may
have a material adverse effect on our retail business, particularly sales of
new and used automobiles. In addition, severe or sustained increases in
gasoline prices may lead to a reduction in automobile purchases or a shift in
buying patterns from luxury and sport utility vehicle models (which typically
provide high margins to retailers) to smaller, more economical vehicles (which
typically have lower margins).
THE SEASONALITY OF OUR BUSINESS MAGNIFIES THE IMPORTANCE OF SECOND AND THIRD
QUARTER OPERATING RESULTS.
Our business is subject to seasonal variations in revenues. In our
experience, demand for automobiles is generally lower during the first quarter
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of each year. We therefore receive a disproportionate amount of revenues
generally in the second, third and fourth quarters and expect our revenues and
operating results to be generally lower in the first quarter. Consequently, if
conditions surface during the second, third and fourth quarters that impair
vehicle sales, such as higher fuel costs, depressed economic conditions or
similar adverse conditions, our revenues for the year could be
disproportionately adversely affected.
GENERAL RISKS RELATED TO INVESTING IN OUR SECURITIES
CONCENTRATION OF VOTING POWER AND ANTI-TAKEOVER 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:
. "going private" transaction;
. disposition of substantially all of our assets;
. transfer resulting in a change in the nature of our business; or
. 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 the action was
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. Delaware law also makes it difficult for stockholders who have
recently acquired a large interest in a company to consummate a business
combination 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. In addition, provisions of our
lending arrangements create an event of default on a change in control. These
agreements, corporate governance documents and laws 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.
THE OUTCOME OF LEGAL AND ADMINISTRATIVE PROCEEDINGS WE ARE OR MAY BECOME
INVOLVED IN COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS
AND PROFITABILITY.
In 2001, the Florida Attorney General's Office issued subpoenas to two of
our wholly-owned dealership subsidiaries located in Florida. The subpoenas
requested, among other things, documentation from the dealerships regarding
transactions with customers in the months of January 1999 and June 2000. In
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subsequent discussions, the Attorney General's office informed each of these
dealership subsidiaries that it was investigating allegations of fraud against
customers by those dealerships in the sale of finance and insurance products.
In April 2002, the Florida Department of Insurance informed the same two
dealership subsidiaries that it had also initiated an investigation into
allegations similar to those underlying the Attorney General's investigation.
Our two dealership subsidiaries are cooperating with this investigation. To
date, there have been no formal charges or administrative proceedings filed
against either dealership subsidiary by the Attorney General or the Department
of Insurance. Additionally, five private civil actions have been filed against
one of the dealership subsidiaries and one private civil action has been filed
against the other dealership subsidiary stating allegations similar to those
underlying the Attorney General's investigation. Two of the private civil
actions purport to represent a class of customers as potential plaintiffs,
although no motion for class certification has been filed or granted.
We intend to vigorously defend ourselves and assert available defenses with
respect to each of the foregoing matters, and do not believe that the ultimate
resolution of these matters will have a material adverse affect on our
business, results of operations, financial condition, cash flows or prospects.
However, because the investigations by the Attorney General's office and
Department of Insurance are continuing and have not resulted in formal charges
to date, and because the private civil actions are also in the early stages of
litigation, we cannot assure you as to the outcomes of such proceedings.
In addition, we are involved, and expect to continue to be involved, in
numerous other legal proceedings arising out of the conduct of our business,
including litigation with customers, employment related lawsuits and actions
brought by governmental authorities. The results of these matters cannot be
predicted with certainty, and an unfavorable resolution of one or more of these
matters, including the matters specifically discussed above, could have a
material adverse effect on our business, financial condition, results of
operations, cash flows and prospects.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY UNFAVORABLE CONDITIONS IN OUR LOCAL
MARKETS, EVEN IF THOSE CONDITIONS ARE NOT PROMINENT NATIONALLY.
Our performance is subject to local economic, competitive and other
conditions prevailing in geographic areas where we operate. For example, 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 approximately 15% of our sales for
the three months ended June 30, 2002. 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.
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, 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.
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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 wage-hour, anti-discrimination,
and other employment practices laws and regulations. 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. 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 that 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 compliance costs.
Our past and present business operations are subject to environmental laws
and regulations. 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. 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.
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., a publicly traded owner and operator of automobile
racing facilities. Accordingly, Sonic competes with Speedway Motorsports, Inc.
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.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This report 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;
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. our financing plans; and
. 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 this report, as well as:
. our ability to generate sufficient cash flows or obtain additional
financing to support acquisitions, capital expenditures 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;
. 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; and
. our ability to successfully integrate recent and potential future
acquisitions.
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