-----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, D1jgRwwB7ks3iT7Sb24A5u4VvLgTBtdcrUnR6G3oYKNJg8eGTWs2fT1Gi3Wvz3jC 7jeZYKHy2fvD614xuY3UNQ== 0000950168-97-003170.txt : 19971107 0000950168-97-003170.hdr.sgml : 19971107 ACCESSION NUMBER: 0000950168-97-003170 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 27 FILED AS OF DATE: 19971106 SROS: NONE 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-33295 FILM NUMBER: 97708660 BUSINESS ADDRESS: STREET 1: 5401 EAST INDEPENDENCE BLVD CITY: CHARLOTTE STATE: NC ZIP: 28218 BUSINESS PHONE: 7045323301 MAIL ADDRESS: STREET 1: 5401 EAST INDEPENDENCE BLVD CITY: CHARLOTTE STATE: NC ZIP: 28218 S-1/A 1 SONIC AUTOMOTIVE, INC. S-1/A #7 As filed with the Securities and Exchange Commission on November 6, 1997 Registration No. 333-33295 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 7 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ Sonic Automotive, Inc. (Exact name of registrant as specified in its charter) Delaware 5511 56-2010790 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
5401 East Independence Boulevard P.O. Box 18747 Charlotte, North Carolina 28218 Telephone (704) 532-3301 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------ Mr. O. Bruton Smith Chief Executive Officer Sonic Automotive, Inc. 5401 East Independence Boulevard P.O. Box 18747 Charlotte, North Carolina 28218 Telephone (704) 532-3301 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------ Copies To: Gary C. Ivey, Esq. Stuart H. Gelfond, Esq. Parker, Poe, Adams & Bernstein L.L.P. Fried, Frank, Harris, Shriver & Jacobson 2500 Charlotte Plaza One New York Plaza Charlotte, North Carolina 28244 New York, New York 10004 Telephone (704) 372-9000 Telephone (212) 859-8000
------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. ------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________________. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________________. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE This Registration Statement contains two separate prospectuses. The first prospectus relates to a public offering of shares of Class A Common Stock of Sonic Automotive, Inc., par value $.01 per share (the "Class A Common Stock") in the United States and Canada (the "U.S. Offering). The second prospectus relates to a concurrent offering of Class A Common Stock outside the United States and Canada (the "International Offering"). The prospectuses for the U.S. Offering and the International Offering will be identical in all respects, except for their respective front cover pages, first page of "Prospectus Summary", "Underwriting" sections and back cover pages. Such alternate pages to be included in the International Offering prospectus appear in this Registration Statement immediately following the complete prospectus for the U.S. Offering. (A redherring appears on the left hand side of this page, rotated 90 degrees. Text follows.) Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED NOVEMBER 5, 1997 PROSPECTUS 5,000,000 Shares (Sonic Automotive Inc. logo) Class A Common Stock ------------------------ All of the 5,000,000 shares of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), offered hereby are being sold by Sonic Automotive, Inc. ("Sonic" or the "Company"). Of the 5,000,000 shares of Class A Common Stock offered hereby, 4,000,000 shares are being offered for sale initially in the United States and Canada by the U.S. Underwriters (as defined herein) and 1,000,000 shares are being offered for sale initially in a concurrent offering outside the United States and Canada by the International Managers (as defined herein). The initial public offering price and the aggregate underwriting discount per share will be identical for both the U.S. Offering and the International Offering. See "Underwriting." Each share of Class A Common Stock entitles its holder to one vote per share. Each share of Class B Common Stock, par value $.01 per share (the "Class B Common Stock," and together with the Class A Common Stock, the "Common Stock"), entitles the holder to ten votes per share, except in certain limited circumstances. All of the shares of Class B Common Stock are held by the members of the Smith Group (as defined herein), who are all of the stockholders of the Company prior to the consummation of the Offering. After consummation of the Offering, the Smith Group will beneficially own shares representing approximately 92.6% of the combined voting power of the Company's Common Stock (approximately 91.6% if the Underwriters' over-allotment option is exercised in full). See "Description of Capital Stock -- Common Stock." Prior to the Offerings, there has been no public market for the Class A Common Stock. It is currently estimated that the initial public offering price will be between $12.00 and $14.00 per share. For a discussion of factors to be considered in determining the initial public offering price, see "Underwriting." The Class A Common Stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol "SAH." See "Risk Factors" beginning on page 9 for a discussion of certain factors that should be considered by prospective purchasers of the Class A Common Stock offered hereby. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [CAPTION] Price to Underwriting Proceeds to Public Discount (1) Company (2) Per Share........................................... $ $ $ Total (3)........................................... $ $ $
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $2,000,000. (3) The Company has granted to the U.S. Underwriters and the International Managers options to purchase up to an additional 600,000 and 150,000 shares of Class A Common Stock, respectively, in each case exercisable within 30 days of the date hereof and solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Class A Common Stock are being offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Class A Common Stock will be made in New York, New York on or about , 1997. ------------------------ Merrill Lynch & Co. NationsBanc Montgomery Securities, Inc. Wheat First Butcher Singer ------------------------ The date of this Prospectus is , 1997. (Sonic Automotive Inc. logo) (Map appears here) Fort Mill Chrysler Plymouth Dodge Fort Mill Ford Frontier Oldsmobile Cadillac Lake Norman Chrysler- Plymouth-Jeep-Eagle Lake Norman Dodge Lone Star Ford Dodge of Chattanooga Infiniti of Chattanooga Jaguar of Chattanooga Dyer and Dyer Volvo Ken Marks Ford Kia and Volkswagen of Chattanooga Cleveland Village Honda Cleveland Chrysler- Plymouth-Jeep-Eagle Nelson Bowers Ford BMW and Volvo of Chattanooga The Company intends to furnish its stockholders with annual reports containing financial statements audited by its independent public accountants and will make available copies of its quarterly reports for the first three quarters of each year. Certain persons participating in the Offering may engage in transactions that stabilize, maintain, or otherwise affect the price of the Class A Common Stock. Such transactions may include stabilizing, the purchase of Class A Common Stock to cover syndicate short positions and the imposition of penalty bids. For a description of these activities, see "Underwriting." ----------------- This Prospectus includes statistical data regarding the retail automotive industry. Unless otherwise indicated herein, such data is taken or derived from information published by a division of Intertec Publishing Corp. in its "Ward's Dealer Business," Crain's Communications, Inc. in its "Automotive News" and "1997 Market Data Book" and the Industry Analysis Division of the National Automobile Dealers Association ("NADA") in its "Industry Analysis and Outlook" and "Automotive Executive Magazine" publications. No Manufacturer (as defined in this Prospectus) has been involved, directly or indirectly, in the preparation of this Prospectus or in the Offering being made hereby. Although, as described in this Prospectus, Manufacturers will have granted consents for various of the Acquisitions (as defined herein) and for this Offering, no Manufacturer has made any statements or representations for the purpose of such statements or representations being included in this Prospectus, and no Manufacturer has any responsibility for the accuracy or completeness of this Prospectus. PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. References in this Prospectus to "Sonic" or the "Company" (i) are to Sonic Automotive, Inc. and, unless the context indicates otherwise, its consolidated subsidiaries and their respective predecessors, (ii) give effect to a recently completed Reorganization (as defined below) of the Company, and (iii) assume that the Company has consummated the acquisition of the assets or all the capital stock of six additional dealerships or dealership groups, as described herein, in North Carolina, Tennessee, Florida, Georgia and South Carolina (the "Acquisitions"). See "The Acquisitions." References to the "Offering" are to the offering of 4,000,000 shares of Class A Common Stock made hereby in the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and to the concurrent offering of 1,000,000 shares of Class A Common Stock outside the United States and Canada by the International Managers (the "International Offering"), collectively. References to the "Underwriters" are to the U.S. Underwriters and the International Managers, collectively. Unless otherwise indicated, all information in this Prospectus (a) gives retroactive effect to a 625-for-1 stock split (effected in the form of a stock dividend) of the Company's Class B Common Stock to be consummated prior to the consummation of the Offering (the "Stock Split") and (b) assumes that the Underwriters' over-allotment option is not exercised. The Acquisitions will be consummated on or before the closing of the Offering. The Company The Company is one of the leading automotive retailers in the United States, operating 23 dealership franchises, four standalone used vehicle facilities and seven collision repair centers in the southeastern and southwestern United States. 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 ("F&I") for its automotive customers. The Company's business is geographically diverse, with dealership operations in the Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta markets, each of which the Company believes is experiencing favorable demographic trends. Sonic sells 15 domestic and foreign brands, which consist of BMW, Cadillac, Chrysler, Dodge, Ford, Honda, Infiniti, Jaguar, Jeep, KIA, Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo. In several of its markets, the Company has a significant market share for new cars and light trucks, including 13.7% in Charlotte and 9.1% in Chattanooga in 1996. Pro forma for the Acquisitions, the Company had revenues of $899.6 million and retail unit sales of 24,206 new and 13,475 used vehicles in 1996. The Company believes that in 1996, based on pro forma retail unit sales, it would have been one of the ten largest dealer groups out of a total of more than 15,000 dealer groups in the United States. The Company's founder and Chief Executive Officer, O. Bruton Smith, has over 30 years of automotive retailing experience. In addition, the Company's other executive officers, regional vice presidents and executive managers have on average 18 years of automotive retailing experience. The Company's dealerships are among those dealerships that have won the highest attainable awards from various manufacturers measuring quality and customer satisfaction. These awards include the Five Star Award from Chrysler, the Chairman's Award from Ford, the President's Award from BMW and the President's Circle Award from Infiniti. In addition, the Company was named to Ford's Top 100 Club, which consists of Ford's top 100 retailers based on retail volume and consumer satisfaction. The Company intends to pursue an acquisition growth strategy led by a management team that has experience in the consolidation of automotive retailing as well as motorsports businesses. Bruton Smith, who is also the Chief Executive Officer of Speedway Motorsports, Inc., the owner and operator of several motorsports facilities, first entered the automotive retailing business in the mid-1960's. Mr. Smith will devote approximately 50% of his business time to the Company. Since 1990, Mr. Smith has successfully acquired three dealerships and increased his dealerships' revenues from $199.4 million in 1992 to $376.6 million in 1996, without giving effect to the Acquisitions. In the Tennessee market, Nelson E. Bowers, II, the Company's Executive Vice President, has acquired or opened eight dealerships since 1992 and increased revenues (primarily through acquisitions) of the dealership group to be acquired by the Company from $13.2 million in 1992 to $101.5 million in 1996. No assurance can be given that Messrs. Smith and Bowers will be successful in acquiring or opening new dealerships for the Company or increasing the Company's revenues. The Company believes the competitive advantages which differentiate it from its local competitors include the reputation of the Company's management in the automotive retailing industry, regional and national economies of scale, brand and geographic diversity, and the established customer base and local name recognition of the Company's dealerships. The Company has developed and implemented several growth strategies to capitalize on these competitive advantages. One of these is to continue to expand its operations in the Southeast and Southwest by acquiring additional dealerships both within its current markets and in new markets. The Company also is seeking additional growth from the increased sale of higher margin products and services such as wholesale parts, after-market products, collision repair services and F&I. The Company believes that an opportunity exists for dealership groups with significant equity capital and experience in identifying, acquiring and professionally managing dealerships, to acquire additional dealerships and capitalize on changes in 3 the automotive retailing industry. With approximately $640 billion in 1996 sales, automotive retailing is the largest consumer retail market in the United States. The industry today is highly fragmented, with the largest 100 dealer groups generating less than 10% of total sales revenues and controlling less than 5% of all new vehicle dealerships. The Company believes that these factors, together with increasing capital costs of operating automobile dealerships, the lack of alternative exit strategies (especially for larger dealerships) and the aging of many dealership owners provide attractive consolidation opportunities. Automobile retailing is highly competitive. The Company's competition includes franchised automobile dealerships, some with greater resources than the Company, selling the same or similar makes of vehicles offered by the Company. Other competitors include other franchised dealers, private market buyers and sellers of used vehicles, used vehicle dealers, service center chains and independent service and repair shops. Primarily as a result of competitive pressures, gross profit margins on new vehicle sales have been declining since 1986. The Company has also experienced gross profit margin pressure on used vehicle sales over the last 18 months. For further discussion of competition affecting the Company's business, see "Risk Factors -- Competition" and "Business -- Competition." Growth Strategy (Bullet) Acquire Dealerships. The Company plans to implement a "hub and spoke" acquisition program primarily by pursuing (i) well-managed dealerships in new metropolitan and growing suburban geographic markets, and (ii) dealerships that will allow the Company to capitalize on regional economies of scale, offer a greater breadth of products and services in any of its markets or increase brand diversity. New Markets. The Company looks to acquire well-managed dealerships in geographic markets it does not currently serve, principally in the Southeast and Southwest regions of the United States. Generally, the Company will seek to retain the acquired dealerships' operational and financial management, and thereby benefit from their market knowledge, name recognition and local reputation. Existing Markets. The Company seeks growth in its operations within existing markets by acquiring dealerships that increase the brands, products and services offered in those markets. These acquisitions should produce opportunities for additional operating efficiencies, promote increased name recognition and provide the Company with better opportunities for repeat and referral business. (Bullet) Pursue Opportunities in Ancillary Products and Services. The Company intends to pursue opportunities to increase its sales of higher-margin products and services by expanding its collision repair centers and its wholesale parts and after-market products businesses, which, other than after-market products, are not directly related to the new vehicle cycle. Collision Repair Centers. The Company's collision repair business provides favorable margins and is not significantly affected by economic cycles or consumer spending habits. The Company believes that because of the high capital investment required for collision repair shops and the cost of complying with environmental and worker safety regulations, large volume body shops will be more successful in the future than smaller volume shops. The Company believes that this industry will consolidate and that it will be able to expand its collision repair business. The Company currently has seven collision repair centers accounting for approximately $8.9 million in pro forma revenue for the year ended 1996. Wholesale Parts. Over time, the Company plans to capitalize on its growing representation of numerous manufacturers in order to increase its sales of factory authorized parts to wholesale buyers such as independent mechanical and body repair garages and rental and commercial fleet operators. After-Market Products. The Company intends to expand its offerings of after-market products in many of its dealership locations. After-market products, such as custom wheels, performance parts, telephones and other accessories, enable the dealership to capture incremental revenue on new and used vehicle sales. (Bullet) Enhance Profit Opportunities in Finance and Insurance. The Company offers its customers a wide range of financing and leasing alternatives for the purchase of vehicles, as well as credit life, accident and health and disability insurance and extended service contracts. As a result of its size and scale, the Company believes it will be able to negotiate with the lending institutions that purchase its financing contracts to increase the Company's revenues. Likewise, the Company expects to negotiate to increase the commissions it earns on extended service and insurance products. (Bullet) Increase Used Vehicle Sales. The Company believes that there will be opportunities to improve the used vehicle departments at several of its dealerships. The Company currently operates four standalone used vehicle facilities. In 1998, the Company intends to convert part of an existing facility in Nashville to a used vehicle facility. It also intends to develop used vehicle facilities in other markets where management believes opportunities exist. 4 Operating Strategy (Bullet) Operate Multiple Dealerships in Geographically Diverse Markets. The Company operates dealerships in Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta. By operating in several locations throughout the United States, the Company believes it will be better able to insulate its earnings from local economic downturns. In addition, the Company believes that by establishing a significant market presence in its operating regions, it will be able to provide superior customer service through a market-specific sales, service, marketing and inventory strategy. (Bullet) Achieve High Levels of Customer Satisfaction. Customer satisfaction has been and will continue to be a focus of the Company. The Company's personalized sales process is intended 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. Manufacturers can withhold approval of acquisitions if a dealer fails to maintain a minimum CSI score. Historically, the Company has not been denied Manufacturer approval of acquisitions based on CSI scores. To keep management focused on customer satisfaction, the Company includes CSI results as a component of its incentive compensation program. (Bullet) Train and Develop Qualified Management. Sonic requires all of its employees, from service technicians to regional vice presidents, to participate in in-house training programs. The Company leverages the experience of senior management, along with third party trainers from manufacturers, industry affiliates and vendors, to formally train all employees. This training is also a convenient and effective way to share best practices among the Company's employees at all levels of the various dealerships. The Company believes that its comprehensive training of all employees at every level of their career path offers the Company a competitive advantage over other dealership groups in the development and retention of its workforce. (Bullet) Offer a Diverse Range of Automotive Products and Services. Sonic offers a broad range of automotive products and services, including a wide selection of new and used vehicles, vehicle financing and insurance programs, replacement parts and maintenance and repair programs. Offering numerous new vehicle brands enables the Company to satisfy a variety of customers, reduces dependence on any one Manufacturer and reduces exposure to supply problems and product cycles. (Bullet) Capitalize on Efficiencies in Operations. Because management compensation is based primarily on dealership performance, expense reduction and operating efficiencies are a significant management focus. As the Company pursues its acquisition strategy, the Company's size and market presence should provide it with an opportunity to negotiate favorable contracts on such expense items as advertising, purchasing, bank financings, employee benefit plans and other vendor contracts. (Bullet) Utilize Professional Management Practices and Incentive Based Compensation Programs. As a result of Sonic's size and geographic dispersion, the Company's senior management has instituted a multi-tiered management structure to supervise effectively its dealership operations. In an effort to align management's interest with that of stockholders, a portion of the incentive compensation program for each officer, vice president and executive manager is provided in the form of Company stock options, with additional incentives based on the performance of individual profit centers. Sonic believes that this organizational structure, with room for advancement and the opportunity for equity participation, serves as a strong motivation for its employees. (Bullet) Apply Technology Throughout Operations. The Company believes that, with the customized technology it has introduced in certain markets, it has been able to improve its operations over time by integrating its systems into all aspects of its business. In these markets the Company uses computer-based technology to monitor its dealerships' operating performance and quickly adjust to market changes and to integrate computer systems into its sales, F&I and parts and service operations. The Company intends to expand this computer system into more of its dealerships and markets as existing contracts for computer systems expire. The Reorganization The Company was recently incorporated and capitalized with the stock of the automobile dealerships that have been under the control of Bruton Smith comprised of Town & Country Ford, Town & Country Toyota, Lone Star Ford, Fort Mill Ford and Frontier Oldsmobile-Cadillac (the "Sonic Dealerships"). As of June 30, 1997, the Company effected a reorganization (the "Reorganization") pursuant to which: (i) the Company acquired all of the capital stock or limited liability company interests of the Sonic Dealerships (the "Dealership Securities"); and (ii) the Company issued Class B Common Stock to the Smith Group in exchange for the Dealership Securities. In connection with the Reorganization and the Offering, the Company will convert from the last-in-first-out method (the "LIFO Method") of inventory accounting to the first-in-first-out method (the "FIFO Method") of inventory accounting (the "FIFO Conversion"), conditioned upon the closing of the Offering. In connection with the FIFO Conversion, and in accordance with generally accepted accounting principles, the accompanying financial information of the Company has been retroactively restated to reflect the FIFO Conversion. See "The Reorganization." 5 The Acquisitions In the past five months, the Company has consummated or signed definitive agreements to purchase six dealerships or dealership groups for an aggregate purchase price of approximately $94.8 million. These acquisitions consist of Ken Marks Ford located in Clearwater, Florida (the "Ken Marks Acquisition") (consummated on October 15, 1997), seven dealerships controlled by the Bowers Transportation Group in Chattanooga, Tennessee and one dealership in Nashville, Tennessee (the "Bowers Acquisition"), Lake Norman Dodge and Lake Norman Chrysler-Plymouth-Jeep-Eagle located in Cornelius, North Carolina (the "Lake Norman Acquisition") (consummated on September 29, 1997), Dyer & Dyer Volvo located in Atlanta, Georgia (the "Dyer Acquisition"), the acquisition of the assets of Jeff Boyd Chrysler-Plymouth-Dodge located in Fort Mill, South Carolina, by the Company's subsidiary, Fort Mill Chrysler-Plymouth-Dodge Inc. (the "Fort Mill Acquisition") (consummated on June 3, 1997), and the acquisition of the assets of Williams Motors located in Rock Hill, South Carolina, by the Company's subsidiary, Town and Country Chrysler-Plymouth-Jeep of Rock Hill, Inc. (the "Williams Acquisition") (consummated on October 10, 1997) (collectively, the "Acquisitions"). The dealerships underlying the Acquisitions had aggregate total revenues of approximately $490.1 million in 1996 and enhance the Company's market presence in the Southeast. See "The Acquisitions." The Company's principal executive office is located at 5401 East Independence Boulevard, Charlotte, North Carolina. Its mailing address is P.O. Box 18747, Charlotte, North Carolina 28218, and its telephone number is (704) 532-3301. The Offering Class A Common Stock Offered by the Company........... 5,000,000 shares (1) Class A Common Stock initially offered in: The U.S. Offering (1)............................... 4,000,000 shares The International Offering (1)...................... 1,000,000 shares Common Stock to be outstanding after the Offering: Class A Common Stock................................ 5,000,000 shares (1)(2) Class B Common Stock................................ 6,250,000 shares Total.......................................... 11,250,000 shares Voting Rights......................................... The Class A Common Stock and Class B Common Stock vote as a single class on all matters, except as otherwise required by law, with each share of Class A Common Stock entitling its holders to one vote and each share of Class B Common Stock entitling its holder to ten votes except with respect to certain limited matters. See "Description of Capital Stock." Use of proceeds....................................... The net proceeds of the Offering will be used to fund the Acquisitions, including repaying certain indebtedness incurred by the Company in connection with the Acquisitions already consummated. See "The Acquisitions" and "Use of Proceeds." Listing............................................... The Class A Common Stock has been approved for listing on the New York Stock Exchange (the "NYSE"), subject to offical notice of issuance, under the symbol "SAH."
- --------------- (1) Does not include up to an aggregate of 600,000 and 150,000 shares of Class A Common Stock, respectively, that may be sold by the Company upon exercise of the over-allotment options granted to the U.S. Underwriters and the International Managers. See "Underwriting." (2) Excludes (i) 1,125,000 shares of Class A Common Stock reserved for future issuance to Company employees under the Company's Stock Option Plan (as defined herein) (including up to 587,509 shares of Class A Common Stock reserved for issuance upon exercise of options to be granted on or before the consummation of the Offering pursuant to the Stock Option Plan), (ii) 150,000 shares of Class A Common Stock reserved for issuance to eligible Company employees under the Company's ESPP (as defined herein) and (iii) 42,187 shares of Class A Common Stock (45,000 shares if the U.S. Underwriters' and the International Managers' over-allotment options are exercised) reserved for issuance under the Dyer Warrant (defined herein). See "The Acquisitions -- The Dyer Acquisition" and "Management -- Stock Option Plan." Risk Factors The Company's ability to make acquisitions in the future may be limited to some extent by the Manufacturers. The Company is required to obtain Manufacturer approval for any acquisition in accordance with industry practice. Moreover, pursuant to Manufacturer policies currently in effect or their approvals of the transactions contemplated hereby, the Company could acquire no more than ten Chrysler dealerships in the United States, no more than the lesser of (i) 15 Ford and 15 Lincoln Mercury dealerships or (ii) that number of Ford and Lincoln Mercury dealerships accounting for 2% of the preceding year's retail sales of those brands in the United States, six additional Toyota dealerships, three Lexus dealerships, six additional Honda dealerships, three Acura dealerships and five additional GM dealerships (within the next two years, subject to increase under certain conditions). For additional information concerning these and other limitations on acquisitions imposed by the Manufacturers, see "Risk Factors -- Risks Associated with Acquisitions," " -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity" and " -- Manufacturers' Restrictions on Acquisitions." See "Risk Factors" beginning on page 9 for a discussion of other factors that should be considered by prospective purchasers of the Class A Common Stock offered hereby. 6 Summary Historical and Pro Forma Combined and Consolidated Financial Data The following Summary Historical and Pro Forma Combined and Consolidated Financial Data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Combined and Consolidated Financial Statements of the Company and the related notes and "Pro Forma Combined and Consolidated Financial Data" included elsewhere in this Prospectus. The Company acquired Fort Mill Ford, Inc. and Fort Mill Chrysler-Plymouth-Dodge in February 1996 and in June 1997, respectively. Both of these acquisitions were accounted for using the purchase method of accounting. As a result the Summary Historical Combined and Consolidated Financial Data below does not include the results of operations of these dealerships prior to the date they were acquired by the Company. Accordingly, the actual historical data for the periods after the acquisition may not be comparable to data presented for periods prior to the acquisitions of Fort Mill Ford and Fort Mill Chrysler-Plymouth-Dodge. Additionally, the Summary Historical and Pro Forma Combined and Consolidated Financial Data below is not necessarily indicative of the results of operations or financial position which would have resulted had the Reorganization, the Acquisitions and the Offering occurred during the periods presented. In connection with the FIFO Conversion, and in accordance with generally accepted accounting principles, the Summary Historical and Pro Forma Combined and Consolidated Financial Data has been retroactively restated to reflect the FIFO Conversion.
Six Months Ended Year Ended December 31, June 30, --------------------------------------------------------------- ------------------- Pro Actual Forma Actual ---------------------------------------------------- -------- ------------------- 1992 1993 1994 1995 1996(1) 1996(2) 1996(1) 1997(3) -------- -------- -------- -------- -------- -------- -------- -------- (in thousands, except per share and vehicles unit data) Combined and Consolidated Statement of Operations Data: Revenues: Vehicle sales...................... $171,065 $203,630 $227,960 $267,308 $326,842 $788,255 $164,333 $185,077 Parts, service and collision repair........................... 24,543 30,337 33,984 35,860 42,644 94,912 21,005 22,907 Finance and insurance.............. 3,743 3,711 5,181 7,813 7,118 16,471 4,277 4,763 -------- -------- -------- -------- -------- -------- -------- -------- Total revenues................... 199,351 237,678 267,125 310,981 376,604 899,638 189,615 212,747 Cost of sales........................ 174,713 208,445 233,011 270,878 331,047 786,129 167,191 188,422 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit......................... 24,638 29,233 34,114 40,103 45,557 113,509 22,424 24,325 Selling, general and administrative expenses........................... 20,251 22,738 24,632 29,343 33,677 85,856 16,590 18,413 Depreciation and amortization........ 682 788 838 832 1,076 3,510 360 396 -------- -------- -------- -------- -------- -------- -------- -------- Operating income..................... 3,705 5,707 8,644 9,928 10,804 24,143 5,474 5,516 Interest expense floor plan.......... 2,215 2,743 3,001 4,505 5,968 9,342 2,801 3,018 Interest expense, other.............. 290 263 443 436 433 3,171 184 269 Other income......................... 1,360 613 609 449 618 2,222 369 274 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes and minority interest.................. 2,560 3,314 5,809 5,436 5,021 13,852 2,858 2,503 Provision for income taxes........... 27 723 2,118 2,176 1,924 5,517 1,093 916 -------- -------- -------- -------- -------- -------- -------- -------- Income before minority interest...... 2,533 2,591 3,691 3,260 3,097 8,335 1,765 1,587 Minority interest in earnings (loss) of subsidiary...................... (31) (22) 15 22 114 -- 41 47 -------- -------- -------- -------- -------- -------- -------- -------- Net income........................... $ 2,564 $ 2,613 $ 3,676 $ 3,238 $ 2,983 $ 8,335 $ 1,724 $ 1,540 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income per share (4)............. $ 0.74 -------- -------- Pro Forma -------- 1997(2) -------- Combined and Consolidated Statement of Operations Data: Revenues: Vehicle sales...................... $418,624 Parts, service and collision repair........................... 49,881 Finance and insurance.............. 9,410 -------- Total revenues................... 477,915 Cost of sales........................ 419,492 -------- Gross profit......................... 58,423 Selling, general and administrative expenses........................... 43,574 Depreciation and amortization........ 1,662 -------- Operating income..................... 13,187 Interest expense floor plan.......... 5,241 Interest expense, other.............. 1,674 Other income......................... 1,247 -------- Income before income taxes and minority interest.................. 7,519 Provision for income taxes........... 2,815 -------- Income before minority interest...... 4,704 Minority interest in earnings (loss) of subsidiary...................... -- -------- Net income........................... $ 4,704 -------- -------- Net income per share (4)............. $ 0.42 -------- --------
Other Combined and Consolidated Operating Data: New vehicle units sold............... 8,060 9,429 9,686 10,273 11,693 24,206 6,027 6,553 Used vehicle units sold -- retail (5)................................ 3,892 4,104 4,374 5,172 5,488 13,475 2,836 2,638 New vehicle sales revenues........... $126,230 $152,525 $164,361 $186,517 $233,146 $540,505 $115,721 $137,069 Used vehicle sales revenues -- retail (5)................................ 33,636 37,742 47,537 60,766 68,054 181,787 35,200 32,666 Parts, service and collision repair sales revenues..................... 24,543 30,337 33,984 35,860 42,644 94,912 21,005 22,906 Gross profit margin.................. 12.4% 12.3% 12.8% 12.9% 12.1% 12.6% 11.8% 11.4% New vehicle gross margin............. 6.7% 6.9% 7.0% 7.3% 7.4% 7.4% 6.6% 6.5% Used vehicle gross margin (retail) (5)................................ 10.7% 10.5% 10.9% 9.5% 8.4% 9.2% 8.4% 8.5% Parts, service and collision repair gross margin....................... 36.3% 36.4% 35.9% 36.1% 36.5% 42.3% 35.8% 35.4%
New vehicle units sold............... 12,596 Used vehicle units sold -- retail (5)................................ 7,043 New vehicle sales revenues........... $285,143 Used vehicle sales revenues -- retail (5)................................ 96,249 Parts, service and collision repair sales revenues..................... 49,881 Gross profit margin.................. 12.2% New vehicle gross margin............. 7.3% Used vehicle gross margin (retail) (5)................................ 8.9% Parts, service and collision repair gross margin....................... 42.3%
As of As of June 30, 1997 December 31, ---------------------------- 1996 Actual Pro Forma -------------- -------- ---------------- Combined and Consolidated Balance Sheet Data: Working capital.............................................................. $ 19,780 $ 16,899 $ 41,382 Total assets................................................................. 110,976 120,384 295,139 Long-term debt............................................................... 5,286 5,137 36,980 Total liabilities............................................................ 84,367 91,978 208,242 Minority interest............................................................ 314 -- -- Stockholders' equity......................................................... 26,295 28,406 86,897
(footnotes on following page) 7 - --------------- (1) The actual statement of operations data for the year ended December 31, 1996 includes the results of Fort Mill Ford, Inc. from the date of acquisition, February 1, 1996. (2) For information regarding the pro forma adjustments made to the Company's historical financial data, which give effect to the Reorganization, the Acquisitions, and the Offering, see "Pro Forma Combined and Consolidated Financial Data." (3) The actual statement of operations data for the six months ended June 30, 1997 include the results of Fort Mill Chrysler-Plymouth-Dodge, Inc. from the date of acquisition June 3, 1997. (4) Historical net income per share is not presented, as the historical capital structure of the Company prior to the Offering is not comparable with the capital structure that will exist after the Offering. (5) The term "retail" describes sales to consumers as compared to sales to wholesalers. RECENT DEVELOPMENTS The Company's unaudited total revenues and gross profit for the nine months ended September 30, 1997 were $339.8 million and $39.2 million, respectively, representing increases of $56.4 million or 19.9% and $5.2 million or 15.4%, respectively, from the comparable 1996 period. These increases were primarily due to increases in sales from retail vehicles and parts, service, collision and repair services, along with additional revenues from the acquisitions of the Fort Mill Chrysler-Plymouth-Dodge, Lake Norman Chrysler-Plymouth-Jeep and Lake Norman Dodge dealerships. Operating income and net income for the nine months ended September 30, 1997 were $8.7 million and $2.5 million, respectively, representing increases of $0.8 million or 10.0% and $46,000 or 1.9%, respectively, primarily due to the increase in gross profit and the stability of selling, general and administrative expenses as a percentage of total revenues. Total revenues and gross profit for the third quarter ended September 30, 1997 were $127.1 million and $14.8 million, respectively, representing increases of $33.3 million or 35.4% and $3.3 million or 29.0%, respectively, from the comparable 1996 period. These increases were primarily due to increases in sales from retail vehicles and parts, service, collision and repair services, along with additional revenue from the acquisitions of the Fort Mill Chrysler-Plymouth-Dodge, Lake Norman Chrysler-Plymouth-Jeep and Lake Norman Dodge dealerships. Operating income and net income for the quarter ended September 30, 1997 were $3.2 million and $0.9 million, respectively, representing increases of $0.7 million or 30.4% and $0.2 million or 33.4%, respectively, primarily due to the increase in gross profit and a decrease in selling, general and administrative expenses as a percentage of total revenues. 8 RISK FACTORS Prospective investors should carefully consider and evaluate all of the information set forth in this Prospectus, including the principal risk factors set forth below. Dependence on Automobile Manufacturers Each of the Company's dealerships operates pursuant to a franchise agreement between the applicable automobile manufacturer (or authorized distributor thereof) (the "Manufacturer") and the subsidiary of the Company that operates such dealership. The Company is dependent to a significant extent on its relationship with such Manufacturers. After giving effect to the Reorganization and the Acquisitions, vehicles manufactured by Ford Motor Company ("Ford"), Chrysler Corporation ("Chrysler"), Volvo Motors ("Volvo") and Toyota Motor Sales (U.S.A.) ("Toyota") accounted for approximately 64.5%, 17.9%, 6.0% and 5.8%, respectively, of the Company's 1996 pro forma unit sales of new vehicles. No other Manufacturer accounted for more than 5% of the new vehicle sales of the Company during 1996. See "Business -- New Vehicle Sales," and " -- Relationships with Manufacturers." Accordingly, a significant decline in the sale of Ford, Chrysler, Toyota, or Volvo new cars could have a material adverse effect on the Company. Manufacturers exercise a great degree of control over the operations of the Company's dealerships. Each of the 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. The Company believes that it is in compliance in all material respects with all its franchise agreements. The Company has no reason to believe that it will not be able to renew all of its franchise agreements upon expiration, but there can be no assurance that any of such agreements will be renewed or that the terms and conditions of such renewals will be favorable to the Company. If a Manufacturer terminates or declines to renew one or more of the Company's significant franchise agreements, such action could have a material adverse effect on the Company and its business. Actions taken by Manufacturers to exploit their superior bargaining position in negotiating the terms of such renewals or otherwise could also have a material adverse effect on the Company. See "Business -- Relationships with Manufacturers." The Company also depends on the Manufacturers to provide it with a desirable mix of popular new vehicles that produce the highest profit margins and which may be the most difficult to obtain from the Manufacturers. If the Company is unable to obtain a sufficient allocation of the most popular vehicles, its profitability may be materially adversely affected. In some instances, in order to obtain additional allocations of these vehicles, the Company purchases a larger number of less desirable models than it would otherwise purchase and its profitability may be materially adversely affected thereby. The Company's dealerships depend on the Manufacturers for certain sales incentives and other programs that are intended to promote dealership sales or support dealership profitability. 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 the profitability of the Company. The success of each of the Company's dealerships depends to a great extent on the financial condition, marketing, vehicle design, production capabilities and management of the Manufacturers which the Company represents. 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 the Company. Similarly, the delivery of vehicles from Manufacturers later than scheduled, which may occur particularly during periods when new products are being introduced, can lead to reduced sales. Although, the Company has attempted to lessen its dependence on any one Manufacturer by establishing dealer relationships with a number of different domestic and foreign automobile Manufacturers, adverse conditions affecting Ford, Chrysler, Toyota and Volvo in particular, could have a material adverse affect on the Company. For instance, workers at a Chrysler engine plant went on strike in April 1997 for 29 days. The strike by the United Auto Workers caused Chrysler's vehicle production to drop during the Spring of 1997, especially for production of its most popular truck and van models. This strike materially affected the Company due to Chrysler's inability to provide the Company with a sufficient supply of new vehicles and parts during such period. In the event of another such strike, the Company may need to purchase inventory from other automobile dealers at prices higher than it would be required to pay to the Manufacturers in order to carry an adequate level and mix of inventory. Consequently, such events could materially adversely affect the financial results of the Company. See "Business -- New Vehicle Sales" and " -- Relationship with Manufacturers." 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 CSI. These Manufacturers may use a dealership's CSI scores as a factor in evaluating applications for additional dealership acquisitions and other matters such as vehicle inventory allocations. The components of CSI have been modified from time to time in the past, and there is no assurance that such components will not be further modified or replaced by different systems in the future. To date, the Company has not been adversely affected by these standards and has not been denied approval of any acquisition based on low CSI scores. However, there can be no assurance that the Company will be able to comply with such standards 9 in the future. Failure of the Company's dealerships to comply with the standards imposed by Manufacturers at any given time may have a material adverse effect on the Company. The Company must also obtain approvals by the applicable Manufacturer for any of its acquisitions. See " -- Risks Associated with Acquisitions." Competition Automobile retailing is a highly competitive business with over 22,000 franchised automobile dealerships in the United States at the beginning of 1996. The Company's competition includes franchised automobile dealerships selling the same or similar makes of new and used vehicles offered by the Company in the same markets as the Company and sometimes at lower prices than those of the Company. These dealer competitors may be larger and have greater financial and marketing resources than the Company. Other competitors include other franchised dealers, private market buyers and sellers of used vehicles, used vehicle dealers, service center chains and independent service and repair shops. Gross profit margins on sales of new vehicles have been declining since 1986. The Company has also had margin pressure on its used vehicle sales over the last 18 months. The used car market faces increasing competition from non-traditional outlets such as used-car "superstores," which use sales techniques such as one price shopping, and the Internet. Several groups have begun to establish nationwide networks of used vehicle superstores. In Charlotte and Atlanta, where the Company has significant operations, CarMax Superstores operate in competition with the Company. In addition, car superstores operate in many of the Company's other markets. "No negotiation" sales methods are also being tried for new cars by at least one of these superstores and by dealers for Saturn and other dealerships. Some recent market entrants may be capable of operating on smaller gross margins compared to the Company, and may have greater financial, marketing and personnel resources than the Company. In addition, certain Manufacturers, such as Ford, have publicly announced that they may directly enter the retail market in the future, which could have a material adverse effect on the Company. 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 margins. As the Company seeks to acquire dealerships in new markets, it may face increasingly significant competition (including from other large dealer groups and dealer groups that have publicly-traded equity) as it strives to gain market share through acquisitions or otherwise. The Company's franchise agreements do not give the Company the exclusive right to sell a Manufacturer's product within a given geographic area. The Company could be materially adversely affected if any of its Manufacturers award franchises to others in the same markets where the Company is operating. A similar adverse affect could occur if existing competing franchised dealers increase their market share in the Company's markets. The Company's gross margins may decline over time as it expands into markets where it does not have a leading position. These and other competitive pressures could materially adversely affect the Company's results of operations. See "Business -- Competition." Operating Condition of Acquired Businesses Although the Company has conducted what it believes to be a prudent level of investigation regarding the operating condition of the assets to be purchased in the Acquisitions in light of the circumstances of each transaction, certain unavoidable levels of risk remain regarding the actual operating condition of these assets. Until the Company actually assumes operating control of such assets, it will not be able to ascertain their actual value and, therefore, will be unable to ascertain whether the price paid for the Acquisitions represented a fair valuation. The same risk regarding the actual operating condition of businesses to be acquired will also apply to future acquisitions by the Company. Risks of Consolidating Operations as a Result of the Acquisitions In connection with the Acquisitions, Sonic is acquiring six dealerships or dealership groups. Each of these dealerships or groups has been operated and managed as a separate independent entity to date, and the Company's future operating results will depend on its ability to integrate the operations of these businesses and manage the combined enterprise. The Company's management group has been expanded in connection with these Acquisitions. There can be no assurance that the management group will be able to effectively and profitably integrate in a timely manner each of the dealerships included in the Acquisitions or any future acquisitions, or to manage the combined entity without substantial costs, delays or other operational or financial problems. The inability of the Company to do so could have a material adverse effect on the Company's business, financial condition and results of operations. Risks Associated with Acquisitions The retail automobile industry is considered a mature industry in which minimal growth is expected in unit sales of new vehicles. Accordingly, the Company's future growth will depend in large part on its ability to acquire additional dealerships as well as on its ability to manage expansion, control costs in its operations and consolidate dealership acquisitions, including the Acquisitions, into existing operations. In pursuing a strategy of acquiring other dealerships, including the Acquisitions, 10 the Company faces 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, disrupting the Company's ongoing business, dissipating the Company's limited management resources, failing to maintain uniform standards, controls and policies, impairing relationships with employees and customers as a result of changes in management and causing increased expenses for accounting and computer systems, as well as integration difficulties. Installing new computer systems has in the past disrupted existing operations as management and salespersons adjust to new technologies. In addition, as contracts with existing suppliers of the Company's computer systems expire, the Company's strategy may be to install new systems at its existing dealerships. The Company expects that it will take one to two years to fully integrate an acquired dealership into the Company's operations and realize the full benefit of the Company's strategies and systems. There can be no assurance that the Company will be successful in overcoming these risks or any other problems encountered with such acquisitions, including in connection with the Acquisitions. Acquisitions may also result in significant goodwill and other intangible assets that are amortized in future years and reduce future stated earnings. See "The Acquisitions," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Growth Strategy." Although there are many potential acquisition candidates that fit the Company's acquisition criteria, there can be no assurance that the Company 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 the Company and higher acquisition prices. The magnitude, timing 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, the Company's financial capabilities, the availability of skilled employees to manage the acquired companies and general economic and business conditions. In addition, the Company's future growth as a result of its acquisition of automobile dealerships will depend on its ability to obtain the requisite Manufacturer approvals. There can be no assurance that it will be able to obtain such consents in the future. See " -- Manufacturers' Restrictions on Acquisitions" and "Business -- Relationships with Manufacturers." In certain cases, the Company may be required to file applications and obtain clearances under applicable federal antitrust laws before consummation of an acquisition. These regulatory requirements may restrict or delay the Company's acquisitions, and may increase the cost of completing such transactions. Limitations on Financial Resources Available for Acquisitions; Possible Inability to Refinance Existing Debt The Company intends to finance acquisitions with cash on hand, through issuances of equity or debt securities and through borrowings under credit arrangements. The Company anticipates the borrowing limit under its long-term credit arrangements will be increased following consummation of the Offering, although no assurance can be given that any such increase will occur or that such increase will adequately meet the Company's future financing needs. Similarly, there is no assurance that the Company will be able to obtain additional debt or equity securities financing. Using cash to complete acquisitions could substantially limit the Company's operating or financial flexibility. Using stock to consummate acquisitions may result in significant dilution of stockholders' percentage interest in the Company, which dilution may be prohibited by the Company's franchise agreements with Manufacturers. See " -- Stock Ownership/Issuance Limits." If the Company is unable to obtain financing on acceptable terms, the Company may be required to reduce significantly the scope of its presently anticipated expansion, which could materially adversely affect the Company's business. See "The Acquisitions," "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Liquidity and Capital Resources" and "Business -- Growth Strategy." In addition, the Company is dependent to a significant extent on its ability to finance the purchase of inventory, which in the automotive retail industry involves significant sums of money in the form of floor plan financing. As of June 30, 1997 on a pro forma basis for the Acquisitions, the Company had approximately $142.2 million of floor plan indebtedness. Substantially all the assets of the Company's dealerships are pledged to secure such indebtedness, which may impede the Company's ability to borrow from other sources. Many floor plan lenders are associated with Manufacturers with whom the Company has franchise agreements. Consequently, deterioration of the Company's relationship with a Manufacturer could adversely affect its relationship with the affiliated floor plan lender and vice-versa. In addition, the Company must obtain new floor plan financing or obtain consents to assume such financing in connection with its acquisition of dealerships. See " -- Dependence on Automobile Manufacturers." The Company's obligations under the Six-Month Facility (as defined herein) are guaranteed by Bruton Smith, the Company's Chairman and Chief Executive Officer, which guarantee is secured by a pledge of shares of Speedway Motorsports, Inc. common stock owned by Bruton Smith. The Company's obligations under the Revolving Facility (as defined herein) are guaranteed by Bruton Smith and are secured by, among other things, a pledge of shares of Speedway Motorsports, Inc. 11 common stock owned by Sonic Financial Corporation ("Sonic Financial"). The Company currently intends to re-finance the Six-Month Facility (to the extent not repaid through proceeds of the Offering) with additional borrowings under the Revolving Facility, which the Company anticipates will be expanded from its current limit of $26.0 million to $75.0 million following the consummation of the Offering. (If net proceeds of the Offering to the Company are $70 million or greater, the guarantee of the Revolving Facility by Bruton Smith and the pledge of shares of Speedway Motorsports, Inc. common stock owned by Sonic Financial, will be released pursuant to the terms of the Revolving Facility. If net proceeds of the Offering to the Company are less than $70 million, Sonic Financial will be required to provide continued credit support for the Revolving Facility in the form of a pledge of shares of Speedway Motorsports, Inc. common stock owned by Sonic Financial equal in value to three times the amount of the shortfall between $70 million and the actual net proceeds of the Offering to the Company.) When the Company will need to refinance the Revolving Facility, there can be no assurance that Mr. Smith will agree to guarantee such debt or that the assets of Mr. Smith or Sonic Financial will be available to provide additional security under a new credit agreement, or that a new credit agreement could be arranged on terms as favorable as the terms of the Six-Month Facility or the Revolving Facility without a guarantee by, or pledge of the assets of, Mr. Smith or Sonic Financial. Stock Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity Standard automobile franchise agreements prohibit transfers of any ownership interests of a dealership and its parent, such as Sonic, and, therefore, often do not by their terms accommodate public trading of the capital stock of a dealership or its parent. While, prior to the Offering and as a condition thereto, all of the Manufacturers of which Company subsidiaries are franchisees will have agreed to permit the Offering and trading in the Class A Common Stock (except as described under " -- No Consent From Jaguar or KIA"), a number of Manufacturers will continue to impose restrictions upon the transferability of the Common Stock. Ford may cause the Company to sell or resign from one or more of its Ford franchises if any person or entity (other than members of the Smith Group) acquires 15% or more of the Company's voting securities. Likewise, General Motors, Toyota and Nissan Motor Corporation In U.S.A. ("Infiniti") may force the sale of their respective franchises if 20% of more of the Company's voting securities are so acquired. American Honda Co., Inc. ("Honda") may force the sale of the Company's Honda franchise if any person or entity, excluding members of the Smith Group, acquires 5% of the Common Stock (10% if such entity is an institutional investor), and Honda deems such person or entity to be unsatisfactory. Volkswagen of America, Inc. ("Volkswagen") has approved of the public sale of only 25% of the voting control of the Company and requires prior approval of any change in control or management of the Company that would affect the Company's control or management of its Volkswagen franchise subsidiaries. Chrysler also has approved of the public sale of only 50% of the Common Stock and requires prior approval of any future sales that would result in a change in voting or managerial control of the Company. Honda's approval of the Offering is subject to the Smith Group plus Nelson Bowers owning 51% of the shares of Common Stock on a fully-diluted basis. Upon consummation of the Offering, 48.9% of the Common Stock (on a fully diluted basis after giving effect to the options to be issued at the time of the Offering under the Stock Option Plan) will be owned by persons other than the Smith Group or Nelson Bowers (assuming full exercise of the Underwriters' over-allotment option). Accordingly, the Company will not be able to issue additional shares of Common Stock (in connection with an acquisition or otherwise) or options without the consent of Honda and Chrysler or being in violation of such dealership agreement. See "Business -- Relationships with Manufacturers." In a similar manner, the lending arrangements the Company has recently obtained require that voting control over the Company be maintained by the Smith Group. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Any transfer of shares of the Company's Common Stock, including a transfer by members of the Smith Group, will be outside the control of the Company and, if such transfer results in a change in control of the Company, could result in the termination or non-renewal of one or more of its franchise agreements and in a default under its credit arrangements. Moreover, these issuance limitations may impede the Company's ability to raise capital through additional equity offerings or to issue Common Stock as consideration for, and therefore, to consummate, future acquisitions. Such restrictions also may prevent or deter prospective acquirors from acquiring control of the Company and, therefore, may adversely impact the Company's equity value. See " -- Limitations on Financial Resources Available for Acquisitions; Possible Inability to Refinance Existing Debt." The Company has contractual obligations to provide "piggyback" registration rights to holders of Class B Common Stock to register their shares under the Securities Act under certain circumstances. Additionally, such shares will become in the future, eligible for sale pursuant to the terms of Rule 144 promulgated under the Securities Act ("Rule 144"). See "Certain Transactions -- Registration Rights Agreement" and "Shares Eligible for Future Sale." The Company will also issue certain stock options prior to consummation of the Offering. See "Management -- Stock Option Plan." Manufacturers' Restrictions on Acquisitions The Company is required to obtain the consent of the applicable Manufacturer prior to the acquisition of any additional dealership franchises. There can be no assurance that Manufacturers will grant such approvals. Obtaining the consent of the Manufacturers for acquisitions of dealerships could also take a significant amount of time. Obtaining the approvals of the Manufacturers for the Acquisitions has taken approximately five months. Although no assurances can be given, the Company 12 believes that Manufacturer approvals of subsequent acquisitions from Manufacturers with which the Company has previously completed applications and agreements may take less time. The Company has received the approval of all of the applicable Manufacturers in connection with the Acquisitions except Jaguar Cars, a division of Ford ("Jaguar") and Kia Motors America, Inc. ("KIA"). If the Company experiences delays in obtaining, or fails to obtain, approvals of the Manufacturers for acquisitions of dealerships, the Company's growth strategy could be materially adversely affected. In determining whether to approve an acquisition, the Manufacturers may consider many factors, including the moral character, business experience, financial condition, ownership structure and CSI scores of the Company and its management. 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 the Company seeks to acquire a dealership franchise. In addition, a Manufacturer may limit the number of such Manufacturers' dealerships that may be owned by the Company or the number that may be owned in a particular geographic area. For example, Ford currently limits the Company to no more than the lesser of (i) 15 Ford and 15 Lincoln Mercury dealerships or (ii) that number of Ford and Lincoln Mercury dealerships accounting for 2% of the preceding year's retail sales of those brands in the United States. It also limits the Company to owning only one Ford dealership in any market area, as defined by Ford, having three or less Ford dealerships in it and no more than 25% of the Ford dealerships in a market area having four or more Ford dealerships. Chrysler has asked the Company to defer any further acquisitions of Chrysler or Chrysler division dealerships until it has established a proven performance record with the Chrysler dealerships it owns or is acquiring in the Acquisitions. BMW has made a similar request. Moreover, Chrysler has recently announced its general policy of limiting ownership to ten Chrysler dealerships in the United States, six Chrysler dealerships in the same sales zone, as determined by Chrysler, and two dealerships in the same market (but no more than one like vehicle line brand in the same market). Toyota currently limits the number of dealerships which may be owned by any one group to seven Toyota and three Lexus dealerships nationally and restricts the number of dealerships that may be owned to (i) the greater of one dealership, or 20% of the Toyota dealer count in a "Metro" market (as defined by Toyota), (ii) the lesser of five dealerships or 5% of the Toyota dealerships in any Toyota region (currently 12 geographic regions), and (iii) two Lexus dealerships in any one of the four Lexus geographic areas. Toyota further requires that at least nine months elapse between acquisitions. Similarly, it is currently the policy of Honda to restrict any company from holding more than seven Honda or more than three Acura franchises nationally and to restrict the number of franchises to (i) one Honda dealership in a "Metro" market (a metropolitan market represented by two or more Honda dealers) with two to 10 Honda dealership points, (ii) two Honda dealerships in a Metro market with 11 to 20 Honda dealership points, (iii) three Honda dealerships in a Metro market with 21 or more Honda dealership points, (iv) no more than 4% of the Honda dealerships in any one of the 10 Honda geographic zones, (v) one Acura dealership in a Metro market (a metropolitan market with two or more Acura dealership points), and (vi) two Acura dealerships in any one of the six Acura geographic zones. Toyota and Honda also prohibit ownership of contiguous dealerships and the coupling of a franchise with any other brand without their consent. General Motors Corporation ("GM" or "General Motors") has limited the number of GM dealerships that the Company may acquire during the next two years to five additional GM dealership locations, which number may be increased on a case-by-case basis. In addition, GM limits the maximum number of GM dealerships that the Company may acquire to 50% of the GM dealerships, by franchise line, in a GM-defined geographic market area having multiple GM dealers. As a condition to granting their consent to the Acquisitions, a number of Manufacturers have also imposed certain other restrictions on the Company. In addition to the restrictions under " -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity" above, these restrictions principally consist of restrictions on (i) certain material changes in the Company or extraordinary corporate transactions such as a merger, sale of a material amount of assets or change in the Board of Directors or management of the Company which could have a material adverse effect on the Manufacturer's image or reputation or could be materially incompatible with the Manufacturer's interests; (ii) the removal of a dealership general manager without the consent of the Manufacturer; and (iii) the use of dealership facilities to sell or service new vehicles of other manufacturers. If the Company is unable to comply with these restrictions, the Company generally must (i) sell the assets of the dealerships to the Manufacturer or to a third party acceptable to the Manufacturer, or (ii) terminate the dealership agreements with the Manufacturer. Other manufacturers may impose other and more stringent restrictions in connection with future acquisitions. The Company owns, after giving effect to the Reorganization and the Acquisitions, five Ford dealerships, six Chrysler dealerships, two BMW dealerships, two Volvo dealerships, two Volkswagen dealerships and one dealership each of GM, Toyota, Honda, Jaguar, Infiniti and KIA. No Consent from Jaguar or KIA The Company has not entered into any agreement with respect to the approval by (a) Jaguar of the proposed acquisition of the assets of the Jaguar of Chattanooga dealership (the "Jaguar Dealership") or (b) KIA of the proposed acquisition of the assets of the KIA of Chattanooga dealership (the "KIA Dealership") by the Company as a part of the Bowers Acquisition. The Company and each of Jaguar and KIA are continuing to negotiate with respect to this matter, although no assurance can 13 be given that such negotiations will result in an arrangement that is favorable to the Company. If Jaguar or KIA refuses to give its approval to the Company, the Company may not be able to acquire the Jaguar Dealership or the KIA Dealership, as the case may be. The Jaguar Dealership and the KIA Dealership each accounted for less than 1% of the Company's 1996 pro forma revenues and profits, respectively. Potential Conflicts of Interest Bruton Smith, the Chairman and Chief Executive Officer of the Company, will continue to serve as the Chairman and Chief Executive Officer of Speedway Motorsports. Accordingly, the Company will compete with Speedway Motorsports for the management time of Mr. Smith. Under his employment agreement with the Company, Mr. Smith is required to devote approximately 50% of his business time to the affairs of the Company. The remainder of his business time may be devoted to other entities including Speedway Motorsports. The Company has in the past and will likely in the future enter into transactions with entities controlled by either Mr. Smith, Nelson Bowers or Ken Marks or other affiliates of the Company. The Company believes that all of these arrangements are favorable to the Company and were entered into on terms that, taken as a whole, reflect arms'-length negotiations, although certain lease provisions included in such transactions may be at below-market rates. Since no independent appraisals evaluating these business transactions were obtained, there can be no assurance that such transactions are on terms no less favorable than could have been obtained from unaffiliated third parties. Certain of the existing arrangements will continue after the Offering. Potential conflicts of interest could also arise in the future between the Company and these affiliated parties in connection with the enforcement, amendment or termination of these arrangements. See "Certain Transactions." The Company anticipates renegotiating its leases with all related parties at lease expiration at fair market rentals, which may be higher than current rents. For further discussion of these related party leases, see "Certain Transactions -- Certain Dealership Leases." In addition to his interest and responsibilities with the Company, Nelson Bowers has ownership interests in several non-Company entities, including a Toyota dealership in Cleveland, Tennessee, an auto body shop in Chattanooga, Tennessee a used-car auction house and a Saturn dealership in Chattanooga, Tennessee which he may negotiate to sell back to the manufacturer. These enterprises are involved in businesses that are related to, and that compete with, the businesses of the Company. Pursuant to his employment agreement, Mr. Bowers is not permitted to participate actively in the operation of those businesses (other than the Saturn dealership) and is only permitted to maintain a passive investment in these enterprises. Under the General Corporation Law of Delaware ("Delaware Law") generally, a corporate insider is precluded from acting on a business opportunity in his individual capacity if that opportunity is one which the corporation is financially able to undertake, is in the line of the corporation's business, is of practical advantage to the corporation and is one in which the corporation has an interest or reasonable expectancy. Accordingly, corporate insiders are generally required to engage in new business opportunities of the Company only through the Company unless a majority of the Company's disinterested directors decide under the standards discussed above that it is not in the best interest of the Company to pursue such opportunities. The Company's Amended and Restated Certificate of Incorporation (the "Certificate") contains provisions providing that transactions between the Company and its affiliates must be no less favorable to the Company than would be available in corporate transactions in arms'-length dealing with an unrelated third party. Moreover, any such transactions involving aggregate payments in excess of $500,000 must be approved by a majority of the Company's directors and a majority of the Company's independent directors. Otherwise, the Company 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. Lack of Independent Directors As of the date hereof, all of the members of the Company's Board of Directors are employees and/or majority shareholders of the Company or affiliates thereof. Although the Company intends to appoint at least two independent directors following completion of the Offering, such directors will not constitute a majority of the Board, and the Company's Board may not have a majority of independent directors in the future. In the absence of a majority of independent directors, the Company's executive officers, who also are principal stockholders and directors, could establish policies and enter into transactions without independent review and approval thereof, subject to certain restrictions under the Certificate. In addition, although the Company intends to establish audit and compensation committees which will consist entirely of outside directors, until those committees are established, audit and compensation policies could be approved without independent review. These and other transactions could present the potential for a conflict of interest between the Company and its stockholders generally and the controlling officers, stockholders or directors. See "Management." 14 Dependence on Key Personnel and Limited Management and Personnel Resources The Company's success depends to a significant degree upon the continued contributions of its management team (particularly its senior management) and service and sales personnel. Additionally, Manufacturer franchise agreements require the prior approval of the applicable Manufacturer before any change is made in franchise general managers. For instance, Volvo has required that Nelson Bowers and Richard Dyer maintain a 20% interest in, and be the general managers of, the Company's Volvo dealerships formerly owned by them. Consequently, the loss of the services of one or more of these key employees could have a material adverse effect on the Company. Although the Company has employment agreements with Bruton Smith, Bryan Scott Smith, Nelson Bowers, Theodore M. Wright, O. Ken Marks, Jr. and Jeffrey C. Rachor, the Company will not have employment agreements in place with other key personnel. In addition, as the Company expands it may need to hire additional managers and will likely be dependent on the senior management of any businesses acquired. The market for qualified employees in the industry and in the regions in which the Company operates, particularly for general managers and sales and service personnel, is highly competitive and may subject the Company to increased labor costs in 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 the Company. In addition, the lack of qualified management or employees employed by the Company's potential acquisition candidates may limit the Company's ability to consummate future acquisitions. See "Business -- Growth Strategy," "Business -- Competition" and "Management." Mature Industry; Cyclical and Local Nature of Automobile Sales The United States automobile dealership industry generally is considered a mature industry in which minimal growth is expected in unit sales of new vehicles. As a consequence, growth in the Company's revenues and earnings are likely to be significantly affected by the Company's success in acquiring and integrating dealerships and the pace and size of such acquisitions. See " -- Risks Associated with Acquisitions" and "Business -- Growth Strategy." The automobile industry is cyclical and historically has experienced periodic downturns characterized by oversupply and weak demand. Many factors affect the industry, including general economic conditions and consumer confidence, the level of discretionary personal income, interest rates and credit availability. For the six months ended June 30, 1997, industry retail sales were down 2% as a result of retail car sales declines of 5.3% and retail truck sales gains of 2.4% from the same period in 1996. Future recessions may have a material adverse effect on the Company's business. Local economic, competitive and other conditions also affect the performance of dealerships. The Sonic Dealerships are located in the Charlotte and Houston markets. Pursuant to the Acquisitions, the Company is acquiring dealerships in the metropolitan areas of Charlotte, Chattanooga, Nashville, Tampa-Clearwater and Atlanta. While the Company intends to pursue acquisitions outside of these markets, the Company expects that the majority of its operations will continue to be concentrated in these areas for the foreseeable future. As a result, the Company's results of operations will depend substantially on general economic conditions and consumer spending habits in the Southeast and, to a lesser extent, in the Houston market, as well as various other factors, such as tax rates and state and local regulations, specific to North Carolina, Tennessee, Florida, Texas, Georgia and South Carolina. There can be no assurance that the Company will be able to expand geographically, or that any such expansion will adequately insulate it from the adverse effects of local or regional economic conditions. See "Business -- Growth Strategy." Seasonality The Company's business is seasonal, with a disproportionate amount of revenues occurring in the second, third and fourth fiscal quarters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Imported Product Restrictions and Foreign Trade Risks Certain motor vehicles retailed by the Company, as well as certain major components of vehicles retailed by the Company, are of foreign origin. Accordingly, the Company is subject to the import and export restrictions of various jurisdictions and is dependent to some extent upon general economic conditions in and political relations with a number of foreign countries, particularly Japan and Sweden. Additionally, fluctuations in currency exchange rates may adversely affect the Company's 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. Adverse Effect of Governmental Regulation; Environmental Regulation Compliance Costs The Company is subject to a wide range of federal, state and local laws and regulations, such as local licensing requirements, and consumer protection laws. The violation of these laws and regulations can result in civil and criminal penalties being levied against the Company or in a cease and desist order against Company operations that are not in compliance. Future acquisitions by the Company may also be subject to regulation, including antitrust reviews. The Company believes 15 that it complies in all material respects with all laws and regulations applicable to its business, but future regulations may be more stringent and require the Company to incur significant additional costs. The Company's 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 storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials and the remediation of contamination associated with such disposal. Certain of these laws and regulations may impose joint and several liability on certain statutory classes of persons for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. These persons include the present or former owner or operator of a contaminated property and companies that generated, disposed of or arranged for the disposal of hazardous substances found at the property. Past and present business operations of the Company subject to such laws and regulations include the use, storage handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. The Company is subject to other laws and regulations as a result of the past or present existence of underground storage tanks at many of the Company's properties. The Company, like many of its competitors, has 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 exist at certain of the Company's properties, and there can be no assurance that other properties have not been contaminated by any leakage from underground storage tanks or by any spillage or other releases of hazardous or toxic substances or wastes. Certain laws and regulations, including those governing air emissions and underground storage tanks, have been amended so as to require compliance with new or more stringent standards as of future dates. The Company 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. Compliance with new or more stringent laws or regulations, stricter interpretation of existing laws or the future discovery of environmental conditions may require additional expenditures by the Company, some of which may be material. See "Business -- Governmental Regulations and Environmental Matters." Concentration of Voting Power and Anti-takeover Provisions The Common Stock is divided into two classes with different voting rights, which allows for the maintenance of control of the Company by the holders of the Class B Common Stock. Holders of Class A Common Stock are entitled to one vote per share on all matters submitted to a vote of the stockholders of the Company. Holders of Class B Common Stock are entitled to ten votes per share on all matters, except that the Class B Common Stock is entitled to only one vote per share with respect to any transaction proposed or approved by the Company's Board of Directors, proposed by or on behalf of the holders of the Class B Common Stock or their affiliates or as to which any members of the Smith Group or any affiliate thereof has a material financial interest (other than as a then existing stockholder of the Company) constituting a (a) "going private" transaction (as defined herein), (b) disposition of substantially all of the Company's assets, (c) transfer resulting in a change in the nature of the Company's business, or (d) merger or consolidation in which current holders of Common Stock would own less than 50% of the Common Stock following such transaction. The two classes vote together as a single class on all matters, except where class voting is required by Delaware Law, which exception would apply, among other situations, to a vote on any proposal to modify the voting rights of the Class A Common Stock. See "Description of Capital Stock." Upon completion of this Offering (assuming the Underwriters' over-allotment option is not exercised), the existing holders of Class B Common Stock will have approximately 92.6% of the combined voting power of the Common Stock (in those circumstances in which the Class B Common Stock has ten votes per share) and 55.6% of the outstanding Common Stock. Accordingly such holders of Class B Common Stock will effectively have the ability to elect all of the directors of the Company and to control all other matters requiring the approval of the Company's stockholders. In addition, the Company may issue additional shares of Class B Common Stock to members of the Smith Group in the future for fair market value. See "Principal Stockholders." The disproportionate voting rights of the Class B Common Stock under the above-mentioned circumstances could have a material adverse effect on the market price of the Class A Common Stock. Such disproportionate voting rights may make the Company a less attractive target for a takeover than it otherwise might be, or render more difficult or discourage a merger proposal, a tender offer or a proxy contest, even if such actions were favored by a majority of the holders of the Class A Common Stock. 16 Certain provisions of the Certificate and the Company's Bylaws make it more difficult for stockholders of the Company to effect certain corporate actions. See "Description of Capital Stock -- Delaware Law, Certain Charter and Bylaw Provisions and Certain Franchise Agreement Provisions." Under the Company's Stock Option Plan, options outstanding thereunder become immediately exercisable upon a change in control of the Company. See "Management -- Employment Agreements" and " -- Stock Option Plan." The agreements, corporate documents and laws described above, as well as provisions of the Company's franchise agreements described in " -- Dependence on Automobile Manufacturers" and " -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity" above (permitting Manufacturers to terminate such agreements upon a change of control) and provisions of the Company's lending arrangements described in " -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity" above (creating an event of default thereunder upon a change in control), may have the effect of delaying or preventing a change in control of the Company or preventing stockholders from realizing a premium on the sale of their shares of Class A Common Stock upon an acquisition of the Company. The Certificate authorizes the Board of Directors of the Company to issue three million shares of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights or preferences that could adversely affect the voting power or other rights of the holders of the Class A Common Stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying, or preventing a change in control of the Company. The issuance of preferred stock could also prevent stockholders from realizing a premium upon the sale of their shares of Class A Common Stock upon an acquisition of the Company. Although the Company has no present intention to issue any shares of its preferred stock, there can be no assurance that the Company will not do so in the future. See "Description of Capital Stock." Additionally, the Company's Bylaws provide: (i) for a Board of Directors divided into three classes serving staggered terms; (ii) that special meetings of stockholders may be called only by the Chairman or by the Company's Secretary or Assistant Secretary at the request in writing of a majority of the Board of Directors; (iii) that no stockholder action may be taken by written consent; and (iv) that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or a special meeting of stockholders, must provide timely notice thereof in writing. These provisions will impair the stockholders' ability to influence or control the Company or to effect a change in control of the Company, and may prevent stockholders from realizing a premium on the sale of their shares of Class A Common Stock upon an acquisition of the Company. See "Description of Capital Stock." No Prior Public Market for Class A Common Stock and Possible Volatility of Stock Price Prior to the Offering, there has been no public market for the Class A Common Stock. The Class A Common Stock has been approved for listing on the NYSE, subject to official notice of issuance. The initial public offering price of the Class A Common Stock will be determined by negotiations among the Company and representatives of the Underwriters. See "Underwriting." There can be no assurance that the market price of the Class A Common Stock prevailing at any time after this Offering will equal or exceed the initial public offering price or that an active trading market will be developed after the Offering or, if developed, that it will be sustained. Quarterly and annual operating results of the Company, variations between such results and the results expected by investors and analysts, changes in local or general economic conditions or developments affecting the automobile industry, the Company or its competitors could cause the market price of the Class A Common Stock to fluctuate substantially. As a result of these factors, as well as other factors common to initial public offerings, the market price could fluctuate substantially from the initial offering price. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations, which could adversely effect the market price for the Class A Common Stock without regard to the financial performance of the Company. Dilution Purchasers of Class A Common Stock in the Offering will experience immediate and substantial dilution in the amount of $11.59 per share in net tangible book value per share from the initial offering price. See "Dilution." Potential Adverse Market Price Effect of Additional Shares Eligible for Future Sale The 6,250,000 shares of Class B Common Stock owned beneficially by existing stockholders of the Company, the 587,509 shares of Class A Common Stock underlying options to be granted by the Company under the Stock Option Plan on or before the consummation of the Offering and the 42,187 shares of Class A Common Stock (45,000 shares if the Underwriter's over-allotment option is exercised in full) underlying the Dyer Warrant (as defined herein), are "restricted securities" as defined in Rule 144 under the Securities Act, and may in the future be resold in compliance with Rule 144. See "Management -- Stock Option Plan" and "The Acquisitions -- The Dyer Acquisition." In addition, 6,250,000 shares of Common Stock constituting restricted securities are subject to certain piggyback registration rights. See "Certain Transactions -- Registration Rights Agreements." No prediction can be made as to the effect that resale of shares of Common Stock, or the 17 availability of shares of Common Stock for resale, will have on the market price of the Class A Common Stock prevailing from time to time. The resale of substantial amounts of Common Stock, or the perception that such resales may occur, could materially and adversely affect prevailing market prices for the Common Stock and the ability of the Company to raise equity capital in the future. The Company has agreed, subject to certain exceptions, not to issue, and all executive officers of the Company and all owners of the Class B Common Stock have agreed not to resell, any shares of Common Stock or other equity securities of the Company for 180 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. See "Management -- Stock Option Plan," "Shares Eligible for Future Sale" and "Underwriting." 18 THE REORGANIZATION The Company was incorporated in 1997 and capitalized with the stock of the Sonic Dealerships, which have been under the control of Bruton Smith and which are comprised of Town & Country Ford, Town & Country Toyota, Lone Star Ford, Fort Mill Ford and Frontier Oldsmobile-Cadillac. As of June 30, 1997, the Company effected the Reorganization pursuant to which: (i) the Company acquired all of the Dealership Securities; and (ii) the Company issued Class B Common Stock in exchange for the Dealership Securities. See "Certain Transactions -- Other Transactions." Subsequent to the Reorganization, the Company will convert from the LIFO Method of inventory accounting to the industry standard FIFO Method of inventory accounting, conditioned upon the closing of the Offering. In connection with the FIFO Conversion, and in accordance with generally accepted accounting principles, the accompanying financial information of the Company has been retroactively restated to reflect the FIFO Conversion. As a result of the Reorganization, the historical combined financial information included in this Prospectus is not necessarily indicative of the results of operations, financial position and cash flows of the Company in the future or of those which would have resulted had the Reorganization been in effect during the periods presented in the Company's Combined and Consolidated Financial Statements included elsewhere in this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." THE ACQUISITIONS In the last four months, the Company has consummated or signed definitive agreements to purchase six additional dealerships or dealership groups for an aggregate purchase price of approximately $94.8 million. These acquisitions consist of the Ken Marks Acquisition (consummated on October 15, 1997), the Bowers Acquisition, the Lake Norman Acquisition (consummated on September 29, 1997), the Dyer Acquisition, the Fort Mill Acquisition (consummated on June 3, 1997) and the Williams Acquisition (consummated on October 10, 1997). The closing of the Offering is contingent upon the Company consummating the remaining Acquisitions. The Company intends to use the proceeds from the Offering to pay the purchase prices of the remaining Acquisitions and to repay certain of the indebtedness incurred in connection with the consummated Acquisitions. See "Use of Proceeds." In addition, the Company intends to refinance all of the floor plan indebtedness of the dealerships being acquired in the Acquisitions. The following table sets forth the sources and uses of funds for financing of the Acquisitions after giving effect to the Offering:
(in millions) Sources of funds: The Six-Month Facility(a).................................................. $ 3.3 The Revolving Facility..................................................... 26.0 The Bowers Note (as defined below)......................................... 4.0 Class A Common Stock offered hereby(b)..................................... 58.5 Existing escrows(c)........................................................ 3.0 ------------- Total................................................................... $ 94.8 ------------- ------------- Uses of funds: The Ken Marks Acquisition(d)............................................... $ 25.5 The Bowers Acquisition..................................................... 27.6 The Lake Norman Acquisition(e)............................................. 18.2 The Dyer Acquisition(f).................................................... 18.0 The Fort Mill Acquisition(g)............................................... 3.7 The Williams Acquisition................................................... 1.8 ------------- Total................................................................... $ 94.8 ------------- -------------
(footnotes on following page) 19 - --------------- (a) The Company initially borrowed $20 million under this facility to fund the Lake Norman Acquisition and the Williams Acquisition, approximately $16.7 million of which is anticipated to be repaid with the proceeds of the Offering assuming the shares are sold at the mid-point of the range set forth on the front cover of this Prospectus. (b) Represents net proceeds assuming Class A Common Stock is sold at the mid-point of the range set forth on the front cover of this Prospectus. To the extent the Class A Common Stock is sold below such mid-point, borrowings under the Revolving Facility or the Six-Month Facility will be adjusted. (c) Pursuant to the Ken Marks Acquisition, the Lake Norman Acquisition, the Bowers Acquisition, and the Dyer Acquisition, $0.5 million, $0.5 million, $1.0 million and $1.0 million, respectively, has been deposited by Sonic into escrow accounts. (d) The Ken Marks Acquisition was financed with the proceeds of the Company's initial borrowing under the Revolving Facility. (e) The Lake Norman Acquisition was financed with the proceeds of the Six-Month Facility. (f) Does not include the Dyer Warrant. See footnote 2 to the Pro Forma Combined and Consolidated Balance Sheet as of June 30, 1997. (g) $3.5 million of the purchase price for the Fort Mill Acquisition was initially funded from the proceeds of a loan from Bruton Smith. This loan will be repaid from the proceeds of the Offering. The Ken Marks Acquisition. Ken Marks Ford is located in Clearwater, Florida. Ken Marks, Jr., together with the other stockholders of Ken Marks Ford, and the Company entered into a definitive stock purchase agreement in July 1997, providing for the acquisition by the Company of all of the outstanding stock of Ken Marks Ford. Ken Marks Ford had retail sales of approximately 4,369 new and 1,764 used vehicles, had aggregate revenues of approximately $148.4 million in 1996, and, based on revenues, is one of the 20 largest Ford dealerships in the United States. This acquisition further implements the Company's growth strategy by adding a well-managed dealership with significant presence in a new market. Ken Marks, Jr., with over 13 years of automotive retailing experience in central Florida, will continue to serve as the Executive Manager of Ken Marks Ford and will join the senior management team of the Company as the Regional Vice President for Florida. In the Ken Marks Acquisition, consummated on October 15, 1997, the Company purchased all of the outstanding capital stock of Ken Marks Ford for a total of approximately $25.5 million. At closing, the Company paid the stockholders of Ken Marks Ford the sum of approximately $25.5 million (of which $0.5 million will be paid to certain employees of Ken Marks Ford in the form of stay bonuses), less $0.5 million which was deposited into escrow for certain contingencies. The $25.5 million sum will be adjusted downward to the extent that the net book value of Ken Marks Ford as of the closing is ultimately determined to be less than approximately $5.1 million. Ken Marks Ford will continue to lease its facilities from an affiliate of the original stockholders of Ken Marks Ford. See "Business -- Facilities" and "Certain Transactions -- Certain Dealership Leases." The Bowers Acquisition. European Motors of Nashville (a BMW and Volkswagen dealership), European Motors (a BMW and Volvo dealership), Jaguar of Chattanooga (a Jaguar and Infiniti dealership), Cleveland Chrysler-Plymouth-Jeep-Eagle, Nelson Bowers Dodge, Cleveland Village Imports (a Honda dealership), Nelson Bowers Ford, L.P. and KIA of Chattanooga (a KIA and Volkswagen dealership) (collectively, the "Bowers Dealerships") and the Company, as well as the persons and entities controlling the Bowers Dealerships, have entered into a definitive asset purchase agreement dated as of June 24, 1997. The Bowers Dealerships are located in the Chattanooga, Tennessee metropolitan area, with the exception of European Motors of Nashville, which is located in Nashville, Tennessee. The Bowers Dealerships had retail sales of approximately 2,331 new and 1,777 used vehicles, and had aggregate revenues of approximately $101.5 million in 1996. The Bowers Dealerships estimate that their combined market share of total new vehicle unit sales in the Chattanooga metropolitan market was approximately 9.1% for 1996. This acquisition serves the Company's growth strategy by adding a group of well-managed dealerships with a substantial portion of its sales in luxury vehicles. Nelson Bowers, the Bowers Dealerships' chief executive, and Jeffrey Rachor, their chief operating officer, have over 20 and 10 years of experience in the automotive industry, respectively. Mr. Bowers will join the Company's senior management team as Executive Vice President. Mr. Rachor will be the Company's Regional Vice President for the Mid-South region, which includes Tennessee, Georgia, Kentucky and Alabama. The Company will acquire substantially all the Bowers Dealerships' assets, excluding real property, and assume substantially all the liabilities associated with the purchased assets. For the Bowers Acquisition, the Company agreed to pay up to $27.6 million. At closing, the Company will pay $22.6 million in cash to the sellers and will deposit $1.0 million into an escrow account, all subject to certain potential downward adjustments based on the net book value of the purchased assets and assumed liabilities as of the closing. The balance (up to $4.0 million) of the purchase price will be evidenced by the 20 Company's promissory notes that will be payable in 28 equal quarterly installments and will bear interest at NationsBank's prime rate less 0.5% (the "Bowers Note"). The sellers or their affiliates will retain ownership of certain real property underlying some of the dealerships and will lease such property to the Company. See "Business -- Facilities" and "Certain Transactions -- Certain Dealership Leases." In the event the Company fails to close the Bowers Acquisition by November 21, 1997, it has agreed to pay a termination fee. Volvo's consent to the Company's acquisition of the European Motors' Volvo franchise assets requires that Mr. Bowers maintain a 20% interest in, and serve as the manager of, the Company's Volvo franchisee subsidiary operating the European Motors' Volvo assets. See "Certain Transactions -- The Bowers Note." The Lake Norman Acquisition. Lake Norman Chrysler-Plymouth-Jeep-Eagle and Lake Norman Dodge (collectively, the "Lake Norman Dealerships") are both located in Cornelius, North Carolina approximately 20 miles north of Charlotte. The Lake Norman Dealerships had retail sales of approximately 3,572 new and 2,320 used vehicles, and had aggregate revenues of approximately $137.7 million in 1996. The existing management of the Lake Norman Dealerships will continue with the Company. On September 29, 1997, the Company acquired substantially all the Lake Norman Dealerships' assets, excluding real property, and assume substantially all of the sellers' liabilities. For the Lake Norman Acquisition, the Company agreed to pay up to $18.2 million. At closing, the Company paid $17.7 million in cash to the sellers and deposited $0.5 million into an escrow account. The purchase price will be adjusted downward based on the net book value of the purchased assets and assumed liabilities as of the closing date, to be determined after the closing. The sellers of the assets retained ownership of the three tracts of real property underlying the dealerships and lease such property to the Company. See "Business -- Facilities." The Dyer Acquisition. Dyer & Dyer, Inc. ("Dyer Volvo"), which is located in Atlanta, Georgia, is the largest Volvo dealership in the United States in terms of retail unit sales. For 1996, Dyer Volvo had retail sales of approximately 1,284 new and 1,493 used vehicles, and had aggregate revenues of approximately $72.6 million. This acquisition is a significant step in the Company's growth strategy in that it adds a large, well-managed dealership in a new geographic market and increases the Company's presence in the luxury car market. Richard Dyer, who has over 25 years in the automotive retailing industry, will continue as the Company's Executive Manager of Dyer Volvo. The Company will acquire all of the operating assets of Dyer Volvo for $18.0 million plus assumption of substantially all of Dyer Volvo's existing recorded liabilities and obligations. The $18.0 million purchase price is subject to adjustment in the event that net book value of the purchased assets, less assumed liabilities, is more or less than $10.5 million as of the date of the closing. At the closing, the Company will pay $17.0 million in cash to the seller and deposit $1.0 million into an escrow account. In addition, the Company will issue a warrant to Richard Dyer to purchase 0.375% of the Company's outstanding shares of Common Stock (in the form of Class A Common Stock) after consummation of the Offering (45,000 shares if the Underwriters' over-allotment option is exercised in full) pursuant to his employment agreement with the Company at a per share exercise price equal to the initial public offering per share price (the "Dyer Warrant"). The Dyer Warrant is exercisable immediately and will expire five years after the consummation of the Dyer Acquisition. The Dyer Warrant is in addition to stock options that are to be granted to Richard Dyer under the Company's Stock Option Plan. Dyer Volvo leases its dealership premises and the Company will assume Dyer Volvo's obligations under the leases at the closing. See "Business -- Facilities." The closing of the Dyer acquisition will occur no later than November 21, 1997. If the Company fails to perform its obligation to close by that date, it has agreed to pay a termination fee. Volvo's consent to the Dyer Acquisition requires that Richard Dyer maintain a 20% interest in, and serve as the manager of, the Company's Volvo franchisee subsidiary operating the Dyer Volvo dealership. The Fort Mill Acquisition. Fort Mill Chrysler-Plymouth-Dodge is located in Fort Mill, South Carolina, which is a part of the Charlotte market. In 1996, Jeff Boyd Chrysler-Plymouth-Dodge (the predecessor to Fort Mill Chrysler-Plymouth-Dodge) had retail sales of approximately 632 new and 842 used vehicles, and had total revenues of $20.3 million. As of June 3, 1997, the Company consummated the acquisition of certain dealership assets, excluding real property, of Jeff Boyd Chrysler-Plymouth-Dodge for a total purchase price of approximately $3.7 million in cash and assumed the floor plan liabilities of the sellers. Of the $3.7 million purchase price paid, $3.5 million was advanced to the Company by Bruton Smith and is to be repaid with proceeds from the Offering. See "Certain Transactions -- The Smith Advance." An affiliate of Jeff Boyd Chrysler-Plymouth-Dodge retained ownership of the real property underlying the dealership and leased the property to the Company. See "Business -- Facilities." The Williams Acquisition. Town and Country Chrysler-Plymouth-Jeep of Rock Hill is located in Rock Hill, South Carolina, approximately 35 miles south of Charlotte. In 1996, Williams Motors, Inc. (the predecessor to Town and Country 21 Chrysler-Plymouth-Jeep of Rock Hill) had retail sales of approximately 248 new and 280 used vehicles, and had total revenues of $9.6 million. As of October 10, 1997, the Company acquired substantially all of the operating assets of Williams Motors (excluding primarily used car inventory and real estate) for $1.8 million plus assumption of floor plan indebtedness to Chrysler Credit Corporation. The Company leases the dealership premises from the sellers for one to five years, at the Company's option. See "Business -- Facilities." Future Acquisitions. The Company intends to pursue acquisitions in the future that will be financed with cash or debt or equity financing or a combination thereof. Any acquisitions using equity financing would require the consent of Chrysler and Honda under the dealership agreements with such Manufacturers. Although the Company has identified and has held preliminary discussions with several potential acquisition candidates, at this time the Company has no agreements to effect any such acquisitions other than the Acquisitions. There is no assurance that the Company will consummate any future acquisition, that they will be on favorable terms to the Company or that financing for such acquisitions will be available. All future acquisitions by the Company will be contingent upon the consent of the applicable manufacturer. No assurance can be given that any such consents will be obtained. The Company is currently negotiating with Ford Motor Credit Company ("Ford Motor Credit") to increase the Revolving Facility (as defined herein) from $26.0 million to $75.0 million in order to finance future acquisitions and for general corporate purposes, although there can be no assurance that the Company will obtain any such financing. After giving pro forma effect to the Acquisitions and the financing thereof, the Company will have approximately $45.7 million available under the Revolving Facility (assuming (i) the Revolving Facility is increased from $26.0 million to $75.0 million, (ii) no exercise of the Underwriters' over-allotment option, (iii) that the shares of Class A Common Stock offered hereby are sold at the mid-point of the range of the initial public offering price set forth on the front cover of this Prospectus and (iv) that at the time the Revolving Facility is increased it is used to refinance the remaining balance under the Six-Month Facility). See "Risk Factors -- Risks Associated with Acquisitions" and " -- Limitations on Financial Resources Available for Acquisitions; Possible Inability to Refinance Existing Debt" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 22 USE OF PROCEEDS The net proceeds to the Company from the sale of 5,000,000 shares of Class A Common Stock offered hereby are estimated to be approximately $58.5 million ($67.5 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $13.00 per share (the midpoint of the range of the initial public offering price set forth on the cover page of this Prospectus) and after deducting the underwriting discount and estimated expenses of the Offering. The net proceeds will be used to pay a portion of the purchase price for the Acquisitions in the aggregate amount of approximately $38.3 million, to repay a loan of approximately $3.5 million advanced by Bruton Smith in connection with the Acquisitions, which bears interest at 3.83% per annum and to repay approximately $16.7 million of the Six-Month Facility, which was used to finance the Lake Norman Acquisition and bears interest at 7.75% per annum. See "The Acquisitions" and "Certain Transactions -- The Smith Advance." DIVIDEND POLICY The Company intends to retain all of its earnings to finance the growth and development of its business, including future acquisitions, and does not anticipate paying any cash dividends on its Common Stock for the foreseeable future. Any future change in the Company's dividend policy will be made at the discretion of the Board of Directors of the Company and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. Furthermore, the Company's existing credit arrangements include covenants which preclude the payment of dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Capital Stock." 23 CAPITALIZATION The following table sets forth, as of June 30, 1997, the capitalization of the Company (a) on an actual basis, including the Reorganization which is effective as of June 30, 1997, and (b) on a pro forma basis, as adjusted to reflect the Acquisitions, the financing thereof, the Offering and the application of the estimated net proceeds thereof to be received by the Company. See "The Acquisitions" and "Use of Proceeds." This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the unaudited Pro Forma Combined and Consolidated Financial Statements of the Company and the related notes thereto included elsewhere in this Prospectus.
June 30, 1997 ----------------------- Pro Forma for the Acquisitions and the Actual Offering(1) ------- ------------ (dollars in thousands) Short-term debt: Notes payable -- floor plan......................................................................... $67,856 $142,191 Notes payable -- other.............................................................................. -- 3,713 Current maturities of long-term debt................................................................ 487 1,343 ------- ------------ Total short-term debt............................................................................ $68,343 $147,247 ------- ------------ ------- ------------ Long-term debt........................................................................................ $ 5,137 $ 36,980 ------- ------------ Stockholders' equity: Preferred Stock, $.10 par value, 3,000,000 shares authorized; no shares issued and outstanding...... -- -- Class A Common Stock, $.01 par value, 50,000,000 shares authorized; no shares issued and outstanding, actual; 5,000,000 shares issued and outstanding, as adjusted (2).................... -- 50 Class B Common Stock, $.01 par value, 15,000,000 shares authorized; 10,000 shares issued and outstanding, actual; 6,250,000 shares issued and outstanding, as adjusted (3).................... 62 62 Additional paid-in capital.......................................................................... 14,418 72,818 Retained earnings and members' and partners' equity................................................. 14,023 14,064 Unrealized loss on marketable equity securities..................................................... (97) (97) ------- ------------ Total stockholders' equity....................................................................... 28,406 86,897 ------- ------------ Total capitalization........................................................................... $33,543 $123,877 ------- ------------ ------- ------------
- --------------- (1) Adjusted to give pro forma effect to the Acquisitions (including the financing thereof) and the Offering (and the application of the net proceeds thereof). See "Pro Forma Combined and Consolidated Financial Data." (2) 5,750,000 shares if the Underwriters' overallotment option is exercised in full. Excludes 1,125,000 shares of Class A Common Stock reserved for future issuance under the Company's Stock Option Plan (including up to 587,509 shares of Class A Common Stock reserved for issuance upon exercise of options to be granted on or before the consummation of the Offering pursuant to the Stock Option Plan) and 150,000 shares of Class A Common Stock reserved for future issuance under the Company's ESPP, and excludes 42,187 shares of Class A Common Stock (45,000 shares if the Underwriters' over-allotment option is exercised in full) reserved for issuance under the Dyer Warrant. See "The Acquisitions -- The Dyer Acquisition" and "Management -- Stock Option Plan." (3) Actual shares of Class B Common Stock include the effect of the Stock Split (which will be effected in the form of a stock dividend). 24 DILUTION The pro forma net tangible book value (deficit) of the Company (after giving effect to the Acquisitions) as of June 30, 1997 was $(6.81) per share of Common Stock. Pro forma net tangible book value (deficit) per share is determined by dividing the pro forma tangible net worth of the Company (pro forma total assets less goodwill less pro forma total liabilities) by the total number of outstanding shares of Common Stock. After giving effect to the sale of the 5,000,000 shares of Class A Common Stock offered hereby and the receipt of an assumed $58.5 million of net proceeds from the Offering (based on an assumed initial public offering price of $13.00 per share and net of the underwriting discounts and estimated offering expenses), pro forma net tangible book value of the Company at June 30, 1997 would have been $1.41 per share. This represents an immediate increase in pro forma net tangible book value of $8.22 per share to existing stockholders and an immediate dilution of $11.59 per share to the new investors purchasing Class A Common Stock in the Offering. The following table illustrates the per share dilution: Assumed initial public offering price per share....................................... $13.00 Pro forma net tangible book value (deficit) per share before giving effect to the Offering......................................................................... (6.81) Increase in pro forma net tangible book value per share attributable to the Offering......................................................................... 8.22 -------- Pro forma net tangible book value per share after giving effect to the Offering....... 1.41 ------ Dilution per share to new investors................................................... $11.59 ------ ------
The following table sets forth, on a pro forma basis as of June 30, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid to the Company by existing stockholders and new investors purchasing shares from the Company in the Offering (before deducting underwriting discounts and commissions and estimated offering expenses):
Shares Purchased Total Consideration Average --------------------- ---------------------- Price Per Number Percent Amount Percent Share ---------- ------- ----------- ------- --------- Existing stockholders (1).......................................... 6,250,000 55.6% $16,604,170 20.3% $ 2.66 New investors (2).................................................. 5,000,000 44.4 65,000,000 79.7 13.00 ---------- ------- ----------- ------- Total......................................................... 11,250,000 100.0% $81,604,170 100.0% $ 7.25 ---------- ------- ----------- ------- ---------- ------- ----------- -------
- --------------- (1) Does not reflect the possible exercise of options to purchase 1,125,000 shares of Class A Common Stock reserved for issuance under the Company's Stock Option Plan, including options to purchase 587,509 shares of Class A Common Stock that will be granted immediately before the completion of the Offering with an exercise price equal to the initial public offering price, the possible issuance of 150,000 shares of Class A Common Stock reserved for issuance under the Company's ESPP, and the possible exercise of the Dyer Warrant to purchase 42,187 shares of Class A Common Stock (45,000 shares if the Underwriters' over-allotment option is exercised in full) at an exercise price equal to the initial public offering price pursuant to the Offering. See "Management -- Stock Option Plan" and "Certain Transactions." (2) Assumes that the Underwriters' over-allotment option is not exercised. Sales pursuant to the full exercise by the Underwriters of the over-allotment option will cause the total number of shares purchased by new investors, total consideration paid by new investors, percent of total consideration paid by new investors and average price per share for all investors to increase to 5,750,000, $74.8 million, 81.8% and $7.25, respectively. 25 SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA The selected combined and consolidated statement of operations data for the years ended December 31, 1994, 1995 and 1996 and the selected combined balance sheet data as of December 31, 1995 and 1996 are derived from the Company's audited financial statements, which are included elsewhere in this Prospectus. The selected combined and consolidated statement of operations data for the years ended December 31, 1992 and 1993 and the selected combined and consolidated balance sheet data as of December 31, 1992, 1993 and 1994 are derived from the Company's unaudited financial statements, which are not included in this Prospectus. The selected combined and consolidated results of operations data for the six months ended June 30, 1996 and 1997, and the selected combined and consolidated balance sheet data at June 30, 1997, are derived from the unaudited financial statements of the Company, which are included elsewhere in this Prospectus. In the opinion of management, these unaudited financial statements reflect all adjustments necessary for a fair presentation of its results of operations and financial condition. All such adjustments are of a normal recurring nature. The results of operations for an interim period are not necessarily indicative of results that may be expected for a full year or any other interim period. In connection with the FIFO Conversion, and in accordance with generally accepted accounting principles, the selected combined and consolidated financial data has been retroactively restated to reflect the FIFO Conversion. This selected combined and consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Combined and Consolidated Financial Statements and related notes included elsewhere in this Prospectus.
Six Months Ended Year Ended December 31, June 30, -------------------------------------------------------- -------------------- 1992 1993 1994 1995 1996(1)(2) 1996(1)(2) 1997(3)(2) -------- -------- -------- -------- -------- -------- -------- (in thousands) Combined and Consolidated Statement of Operations Data: Revenues: Vehicle sales......................... $171,065 $203,630 $227,960 $267,308 $326,842 $164,333 $185,077 Parts, service and collision repair............................. 24,543 30,337 33,984 35,860 42,644 21,005 22,907 Finance and insurance................. 3,743 3,711 5,181 7,813 7,118 4,277 4,763 -------- -------- -------- -------- -------- -------- -------- Total revenues..................... 199,351 237,678 267,125 310,981 376,604 189,615 212,747 Cost of sales........................... 174,713 208,445 233,011 270,878 331,047 167,191 188,422 -------- -------- -------- -------- -------- -------- -------- Gross profit............................ 24,638 29,233 34,114 40,103 45,557 22,424 24,325 Selling, general and administrative expenses.............................. 20,251 22,738 24,632 29,343 33,677 16,590 18,413 Depreciation and amortization........... 682 788 838 832 1,076 360 396 -------- -------- -------- -------- -------- -------- -------- Operating income........................ 3,705 5,707 8,644 9,928 10,804 5,474 5,516 Interest expense, floor plan............ 2,215 2,743 3,001 4,505 5,968 2,801 3,018 Interest expense, other................. 290 263 443 436 433 184 269 Other income............................ 1,360 613 609 449 618 369 274 -------- -------- -------- -------- -------- -------- -------- Income before income taxes and minority interest.............................. 2,560 3,314 5,809 5,436 5,021 2,858 2,503 Provision for income taxes.............. 27 723 2,118 2,176 1,924 1,093 916 -------- -------- -------- -------- -------- -------- -------- Income before minority interest......... 2,533 2,591 3,691 3,260 3,097 1,765 1,587 Minority interest in earnings (loss) of subsidiary............................ (31) (22) 15 22 114 41 47 -------- -------- -------- -------- -------- -------- -------- Net income(4)........................... $ 2,564 $ 2,613 $ 3,676 $ 3,238 $ 2,983 $ 1,724 $ 1,540 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Combined and Consolidated Balance Sheet Data: Working capital......................... $ 5,883 $ 9,629 $ 13,246 $ 18,140 $ 19,780 $ 20,625 $ 16,899 Total assets............................ 48,524 54,917 69,061 79,462 110,976 99,456 120,384 Long-term debt.......................... 3,904 4,142 3,773 3,561 5,286 4,825 5,137 Total liabilities....................... 43,336 46,822 57,274 62,956 84,367 73,695 91,978 Minority interest....................... 139 161 177 200 314 240 -- Stockholders' equity.................... 5,049 7,934 11,610 16,306 26,295 25,521 28,406
- --------------- (1) The statement of operations data includes the results of Fort Mill Ford, Inc. from the date of acquisition, February 1, 1996. (footnotes continued on following page) 26 (2) The Company acquired Fort Mill Ford, Inc. and Fort Mill Chrysler-Plymouth-Dodge in February 1996 and in June 1997, respectively. Both of these acquisitions were accounted for using the purchase method of accounting. As a result, the Selected Combined and Consolidated Financial Data below does not include the results of operations of these dealerships prior to the date they were acquired by the Company. Accordingly, the actual historical data for periods after the acquisition may not be comparable to data presented for periods prior to the acquisition of Fort Mill Ford and Fort Mill Chrysler-Plymouth-Dodge. (3) The statement of operations data for the six months ended June 30, 1997 includes the results of Fort Mill Chrysler-Plymouth-Dodge, Inc. from the date of acquisition, June 3, 1997. (4) Historical net income per share is not presented, as the historical capital structure of the Company prior to the Offering is not comparable with the capital structure that will exist after the Offering. 27 PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL DATA The following unaudited pro forma combined and consolidated statements of operations for the year ended December 31, 1996 and for the six months ended June 30, 1997 reflect the historical accounts of the Company for those periods, adjusted to give pro forma effect to the Reorganization, the Acquisitions and the Offering, as if these events had occurred at January 1, 1996. The following unaudited pro forma consolidated balance sheet as of June 30, 1997 reflects the historical accounts of the Company as of that date adjusted to give pro forma effect to the Acquisitions and the Offering as if these events had occurred on June 30, 1997. The Acquisitions will be consummated on or before the closing of the Offering and are conditions precedent to the closing of the Offering. The Company will convert to the FIFO Method of inventory accounting conditioned and effective upon the closing of the Offering. In connection with the FIFO Conversion, and in accordance with generally accepted accounting principles, the accompanying financial information of the Company has been retroactively restated to reflect the FIFO Conversion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." The pro forma combined and consolidated financial data and accompanying notes should be read in conjunction with the Combined and Consolidated Financial Statements and related notes of the Company as well as the financial statements and related notes of the Bowers Dealerships, the Lake Norman Dealerships, Ken Marks Ford and Dyer Volvo, all of which are included elsewhere in this Prospectus. Such pro forma data and accompanying notes do not give effect to the Fort Mill Acquisition, the Williams Acquisition or the financing thereof because management does not believe such acquisitions or financings are material. The Company believes that the assumptions used in the following statements provide a reasonable basis on which to present the pro forma financial data. The pro forma combined financial data is provided for informational purposes only and should not be construed to be indicative of the Company's financial condition or results of operations had the transactions and events described above been consummated on the dates assumed, and are not intended to project the Company's financial condition on any future date or its results of operation for any future period. 28 Pro Forma Combined Statement of Operations Year Ended December 31, 1996
Company The Acquisitions ------------------------ ------------------------------------------------------------------- Pro Forma Pro Forma Adjustments Adjustments for for the Bowers the Reorgani- Dealerships Lake Norman Ken Marks Dyer Acquisitions Actual (1) zation Pro Forma (2) Dealerships Ford (3) Volvo (4)(5) ---------- ----------- ------------- ----------- --------- ------- --------------- (in thousands, except per share data) Revenues: Vehicle sales............... $ 326,842 $ $ 144,177 $ 124,539 $ 131,826 $60,871 $ Parts, service and collision repair.................... 42,644 17,338 9,543 14,224 11,163 Finance and insurance....... 7,118 2,877 3,617 2,317 542 ---------- ----------- ------------- ----------- --------- ------- --------------- Total revenues............ 376,604 164,392 137,699 148,367 72,576 Cost of sales................. 331,047 142,424 121,806 128,850 62,547 (545)(11) ---------- ----------- ------------- ----------- --------- ------- --------------- Gross profit.................. 45,557 21,968 15,893 19,517 10,029 545 Selling, general and administrative expenses..... 33,677 18,977 14,215 16,190 6,997 (1,299)(12) (3,351)(13) 249(14) Depreciation and amortization................ 1,076 75(8) 733 89 94 126 (193)(15) 1,539(16) (29)(14) ---------- ----------- ------------- ----------- --------- ------- --------------- Operating income.............. 10,804 (75) 2,258 1,589 3,233 2,906 3,629 Interest expense, floor plan........................ 5,968 1,522 1,552 2,054 373 (2,127)(10) Interest expense, other(6).... 433 199 50 315(17) (108)(14) 2,282(6) Other income.................. 618 797 258 97 452 ---------- ----------- ------------- ----------- --------- ------- --------------- Income before income taxes and minority interest........... 5,021 (75) 1,334 245 1,276 2,985 3,267 Provision for income taxes.... 1,924 (30)(9) 61 546 955 1,390(18) 1,627(19) 79(20) (955)(21) ---------- ----------- ------------- ----------- --------- ------- --------------- Income before minority interest.................... 3,097 (45) 1,273 245 730 2,030 1,126 Minority interest in earnings of subsidiary............... 114 (114)(8) ---------- ----------- ------------- ----------- --------- ------- --------------- Net income.................... $ 2,983 $ 69 $ 1,273 $ 245 $ 730 $ 2,030 $ 1,126 ---------- ----------- ------------- ----------- --------- ------- --------------- ---------- ----------- ------------- ----------- --------- ------- --------------- Pro forma net income per share(7).................... Weighted average shares outstanding (000's)......... Pro Forma for the Reorgani- Pro Forma zation, the Adjustments Acquisitions for the and the Offering Offering ----------- ------------ Revenues: Vehicle sales............... $ $788,255 Parts, service and collision repair.................... 94,912 Finance and insurance....... 16,471 ----------- ------------ Total revenues............ 899,638 Cost of sales................. 786,129 ----------- ------------ Gross profit.................. 113,509 Selling, general and administrative expenses..... 201(22) 85,856 Depreciation and amortization................ 3,510 ----------- ------------ Operating income.............. (201) 24,143 Interest expense, floor plan........................ 9,342 Interest expense, other(6).... 3,171 Other income.................. 2,222 ----------- ------------ Income before income taxes and minority interest........... (201) 13,852 Provision for income taxes.... (80)(23) 5,517 ----------- ------------ Income before minority interest.................... (121) 8,335 Minority interest in earnings of subsidiary............... ----------- ------------ Net income.................... $ (121) $ 8,335 ----------- ------------ ----------- ------------ Pro forma net income per share(7).................... $ 0.74 ------------ ------------ Weighted average shares outstanding (000's)......... 11,250 ------------ ------------
29 Pro Forma Combined Statement of Operations Six Months Ended June 30, 1997
The Acquisitions Company ------------------------------------------------------------- -------------------------- Pro Forma Pro Forma Adjustments Adjustments Bowers Ken for the For the Dealerships Lake Norman Marks Dyer Acquisitions Actual(1) Reorganization Pro Forma (2) Dealerships Ford (3) Volvo (4)(5) --------- -------------- ------------- ----------- -------- ------ ----------- (in thousands, except per share data) Revenues: Vehicle sales.............. $ 185,077 $ $67,219 $69,798 $65,157 $31,373 $ Parts, service and collision repair......... 22,907 9,694 5,321 5,999 5,960 Finance and insurance...... 4,763 1,539 1,950 1,029 129 --------- -------------- ------------- ----------- -------- ------ ----------- Total revenues........... 212,747 78,452 77,069 72,185 37,462 Cost of sales................ 188,422 67,390 68,272 63,402 32,377 (371)(11) --------- -------------- ------------- ----------- -------- ------ ----------- Gross profit................. 24,325 11,062 8,797 8,783 5,085 371 Selling, general and administrative expenses.... 18,413 8,744 6,937 7,547 3,498 (923)(12) (1,004)(13) 191(14) Depreciation and amortization............... 396 36(8) 338 47 47 151 (100)(15) 769(16) (22)(14) --------- -------------- ------------- ----------- -------- ------ ----------- Operating income............. 5,516 (36) 1,980 1,813 1,189 1,436 1,460 Interest expense, floor plan....................... 3,018 885 1,185 925 276 (1,048)(10) Interest expense, other (6)........................ 269 118 68 1,141(6) 158(17) (80)(14) Other income................. 274 459 176 91 247 --------- -------------- ------------- ----------- -------- ------ ----------- Income before income taxes and minority interest...... 2,503 (36) 1,436 736 355 1,407 1,289 Provision for income taxes... 916 (15)(9) 31 147 436(18) 1,285(19) 83(20) --------- -------------- ------------- ----------- -------- ------ ----------- Income before minority interest................... 1,587 (21) 1,405 736 208 1,407 (515) Minority interest in earnings of subsidiary.............. 47 (47)(8) --------- -------------- ------------- ----------- -------- ------ ----------- Net income................... $ 1,540 $ 26 $ 1,405 $ 736 $ 208 $1,407 $ (515) --------- -------------- ------------- ----------- -------- ------ ----------- --------- -------------- ------------- ----------- -------- ------ ----------- Pro forma net income per share (7).................. Weighted average shares outstanding (000's)........ Pro Forma Pro Forma for the Adjustments Reorganization, for the the Acquisitions Offering and the Offering ----------- ----------------- Revenues: Vehicle sales.............. $ $ 418,624 Parts, service and collision repair......... 49,881 Finance and insurance...... 9,410 ----------- ----------------- Total revenues........... 477,915 Cost of sales................ 419,492 ----------- ----------------- Gross profit................. 58,423 Selling, general and administrative expenses.... 43,574 171(22) Depreciation and amortization............... 1,662 ----------- ----------------- Operating income............. (171) 13,187 Interest expense, floor plan....................... 5,241 Interest expense, other (6)........................ 1,674 Other income................. 1,247 ----------- ----------------- Income before income taxes and minority interest...... (171) 7,519 Provision for income taxes... (68) (23) 2,815 ----------- ----------------- Income before minority interest................... (103) 4,704 Minority interest in earnings of subsidiary.............. ----------- ----------------- Net income................... $ (103) $ 4,704 ----------- ----------------- ----------- ----------------- Pro forma net income per share (7).................. $ 0.42 ----------------- ----------------- Weighted average shares outstanding (000's)........ 11,250 ----------------- -----------------
- --------------- (1) The actual combined statement of operations data for the Company includes the results of Fort Mill Ford from February 1, 1996, the effective date of its acquisition. Pro forma adjustments have not been presented to include the results of operations for Fort Mill Ford for the one month period ended February 1, 1996 because management believes such results are not material. The actual consolidated statement of operations data for the six months ended June 30, 1997 include the results of Fort Mill Chrysler-Plymouth-Dodge from June 3, 1997, the date of its acquisition. (footnotes continued on following page) 30 (2) During 1996 and 1997, Nelson Bowers acquired three automobile dealerships whose operating results, from their respective dates of acquistion, are included in the historical combined and consolidated statement of operations in the table below. The following table adjusts the historical combined and consolidated statements of operations to include the acquirees as if the acquisitions had occurred on January 1, 1996.
Year Ended December 31, 1996 ------------------------------------------------------------------------------------ Bowers European European Nelson Bowers Dealerships(a) Motors of Motors of Bowers Pro Forma Dealerships (Historical) Chattanooga(e) Nashville(b) Dodge(b) Adjustments (Pro Forma) -------------- -------------- ------------ -------- ----------- -------------- (in thousands) Revenues: Vehicle sales............................... $ 91,183 $6,940 $ 21,827 $24,227 $ $144,177 Parts, service and collision repair......... 7,970 1,194 4,740 3,434 17,338 Finance and insurance....................... 2,337 199 341 2,877 -------------- -------------- ------------ -------- ----------- -------------- Total revenues............................ 101,490 8,134 26,766 28,002 164,392 Cost of sales................................. 87,757 7,130 23,054 24,483 142,424 -------------- -------------- ------------ -------- ----------- -------------- Gross profit.................................. 13,733 1,004 3,712 3,519 21,968 Selling, general and administrative expenses...................................... 11,807 926 3,401 2,843 18,977 Depreciation and amortization................. 365 37 86 106 139(d) 733 -------------- -------------- ------------ -------- ----------- -------------- Operating income.............................. 1,561 41 225 570 (139) 2,258 Interest expense, floor plan.................. 1,178 87 208 49 1,522 Interest expense, other....................... 196 3 199 Other income.................................. 121 92 166 418 797 -------------- -------------- ------------ -------- ----------- -------------- Income before income taxes.................... 308 46 183 936 (139) 1,334 Provision for income taxes.................... 61 61 -------------- -------------- ------------ -------- ----------- -------------- Net Income.................................... $ 247 $ 46 $ 183 $ 936 $ (139) $ 1,273 -------------- -------------- ------------ -------- ----------- -------------- -------------- -------------- ------------ -------- ----------- --------------
Six Months Ended June 30, 1997 ----------------------------------------------------- Bowers Nelson Bowers Dealerships(a) Bowers Pro Forma Dealerships (Historical) Dodge(c) Adjustments (Pro Forma) -------------- -------- ----------- ----------- (in thousands) Revenues: Vehicle sales.......................................................... $ 63,950 $ 3,269 $ $ 67,219 Parts, service and collision repair.................................... 9,107 587 9,694 Finance and insurance.................................................. 1,497 42 1,539 -------------- -------- ----------- ----------- Total revenues....................................................... 74,554 3,898 78,452 Cost of sales............................................................ 63,945 3,445 67,390 -------------- -------- ----------- ----------- Gross profit............................................................. 10,609 453 11,062 Selling, general and administrative expenses............................. 8,294 450 8,744 Depreciation and amortization............................................ 309 14 15(d) 338 -------------- -------- ----------- ----------- Operating income (loss).................................................. 2,006 (11 ) (15) 1,980 Interest expense, floor plan............................................. 881 4 885 Interest expense, other.................................................. 118 118 Other income............................................................. 422 37 459 -------------- -------- ----------- ----------- Income before income taxes............................................... 1,429 22 (15) 1,436 Provision for income taxes............................................... 31 31 -------------- -------- ----------- ----------- Net Income............................................................... $ 1,398 $ 22 $ (15) $ 1,405 -------------- -------- ----------- ----------- -------------- -------- ----------- -----------
(a) The historical statement of operations data for the Bowers Dealerships includes the results of Nelson Bowers Dodge from March 1, 1997, the date of its acquisition by the owners of the Bowers Dealerships. Such statement also includes the results of European Motors of Nashville and European Motors of Chattanooga from October 1, 1996 and May 1, 1996, respectively, which were acquired by the owners of the Bowers Dealerships on those dates. (footnotes continued on following page) 31 (b) Reflects the results of operations of (i) Nelson Bowers Dodge for the year ended December 31, 1996; and (ii) European Motors of Nashville for the period from January 1, 1996 to October 1, 1996, the date of its acquisition by the owners of the Bowers Dealerships. Such data was obtained from monthly financial statements prepared by the dealership as required by the manufacturers. (c) Reflects the results of operations of Nelson Bowers Dodge for the period from January 1, 1997 to March 1, 1997, the date of its acquisition by the owners of the Bowers Dealerships. Such data was obtained from monthly financial statements prepared by the dealership as required by the manufacturers. (d) Reflects the amortization of goodwill resulting from the acquisition of Nelson Bowers Dodge, European Motors of Nashville and European Motors of Chattanooga over an assumed amortization period of 40 years for the period not included in the historical financial statements, assuming that such acquisitions were consummated on January 1, 1996. (e) Reflects the results of operations of European Motors of Chattanooga for the period from January 1, 1996 to April 30, 1996, the date of its acquisition by the owners of the Bowers Dealerships. Such data was obtained from monthly financial statements prepared by the dealership as required by the Manufacturer. (3) Ken Marks Ford's fiscal year ends on April 30 of each year. Accordingly, the Statement of Operations data for Ken Marks Ford for the year ended December 31, 1996 was derived by adjusting the data for the year ended April 30, 1997 to include results from January 1, 1996 through April 30, 1996, and exclude results from January 1, 1997 through April 30, 1997. The Statement of Operations data for the six months ended June 30, 1997 was similarly derived by adjusting the historical financial statements for the year ended April 30, 1997 to include results from May 1, 1997 through June 30, 1997, and excludes results from May 1, 1996 through December 31, 1996. (4) The Company has excluded (i) the results of operations of Fort Mill Chrysler-Plymouth-Dodge for the year ended December 31, 1996 and the period ended June 3, 1997 and (ii) the historical results of operations and related pro forma adjustments related to the Williams Acquisition because management believes such results and adjustments are not material to the Pro Forma Combined and Consolidated Statement of Operations. (5) Prior to the Company's acquisition of the Lake Norman Dealerships, its former owners directed $550,000 and $150,000 in contributions to charitable organizations during the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. It is the Company's intention not to maintain the level of charitable contributions already reflected in the Company's historical combined financial statements. Although no pro forma adjustment to eliminate this expense has been included in the accompanying Pro Forma Combined and Consolidated Statements of Operations, the Company believes disclosure and consideration of the Lake Norman Dealerships contributions is appropriate to understand the continuing impact on the Company's results of operations of the acquisition of the Lake Norman Dealerships. (6) Reflects the increase in interest expense associated with the assumed borrowings made under the Company's new credit arrangements of $26.9 million to provide a portion of the funds necessary for consummation of the Acquisitions. The effective interest rate used in the pro forma calculation was 8.5%. This assumed borrowing level was calculated based upon a per share price of the Offering of $13.00, which is the midpoint of the range of the initial public offering price shown on the cover page of this Prospectus. Should the actual per share price of the Offering be different, the actual amount borrowed to provide a portion of the funds necessary for the consummation of the Acquisitions and the related interest expense would be different than the amounts assumed here. (7) Pro forma net income per share is based upon the assumption that 11,250,000 shares of Common Stock are outstanding after the Offering. This amount represents 5,000,000 shares of Class A Common Stock to be issued in the Offering and 6,250,000 shares of Class B Common Stock owned by the Company's stockholders immediately following the Reorganization and the Acquisitions and giving effect to the Stock Split. See "Principal Stockholders" and Note 1 to the Company's Combined and Consolidated Financial Statements included elsewhere in this Prospectus. (8) Reflects the elimination of minority interest in earnings as a result of the acquisition of the 31% minority ownership interest in Town & Country Toyota, Inc. for $3.2 million of Class B Common Stock in connection with the Reorganization, and the amortization of approximately $3.0 million in related goodwill over 40 years arising from such acquisition. (9) Reflects the net increase in the provision for income taxes due to the amortization of goodwill related to the acquisition of the minority interest pursuant to the Reorganization, calculated at the effective rate of 39.9%. (footnotes continued on following page) 32 (10) Reflects the decrease in interest expense, floor plan resulting from the refinancing of the floor plan notes payable arrangements of the Company and the dealerships being acquired in the Acquisitions under one master agreement. The aggregate balance of floor plan notes payable arrangements of the Company and the dealerships being acquired in the Acquisitions was $136.2 million and $142.2 million at December 31, 1996 and June 30, 1997, respectively. The average interest expense under this new agreement is approximately 7.6% compared to historical interest rates ranging from 7.75% to 10.25%. (11) Adjustment reflects the conversion from the LIFO Method of inventory accounting to the FIFO Method of inventory accounting at the Lake Norman Dealerships, Ken Marks Ford and Dyer Volvo in the amount of $169,000, $260,000 and $116,000, respectively for the year ended December 31, 1996 and $324,000 at the Lake Norman Dealerships and $47,000 at Ken Marks Ford for the six months ended June 30, 1997 (there being no significant amount for Dyer Volvo during this period). The Company will convert to the FIFO Method conditioned upon the closing of the Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (12) Reflects the net decrease in selling, general and administrative expenses related to the net reduction in salaries and fringe benefits of owners and officers of the acquired dealerships who will become employees of the Company after the Offering, consistent with reduced salaries pursuant to employment agreements with the Company, effective upon consummation of the Offering. (13) The decrease in selling, general and administrative expenses reflects the elimination of salaries paid to owners of certain dealerships acquired in the Acquisitions whose positions and salaries will be eliminated in conjunction with the Offering. (14) Reflects the Company's estimate of the increase in rent expense related to lease agreements entered into with the sellers of the Bowers Dealerships for the dealerships' real property with a net carrying value of $2.3 million that will not be acquired by the Company, and decreases in depreciation expense (based on useful lives ranging from 31.5 to 39 years) and interest expense related to mortgage indebtedness encumbering such property. The related mortgage indebtedness was approximately $1.8 million with interest charged at 8.9% annually. The increase in rent expense and decreases in depreciation expense and interest expense are based on the terms of the asset purchase agreement pertaining to the Bowers Dealerships. (15) Reflects the elimination of amortization expense related to goodwill that arose in previous acquisitions in the Bowers Dealerships, assuming that each of the acquisitions giving rise to goodwill was consummated on January 1, 1996. See Note (2) above. (16) Reflects the amortization over an assumed amortization period of 40 years of approximately $61.6 million in intangible assets, which consist primarily of goodwill, resulting from the Acquisitions which were assumed to occur on January 1, 1996. See "The Acquisitions" and "Pro Forma Combined and Consolidated Balance Sheet." (17) In connection with the Bowers Acquisition, the Company will issue a promissory note of up to $4.0 million that will bear interest at NationsBank's prime rate less 0.5%. This adjustment reflects an increase in interest expense related to the promissory note assuming a prime rate of 8.5%. (18) Reflects the net increase in provision for income taxes resulting from adjustments (6) and (11) through (17) above, computed using effective income tax rates ranging from 38.5% to 42.8%. (19) Certain of the Bowers Dealerships, the Lake Norman Dealerships, and Dyer Volvo were not subject to federal and state income taxes because they were either S corporations, partnerships, or limited liability companies during the period indicated. This adjustment reflects an increase in the federal and state income tax provision as if these entities had been taxable at the combined statutory income tax rate of approximately 39%. Upon completion of the Acquisitions, these businesses that have historically not been subject to corporate income tax will thereafter be subject to federal and state income tax as C corporations. (20) Reflects an increase from the Company's historical effective tax rate resulting from a higher statutory tax rate used due to an increase in taxable income for the pro forma combined entity and from an additional pro forma permanent difference for non-taxable goodwill amortization. (21) Reflects the elimination of federal and state tax expense which were assessed on the recapture of the LIFO inventory reserve which was required by tax law pursuant to the conversion of Dyer Volvo from a C corporation to an S corporation effective January 1, 1996. The liability associated with this tax assessment was not a liability assumed by the Company in its purchase of the net assets of Dyer Volvo. (22) Reflects the increase in salaries of existing and new officers who have entered into employment agreements with the Company, effective upon consummation of the Offering. (23) Reflects the net decrease in provision for income taxes resulting from adjustment (22) above, computed using an effective income tax rate of 39.9%. 33 Pro Forma Combined and Consolidated Balance Sheet As of June 30, 1997
The Acquisitions ------------------------------------------------------------------------ Pro Forma Actual Bowers Lake Norman Ken Marks Adjustments for Assets (1) Dealerships Dealerships Ford Dyer Volvo the Acquisitions -------- ----------- ----------- --------- ---------- ------------------- (in thousands) Current Assets: Cash and cash equivalents.............. $ 9,238 $ 4,766 $ 3,467 $ 2,491 $ 173 $ (85,300)(2) 26,850(9) Marketable equity securities........... 769 Receivables............................ 12,897 2,649 2,535 2,347 2,535 Inventories............................ 73,410 30,948 22,778 14,802 11,129 6,817(3) Deferred income taxes.................. 256 96 Other current assets................... 818 2,779 244 679 32 -------- ----------- ----------- --------- ---------- -------- Total current assets............... 97,388 41,142 29,024 20,415 13,869 (51,633) Property and equipment, net.............. 13,270 4,106 567 489 1,156 (2,311)(4) 61,550(2) Goodwill, net............................ 9,463 8,286 (8,286)(5) Other assets............................. 263 658(2) 462 14 297 -------- ----------- ----------- --------- ---------- -------- Total assets....................... $120,384 $54,192 $30,053 $20,918 $ 15,322 $ (680) -------- ----------- ----------- --------- ---------- -------- -------- ----------- ----------- --------- ---------- -------- Liabilities and Stockholders' Equity Current Liabilities: Notes payable-floor plan............... $ 67,856 $26,771 $25,865 $16,165 $ 5,534 $ Notes payable-other.................... 3,685 28 Trade accounts payable................. 3,848 1,190 1,352 622 Accrued interest....................... 491 178 Other accrued liabilities.............. 3,394 1,424 472 1,648 512 Taxes payable.......................... 913(10) 67 239 176(6) Payable to Company's Chairman.......... 3,500 Current maturities of long-term debt... 487 428 71 357(2) -------- ----------- ----------- --------- ---------- -------- Total current liabilities.......... 80,489 33,676 27,788 18,502 6,285 533 Long-term debt........................... 5,137 2,332 786 (1,768)(4) 3,643(2) 26,850(9) Payable to affiliated companies.......... 855 Deferred income taxes.................... 931 17 882(6) Income tax payable....................... 4,566(10) Other long-term liabilities.............. 238 Stockholders' Equity: Common Stock of combined companies..... 300 75 1 153 (529)(2) Class A Common Stock................... Class B Common Stock................... 62 Paid-in capital........................ 14,418 600 424 28 (1,052)(2) Treasury stock......................... (4,976) 4,976(2) Retained earnings and members' and 14,023 17,884 804 1,974 13,594 6,817(3) partners' equity..................... (1,058)(6) (543)(4) (31,145)(2) (8,286)(5) Unrealized loss on marketable (97) equity securities.................... -------- ----------- ----------- --------- ---------- -------- Total stockholders' equity......... 28,406 18,184 1,479 2,399 8,799 (30,820) -------- ----------- ----------- --------- ---------- -------- Total liabilities and stockholders' $120,384 $54,192 $30,053 $20,918 $ 15,322 $ (680) equity.................................. -------- ----------- ----------- --------- ---------- -------- -------- ----------- ----------- --------- ---------- -------- Pro Forma Adjustments for Assets the Offering Total --------------- -------- Current Assets: Cash and cash equivalents.............. $ 58,450(7) $ 16,635 (3,500)(8) Marketable equity securities........... 769 Receivables............................ 22,963 Inventories............................ 159,884 Deferred income taxes.................. 352 Other current assets................... 4,552 --------------- -------- Total current assets............... 54,950 205,155 Property and equipment, net.............. 17,277 Goodwill, net............................ 71,013 Other assets............................. 1,694 --------------- -------- Total assets....................... $ 54,950 $295,139 --------------- -------- --------------- -------- Liabilities and Stockholders' Equity Current Liabilities: Notes payable-floor plan............... $ $142,191 Notes payable-other.................... 3,713 Trade accounts payable................. 7,012 Accrued interest....................... 669 Other accrued liabilities.............. 7,450 Taxes payable.......................... 1,395 Payable to Company's Chairman.......... (3,500)(8) Current maturities of long-term debt... 1,343 --------------- -------- Total current liabilities.......... (3,500) 163,773 Long-term debt........................... 36,980 Payable to affiliated companies.......... 855 Deferred income taxes.................... 1,830 Income tax payable....................... 4,566 Other long-term liabilities.............. 238 Stockholders' Equity: Common Stock of combined companies..... Class A Common Stock................... 50(7) 50 Class B Common Stock................... 62 Paid-in capital........................ 58,400(7) 72,818 Treasury stock......................... Retained earnings and members' and 14,064 partners' equity..................... Unrealized loss on marketable (97) equity securities.................... --------------- -------- Total stockholders' equity......... 58,450 86,897 --------------- -------- Total liabilities and stockholders' $ 54,950 $295,139 equity.................................. --------------- -------- --------------- --------
(footnotes on following page) 34 - --------------- (1) The Reorganization, including the acquisition of the 31% minority interest in Town & Country Toyota for $3.2 million in Class B Common Stock in exchange therefor, was effective as of June 30, 1997 and is therefore reflected in the actual balance sheet as of that date. The acquisition of the minority interest resulted in the recognition of $3.0 million of additional goodwill. (2) Reflects the preliminary allocation of the aggregate purchase price of the Acquisitions based on the estimated fair value of the net assets acquired. Because the carrying amount of the net assets acquired, which primarily consist of accounts receivable, inventory, equipment, and floor plan indebtedness, approximates their fair value, management believes the application of purchase accounting will not result in an adjustment to the carrying amount of those net assets. Under the acquisition agreements, the negotiated purchase prices for the Acquisitions will be adjusted downward to the extent that the fair value of the tangible net assets as of the closing is less than an agreed upon amount. The amount of goodwill and the corresponding amortization actually recorded may ultimately be different from the amounts estimated here, depending upon the actual fair value of tangible net assets acquired at closing of the Acquisitions. The estimated purchase price allocation consists of the following:
Bowers Dealerships Ken Marks Ford Lake Norman Dealerships Dyer Volvo Total ------------------ -------------- ----------------------- ---------- ------- (in thousands) Estimated total consideration: Cash.............................. $ 23,600 $ 25,500 $18,200 $ 18,000 $85,300 Promissory note issued............ 4,000 -- -- -- 4,000 ------- -------------- ------- ---------- ------- Total......................... 27,600 25,500 18,200 18,000 89,300 Less negotiated minimum fair value of tangible net assets acquired... 9,200 5,050 3,000 10,500 27,750 ------- -------------- ------- ---------- ------- Excess of purchase price over fair value of net tangible assets acquired.......................... $ 18,400 $ 20,450 $15,200 $ 7,500 $61,550 ------- -------------- ------- ---------- ------- ------- -------------- ------- ---------- -------
In connection with the acquisition of Dyer Volvo, the Company will issue a warrant that will entitle the holder to acquire 42,187 shares of Class A Common Stock, representing a 0.375% ownership interest in the Company at an exercise price per share equal to the price offered in the Offering. The Pro Forma Combined and Consolidated Balance Sheet does not give effect to the issuance of this warrant because management believes the effect on the Company's pro forma financial position and results of operations would not be materially different from that which is presented. The difference between the purchase price and the fair market value of the net tangible assets acquired will be allocated to intangible assets, primarily goodwill and amortized over 40 years. Volvo's consent to the acquisition of European Motors' Volvo franchise as part of the Bowers Acquisition and the acquisition of Dyer Volvo requires that each former owner maintain a 20% voting interest in, and serve as the manager of, these respective dealerships. Company management believes that the effect of these arrangements, as currently structured, on the Company's pro forma financial positions and results of operations would not be materially different from that presented above. (3) Reflects the conversion from the LIFO Method of inventory accounting to the FIFO Method of inventory accounting at the Lake Norman Dealerships, Ken Marks Ford and Dyer Volvo in the amounts of $1.6 million, $2.8 million and $2.5 million, respectively. The Company intends to convert to the FIFO Method conditioned upon the closing of the Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (4) Reflects the distribution of real property of the Bowers Dealerships with a net depreciated cost of approximately $2.3 million, which are not being acquired in the Acquisitions, and the related mortgage indebtedness in the amount of approximately $1.8 million. See "Certain Transactions." (5) Reflects the elimination of goodwill that arose in previous acquisitions of the Bowers Dealerships. (6) Reflects the amount of taxes payable that will result from the FIFO conversion at Ken Marks Ford in the amount of $1.1 million. (7) Reflects the issuance of Class A Common Stock in the Offering assuming a per share price of $13.00, which is the midpoint of the range of the initial public offering price set forth on the cover page of this Prospectus, and the Stock Split pertaining to the Class B Common Stock. See "Use of Proceeds" and "Prospectus Summary." (8) Reflects the repayment of the Payable to the Company's Chairman. See "Use of Proceeds." (9) Reflects borrowings made under the Company's new credit arrangements to provide a portion of the funds necessary for consummation of the Acquisitions. These borrowings are payable in full two years from establishment, and have been shown as a non-current liability in the accompanying pro forma combined and consolidated balance sheet. Should the actual per share price of the Offering be different than $13.00, the net proceeds of the Offering and the actual amount borrowed to provide a portion of the funds necessary for the consummation of the Acquisitions would be different than amounts assumed here (excluding funds borrowed to finance the Fort Mill Acquisition and the Williams Acquisition). See "Use of Proceeds." (10) In connection with the Reorganization and the Offering, the Company will convert from the last-in, first-out (LIFO) method of inventory accounting to the first-in, first-out (FIFO) method of inventory accounting. The accompanying pro forma combined and consolidated balance sheet includes $5.5 million representing an additional tax liability which will result from this conversion. This liability will be payable over a six-year period. 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition should be read in conjunction with (i) the Sonic Automotive, Inc. and Affiliated Companies Combined and Consolidated Financial Statements and the related notes thereto included elsewhere in this Prospectus, (ii) the financial statements of certain of the entities being acquired in the "Acquisitions" and the related notes thereto and (iii) the Pro Forma Financial Statements and the related notes thereto, all included elsewhere in this Prospectus. Overview Sonic Automotive, Inc. is one of the leading automotive retailers in the United States, operating 23 dealership franchises, four standalone used vehicle facilities and seven collision repair centers in the southeastern and southwestern United States. Sonic sells new and used cars and light trucks, sells replacement parts, provides vehicle maintenance, warranty, paint and repair services and arranges related F&I for its automotive customers. The Company's business is geographically diverse, with dealership operations in the Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta markets, each of which the Company believes is experiencing favorable demographic trends. Sonic sells 15 domestic and foreign brands, which consist of BMW, Cadillac, Chrysler, Dodge, Ford, Honda, Infiniti, Jaguar, Jeep, KIA, Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo. In several of its markets, the Company has a significant market share for new cars and light trucks, including 13.7% in Charlotte and 9.1% in Chattanooga in 1996. Pro forma for the Acquisitions, the Company had revenues of $899.6 million and retail unit sales of 24,206 new and 13,475 used vehicles in 1996. The Company believes that in 1996, based on pro forma retail unit sales it would have been one of the ten largest dealer groups out of a total of more than 15,000 dealer groups in the United States and, based on pro forma revenues, it would have had three of the top 100 individual dealerships locations in the United States. The Company intends to pursue an acquisition growth strategy led by a management team that has experience in the consolidation of automotive retailing as well as motorsports businesses. Bruton Smith, who is also the Chief Executive Officer of Speedway Motorsports, Inc., the owner and operator of several motorsports facilities, first entered the automotive retailing business in the mid-1960's. Mr. Smith will devote approximately 50% of his business time to the Company. Since 1990, Mr. Smith has successfully acquired three dealerships and increased revenues from his dealerships from $199.4 million in 1992 to $376.6 million in 1996, without giving effect to the Acquisitions. In the Tennessee market, Mr. Bowers has acquired or opened eight dealerships since 1992 and increased revenues (primarily through acquisitions) of the Bowers Dealerships from $13.2 million in 1992 to $101.5 million in 1996. No assurance can be given that Messrs. Smith and Bowers will be successful in acquiring or opening new dealerships for the Company or increasing the Company's revenues. New vehicle revenues include 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 F&I and sales of third party extended warranties for vehicles (collectively, "F&I transactions"). In connection with vehicle financing contracts, the Company receives a fee (a "finance fee") from the lender for originating the loan. If, within 90 days of origination, the customer pays off the loans through refinancing or selling/trading in the vehicle or defaults on the loan, the finance company will assess a charge (a "chargeback") for a portion of the original commission. The amount of the chargeback depends on how long the related loan was outstanding. As a result, the Company has established reserves based on its historical chargeback experience. The Company also sells warranties provided by third-party vendors, and recognizes a commission at the time of sale. While the automotive retailing business is cyclical, Sonic sells several products and services that are not closely tied to the sale of new and used vehicles. Such products and services include the Company's parts and service and collision repair businesses, both of which are not dependent upon near-term new vehicle sales volume. One measure of cyclical exposure in the automotive retailing business is based on the dealerships' ability to cover fixed costs with gross profit from revenues independent of vehicle sales. According to this measurement of "fixed coverage," a higher percentage of non-vehicle sales revenue to fixed costs indicates a lower exposure to economic cycles. Each manufacturer requires its dealerships to report fixed coverage according to a specific method, and the methods used vary widely among the manufacturers and are not comparable. The Company's cost of sales and profitability are also affected by the allocations of new vehicles which its dealerships receive from Manufacturers. When the Company does not receive allocations of new vehicle models adequate to meet customer demand, it purchases 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, the Company follows a disciplined approach in selling 36 vehicles to other dealers and wholesalers when the vehicles have been in the Company's inventory longer than the guidelines set by the Company. Such sales are frequently at or below cost and, therefore, affect the Company's overall gross margin on vehicle sales. The Company's salary expense, employee benefits costs and advertising expenses comprise the majority of its selling, general and administrative ("SG&A") expenses. The Company's interest expense fluctuates based primarily on the level of the inventory of new vehicles held at its dealerships, substantially all of which is financed (such financing being called "floor plan financing"). The Company has historically accounted for all of its dealership acquisitions using the purchase method of accounting and, as a result, does not include in its financial statements the results of operations of these dealerships prior to the date they were acquired by the Company. The Combined and Consolidated Financial Statements of the Company discussed below reflect the results of operations, financial position and cash flows of each of the Company's dealerships acquired prior to June 30, 1997. As a result of the effects of the Reorganization, as well as the effects of the Acquisitions and the Offering, the historical combined and 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 of the Company in the future or the results of operations, financial position and cash flows which would have resulted had the Reorganization and Acquisitions occurred at the beginning of the periods presented in the Combined and Consolidated Financial Statements. The Company's total revenues have increased from $199.4 million in 1992 to $376.6 million in 1996, for a compound annual growth rate of 17.2% (primarily as a result of acquisitions). Operating income during this period experienced faster growth, with operating income increasing from $3.7 million in 1992 to $10.8 million in 1996, for a 30.7%, compound annual growth rate (primarily as a result of acquisitions). Income before income taxes and minority interest, however, has only increased at a compound annual growth rate of 18.3% primarily because interest expense on floor plan obligations has increased from 1.1% of total revenues in 1992 to 1.6% of total revenues in 1996. Inventory and floor plan balances increased during 1995 and 1996 to support the Company's strategy of increasing market share. In early 1997, the Company instituted additional inventory controls in order to reduce interest costs to levels typical of the industry. Interest expense on floor plan obligations as a percentage of total revenues has improved from 1.5% for the six months ended June 30, 1996 to 1.4% for the six months ended June 30, 1997. As of June 30, 1997, the Company effected the Reorganization pursuant to which the Company (i) acquired all of the capital stock of the Sonic Dealerships and (ii) issued Class B Common Stock in exchange for the Dealership Securities. The Company will acquire these minority interests in purchase transactions at a price in excess of their book value by approximately $2.5 million. This excess will be capitalized as goodwill and amortized over forty years. From May through October 1997, the Company consummated or signed definitive agreements to purchase six additional dealerships or dealership groups for an aggregate purchase price of $94.8 million. The Company intends to use the proceeds from the Offering, along with borrowings under the Six-Month Facility (as defined herein), the initial borrowing under the Revolving Facility (as defined herein), and the Bowers Note to pay the purchase price of the Acquisitions. In connection with the Acquisitions, the Company will book approximately $61.6 million of goodwill which will be amortized over forty years. The automobile industry is cyclical and historically has experienced periodic downturns, characterized by oversupply and weak demand. Many factors affect the industry including general economic conditions and consumer confidence, the level of discretionary personal income, interest rates and available credit. During the five years ended December 31, 1996, the automobile industry was generally in a growth period with new vehicles sales growing at a compound rate of 10.5% as a result of price increases of 6.2% and unit sales increases of 4.0%. During the first six months of 1997, however, industry sales of new cars declined by 2.0%, although the Company's new car and light truck unit sales increased by 7.0% during the period. During these periods, interest rates were relatively stable. 37 Results of Operations The following table summarizes, for the periods presented, the percentages of total revenues represented by certain items reflected in the Company's statement of operations.
Percentage of Total Revenues for ---------------------------------------------- Six Months Ended Year Ended December 31, June 30, -------------------------- ---------------- 1994 1995 1996 1996 1997 ------ ------ ------ ------ ------ Revenues: New vehicle sales........................................................ 61.5 % 60.0 % 61.9 % 61.0 % 64.4 % Used vehicle sales....................................................... 23.9 % 26.0 % 24.9 % 25.6 % 22.6 % Parts, service and collision repair...................................... 12.7 % 11.5 % 11.3 % 11.1 % 10.8 % Finance and insurance.................................................... 1.9 % 2.5 % 1.9 % 2.3 % 2.2 % ------ ------ ------ ------ ------ Total revenues........................................................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales............................................................ 87.2 % 87.1 % 87.9 % 88.2 % 88.6 % ------ ------ ------ ------ ------ Gross profit............................................................. 12.8 % 12.9 % 12.1 % 11.8 % 11.4 % Selling, general and administrative...................................... 9.2 % 9.4 % 8.9 % 8.8 % 8.7 % Operating income......................................................... 3.2 % 3.2 % 2.9 % 2.9 % 2.6 % Interest expense......................................................... 1.3 % 1.6 % 1.7 % 1.6 % 1.6 % ------ ------ ------ ------ ------ Income before income taxes............................................... 2.2 % 1.7 % 1.3 % 1.5 % 1.2 % ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Revenues. Revenues grew in each of the Company's primary revenue areas, except for used vehicles, for the first half of 1997 as compared with the first half of 1996, causing total revenues to increase 12.2% to $212.7 million. New vehicle sales revenue increased 18.4% to $137.1 million, compared with $115.7 million. New vehicle unit sales increased from 6,027 to 6,553, accounting for 51.5% of the increase in vehicle sales revenues. The remainder of the increase was primarily due to a 8.9% increase in the average selling price resulting from changes in vehicle prices, particularly a shift in customer preference to higher cost light trucks and sport utility vehicles. Used vehicle revenues from retail sales declined 7.2% from $35.2 million in the first half of 1996 to $32.7 million in the first half of 1997. The decline in used vehicle revenues was due principally to declines in used vehicle unit sales at the Company's Town & Country Ford and Lone Star Ford locations, which related to changes in consumer demand. The Company's parts, service and collision repair revenue increased 9.0% to $22.9 million from $21.0 million, and declined as a percentage of revenue to 10.8% from 11.1%. The increase in service and parts revenue was due principally to increased parts revenue, including wholesale parts, from the Company's Lone Star Ford and Fort Mill Ford locations. F&I revenue increased $0.5 million, due principally to increased new vehicle sales and related financings. Gross Profit. Gross profit increased 8.5% in the 1997 period to $24.3 million from $22.4 million in the 1996 period due to increases in revenues of new vehicles principally at the Company's Lone Star Ford and Fort Mill Ford locations. Parts and service revenue increases also contributed to the increase in gross profit. Gross profit as a percentage of sales declined from 11.8% to 11.4% due principally to reductions in higher margin used vehicle sales from the prior period. Selling, General and Administrative Expenses. SG&A expenses increased 10.8% from $16.6 million to $18.4 million. These expenses increased due to increases in sales volume as well as expenses associated with the Acquisitions and the Offering. Interest Expense. The Company's interest expense increased 10.1% from $3.0 million to $3.3 million. The increase in interest expense was due to the acquisition of Fort Mill Chrysler-Plymouth-Dodge dealership in June of 1997, increases in interest rates on floor plan debt and increased new vehicle inventory levels at existing dealerships. Net Income. As a result of the factors noted above, the Company's net income decreased by $0.2 million in the first half of 1997 compared to the first half of 1996. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Revenues. The Company's total revenue increased 21.1% to $376.6 million in 1996 from $311.0 million in 1995. New vehicle sales increased 25.0% to $233.1 million in 1996 from $186.5 million in 1995, primarily because of the acquisition in 38 February 1996 of the Company's Fort Mill Ford dealership. The inclusion of the results of the Fort Mill Ford dealership accounted for 65.3% of the Company's overall increase in new vehicle sales in 1996. Of the increase in sales, 60.7% was attributable to increases in unit sales from 1995 to 1996. The remainder of the increase in new vehicle sales in 1996 was largely attributable to an increase in average unit sales prices of 9.8% which the Company believes was primarily due to changes in inventory mix (in response to shifting customer preferences to light trucks and sport utility vehicles) and general increases in new vehicle sales prices. Used vehicle revenues from retail sales increased 12.0% to $68.0 million in 1996 from $60.8 million in 1995. The inclusion of the results of the Company's Fort Mill Ford dealership accounted for substantially all of this increase in used vehicle sales. The Company attributes the remainder of the increase in its used vehicle sales in 1996 to increases of approximately 5.6% in the average retail selling price per vehicle sold. Increases in average retail selling prices were due to changes in product mix and general price increases. The Company's parts, service and collision repair revenue increased 19.0% to $42.6 million for 1996, compared to $35.9 million in 1995. Of this increase, $4.4 million or 64.5% was due to the inclusion of the Company's Fort Mill Ford dealership in the 1996 results of operations. The remainder of the increase was principally the result of improved service operations and wholesale parts distribution at the Company's Town and Country Ford dealership. F&I revenues declined $0.7 million, or 8.9%, due principally to reductions in sales of finance and insurance products at Town and Country Ford. Gross Profit. Gross profit increased 13.7% in 1996 to $45.6 million from $40.1 million in 1995 primarily due to the addition of the Fort Mill Ford dealership. Gross profit decreased from 12.9% to 12.1% as a percentage of sales due principally to declines in F&I income and declines in gross profit margins on the sale of used vehicles. Gross margins on new vehicles increased primarily due to increases in the average selling price per unit due to a change in mix of new vehicles sold, particularly higher margin light trucks and sport utility vehicles. Selling, General and Administrative Expenses. The Company's SG&A expenses increased $4.3 million, or 14.8%, from $29.3 million in 1995 to $33.7 million in 1996. However, as a percentage of revenue, SG&A expenses decreased from 9.4% to 8.9%. Expenses associated with the Fort Mill Ford dealership acquired by the Company in 1996 accounted for approximately 91.4% of this increase. The Company attributes the remainder of the increase in selling, general and administrative expenses primarily to higher compensation levels in 1996 and to an increase in advertising expenses. Interest Expense. The Company's interest expense in 1996 increased 29.6% to $6.4 million from $4.9 million in 1995. Of this increase, $1.0 million or 70.4% was attributable to floor plan financing at the Company's Fort Mill Ford dealership acquired in February 1996. The remainder of the increase primarily reflects interest expense on the debt assumed in the acquisition of Fort Mill Ford and an increase in floor plan interest rates during 1996. Net Income. The Company's net income in 1996 decreased 6.3% to $3.0 million from $3.2 million in 1995. This decrease was principally caused by increased interest costs related to floor plan financing and debt assumed in the acquisition of Fort Mill Ford. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Revenues. The Company's total revenue increased 16.4% to $311.0 million in 1995 from $267.1 million in 1994. New vehicle sales increased 13.5% to $186.5 million in 1995 from $164.4 million in 1994. The Company attributes the increase in new vehicle sales to unit sales increases of 6.1% primarily from the Town & Country Ford and Lone Star Ford dealerships which increased 9.3% and 7.1%, respectively. The remainder of the increase was due to increased sales of higher priced light trucks and sport utility vehicles and general price increases. Used vehicle revenues from retail sales increased by 27.9% to $60.8 million in 1995, compared with $47.5 million in 1994. The increase in used vehicle unit sales was due principally to increases at the Company's Lone Star Ford, Town & Country Ford and Frontier Cadillac-Oldsmobile locations. Unit sales volume increased 18.2%, or 798 units, accounting for 70.9% of the increase in used vehicle revenues. The remainder of the increase was due to improvements in product mix and general increases in used vehicle selling prices. The Company's parts, service and collision repair revenue increased 5.5% or $1.9 million, from $34.0 million in 1994 to $35.9 million in 1995. Wholesale parts sale increases at the Company's Lone Star Ford dealership and improved service operations at the Company's Town and Country Toyota dealership account for the majority of the increase. F&I revenue increased $2.6 million due principally to additional sales of F&I products at the Company's Town and Country Ford and Lone Star Ford dealerships. 39 Gross Profit. Gross profit increased 17.6% in 1995 to $40.1 million from $34.1 million in 1994. Gross profit as a percentage of sales increased from 12.8% to 12.9% due principally to a 50.8% increase in high margin F&I product sales. Gross margins on used vehicles improved due to the Company's strategy of improved inventory management and the purchase of quality used vehicles. Selling, General and Administrative Expenses. The Company's SG&A expenses increased $4.7 million to $29.3 million or 19.1% and represented 9.4% in total revenues in 1995 from $24.6 million or 9.2% of total revenues in 1994. Interest Expense. The Company's interest expense in 1995 increased 43.5% to $4.9 million from $3.4 million in 1994. Increased interest expense was due to increases in inventory levels and related floor plan borrowings. Net Income. The Company's net income in 1995 decreased 13.5% to $3.2 million from $3.7 million in 1994. This decrease was caused by the increase in floor plan financing due to an increase in vehicle inventory levels. Liquidity and Capital Resources The Company's principal needs for capital resources are to finance acquisitions, debt service and working capital requirements. Historically, the Company has relied primarily upon internally generated cash flows from operations, borrowing under its various credit facilities and borrowings and capital contributions from its stockholders to finance its operations and expansion. After the Offering, the Company does not expect to receive any additional financing from its existing stockholders. The Company has historically maintained a separate revolving floor plan credit facility for each dealership which has been used to finance vehicle inventory. The Company currently has floor plan credit facilities with Ford Motor Credit, Chrysler Financial Corporation and World Omni Financial Corporation. As of June 30, 1997 there was an aggregate of $67.9 million outstanding under the floor plan credit facilities. These floor plan facilities bear interest at variable rates ranging from LIBOR plus 2.75% to prime plus 1.0%. Typically new vehicle floor plan indebtedness exceeds the related inventory balances. The inventory balance is generally reduced by the manufacturer's purchase discounts, and such reduction is not reflected in the related floor plan liability. These manufacturer purchase discounts are standard in the industry, typically occur on all new vehicle purchases, and are not used to offset the related floor plan liability. These discounts are aggregated and generally paid to the Company by the manufacturer on a quarterly basis. The related floor plan liability becomes due as vehicles are sold. The Company makes monthly interest payments on the amount financed under the floor plan lines but is not required to make loan principal repayments prior to the sale of the vehicles. The underlying notes are due when the related vehicles are sold and are collateralized by vehicle inventories and other assets of the Company. The floor plan financing agreements contain a number of covenants, including among others, covenants restricting the Company with respect to the creation of liens and changes in ownership, officers and key management personnel. The Company has received a commitment from Ford Motor Credit to consolidate its new vehicle floor plan lines, contingent upon the Offering and other customary terms and conditions. The average interest expense under this new agreement is anticipated to be approximately 7.6% compared to historical interest rates ranging from 7.75% to 10.25%. The Company leases various facilities and equipment under operating lease agreements including leases with related parties. See "Certain Transaction -- Leases." During the first six months of 1997, the Company generated net cash of $4.0 million from operating activities. Net cash provided by operating activities was $2.1 million in 1996 and was primarily attributable to net income of $3.0 million. Increased inventory levels and accounts receivable were primarily offset by increased floor plan indebtedness and accounts payable. The increase in inventory levels in 1996 reflects an increase in the volume of sales and the timing of shipments from the Manufacturers. Increased receivables reflect increased sales primarily attributable to Fort Mill Ford and Fort Mill Chrysler-Plymouth-Dodge acquired in 1996 and 1997, respectively. The Company generated net cash from operations of $3.0 million in 1995 and 1994. Cash used for investing activities, excluding amounts paid in acquisitions, was approximately $0.8 million for the first six months of 1997 and related primarily to acquisitions of property and equipment. Cash provided by (used in) investing activities was ($11.5) million, $0.3 million and ($1.7) million in 1996, 1995 and 1994, respectively, including $1.9 million, $1.5 million and $1.4 million of capital expenditures during such periods. In 1996, cash provided by financing activities of $7.1 million reflected the purchase of capital stock by a stockholder of the Company, the proceeds of which were used to fund the acquisition of Fort Mill Ford and the purchase of stock by a stockholder of Town & Country Ford. Cash used in financing activities, excluding capital contributions for the six months ended June 30, 1997 was $0.2 million principally due to scheduled payments on long-term debt. 40 In conjunction with the recent consummation of the Lake Norman Acquisition, the Company obtained from NationsBank, N.A. ("NationsBank") a short-term line of credit in an aggregate principal amount of up to $20.0 million that matures no later than February 15, 1998 (the "Six-Month Facility"). A total of $20.0 million in aggregate principal amount is currently outstanding under the Six-Month Facility, which amount has been applied to fund the purchase price of the Lake Norman Acquisition and the Williams Acquisition. The Six-Month Facility is secured by a pledge of Speedway Motorsports, Inc. common stock shares owned by Bruton Smith, the Company's Chairman and Chief Executive Officer. See "Certain Transactions -- The Smith Guaranties and Pledges." No assets of the Company secure the Six-Month Facility, and the Company is under no obligation to repay or reimburse Mr. Smith should NationsBank foreclose on the securities pledged by Mr. Smith. The Company recently obtained a secured, revolving acquisition line of credit (the "Revolving Facility") from Ford Motor Credit in an initial aggregate principal amount of $26.0 million (the "Initial Loan Commitment"), which the Company expects to be increased to an aggregate principal amount of $75.0 million (the "Maximum Loan Commitment") pursuant to a commitment from Ford Motor Credit. The Company has also received a commitment from Ford Motor Credit to provide floor plan financing to the Company's wholly-owned dealership subsidiaries (the "Wholesale Credit Lines" and, together with the Revolving Facility, the "Facilities"). Under the terms of the Revolving Facility governing the Initial Loan Commitment, the Revolving Facility will mature on December 15, 1997, unless the Revolving Facility is increased to the Maximum Loan Commitment. After the increase to the Maximum Loan Commitment, the Revolving Facility will mature in two years, unless the Company requests that such term be extended, at the option of Ford Motor Credit, for a number of additional one year terms to be negotiated by the parties. No assurance can be given that such extensions will be granted. The Revolving Facility is expected to be increased to the Maximum Loan Commitment after the consummation of the Offering, subject to customary terms and conditions. The proceeds from the Initial Loan Commitment were used to consummate the Ken Marks Acquisition. Amounts to be drawn under the Maximum Loan Commitment are anticipated by the Company to be used (i) for the acquisition of additional dealership subsidiaries, (ii) to refinance the amounts remaining outstanding under the Six-Month Facility (after application of the proceeds of the Offering), which will result in the retirement of the Six-Month Facility, and (iii) to provide general working capital needs of the Company not to exceed $10 million. The Wholesale Credit Lines are to be provided to the Company's dealership subsidiaries, including the dealerships acquired in the Acquisitions, subject to customary terms and conditions on terms substantially the same as the floor plan financing previously provided by Ford Motor Credit to the Company's subsidiaries. Although management believes that the Revolving Facility will be increased to the Maximum Loan Commitment after the consummation of the Offering, no assurance can be given that such increase will occur. The Initial Loan Commitment is secured by a pledge of Speedway Motorsports, Inc. common stock owned by Sonic Financial. See "Certain Transactions -- The Smith Guaranties and Pledges." The Company is under no obligation to repay or reimburse Sonic Financial if Ford Motor Credit forecloses on its securities. In addition, all of the Facilities are secured by a pledge by the Company of all the capital stock, membership interests and partnership interests of all of the Company's dealership subsidiaries and a lien on all of the Company's other assets, except for real estate owned by the Company. Mr. Smith and the Company's subsidiaries also guarantee the Facilities, and the Company will guarantee the Wholesale Credit Lines. The guarantees made by the Company's dealership subsidiaries are secured by certain assets of such dealership subsidiaries. If the Revolving Facility is increased to the Maximum Loan Commitment, Mr. Smith's guaranty and Sonic Financial's pledge of Speedway Motorsports, Inc. common stock may be released. (If net proceeds of the Offering to the Company are $70 million or greater, the guarantee of the Revolving Facility by Bruton Smith, and the pledge of shares of Speedway Motorsports, Inc. common stock owned by Sonic Financial, will be released pursuant to the terms of the Revolving Facility. If net proceeds of the Offering to the Company are less than $70 million, Sonic Financial will be required to provide continued credit support for the Revolving Facility in the form of a pledge of shares of Speedway Motorsports, Inc. common stock owned by Sonic Financial equal in value to three times the amount of the shortfall between $70 million and the actual net proceeds of the Offering to the Company.) When the Company will need to refinance the Revolving Facility, there can be no assurance that Mr. Smith will agree to guarantee such debt or that the assets of Mr. Smith or Sonic Financial will be available to provide additional security under a new credit agreement, or that a new credit agreement could be arranged on terms as favorable as the terms of the Six-Month Facility or the Revolving Facility without a gurantee by, or pledge of the assets of, Mr. Smith or Sonic Financial. Pursuant to the terms of the Revolving Facility, the Company also agreed not to pledge any of its assets to any third party (with the exception of currently encumbered real estate and assets of the Company's dealership subsidiaries that are subject to previous pledges or liens). See "Risk Factors -- Limitations on Financial Resources Available for Acquisitions; Possible Inability to Refinance Existing Debt." The Revolving Facility currently does not contain any affirmative financial covenants by the Company, but does contain certain negative covenants made by the Company, including covenants restricting or prohibiting the payment of dividends, capital expenditures and material dispositions of assets as well as other customary covenants. It is anticipated by the Company that when the Initial Loan Commitment is increased to the Maximum Loan Commitment, the Revolving Facility will be 41 amended by Ford Motor Credit and the Company to provide for, in addition to the negative covenants described in the previous sentence, additional financial covenants requiring the Company to maintain compliance with, among other things, specified ratios of (i) debt to tangible equity (as defined in the Revolving Facility), (ii) current assets to current liabilities, (iii) earnings before interest, taxes, depreciation and amortization (EBITDA) to fixed charges, (iv) EBITDA to interest expense, (v) EBITDA to total debt and (vi) EBITDA to total floor plan debt. Moreover, the loss of voting control over the Company by the Smith Group or the failure by the Company, with certain exceptions, to own all the outstanding equity, membership or partnership interests in its dealership subsidiaries will constitute an event of default under the Revolving Facility. Capital expenditures, excluding amounts paid in acquisitions, were $0.9 million, $1.9 million, $1.5 million and $1.4 million in the first six months of 1997 and in 1996, 1995 and 1994, respectively. The Company's principal capital expenditures typically include building improvements and equipment for use in the Company's dealerships. Capital expenditures in 1996 and 1995 were primarily attributable to expenditures for the addition of a used car lot in 1996 and other capital improvements at the Lone Star Ford dealership. Excluding the purchase price for the Acquisitions and future acquisitions, the Company is anticipating total capital expenditures in the second half of 1997 to be approximately $1.0 million. The Company expects to increase its capital expenditures over the next few years as part of its acquisition and growth strategy. The Company believes that funds generated through future operations and availability of borrowings under its floor plan financing (or any replacements thereof) and its other credit arrangements (including the Maximum Loan Commitment expected to become effective after consummation of the Offering) will be sufficient to fund its debt service and working capital requirements and any seasonal operating requirements, including its currently anticipated internal growth for the foreseeable future. The Company estimates that it will incur a tax liability of approximately $5.5 million in connection with the change in its tax basis of accounting for inventory from LIFO to FIFO. The Company believes that it will be required to pay this liability over a six-year period, beginning in January 1998, and believes that it will be able to pay such obligation with cash provided by operations. The Company expects to fund any future acquisitions from its future cash flow from operations, additional debt financing (including the Maximum Loan Commitment) or Class A Common Stock issuances. The Company does not currently have in place any credit facilities for additional acquisitions. There can be no assurance that additional financing can be obtained on terms favorable to the Company, or that the Company will be able to use its Common Stock to fund any future acquisitions. See "Risk Factors -- Limitations on Financial Resources Available for Acquisitions; Possible Inability to Refinance Existing Debt", " -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity" and "The Acquisitions -- Future Acquisitions." Seasonality The Company's operations are subject to seasonal variations. The first quarter generally contributes less revenue and operating profits than the second, third and fourth quarters. Seasonality is principally caused by weather conditions and timing of manufacturer incentive programs and model changeovers. Set forth below is revenue information with respect to the Company's operations for the most recent six quarters.
1996 1997 ----------------------------------------- ------------------- 1st 2nd 3rd 4th 1st 2nd Quarter Quarter Quarter Quarter Quarter Quarter ------- -------- ------- ------- ------- -------- (in thousands) Revenues................................................ $85,669 $103,946 $93,222 $93,767 $98,739 $114,008
Effects of Inflation Due to the relatively low levels of inflation in 1994, 1995 and 1996 and the first half of 1997, inflation did not have a significant effect on the Company's results of operations for those periods. New Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This Statement specifies the computation, presentation and disclosure requirements for earnings per share. The Company believes that the adoption of such Statement would not result in earnings per share materially different than pro forma earnings per share presented in the accompanying statements of income. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This standard establishes standards of reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement will be effective for the Company's fiscal year ending December 31, 1998, and the Company does not intend to adopt this statement prior to the effective date. Had the Company adopted this Statement as of January 1, 1994, it would have reported comprehensive income of $2.8 million, $2.4 million and $2.1 million for the years ended December 31, 1994, 1995 and 1996, respectively. 42 BUSINESS Overview The Company is one of the leading automotive retailers in the United States, operating 23 dealership franchises, four standalone used vehicle facilities and seven collision repair centers in the southeastern and southwestern United States. Sonic sells new and used cars and light trucks, sells replacement parts, provides vehicle maintenance, warranty, paint and repair services and arranges related F&I for its automotive customers. The Company's business is geographically diverse, with dealership operations in the Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta markets, each of which the Company believes is experiencing favorable demographic trends. Sonic sells 15 domestic and foreign brands, which consist of BMW, Cadillac, Chrysler, Dodge, Ford, Honda, Infiniti, Jaguar, Jeep, KIA, Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo. In several of its markets, the Company has a significant market share for new cars and light trucks, including 13.7% in Charlotte and 9.1% in Chattanooga in 1996. Pro forma for the Acquisitions, the Company had revenues of $899.6 million and retail unit sales of 24,206 new and 13,475 used vehicles in 1996. The Company believes that in 1996, based on pro forma retail unit sales, it would have been one of the ten largest dealer groups out of a total of more than 15,000 dealer groups in the United States and, based on pro forma revenues, it would have had three of the top 100 individual dealerships locations in the United States. The Company's founder and Chief Executive Officer, O. Bruton Smith, has over 30 years of automotive retailing experience. In addition, the Company's other executive officers, regional vice presidents and executive managers have on average 18 years of automotive retailing experience. The Company's dealerships are among those dealerships that have won the highest attainable awards from various manufacturers measuring quality and customer satisfaction. These awards include the Five Star Award from Chrysler, the Chairman's Award from Ford, the President's Award from BMW and the President's Circle Award from Infiniti. In addition, the Company was named to Ford's Top 100 Club, which consists of Ford's top 100 retailers based on retail volume and consumer satisfaction. Also, various members of the management team have served on several manufacturer dealer councils which act as liaisons between the manufacturers and dealer groups. The Company intends to pursue an acquisition growth strategy led by a management team that has experience in the consolidation of automotive retailing as well as motorsports businesses. Bruton Smith, who is also the Chief Executive Officer of Speedway Motorsports, Inc., the owner and operator of several motorsports facilities, first entered the automotive retailing business in the mid-1960's. Mr. Smith will devote approximately 50% of his business time to the Company. Since 1990, Mr. Smith has successfully acquired three dealerships and increased his dealerships' revenues from $199.4 million in 1992 to $376.6 million in 1996, without giving effect to the Acquisitions. In the Tennessee market, Mr. Bowers has acquired or opened eight dealerships since 1992 and increased revenues (primarily through acquisitions) of the Bowers Dealerships from $13.2 million in 1992 to $101.5 million in 1996. No assurance can be given that Messrs. Smith and Bowers will be successful in acquiring or opening new dealerships for the Company or increasing the Company's revenues. The Company believes the competitive advantages which differentiate it from its local competitors include the reputation of the Company's management in the automotive retailing industry, regional and national economies of scale, brand and geographic diversity, and the established customer base and local name recognition of the Company's dealerships. The Company has developed and implemented several growth strategies to capitalize on these competitive advantages. One of these is to continue to expand its operations in the Southeast and Southwest by acquiring additional dealerships both within its current markets and in new markets. The Company also is seeking additional growth from the increased sale of higher margin products and services such as wholesale parts, after-market products, collision repair services and F&I. Automobile retailing is highly competitive. The Company's competition includes franchised automobile dealerships, some with greater resources than the Company, selling the same or similar makes of vehicles offered by the Company. Other competitors include other franchised dealers, private market buyers and sellers of used vehicles, used vehicle dealers, service center chains and independent service and repair shops. Primarily as a result of competitive pressures, gross profit margins on new vehicle sales have been declining since 1986. The Company has also experienced gross profit margin pressure on used vehicle sales over the last 18 months. For further discussion of competition affecting the Company's business, see "Risk Factors -- Competition" and "Business -- Competition." Growth Strategy The Company's objective is to capitalize on the consolidation of the automotive retailing industry. Key elements of the Company's strategy to achieve this objective include the acquisition of additional dealerships and the leveraging of the Company's new vehicle franchises to increase sales of higher margin products and services. 43 (Bullet) Acquire Dealerships. The Company plans to implement a "hub and spoke" acquisition program primarily by pursuing (i) well-managed dealerships in new metropolitan and growing suburban geographic markets, and (ii) dealerships that will allow the Company to capitalize on regional economies of scale, offer a greater breadth of products and services in any of its markets or increase brand diversity. The growth generated through acquisitions creates opportunities for economies of scale, including more favorable financing terms from lenders and cost savings from the consolidation of administrative functions such as employee benefits, risk management and employee training. New Markets. The Company looks to acquire well-managed dealerships in geographic markets it does not currently serve, principally in the Southeast and Southwest regions of the United States. The Company will target dealers having superior operational and financial management. Generally, the Company will seek to retain the acquired dealerships' operational and financial management, and thereby benefit from their market knowledge, name recognition and local reputation. The Company also anticipates that management teams at the acquired dealerships will enable the Company to identify more effectively additional acquisition opportunities in these markets. Existing Markets. The Company seeks growth in its operations within existing markets by acquiring dealerships that increase the brands, products and services offered in those markets. These acquisitions should produce opportunities for additional operating efficiencies, promote increased name recognition and provide the Company with better opportunities for repeat and referral business. Such acquisitions should also create opportunities for regional economies of scale in areas such as vendor consolidation, facility and personnel utilization and advertising spending. Additionally, cost savings may be achieved by consolidating certain administrative functions on a regional basis that would not be efficient on a national basis, such as accounting, information systems, title work, credit and collection. (Bullet) Pursue Opportunities in Ancillary Products and Services. The Company intends to pursue opportunities to increase its sales of higher-margin products and services by expanding its collision repair centers and its wholesale parts and after-market products businesses, which, other than after market products, are not directly related to the new vehicle cycle. Collision Repair Centers. The Company's collision repair business provides favorable margins and is not significantly affected by economic cycles or consumer spending habits. The Company believes that because of the high capital investment required for collision repair shops and the cost of complying with environmental and worker safety regulations, large volume body shops will be more successful in the future than smaller volume shops. The Company believes that this industry will consolidate and that it will be able to capitalize on this trend by expanding its collision repair business. The Company also believes that opportunities exist for those automotive retailers that can establish relationships with major insurance carriers. The Company currently participates in 35 direct repair programs with major insurance companies and its relationships with these carriers provide a source of collision repair customers. The Company currently has eight collision repair centers accounting for approximately $8.9 million in pro forma revenue for the year ended 1996. Sonic intends over the next several years to establish collision repair centers at various of its other facilities as market conditions warrant. Wholesale Parts. Over time, the Company plans to capitalize on its growing representation of numerous manufacturers in order to increase its sales of factory authorized parts to wholesale buyers such as independent mechanical and body repair garages and rental and commercial fleet operators. After-Market Products. The Company intends to expand its offerings of after-market products in many of its dealership locations. After-market products, such as custom wheels, performance parts, telephones and other accessories, enable the dealership to capture incremental revenue on new and used vehicle sales. (Bullet) Enhance Profit Opportunities in Finance and Insurance. The Company offers its customers a wide range of financing and leasing alternatives for the purchase of vehicles, as well as credit life, accident and health and disability insurance and extended service contracts. As a result of its size and scale, the Company believes it will be able to negotiate with the lending institutions that purchase its financing contracts to increase the Company's revenues. Likewise, the Company expects to negotiate to increase the commissions it earns on extended service and insurance products. It also expects that the integration of innovative computer technologies and in-depth sales training will serve as an important tool in enhancing F&I profitability. (Bullet) Increase Used Vehicle Sales. The Company believes that there will be opportunities to improve the used vehicle departments at several of its dealerships. The Company currently operates four standalone used vehicle facilities. In 1998, the Company intends to convert part of an existing facility in Nashville to a used vehicle facility. It also intends to develop used vehicle facilities in other markets where management believes opportunities exist. 44 Operating Strategy Sonic's operating objectives are to focus on customer satisfaction throughout the organization in order to build long-term customer relationships and to capitalize on operating efficiencies which will enhance its financial performance. The Company seeks to achieve these objectives by implementing the following operating strategies. (Bullet) Operate Multiple Dealerships in Geographically Diverse Markets. The Company operates dealerships in Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta. By operating in several locations throughout the United States, the Company believes it will be better able to insulate its earnings from local economic downturns. In addition, the Company believes that by establishing a significant market presence in its operating regions, it will be able to provide superior customer service through a market-specific sales, service, marketing and inventory strategy. It is the Company's strategy, for instance, that the savings in a market on reduced advertising costs will be re-deployed into customer service and customer retention programs. The Company's market share in its Charlotte and Chattanooga markets was 13.7% and 9.1%, respectively in 1996. (Bullet) Achieve High Levels of Customer Satisfaction. Customer satisfaction has been and will continue to be a focus of the Company. The Company's personalized sales process is intended to satisfy customers by providing high-quality, affordable vehicles in a positive, "consumer friendly" buying environment. The Company's service department also seeks to provide its customers with a professional and reliable service experience of a consistently high standard. Beyond establishing strong consumer loyalty, this focus on customer satisfaction engenders good relations with Manufacturers. Manufacturers generally measure CSI, which is a result of a survey given to new vehicle buyers. Some Manufacturers offer specific performance incentives, on a per vehicle basis, if certain CSI levels (which vary by Manufacturer) are achieved by a dealer. Manufacturers can withhold approval of acquisitions if a dealer fails to maintain a minimum CSI score. Historically, the Company has not been denied Manufacturer approval of acquisitions based on CSI scores. To keep management focused on customer satisfaction, the Company includes CSI results as a component of its incentive compensation program. (Bullet) Train and Develop Qualified Management. Sonic requires all of its employees, from service technicians to regional vice presidents, to participate in in-house training programs. The Company leverages the experience of senior management, along with third party trainers from manufacturers, industry affiliates and vendors, to formally train all employees. This training regimen has resulted in many of the Company's regional vice presidents, executive managers and salespeople being certified by NADA, and has become a convenient and effective way to share best practices among the Company's employees at all levels of the various dealerships. The Company is developing an education center (the "Education Center") to be equipped with classrooms specifically designed on a departmental basis. The F&I classroom in the Education Center, for example, is to be equipped with simulation software that replicates the dealers' systems and allows the employee to handle all facets of an F&I transaction. The Company believes that its comprehensive training of all employees at every level of their career path offers the Company a competitive advantage over other dealership groups in the development and retention of its workforce. (Bullet) Offer a Diverse Range of Automotive Products and Services. Sonic offers a broad range of automotive products and services, including a wide selection of new and used vehicles, vehicle financing and insurance programs, replacement parts and maintenance and repair programs. The Company offers 15 product lines ranging from economy to luxury brands consisting of BMW, Cadillac, Chrysler, Dodge, Ford, Honda, Infiniti, Jaguar, Jeep, KIA, Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo. The Company also offers a variety of used vehicles at a broad range of prices. Offering numerous new vehicle brands enables the Company to satisfy a variety of customers, reduces dependence on any one Manufacturer and reduces exposure to supply problems and product cycles. (Bullet) Capitalize on Efficiencies in Operations. Because management compensation is based primarily on dealership performance, expense reduction and operating efficiencies are a significant management focus. As the Company pursues its acquisition strategy, the Company's size and market presence should provide it with an opportunity to negotiate favorable contracts on such expense items as advertising, purchasing, bank financings, employee benefit plans and other vendor contracts. In addition, the Company has instituted both regional and national operations committees that meet on a regular basis to share best practices to improve dealership performance. (Bullet) Utilize Professional Management Practices and Incentive Based Compensation Programs. As a result of Sonic's size and geographic dispersion, the Company's senior management has instituted a multi-tiered management structure to supervise effectively its dealership operations. In addition to the officers of the Company, this structure includes executive managers who are responsible for individual dealership operations, as well as regional vice presidents responsible for various regions throughout the country. In an effort to align management's interest with that of stockholders, a portion of 45 the incentive compensation program for each officer, vice president and executive manager is provided in the form of Company stock options, with additional incentives based on the performance of individual profit centers. Sonic believes that this organizational structure, with room for advancement and the opportunity for equity participation, serves as a strong motivation for its employees. (Bullet) Apply Technology Throughout Operations. The Company believes that, with the customized technology it has introduced in certain markets, it has been able to improve its operations over time by integrating its systems into all aspects of its business. In these markets the Company uses computer-based technology to monitor its dealerships' operating performance and quickly adjust to market changes, and to integrate computer systems into its sales, F&I and parts and service operations. For example, sales managers use a database to identify and solicit prospective customers, and to design appropriate financing packages for prospective buyers. Service and parts managers utilize computer technology to coordinate between the two departments and to service customers more efficiently. In addition to these uses, the Company's technology also plays a role in its inventory management. The Company intends to expand this computer system into more of its dealerships and markets as existing contracts for computer systems expire. Industry Overview Automotive retailing, with approximately $640 billion in 1996 retail sales, is the largest consumer retail market in the United States, representing approximately 8% of the domestic gross product based on data collected by NADA and the U.S. Department of Commerce. Retail sales of new vehicles, which are sold exclusively through new vehicle dealers, were approximately $328 billion. In addition, used vehicle retail sales in 1996 were estimated at $311 billion, with approximately $260 billion in sales by franchised and independent dealers and the balance in privately negotiated transactions. From 1992 to 1996, new vehicles sales have grown at an annual compound rate of 10.5%, while used vehicle sales have grown at a rate of 15.8% for retail used vehicle sales and 6.7% for wholesale used vehicle sales. This significant increase in sales revenue is primarily because the average price of a new vehicle has risen at a compound average rate of 6.2% from 1992 to 1996 and newer, high-quality used vehicles now comprise a larger part of the used vehicle market. During this period, unit sales grew at rates of only 4.0% for new vehicles, 6.4% for retail used vehicles and 1.4% for wholesale used vehicles. For the six months ended June 30, 1997, industry retail sales were down 2% as a result of retail car sales declines of 5.3% and retail truck sales gains of 2.4% from the same period in 1996. The following table sets forth information regarding vehicle sales by new vehicle dealerships for the periods indicated.
United States New Vehicle Dealers' Vehicle Sales (1) -------------------------------------------------- 1992 1993 1994 1995 1996 ------ ------ ------ ------ ------ (Units in millions; dollars in billions) New vehicle unit sales................................................. 12.9 13.9 15.1 14.7 15.1 New vehicle sales (2).................................................. $220.3 $253.3 $289.1 $301.2 $328.4 Used vehicle unit sales-retail......................................... 9.3 9.9 10.9 11.5 11.9 Used vehicle sales-retail (2).......................................... $ 77.1 $ 90.7 $110.6 $126.9 $137.9 Used vehicle unit sales-wholesale...................................... 6.9 6.4 6.9 7.0 7.3 Used vehicle sales -- wholesale (2).................................... $ 26.2(3) $ 24.3 $ 27.9 $ 30.4 $ 33.9 Total vehicle sales.................................................... $323.6 $368.3 $427.6 $458.5 $500.2 Annual growth in total vehicle sales................................... -- 13.8% 16.1% 7.2% 9.1%
- --------------- (1) Reflects new vehicle dealership sales at retail and wholesale. In addition, sales by independent retail used vehicle dealers were approximately $81, $100, $134, $130 and $122 billion, respectively, and casual used car sales were estimated at approximately $36, $33, $40, $52 and $51 billion, respectively, for each of the five years ended December 31, 1996. (2) Sales figures are calculated by multiplying unit sales by the average sales price for the year. (3) The NADA did not report the averages sales price for wholesale transactions prior to 1993. As a result, the 1992 wholesale used vehicle sales were calculated using the 1993 average wholesale price for used vehicles. In addition to new and used vehicles, dealerships offer a wide range of other products and services, including repair and warranty work, replacement parts, extended warranty coverage, financing and credit insurance. In 1996, the average dealership's revenue consisted of 57.7% new vehicles sales, 30.4% used vehicle sales, and 11.9% other products and services. As a result of intense competition for new vehicle sales, the average dealership generates the majority of its profits from the sale of used vehicles and other products and services, including finance and insurance, mechanical and collision repair, and parts and 46 service. In 1996, for example, a used vehicle earned an average gross margin of 11.0% as compared to a new vehicle's average gross margin of 6.4%, in each case for sales by new vehicle dealerships. As is typical in the retailing industry, dealership profitability varies widely across different stores and, ultimately, profitability depends on effective management of inventory, competition, marketing, quality control and, most importantly, responsiveness to the customer. New Vehicle Sales. Franchised dealerships were originally established by automobile manufacturers for the distribution of their new vehicles. In return for exclusive distribution rights within specified territories, manufacturers exerted significant influence over their dealers by limiting the transferability of ownership in dealerships, designating the dealerships location, and managing the supply and composition of the dealership's inventory. These arrangements resulted in the proliferation of small, single-owner operations that, at their peak in the late 1940's, totaled almost 50,000. As a result of competitive, economic and political pressures during the 1970's and 1980's, significant changes and consolidation occurred in the automotive retail industry. One of the most significant changes was the increased penetration by foreign manufacturers and the resulting loss of market share by domestic car makers, which forced many dealerships to close or sell to better-capitalized dealership groups. According to industry data, the number of franchised dealerships has declined from approximately 25,000 dealerships in 1990 to approximately 22,000 in 1996. Although significant consolidation has taken place since the automotive retailing industry's inception, the industry today remains highly fragmented, with the largest 100 dealer groups generating less than 10% of total sales revenues and controlling less than 5% of all franchised dealerships. Used Vehicle Sales. Sales of used vehicles have increased over the past five years, primarily as a result of the substantial increase in new vehicle prices and the greater availability of newer used vehicles due to the increased popularity of short-term leases. Like the new vehicle market, the used vehicle market is highly fragmented, with approximately 22,000 new vehicle dealers accounting for approximately $172 billion in 1996 sales. In addition, an even greater number of independent used car dealers accounted for approximately $122 billion in 1996 sales. Privately negotiated transactions accounted for the remaining 1996 sales, estimated at $51 billion. In addition, an increasing number of used vehicles are being sold by "superstore" outlets, which market only used vehicles and offer a wide selection of low mileage, popular models. In 1996, the top 100 new vehicle dealer groups accounted for less than 2% of used vehicle sales. Industry Consolidation. The Company believes that further consolidation is likely due to increased capital requirements of dealerships, the limited number of viable alternative exit strategies for dealership owners, and the desire of certain manufacturers to strengthen their brand identity by consolidating their franchised dealerships. The Company also believes that an opportunity exists for dealership groups with significant equity capital, and experience in identifying, acquiring and professionally managing dealerships, to acquire additional dealerships for cash, stock, debt or a combination thereof. Publicly owned dealer groups, such as the Company, are able to offer prospective sellers tax advantaged transactions through the use of publicly traded stock which may, in certain circumstances, make them more attractive to prospective sellers. Dealership Operations Upon completion of the Reorganization and the Acquisitions, the Company will own eight dealership franchises in the Charlotte market, ten dealership franchises in the Chattanooga market, two dealership franchises in the Nashville market, one dealership franchise in the Houston market, one dealership franchise in the Tampa-Clearwater market and one dealership franchise in the Atlanta market. The following table sets forth, for each of those areas, information relating to the Company's pro forma performance for the year ended December 31, 1996 and the six months ended June 30, 1997:
Nashville/ Tampa/ Charlotte Chattanooga Houston Clearwater Atlanta Market Market Market Market Market Total --------- ----------- -------- ---------- ------- -------- (in thousands) Year ended December 31, 1996 sales: New vehicles........................................ $ 229,181 $ 98,777 $ 83,763 $ 88,844 $39,940 $540,505 Used vehicles....................................... 105,034 45,400 33,403 42,982 20,931 247,750 Parts, service and collision repair................. 33,260 17,338 18,927 14,224 11,163 94,912 Finance and insurance............................... 7,397 2,877 3,338 2,317 542 16,471 --------- ----------- -------- ---------- ------- -------- Total............................................. $ 374,872 $ 164,392 $139,431 $148,367 $72,576 $899,638 --------- ----------- -------- ---------- ------- -------- --------- ----------- -------- ---------- ------- -------- Six months ended June 30, 1997 sales: New vehicles........................................ $ 123,130 $ 40,938 $ 55,902 $ 45,577 $19,596 $285,143 Used vehicles....................................... 57,978 26,281 17,865 19,580 11,777 133,481 Parts, service and collision repair................. 17,865 9,694 10,363 5,999 5,960 49,881 Finance and insurance............................... 4,464 1,539 2,249 1,029 129 9,410 --------- ----------- -------- ---------- ------- -------- Total............................................. $ 203,437 $ 78,452 $ 86,379 $ 72,185 $37,462 $477,915 --------- ----------- -------- ---------- ------- -------- --------- ----------- -------- ---------- ------- --------
47 Since 1990 the Company has grown significantly, as a result of the acquisition and integration of new vehicle dealerships and an increase in revenues at its existing dealerships. The following table sets forth the name, brands, year of acquisition and location of the dealerships acquired by or awarded to the Company or one of the Bowers Dealerships since 1990:
Year Acquired Location -------- ------------ Dealership and brands currently represented Sonic Automotive Town & Country Toyota............................................................. 1990 Charlotte Fort Mill Ford.................................................................... 1996 Charlotte Fort Mill Chrysler-Plymouth-Dodge................................................. 1997 Charlotte Lake Norman Dodge................................................................. 1997 Charlotte Lake Norman Chrysler-Plymouth-Jeep-Eagle.......................................... 1997 Charlotte Williams Chrysler-Plymouth-Jeep................................................... 1997 Charlotte Ken Marks Ford.................................................................... 1997 Tampa/ Clearwater Bowers Dealerships Infiniti of Chattanooga........................................................... 1992 Chattanooga Nelson Bowers Ford................................................................ 1993 Chattanooga Cleveland Village Honda........................................................... 1994 Chattanooga Cleveland Chrysler-Plymouth-Jeep-Eagle............................................ 1994 Chattanooga Jaguar of Chattanooga (awarded franchise)......................................... 1995 Chattanooga European Motors of Nashville "BMW, Volkswagen"............................................................... 1996 Nashville European Motors "BMW, Volvo".................................................................... 1996 Chattanooga Nelson Bowers Dodge............................................................... 1997 Chattanooga KIA -- VW of Chattanooga (awarded franchise)...................................... 1997 Chattanooga
Dealership Management Operations of the dealerships are overseen by Regional Vice Presidents, who report to the Company's Chief Operating Officer. Each of the Company's dealerships is managed by an Executive Manager who is responsible for the operations of the dealership and the dealership's financial and customer satisfaction performance. The Executive Manager is responsible for selecting, training and retaining dealership personnel. All Executive Managers report to the Company's senior management on a regular basis and prepare a comprehensive monthly financial and operating statement of their dealership. In addition, the Company's senior management meets on a monthly basis with its Executive Managers to address changing customer preferences, operational concerns and to share best practices, such as maintaining a customer-friendly buying environment, maximizing potential revenues per new vehicle sale through increased F&I penetration, using customer calling and coupon programs to attract and retain service customers, and continued training of dealership personnel. Each Executive Manager is complemented by a team which includes two senior managers that 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 who reports to the General Sales Manager or Parts and Service Director. After the Acquisitions, the Company's Regional Vice Presidents will be as listed, with their region of responsibility and age, on the following table:
Name Age Region of Responsibility - ------------------ ------ --------------------------------------------------------------- Ken Marks, Jr. 35 Florida Jeffrey C. Rachor 35 Mid-South (Tennessee, Georgia, Kentucky and Alabama) Ivan A. Tufty 57 Texas William Sullivan 65 North Carolina and South Carolina
New Vehicle Sales The Company sells 15 brands of cars, light trucks and sport utility vehicles. The products have a broad range of prices from lower priced, or economy vehicles, to luxury vehicles. The Company believes that its brand, product and price diversity 48 reduces the risk of changes in customer preferences, product supply shortages and aging products. Sales of new vehicles in 1996 were approximately 41% cars and 59% trucks. Approximately 13% of sales in 1996 were luxury brands (BMW, Cadillac, Infiniti, Jaguar and Volvo). See "Risk Factors -- Dependence on Automobile Manufacturers." The following table sets forth, by vehicle brand, information relating to the Company's and the dealerships being acquired pursuant to the Acquisitions new vehicle sales for 1996 and the first six months of 1997:
New Vehicle Sales ------------------------------------------- Six Months Ended Year Ended June 30, December 31, 1996 (1) 1997 (1) ---------------------------- ----------- Percentage of New Vehicle New Vehicle New Vehicle Revenues Revenues Revenues ----------- ------------- ----------- (revenue amounts in thousands) Vehicle Brand/Manufacturer BMW................................................................... $ 10,838 2.2% $ 13,993 Cadillac.............................................................. 2,029 0.4% 770 Chrysler/Dodge/Plymouth/Jeep/Eagle.................................... 88,951 17.9% 50,935 Ford.................................................................. 297,169 59.9% 164,768 Honda................................................................. 11,599 2.3% 4,992 Infiniti.............................................................. 6,618 1.3% 3,247 Jaguar................................................................ 2,296 0.5% 1,405 KIA................................................................... -- -- 685 Oldsmobile............................................................ 2,212 0.4% 1,055 Toyota................................................................ 30,520 6.2% 19,246 Volvo................................................................. 43,060 8.7% 21,478 Volkswagen............................................................ 732 0.2% 257 ----------- ------------- ----------- Total............................................................... $ 496,024 100.0% $ 282,831 ----------- ------------- ----------- ----------- ------------- ----------- Percentage of New Vehicle Revenues ------------- Vehicle Brand/Manufacturer BMW................................................................... 4.9% Cadillac.............................................................. 0.3% Chrysler/Dodge/Plymouth/Jeep/Eagle.................................... 18.0% Ford.................................................................. 58.3% Honda................................................................. 1.8% Infiniti.............................................................. 1.1% Jaguar................................................................ 0.5% KIA................................................................... 0.2% Oldsmobile............................................................ 0.4% Toyota................................................................ 6.8% Volvo................................................................. 7.6% Volkswagen............................................................ 0.1% ------------- Total............................................................... 100.0% ------------- -------------
- --------------- (1) Does not include Nelson Bowers Dodge which was purchased on March 1, 1997 and KIA-VW of Chattanooga which was purchased in April 1997. European Motors of Nashville and European Motors were purchased in October 1996 and May 1996, respectively, and information for such dealerships is included from their purchase dates through December 1996. The Company seeks to provide customer oriented service and build lasting customer relationships that will result in repeat and referral business. Sales techniques and processes vary depending on the product line and local market conditions. All of the Company's dealerships use computer technology for prospecting and customer follow-up and extensively train sales staff to meet the needs of customers. Certain of the dealerships use computer kiosks to allow customers to browse vehicle inventories at their leisure. Depending on brand and local market, dealerships may use "greeters" rather than sales people to initially assist customers entering a dealership. Substantially all of the Company's new vehicles are acquired from Manufacturers. Allocation of vehicle inventory from Manufacturers is based primarily on sales volume and input from dealers. Vehicle purchases are financed through revolving credit facilities known in the industry as floor plan lending. The following table presents information with respect to the Company's new vehicle sales:
Sonic Dealerships Sonic Dealerships -------------------- ------------------------------------------------------------------------ Six Months Ended Year Ended December 31, June 30, ------------------------------------------------------------------------ -------------------- Pro Forma for the Actual Acquisitions Actual -------------------------------------------------------- ------------ -------------------- 1992 1993 1994 1995 1996 1996 1996 1997 -------- -------- -------- -------- -------- ------------ -------- -------- (in thousands, except vehicle unit data) Unit sales............ 8,060 9,429 9,686 10,273 11,693 24,206 6,027 6,553 Sales revenue......... $126,230 $152,525 $164,361 $186,517 $233,146 $540,505 $115,721 $137,069 Gross profit.......... $ 8,513 $ 10,474 $ 11,494 $ 13,584 $ 17,169 $ 40,221 $ 7,672 $ 8,893 Gross profit margin... 6.7% 6.9% 7.0% 7.3% 7.4% 7.4% 6.6% 6.5% Pro Forma for the Acquisitions ------------ 1997 ------------ Unit sales............ 12,596 Sales revenue......... $285,143 Gross profit.......... $ 20,749 Gross profit margin... 7.3%
New vehicle sales include retail lease transactions and lease-type transactions, both of which are arranged by the Company. New vehicle leases generally have short terms. Lease customers, therefore, return to the new vehicle market more 49 frequently. Leases also provide a source of late-model, generally low mileage, vehicles for its used vehicle inventory. Generally, leased vehicles are under warranty for the entire lease term, which allows the Company to provide repair service to the lessee throughout the term of the lease. Used Vehicle Sales The Company sells a broad variety of makes and models of used cars, vans, trucks and sport utility vehicles. On a pro forma basis in 1996, the Company sold 9,281 used car and 4,194 used truck (including sport utility vehicles) units. Used vehicle retail sales for 1996 represented 35.8% of pro forma total retail unit sales. Used vehicles are obtained by the Company 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. The Company sells its used vehicles to retail customers and, in the case of vehicles in poor condition or vehicles which remain unsold for a specified period of time, to other dealers or wholesalers. Sales to other dealers or wholesalers are frequently close to or below cost and therefore negatively affect the Company's gross margin on used vehicle sales. The Company emphasizes retail sales of used vehicles in order to offer a wider variety of vehicles and to benefit from the higher gross margins from used vehicle sales. To improve the marketability of used vehicles the Company employs both manufacturer supported and in-house used car certification programs and sale of extended warranties on used vehicles. At certain locations, the Company provides a five day money back guarantee on the sale of all used vehicles. The Company intends to expand this guarantee program to all locations. After the Acquisitions, the Company will operate four standalone used car facilities. As the Company enters new markets and gains market share in existing markets, the Company intends to expand its standalone used car facilities to take advantage of the high quality sources of vehicles available to new vehicle retailers. The following table sets forth information on the Company's used vehicle sales:
Sonic Dealerships Sonic Dealerships ------------------ ------------------------------------------------------------------- Six Months Ended Year Ended December 31, June 30, ------------------------------------------------------------------- ------------------ Pro Forma for the Actual Acquisitions Actual --------------------------------------------------- ------------ ------------------ 1992 1993 1994 1995 1996 1996 1996 1997 ------- ------- ------- ------- ------- ------------ ------- ------- (in thousands, except vehicle unit data) Retail unit sales.......... 3,892 4,104 4,374 5,172 5,488 13,475 2,836 2,638 Retail sales revenue....... $33,636 $37,742 $47,537 $60,766 $68,054 $181,787 $35,200 $32,666 Retail gross profit........ 3,610 3,964 5,182 5,792 5,748 16,762 2,968 2,772 Retail gross margin........ 10.7% 10.5% 10.9% 9.5% 8.4% 9.2% 8.4% 8.5% Wholesale unit sales....... 3,756 4,189 4,656 5,009 5,344 12,385 2,751 2,750 Wholesale sales revenue.... $11,199 $13,363 $16,062 $20,025 $25,642 $ 65,963 $13,412 $15,342 Wholesale gross profit..... 16 27 43 (45) (23) (52) (12) (145) Wholesale gross margin..... 0.1% 0.2% 0.3% (0.2)% (0.1)% (0.1)% (0.1)% (0.9)% Total unit sales........... 7,648 8,293 9,030 10,181 10,832 25,860 5,587 5,388 Total revenue.............. $44,835 $51,105 $63,599 $80,791 $93,696 $247,750 $48,612 $48,008 Total gross profit......... 3,626 3,991 5,225 5,747 5,725 16,710 2,956 2,627 Total gross margin......... 8.1% 7.8% 8.2% 7.1% 6.1% 6.7% 6.1% 5.5% Pro Forma for the Acquisitions ------------- 1997 ------------- Retail unit sales.......... 7,043 Retail sales revenue....... $ 96,249 Retail gross profit........ 8,521 Retail gross margin........ 8.9% Wholesale unit sales....... 6,513 Wholesale sales revenue.... $ 37,232 Wholesale gross profit..... (34) Wholesale gross margin..... 0.1% Total unit sales........... 13,556 Total revenue.............. $ 133,481 Total gross profit......... 8,487 Total gross margin......... 6.4%
Service and Part Sales The Company provides service and parts at each of its franchised dealerships. The Company provides maintenance and repair services at its 19 new vehicle dealership facilities and three used vehicle facilities. The Company utilizes approximately 400 service bays in providing both warranty and non-warranty services. Service and parts sales provide higher gross margins than vehicle sales. On a pro forma basis in 1996, the Company's service and parts operations generated $85.9 million in revenues and $35.1 million in gross profit, representing 9.6% and 31.0% of total revenues and gross profit, respectively. Historically, the automotive repair industry has been highly fragmented. However, the Company believes the increased use of advanced technology in vehicles has made it difficult for independent repair shops to perform major or technical repairs. Additionally, manufacturers permit warranty work to be performed only at franchised dealerships. Given the increasing technological complexity of motor vehicles and the trend to long term warranties, the Company believes an increasing percentage of repair work will be performed at franchised dealerships. 50 The Company regards its service operations as an integral part of its overall approach to customer service. Vehicle service provides additional opportunities to build long-term customer relationships. The Company uses customer calling, coupon programs and other techniques to attract and retain service customers. Although individual dealerships vary based on markets and brands, many Company dealerships use service "teams" and variable rate or "menu" pricing structures to improve customer satisfaction with repair service. Sales of factory authorized equipment and parts to wholesale customers are an integral component of parts operations at certain of the Company's dealerships. For example, the Company's Lone Star Ford dealership sold approximately $9.3 million in wholesale parts in 1996. The Company plans to capitalize on its representation of numerous manufacturers and its experience as a wholesale parts distributor in order to increase sales of factory authorized equipment and parts to wholesale customers. The following table sets forth information regarding the Company's service and parts sales:
Sonic Dealerships Sonic Dealerships ------------------ ------------------------------------------------------------------- Six Months Ended Year Ended December 31, June 30, ------------------------------------------------------------------- ------------------ Pro Forma for the Actual Acquisitions Actual --------------------------------------------------- ------------ ------------------ 1992 1993 1994 1995 1996 1996 1996 1997 ------- ------- ------- ------- ------- ------------ ------- ------- (In thousands) Sales revenue.............. $21,778 $27,243 $30,298 $31,957 $37,702 $ 85,958 $18,607 $20,220 Gross profit............... 7,540 9,540 10,344 11,003 13,106 35,142 6,317 6,822 Gross profit margin........ 34.6% 35.0% 34.1% 34.4% 34.8% 40.9% 33.9% 33.7% Pro Forma for the Acquisitions ------------ 1997 ------------ Sales revenue.............. $ 44,649 Gross profit............... 18,494 Gross profit margin........ 41.4%
Collision Repair The Company operates collision repair centers, or body shops, at seven of its dealership locations. In 1996, collision repair accounted for $8.9 million, or 1.0%, of the Company's pro forma revenues and 4.4% of the Company's gross profit. The Company's 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 Company believes that, because of the high capital investment required for collision repair shops and the cost of complying with governmental regulations, large volume body shops will be more successful in the future than smaller volume shops. The Company believes the collision repair business will consolidate and that it will be able to capitalize on this consolidation. The following table sets forth information regarding the Company's collision repair operations:
Sonic Dealerships Sonic Dealerships ---------------- -------------------------------------------------------------- Six Months Ended Year Ended December 31, June 30, -------------------------------------------------------------- ---------------- Pro Forma for the Actual Acquisitions Actual ---------------------------------------------- ------------ ---------------- 1992 1993 1994 1995 1996 1996 1996 1997 ------ ------ ------ ------ ------ ------------ ------ ------ (In thousands) Sales revenue...................... $2,765 $3,094 $3,686 $3,903 $4,942 $8,954 $2,398 $2,686 Gross profit....................... 1,378 1,516 1,870 1,956 2,452 4,993 1,201 1,284 Gross profit margin................ 49.8% 49.0% 50.7% 50.1% 49.6% 55.8% 50.1% 47.8% Pro Forma for the Acquisitions ------------ 1997 ------------ Sales revenue...................... $5,232 Gross profit....................... 2,628 Gross profit margin................ 50.2%
Finance and Insurance The Company offers its customers a wide range of financing and leasing alternatives for the purchase of vehicles. In addition, as part of each sale, the Company offers customers credit life, accident and health and disability insurance to cover the financing cost of their vehicle, as well as warranty or extended service contracts. The Company's pro forma revenue from financing, insurance and extended warranty transactions was $16.5 million in 1996 and $9.4 million for the six months ended June 30, 1997. The Company believes that its customers' ability to obtain financing at its dealerships significantly enhances the Company's ability to sell new and used vehicles. The Company provides a variety of financing and leasing alternatives in order to meet the specific needs of each potential customer. The Company believes its ability to obtain customer-tailored financing on a "same day" basis provides it with an advantage over many of its competitors, particularly smaller competitors which do not generate sufficient volume to attract the diversity of financing sources that are available to the Company. The dealership will then be able to provide a customer with a broader array of lease payment alternatives and, consequently, appeal to a term buyer who is trying to purchase a vehicle of choice at or below a specific monthly payment. During 1996, the Company arranged for financing for approximately 44.0% of its new vehicle sales and 53.1% of its used vehicle sales. 51 The Company assigns its vehicle financing contracts and leases to other parties, instead of directly financing sales, which reduces the Company's exposure to loss from financing activities. The Company receives a commission from the lender for originating and assigning the loan or lease but is assessed a chargeback fee by the lender if a loan is canceled, in most cases, within 120 days of making the loan. Early cancellation can result from early repayment because of refinancing of the loan, the sale or trade-in of the vehicle, or default on the loan. The Company establishes an allowance to absorb estimated chargebacks and refunds. The Company believes that its high volume of business makes the Company's retail contracts more attractive to lenders, which may enable the Company to negotiate higher commission rates in contrast to lower volume dealerships. In addition to its financing activities, the Company offers extended service contracts in connection with the sale of new and used vehicles. Extended service contracts on new vehicles supplement the warranties offered by the vehicle manufacturer, and on used vehicles, such contracts supplement any remaining manufacturer warranty or serve as the primary service contract on the vehicle. The extended service contracts sold by the Company are issued by third-party insurers that pay the Company a commission upon sale of the contract. In 1996, the Company sold extended service contracts on 24.0% and 36.1% respectively, of its new and used retail vehicle sales. The Company also offers its customers credit life, health and accident insurance when they finance an automobile purchase, and receives a commission on each policy sold. Sales and Marketing The Company's marketing and advertising activities vary among its dealerships and among its markets. The Company advertises primarily through television, newspapers, radio and direct mail and regularly conducts special promotions designed to focus vehicle buyers on its product offerings. The Company intends to continue tailoring its marketing efforts to the relevant marketplace in order to reach the Company's targeted customer base. The Company also has computer technology to aid sales people in prospecting for customers. Under arrangements with manufacturers, the Company receives a subsidy for a portion of its advertising expenses incurred in connection with a manufacturer's vehicles. Because of the Company's leading market presence in certain markets, the Company believes it has been able to realize cost savings on its advertising expenses due to volume discounts and other concessions from media. The Company also believes its consolidated marketing campaigns within particular markets result in enhanced name recognition and sales volume when compared with smaller competitors in the same market. Relationships with Manufacturers Each of the Company's dealerships operates under a separate franchise or dealer agreement (a "Dealer Agreement") which governs the relationship between the dealership and the Manufacturer. In general, each Dealer Agreement specifies the location of the dealership for the sale of vehicles and for the performance of certain approved services in a specified market area. The designation of such areas generally does not guarantee exclusivity within a specified territory. In addition, most Manufacturers allocate vehicles on a "turn and earn" basis which rewards high volume. A Dealer Agreement requires the dealer to meet specified standards regarding showrooms, the facilities and equipment for servicing vehicles, inventories, minimum net working capital, personnel training, and other aspects of the business. The Dealer Agreement with each dealership also gives each 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, a 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. In connection with the Offering, the Company is amending its Dealer Agreements or otherwise obtaining consents from Manufacturers to revise those provisions which would have prohibited the Company from selling its Common Stock to the public. See "Description of Capital Stock -- Delaware Law, Certain Charter and Bylaw Provisions and Certain Franchise Agreement Provisions." Many automobile manufacturers are still developing their policies regarding public ownership of dealerships. The Company believes 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 the Company's Common Stock, such policies could have a material adverse effect on the Company. See "Risk Factors -- Dependence on Automobile Manufacturers," " -- Manufacturers' Restrictions on Acquisitions," " -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity" and " -- Concentration of Voting Power and Anti-Takeover Provisions." 52 The Company's Dealer Agreement with Ford requires the Company to deliver to Ford all Securities and Exchange Commission filings made by the Company or third-parties with respect to the Company, including Schedules 13D and 13G. If any such filing shows that (a) any person or entity would acquire 15% or more of Sonic's voting securities, (b) any person or entity that owns or controls 15% or more of Sonic's voting securities (or other securities convertible into such voting securities) intends or may intend to acquire additional voting securities of Sonic, (c) an extraordinary corporate transaction, such as a merger or liquidation, involving Sonic or any of its subsidiaries is anticipated, (d) a material asset sale involving Sonic or any of its subsidiaries is anticipated, (e) a change in Sonic's Board of Directors or management is planned or has occurred, or (f) any other material change in Sonic's business or corporate structure is planned or has occurred, then the Company must give Ford notice of such event. If Ford reasonably determines that such an event is not in its interest, the Company may be required to sell or resign from one or more of its Ford franchises. Should Sonic or any of its Ford franchisee subsidiaries enter into an agreement to transfer the assets of a Ford franchisee subsidiary to a third party, the right of first refusal described in the Ford Dealer Agreement will apply. Under the Company's Dealer Agreements with Toyota and Infiniti, Toyota and Infiniti have the right to approve any ownership or voting rights of Sonic of 20% or greater by any individual or entity. Honda may force the sale of the Company's Honda franchise if any person or entity, other than members of the Smith Group, acquires 5% or greater of the Common Stock (10% or greater if such entity is an institutional investor), and Honda deems such person or entity to be unsatisfactory. Volkswagen has approved the sale of no more than 25% of the voting control of Sonic in the Offering, and any future changes in ownership or transfers among the Company's current stockholders that could effect the voting or managerial control of Sonic's Volkswagen franchisee subsidiaries requires the prior approval of Volkswagen. Similarly, Chrysler has approved of the public sale of only 50% of the Common Stock and requires prior approval of any future sales that would result in a change in voting or managerial control of the Company. Moreover, Honda's approval of the Offering is subject to the Smith Group plus Nelson Bowers owning 51% of the shares of Common Stock on a fully-diluted basis. Upon consummation of the Offering, 48.9% of the Common Stock (on a fully-diluted basis after giving effect to the options to be issued at the time of the Offering under the Stock Option Plan), will be owned by persons other than the Smith Group or Nelson Bowers (assuming full exercise of the Underwriters' over-allotment option). Under the Company's Dealer Agreement with General Motors ("GM"), the Company has agreed, among other things, to disclose the following provisions: Sonic will deliver to GM copies of all Schedules 13D and 13G, and all amendments thereto and terminations thereof, received by Sonic, within five days of receipt of such Schedules. If Sonic is aware of any ownership of its stock that should have been reported to it on Schedule 13D but that is not reported in a timely manner, it will promptly give GM written notice of such ownership, with any relevant information about the owner that Sonic possesses. If Sonic, through its Board of Directors or through shareholder action, proposes or if any person, entity or group sends Sonic a Schedule 13D, or any amendments thereto, disclosing (a) an agreement to acquire or the acquisition of aggregate ownership of more than 20% of the voting stock of Sonic and (b) Sonic, through its Board of Directors or through shareholder action, proposes or if any plans or proposals which relate to or would result in the following: (i) the acquisition by any person of more than 20% of the voting stock of Sonic other than for the purposes of ordinary passive investment; (ii) an extraordinary corporate transaction, such as a material merger, reorganization or liquidation, involving Sonic or a sale or transfer of a material amount of assets of Sonic and its subsidiaries; (iii) any change which, together with any changes made to the Board of Directors within the preceding year, would result in a change in control of the then current Board of Sonic; or (iv) in the case of an entity that produces motor vehicles or controls or is controlled by or is under common control with an entity that either produces motor vehicles or is a motor vehicle franchisor, the acquisition by any person, entity or group of more than 20% of the voting stock of Sonic and any proposal by any such person, entity or group, through the Sonic Board of Directors or shareholders action, to change the Board of Directors of Sonic, then, if such actions in GM's business judgment could have a material or adverse effect on its image or reputation in the GM dealerships operated by Sonic or be materially incompatible with GM's interests (and upon notice of GM's reasons for such judgment), Sonic has agreed that it will take one of the remedial actions set forth in the next paragraph within 90 days of receiving such Schedule 13D or such amendment. If Sonic is obligated under the previous paragraph to take remedial action, it will (a) transfer to GM or its designee, and GM or its designee will acquire the assets, properties or business associated with any GM dealership operated by Sonic at fair market value as determined in accordance with GM's Dealership Agreement with the Company, or (b) provide evidence to GM that such person, entity or group no longer has such threshold level of ownership interest in Sonic or that the actions described in clause (b) of the previous paragraph will not occur. 53 Should Sonic or its GM franchisee subsidiary enter into an agreement to transfer the assets of the GM franchisee subsidiary to a third party, the right of first refusal described in the GM Dealer Agreement shall apply to any such transfer. Certain state statutes in Florida and other states limit manufacturers' control over dealerships. 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. 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 and the laws of other states, 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 and elsewhere 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. 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. If a manufacturer terminates a franchise agreement due to a proposed transfer of the dealership or for any other reason not considered to constitute good cause under Georgia law, such termination will be ineffective. 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. Under Tennessee law, a manufacturer may not modify, terminate or refuse to renew a franchise agreement with a dealer except for good cause, as defined in the governing Tennessee statutes. Further, a manufacturer may be denied a Tennessee license, or have an existing license revoked or suspended if the manufacturer modifies, terminates, or suspends a franchise agreement due to an event not constituting good cause. Good cause includes material shortcomings in the character, financial condition or business experience of the dealer. A manufacturer's Tennessee license may also be revoked if the manufacturer prevents or attempts to prevent the sale or transfer of the dealership by unreasonably withholding consent to the transfer. Competition The retail automotive industry is highly competitive. Depending on the geographic market, the Company competes with both dealers offering the same brands and product line as the Company and dealers offering other automakers' vehicles. The Company also competes for vehicle sales with auto brokers and leasing companies. The Company competes with small, local dealerships and with large multi-franchise auto dealerships. Many of the Company's larger competitors are larger and have greater financial and marketing resources and are more widely known than the Company. Some of the Company's competitors also may utilize marketing techniques, such as Internet visibility or "no negotiation" sales methods, not currently used by the Company. The Company also competes with regional and national car rental companies, which sell their used rental cars, and used automobile "superstores," such as AutoNation and CarMax. In the future, new competitors may enter the automotive retailing market, including automobile manufacturers (such as Ford) that may decide to open additional retail outlets or acquire other dealerships. In addition, the used vehicle superstores generally offer a greater and more varied selection of vehicles than the Company's dealerships. As the Company seeks to acquire dealerships in new markets, it may face significant competition (including competition from other publicly-owned dealer groups) as it strives to gain market share. See "Risk Factors -- Competition." 54 The Company believes that the principal competitive factors in vehicle sales are the marketing campaigns conducted by automakers, the ability of dealerships to offer a wide selection of the most popular vehicles, the location of dealerships and the quality of customer service. Other competitive factors include customer preference for makes of automobiles, pricing (including manufacturer rebates and other special offers) and warranties. In addition to competition for vehicle sales, the Company also competes with other auto dealers, service stores, auto parts retailers and independent mechanics in providing parts and service. The Company believes 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 the Company's prices. In arranging or providing financing for its customers' vehicle purchases, the Company competes with a broad range of financial institutions. The Company believes that the principal competitive factors in providing financing are convenience, interest rates and contract terms. The Company's success depends, in part, on national and regional automobile-buying trends, local and regional economic factors and other regional competitive pressures. The Company sells its vehicles in the Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta markets. Conditions and competitive pressures affecting these markets, such as price-cutting by dealers in these areas, or in any new markets the Company enters, could adversely affect the Company, although the retail automobile industry as a whole might not be affected. See "Risk Factors -- Competition." Governmental Regulations and Environmental Matters A number of regulations affect the Company's business of marketing, selling, financing and servicing automobiles. The Company also is subject to laws and regulations relating to business corporations generally. Under North Carolina, South Carolina, Tennessee, Florida, Georgia and Texas law as well as the laws of other states into which the Company may expand, the Company must obtain a license in order to establish, operate or relocate a dealership or operate an automotive repair service. These laws also regulate the Company's conduct of business, including its advertising and sales practices. Other states may have similar requirements. The Company's operations are also subject to laws governing consumer protection. Automobile dealers and manufacturers are subject to so-called "Lemon Laws" that require a manufacturer or the 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 the Company are subject to United States customs duties and, in the ordinary course of its business, the Company may, from time to time, be subject to claims for duties, penalties, liquidated damages, or other charges. Currently, United States customs duties are generally assessed at 2.5% of the customs value of the automobiles imported, as classified pursuant to the Harmonized Tariff Schedule of the United States. See "Risk Factors -- Imported Products." The Company's financing activities with its 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. State and federal environmental regulations, including regulations governing air and water quality and the storage and disposal of gasoline, oil and other materials, also apply to the Company. The Company believes that it complies in all material respects with the laws affecting its business. Possible penalties for violation of any of these laws include revocation of the Company's licenses and fines. In addition, many laws may give customers a private cause of action. As with automobile dealerships generally, and service parts and body shop operations in particular, the Company's business involves the use, storage, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. The Company's business also involves the past and current operation and/or removal of aboveground and underground storage tanks containing such substances or wastes. Accordingly, the Company is subject to regulation by federal, state and local authorities establishing health and environmental quality standards, and liability related thereto, and providing penalties for violations of those standards. The Company is also subject to laws, ordinances and regulations governing remediation of 55 contamination at facilities it operates or to which it sends hazardous or toxic substances or wastes for treatment, recycling or disposal. The Company believes that it does 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 the Company's results of operations or financial condition. However, soil and groundwater contamination is known to exist at certain properties used by the Company. Furthermore, environmental laws and regulations are complex and subject to frequent change. There can be no assurance that compliance with amended, 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 the Company, or that such expenditures will not be material. See "Risk Factors -- Adverse Effect of Government Regulation; Environmental Regulatory Compliance Costs." 56 Facilities The Company's principal executive offices are located at 5401 East Independence Boulevard, Charlotte, North Carolina 28218, and its telephone number is (704) 532-3301. These executive offices are located on the premises owned by Town & Country Ford. The following table identifies, for each of the properties to be utilized by the Company's dealership operations the location, the owner/lessor, and the term and rental rate of the Company's lease for such property, if applicable:
1997 Ownership Monthly Expiration Dealership Status Owner/Lessor Rent (2) Date Facility - ------------------------------------- --------- ---------------------------- ----------- ---------- --------------- Town & Country Ford.................. Lease STC Properties (1) $ 34,083 2000 Main Bldg. Body Shop 5401 East Independence Blvd., Charlotte Lone Star Ford....................... Lease Viking Investments (1) $ 30,000 2005 Main Bldg. Used Car Bldg. 8477 North Freeway, Houston Body Shop Fleet Bldg. Fort Mill Ford....................... Own -- -- -- Main Bldg. Body Shop 788 Gold Hill Rd., Fort Mill, SC Fort Mill Chrysler-Plymouth-Dodge.... Lease Jeffrey Boyd $ 16,667 2002 Main Bldg. Used Car Bldg. 3310 Hwy. 51, Fort Mill, SC Town & Country Toyota................ Own -- -- -- Main Bldg. Body Shop 9101 South Blvd., Charlotte Frontier Oldsmobile-Cadillac......... Lease Landers Oldsmobile-Cadillac $ 17,000 1998(3 ) Main Bldg. Body Shop 2501 Roosevelt Blvd., Monroe, NC Used Car Bldg. Ken Marks Ford....................... Lease Marks Holding Company (1) $ 95,000 2007(3 ) Main Bldg. 24825 US Hwy. 19 North, Clearwater & 3925 Tampa Rd., Oldsmar, FL Dyer Volvo........................... Lease D&R Investments (1) $ 50,000 (4) 2009(3 ) Main Bldg. 5260 Peachtree Industrial Blvd., Atlanta Lake Norman Lease Phil M. and Quinton M. Gandy $ 40,000 (4) 2007(3 ) Main Bldg. Chrysler-Plymouth-Jeep-Eagle....... and affiliates Chartwell Center Dr., Cornelius, NC Lake Norman Dodge.................... Lease Phil M. and Quinton M. Gandy $ 40,000 (4) 2007(3 ) Main Bldg. and affiliates Truck Center I-77 & Torrence Chapel Rd., Cornelius, NC KIA/VW of Chattanooga................ Lease KIA Land Development (1) $ 11,070 2007(3 ) Main Bldg. 6015 International Dr., Chattanooga European Motors of Nashville......... Lease Third National Bank, $ 21,070 1998(3 ) Main Bldg.(6) David P'Pool, 630 Murfreeboro Pike, Nashville Stella P'Pool European Motors...................... Lease Nelson Bowers (1) $ 16,846 (4) 2007(3 ) Main Bldg. 5949 Brainerd Rd., Chattanooga Jaguar of Chattanooga................ Lease JAG Properties LLC, Thomas $ 22,010 2017(3 ) Main Bldg. Green, Jr. and 5915 Brainerd Rd., Chattanooga Nelson Bowers (1) Nelson Bowers Ford................... Lease Cleveland Properties LLC (1) $ 14,000 2011(3 ) Main Bldg. 717 South Lee Hwy., Cleveland, TN Nelson Bowers Dodge.................. Lease Edward & Barbara Wright $ 16,800 2001(3 ) Main Bldg. 402 West Martin Luther King Blvd., Chattanooga Cleveland Village Imports............ Lease Thomas Green, Jr. and Nelson $ 11,000 1997(3 ) Main Bldg.(7) Bowers (1) 2490 & 2492 South Lee Hwy., Cleveland, TN Cleveland Lease Robert G. Card, Jr. $ 8,900 Month to ) Main Bldg. Chrysler-Plymouth-Jeep-Eagle....... Month(3 2496 South Lee Hwy., Cleveland, TN Williams Motors...................... Lease J.T. Williams $ 14,000 1998(5 ) Main Bldg. 803 North Anderson Rd., Rock Hill, SC Dealership Sq. Ft. Acres - ------------------------------------- ----------- ---------- Town & Country Ford.................. 85,013 12.48 24,768 5401 East Independence Blvd., Charlotte Lone Star Ford....................... 79,725 24.76 2,125 8477 North Freeway, Houston 26,450 1,500 Fort Mill Ford....................... 34,162 10.00 11,275 788 Gold Hill Rd., Fort Mill, SC Fort Mill Chrysler-Plymouth-Dodge.... 9,809 5.50 1,470 3310 Hwy. 51, Fort Mill, SC Town & Country Toyota................ 50,800 5.70 17,840 9101 South Blvd., Charlotte Frontier Oldsmobile-Cadillac......... 14,825 7.08 11,250 2501 Roosevelt Blvd., Monroe, NC 2,200 Ken Marks Ford....................... 79,100 22.00 24825 US Hwy. 19 North, Clearwater & 3925 Tampa Rd., Oldsmar, FL Dyer Volvo........................... 60,000 6.00 5260 Peachtree Industrial Blvd., Atlanta Lake Norman 26,000 6.00 Chrysler-Plymouth-Jeep-Eagle....... Chartwell Center Dr., Cornelius, NC Lake Norman Dodge.................... 25,000 6.00 5,000 I-77 & Torrence Chapel Rd., Cornelius, NC KIA/VW of Chattanooga................ 8,445 3.75 6015 International Dr., Chattanooga European Motors of Nashville......... 49,385 4.00 630 Murfreeboro Pike, Nashville European Motors...................... 40,295 12.24 5949 Brainerd Rd., Chattanooga Jaguar of Chattanooga................ 34,850 3.57 5915 Brainerd Rd., Chattanooga Nelson Bowers Ford................... 17,750 5.60 717 South Lee Hwy., Cleveland, TN Nelson Bowers Dodge.................. 30,000 4.88 402 West Martin Luther King Blvd., Chattanooga Cleveland Village Imports............ 15,760 2.05 2490 & 2492 South Lee Hwy., Cleveland, TN Cleveland 19,725 1.40 Chrysler-Plymouth-Jeep-Eagle....... 2496 South Lee Hwy., Cleveland, TN Williams Motors...................... 15,000(8) 3.0(8) 803 North Anderson Rd., Rock Hill, SC
(footnotes on following page) 57 - --------------- (1) These lessors are affiliates of the Company's stockholders and/or executive officers. See "Risk Factors -- Potential Conflicts of Interest," "Certain Transactions -- Certain Dealership Leases" and "Principal Stockholders." (2) All of the Company's leases are "triple net" leases and require the Company to pay all real estate taxes, maintenance and insurance costs for the property. (3) Each of these leases provides for two renewal terms of five years each, at the option of the Company. (4) Monthly rent expense based on estimate from the purchase agreement relating to the Acquisition. (5) This lease provides for four renewal terms of one year each, at the option of the Company. (6) European Motors of Nashville has entered into a 20-year lease with H.G. Hill Realty Company, an entity unaffiliated with the Company, regarding a new BMW facility to be constructed at a site separate from its existing facility. The monthly rent payments under this lease are not presently fixed and will depend upon the final construction costs of the new facility. The lease term will begin when the Company occupies these premises. (7) Cleveland Village Imports also leases a used-car lot across the street from its main facility from individuals not affiliated with the Company for a term expiring in 2002 and providing for $3,000 in monthly rent. (8) Estimated size. The Company's dealerships are generally located along major U.S. or interstate highways. One of the principal factors considered by the Company in evaluating an acquisition candidate is its location. The Company prefers to acquire dealerships located along major thoroughfares, primarily interstate highways with ease of access, which can be easily visited by prospective customers. The Company owns certain of the real estate associated with Town & Country Toyota and Fort Mill Ford. The remainder of the properties utilized by the Company's dealership operations are leased as set forth in the foregoing table. The Company believes that its facilities are adequate for its current needs. In connection with its acquisition strategy, the Company intends to lease the real estate associated with a particular dealership whenever practicable. Under the terms of its franchise agreements, the Company must maintain an appropriate appearance and design of its facilities and is restricted in its ability to relocate its dealerships. See " -- Relationships with Manufacturers." Employees As of June 30, 1997 the Company employed 1,814 people, of whom approximately 271 were employed in managerial positions, 654 were employed in non-managerial sales positions, 387 were employed in non-managerial parts and service positions and 502 were employed in administrative support positions. The Company believes that many dealerships in the retail automobile industry have difficulty in attracting and retaining qualified personnel for a number of reasons, including the historical inability of dealerships to provide employees with an equity interest in the profitability of the dealerships. The Company intends, upon completion of the Offering, to provide certain executive officers, managers and other employees with stock options and all employees with a stock purchase plan and believes this type of equity incentive will be attractive to existing and prospective employees of the Company. See "Management -- Stock Option Plan" and " -- Employee Stock Purchase Plan" and "Risk Factors -- Dependence on Key Personnel and Limited Management and Personnel Resources." The Company believes that its relationship with its employees is good. None of the Company's employees is represented by a labor union. Because of its dependence on the Manufacturers, however, the Company may be affected by labor strikes, work slowdowns and walkouts at the Manufacturer's manufacturing facilities. See "Risk Factors -- Dependence on Automobile Manufacturers." Legal Proceedings and Insurance From time to time, the Company is named in claims involving the manufacture of automobiles, contractual disputes and other matters arising in the ordinary course of the Company's business. Currently, no legal proceedings are pending against or involve the Company that, in the opinion of management, could reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of the Company. Because of their vehicle inventory and nature of business, automobile retail dealerships generally require significant levels of insurance covering a broad variety of risks. The Company's insurance includes an umbrella policy as well as insurance on its real property, comprehensive coverage for its vehicle inventory, general liability insurance, employee dishonesty coverage and errors and omissions insurance in connection with its vehicle sales and financing activities. 58 MANAGEMENT Executive Officers and Directors; Key Personnel The executive officers, directors and key personnel of the Company, and their ages as of the date of this Prospectus, are as follows:
Name Age Position(s) with the Company - ----- ------- -------------------------------------------------------------------------------- O. Bruton Smith..................... 70 Chairman, Chief Executive Officer and Director* Bryan Scott Smith................... 29 President, Chief Operating Officer and Director* Nelson E. Bowers, II................ 53 Executive Vice President and Director Nominee* Chief Financial Officer, Vice President-Finance, Treasurer, Secretary and Director* Theodore M. Wright.................. 35 William R. Brooks................... 47 Director Jeffrey C. Rachor................... 35 Regional Vice President-Mid South Region O. Ken Marks, Jr.................... 35 Regional Vice President-Florida Ivan A. Tufty....................... 57 Regional Vice President-Texas William M. Sullivan................. 65 Regional Vice President-North and South Carolina
- --------------- * Executive Officer O. Bruton Smith has been the Chairman, Chief Executive Officer and a director of the Company since its organization in 1997 and presently is the controlling stockholder of the Company through his direct and indirect ownership of Class B Common Stock. Mr. Smith has been the president and controlling stockholder of Sonic Financial since its formation, which prior to the Reorganization owned a controlling interest in all of the Company's dealerships except Town & Country Toyota and presently owns a controlling interest in the Company's Common Stock. Mr. Smith, prior to the Reorganization, owned a controlling interest in Town & Country Toyota. Mr. Smith currently is, and since their acquisition by Sonic Financial has been, a director and the president of each of the Company's dealerships. Mr. Smith has worked in the retail automobile industry since 1966. Mr. Smith's initial term as a director of the Company will expire at the annual meeting of stockholders of the Company to be held in 2000. Mr. Smith is also the chairman and chief executive officer, a director and controlling shareholder, either directly or through Sonic Financial, of Speedway Motorsports, Inc. ("SMI"). SMI is a public company traded on the NYSE. Among other things, it owns and operates the following NASCAR racetracks: Atlanta Motor Speedway, Bristol Motor Speedway, Charlotte Motor Speedway, Sears Point Raceway and Texas Motor Speedway. He is also the executive officer and a director of each of SMI's operating subsidiaries. Under his employment agreement with the Company, Mr. Smith is required to devote approximately 50% of his business time to the Company's business. Bryan Scott Smith has been the President and Chief Operating Officer of the Company since April 1997, and a director of the Company since its organization in 1997. Mr. Smith, who is the son of Bruton Smith, has been the Vice President since 1993 and, prior to the Reorganization, the minority owner of Town & Country Ford. Mr. Smith joined the Company's predecessor in January 1991 on a full-time basis as an assistant used car manager. In August of 1991, Mr. Smith became the used car manager at Town & Country Ford. Mr. Smith was promoted to General Manager of Town & Country Ford in November 1992 where he remained until his appointment to President and Chief Operating Officer of the Company in April of 1997. Mr. Smith's initial term as a director of the Company will expire at the annual meeting of stockholders of the Company to be held in 1998. Nelson E. Bowers, II will be appointed the Executive Vice President and a director of the Company upon consummation of the Bowers Acquisition. Mr. Bowers owns a controlling interest in the dealerships that are the subject of the Bowers Acquisition and has worked in the retail automobile industry since 1974. Mr. Bowers has served on national dealer councils for BMW and Volvo and has owned and operated dealerships since 1979. Several of the dealerships owned by Mr. Bowers have been awarded the highest awards available from manufacturers for customer satisfaction. Mr. Bowers' initial term as a director of the Company will expire at the annual meeting of stockholders to be held in 1999. Theodore M. Wright has been the Chief Financial Officer, Vice President-Finance, Treasurer and Secretary of the Company since April 1997, and a director of the Company since June 1997. Before joining the Company, Mr. Wright was a Senior Manager and in charge of the Columbia, South Carolina office of Deloitte & Touche LLP. Prior to 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's initial term as a director of the Company will expire at the annual meeting of stockholders to be held in 1999. 59 William R. Brooks has been a director of the Company since its formation. Mr. Brooks also served as the Company's Treasurer, Vice President and Secretary from its organization in February 1997 to April 1997 when Mr. Wright was appointed to those positions. Since December 1994, Mr. Brooks has been the Vice President, Treasurer, Chief Financial Officer and a director of SMI. Mr. Brooks also serves as an executive officer and a director for various operating subsidiaries of SMI. Before the formation of SMI in December 1994, Mr. Brooks was the Vice President of the Charlotte Motor Speedway and a Vice President and a director of Atlanta Motor Speedway. Mr. Brooks joined Sonic Financial from Price Waterhouse in 1983. At Sonic Financial, he was promoted from Manager to Controller in 1985 and again to Chief Financial Officer in 1989. Mr. Brooks' initial term as a director of the Company will expire at the annual meeting of stockholders to be held in 2000. Jeffrey C. Rachor will be appointed Regional Vice President upon consummation of the Bowers Acquisition. Mr. Rachor has over 13 years experience in automobile retailing and has been the chief operating officer at the Bowers Dealerships since 1989. During this period, Mr. Rachor has also served at various times as the general manager of Toyota, Saturn and Chrysler-Plymouth-Jeep-Eagle dealerships. Prior to joining the Bowers organization, 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. O. Ken Marks, Jr. owns a controlling interest in Ken Marks Ford and has operated that dealership as its chief executive since prior to 1992. Mr. Marks is a Chairman's award winner from Ford and has over 13 years experience in auto retailing. Ken Marks Ford is one of the top 100 automobile dealerships in the United States and one of the 30 largest Ford dealerships. Mr. Marks will be appointed a Regional Vice President upon consummation of the Offering. Ivan A. Tufty has been Executive Manager of Lone Star Ford since 1990 and will be appointed a Regional Vice President upon consummation of the Offering. Under Mr. Tufty's leadership, Lone Star Ford has been recognized as one of the 30 largest Ford dealerships and one of the 100 largest dealerships in the United States. Mr. Tufty has over 40 years of experience in auto retailing and was a dealer principal and equity owner for 12 years. William M. Sullivan has been Vice-President of Town & Country Ford since prior to 1992 and will be appointed a Regional Vice President upon consummation of the Offering. Mr. Sullivan has over 25 years experience in auto retailing as an Executive Manager, head of F&I and in other roles. As soon as practicable after the Offering, the Company intends to name two or three individuals not employed by or affiliated with the Company to the Company's Board of Directors. The Board of Directors of the Company is divided into three classes, each of which, after a transitional period, will serve for three years, with one class being elected each year. The executive officers are elected annually by, and serve at the discretion of, the Company's Board of Directors. Compensation Committee Interlocks and Insider Participation Since the Company's organization in February 1997, all matters concerning executive officer compensation have been addressed by the entire Board of Directors. Bruton Smith, Scott Smith and Theodore Wright were executive officers of the Company and, together with William R. Brooks, will constitute the entire Board until the consummation of the Offering when Nelson Bowers, an executive officer of the Company, is to be appointed. Bruton Smith serves as Chairman of the Board of SMI. William R. Brooks, an executive officer of SMI, serves on the Board of the Company. As soon as practicable after the Offering, the Company intends to name at least two independent directors who will comprise the Company's compensation committee. See "Management." Limitations of Directors Liability The Certificate includes a provision that effectively eliminates the liability of directors to the Company or to the Company's stockholders for monetary damages for breach of the fiduciary duties of a director, except for breaches of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, certain actions with respect to unlawful dividends, stock repurchases or redemptions and any transaction from which the director derived an improper personal benefit. This provision does not prevent stockholders from seeking nonmonetary remedies covering any such action, nor does it affect liabilities under the federal securities laws. The Company's Bylaws further provide that the Company shall indemnify each of its directors and officers, to the fullest extent authorized by Delaware Law, with respect to any threatened, pending or completed action, suit or proceeding to which such person may be a party by reason of serving as a director or officer. Delaware Law currently authorizes a corporation to indemnify its directors and 60 officers against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by a third party if such officers or directors acted in good faith and in a manner they reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. Indemnification is permitted in more limited circumstances with respect to derivative actions. The Company believes that these provisions of the Certificate and the Bylaws are necessary to attract and retain qualified persons to serve as directors and officers. Committees of the Board The Board of Directors will establish a Compensation Committee and an Audit Committee consisting of independent directors upon the election of at least two independent directors. The Compensation Committee will review and approve compensation for the executive officers, and administer, and determine awards under, the Stock Option Plan and any other incentive compensation plans for employees of the Company. See " -- Stock Option Plan" and " -- Employee Stock Purchase Plan." The Audit Committee will recommend the selection of auditors for the Company and will review the results of the audit and other reports and services provided by the Company's independent auditors. The Company has not previously had either of these committees. Director Compensation Members of the Board of Directors who are not employees of the Company will be compensated for their services in amounts to be determined. The Company will also reimburse all directors for their expenses incurred in connection with their activities as directors of the Company. Directors who are also employees of the Company receive no compensation for serving on the Board of Directors. Executive Compensation Sonic was incorporated on January 31, 1997 and did not conduct any operations prior to that time. The Company anticipates that during 1997 its most highly compensated executive officers with annual salaries exceeding $100,000, and their annual base salaries for 1997, will be: Bruton Smith -- $350,000, Scott Smith -- $300,000, Nelson Bowers -- $400,000, and Theodore Wright -- $180,000. Set forth below is information for the years ended December 31, 1996, 1995 and 1994 with respect to compensation for services to the Company's predecessors of the Company's executive officers. Summary Compensation Table
Long-Term Annual Compensation Compensation Awards ----------------------------------------------- ------------------- Other Number of Shares Annual Underlying All Other Name and Principal Position(s) Year Salary (1) Bonus (2) Compensation Options (4) Compensation (5) - ------------------------------------- ----- ---------- --------- ------------ ------------------- ---------------- O. Bruton Smith 1996 $ 164,750 -- $ 33,350(3) -- -- Chairman, Chief Executive Officer 1995 142,200 -- 41,350(3) -- -- and Director 1994 142,200 -- 41,000(3) -- -- Bryan Scott Smith 1996 $ 48,000 $ 230,714 (5) -- -- President, Chief 1995 48,000 168,670 (5) -- -- Operating Officer 1994 48,000 134,537 (5) -- -- and Director
- --------------- (1) Does not include the dollar value of perquisites and other personal benefits. (2) The amounts shown are cash bonuses earned in the specified year and paid in the first quarter of the following year. (3) The Company provides Mr. Smith with the use of automobiles for personal use, the annual cost of which is reflected as Other Annual Compensation. (4) The Company's Stock Option Plan was adopted in September 1997. Therefore, no options were granted to any of the Company's executive officers in 1996, 1995 or 1994. (5) The aggregate amount of perquisites and other personal benefits received did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for such executive officer. 61 Employment Agreements The Company has entered into employment agreements with Messrs. Bruton Smith, Scott Smith, Bowers, Wright, Marks and Rachor (the "Employment Agreements"), effective upon consummation of the Offering, which provide for an annual base salary and certain other benefits. Pursuant to the Employment Agreements, the 1997 base salaries of Messrs. Bruton Smith, Scott Smith, Bowers, Wright, Marks and Rachor will be $350,000, $300,000, $400,000, $180,000, $48,000, and $150,000, respectively. The executives will also receive such additional increases as may be determined by the Compensation Committee. The Employment Agreements, except those of Messrs. Rachor and Marks, provide for the payment of annual performance-based bonuses equal to a percentage of the executive's base salary, upon achievement by the Company (or relevant region) of certain performance objectives, based on the Company's pre-tax income, to be established by the Compensation Committee. The Employment Agreements of Messrs. Rachor and Marks provide for the payment of annual performance-based bonuses, paid in equal installments on a monthly basis, equal to a percentage of the pre-tax earnings of subsidiaries of the Company located within his regions of responsibility, in the case of Mr. Rachor, and of Ken Marks Ford in the case of Mr. Marks. See " -- Incentive Compensation Plan." Under the terms of the Employment Agreements, the Company will employ Mr. Bruton Smith through November 2000. Under the terms of their respective Employment Agreements, the Company will employ Messrs. Scott Smith, Bowers, Wright, Marks and Rachor for five years or until their respective Employment Agreements are terminated by the Company or the executive. Messrs. Scott Smith, Bowers, Wright, Marks and Rachor also receive under their Employment Agreements, options pursuant to the Company's Stock Option Plan, for 99,875 shares, 79,313 shares, 38,188 shares, 35,250 shares and 41,125 shares, of the Class A Common Stock, respectively, exercisable at the initial public offering price, vesting in three equal annual installments beginning October 1998 and expiring in October 2007. Each of the Employment Agreements contain similar noncompetition provisions. These provisions, during the term of the Employment Agreement, (i) prohibit the disclosure or use of confidential Company information, and (ii) prohibit competition with the Company for the Company's employees and its customers, interference with the Company's relationships with its vendors, and employment with any competitor of the Company in specified territories. The provisions referred to in (ii) above shall also apply for a period of two years following the expiration or termination of an Employment Agreement. With respect to Messrs. Bruton Smith, Scott Smith and Wright, the geographic restrictions apply in any Standard Metropolitan Statistical Area ("SMSA") or county in which the Company has a place of business at the time their employment ends. With respect to Messrs. Bowers and Rachor, the restrictions apply only in the SMSA's for Houston, Charlotte, Chattanooga, and Nashville, provided that such noncompetition provisions do not apply to his operation of Saturn of Chattanooga. With respect to Mr. Marks, the territorial restrictions apply only in the SMSA's or counties in which the Company has a place of business and about which Marks had access to confidential information or for which he had operational or managerial involvement. Stock Option Plan In October 1997, the Board of Directors and stockholders of the Company adopted the Company's 1997 Stock Option Plan (the "Stock Option Plan") in order to attract and retain key personnel. The following discussion of the material features of the Stock Option Plan is qualified by reference to the text of such Plan filed as an exhibit to the Registration Statement of which this Prospectus is a part. Under the Stock Option Plan, options to purchase up to an aggregate of 1,125,000 shares of Class A Common Stock may be granted to key employees of the Company and its subsidiaries and to officers, directors, consultants and other individuals providing services to the Company. Members of the Board of Directors who serve on the Compensation Committee must qualify as "non-employee directors," as that term is defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. The Compensation Committee of the Board of Directors of the Company will administer the Stock Option Plan and will determine, among other things, the persons who are to receive options, the number of shares to be subject to each option and the vesting schedule of options. The Board of Directors of the Company will determine the terms and conditions upon which the Company may make loans to enable an optionee to pay the exercise price of an option. In selecting individuals for options and determining the terms thereof, the Compensation Committee may consider any factors it considers relevant, including present and potential contributions to the success of the Company. Options granted under the Stock Option Plan must be exercised within a period fixed by the Compensation Committee, which period may not exceed ten years from the date of grant of the option or, in the case of incentive stock options ("ISOs") granted to any holder on the date of grant of more than ten percent of the total combined voting power of all classes of stock of the Company, five years from the date of grant of the option. Options may be made exercisable in whole or in installments, as determined by the Compensation Committee. 62 Options generally may not be transferred other than by will or the laws of descent and distribution and, during the lifetime of an optionee, options may be exercised only by the optionee. Notwithstanding the foregoing, the Compensation Committee, in its absolute discretion, may grant transferable options if such options are not ISOs. The exercise price of options that are not ISOs will be determined at the discretion of the Compensation Committee. The exercise price of ISOs may not be less than the market value of the Class A Common Stock on the date of grant of the option. In the case of ISOs granted to any holder on the date of grant of more than ten percent of the total combined voting power of all classes of stock of the Company and its subsidiaries, the exercise price may not be less than 110% of the market value per share of the Class A Common Stock on the date of grant. Unless designated as "incentive stock options" intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), options granted under the Stock Option Plan are intended to be "nonstatutory stock options" ("NSOs"). The exercise price may be paid in cash, in shares of Class A Common Stock owned by the optionee, in NSOs granted under the Stock Option Plan (except that the exercise price of an ISO may not be paid in NSOs) or in any combination of cash, shares and NSOs. Options granted under the Stock Option Plan may include the right to acquire a "reload" option. In such a case, if a participant pays all or part of the exercise price of an option with shares of Class A Common Stock held by the participant for at least six months, then, upon exercise of the option, the participant is granted a second option to purchase, at the fair market value as of the date of grant of the second option, the number of shares of Class A Common Stock transferred to the Company by the participant in payment of the exercise price of the original option. A reload option is not exercisable until one year after the grant date of such reload option or the expiration date of the original option. If the exercise price of a reload option is paid for with shares of Class A Common Stock that have been held by the optionee for more than six months, then another reload option will be issued. Shares of Class A Common Stock covered by a reload option will not reduce the number of shares of Class A Common Stock available under the Stock Option Plan. The Stock Option Plan provides that, in the event of changes in the corporate structure of the Company or certain events affecting the shares of the Company, adjustments will automatically be made in the number and kind of shares available for issuance and in the number and kind of shares covered by outstanding options. It further provides that, in connection with any merger or consolidation in which the Company is not the surviving corporation and which results in the holders of the outstanding voting securities of the Company owning less than a majority of the surviving corporation or any sale or transfer by the Company of all or substantially all its assets or any tender offer or exchange offer for or the acquisition, directly or indirectly, by any person or group of all or a majority of the then-outstanding voting securities of the Company, all outstanding options under the Stock Option Plan will become exercisable in full on and after (i) the 15th day prior to the effective date of such merger, consolidation, sale, transfer or acquisition or (ii) the date of commencement of such tender offer or exchange offer, as the case may be. The Board of Directors of the Company, on or before the consummation of the Offering, intends to grant NSOs and ISOs to purchase an aggregate of 587,509 shares of Class A Common Stock under the Stock Option Plan to three executive officers, five regional vice presidents and one dealer manager of the Company. Messrs. Scott Smith, Bowers and Wright are to be granted NSOs to purchase 79,875 shares, 59,313 shares and 18,188 shares, respectively at an exercise price equal to the public offering price of the Class A Common Stock sold in the Offering. Messrs. Scott Smith, Bowers and Wright are also to be granted ISOs to purchase 20,000 shares, 20,000 shares and 20,000 shares, respectively, at an exercise price equal to the public offering price of the Class A Common Stock sold in the Offering. All of these options will become exercisable in three equal annual installments beginning in October 1998 with the last installment vesting in October 2000, and all these options will expire in October 2007. Consequently, all executive officers as a group are to be granted NSOs to purchase an aggregate of 157,376 shares and ISOs to purchase an aggregate of 60,000 shares. Non-executive officer employees are to be granted NSOs and ISOs to purchase an aggregate of 290,133 shares and 80,000 shares, respectively. See " -- Employment Agreements." The issuance and exercise of ISOs have no federal income tax consequences to the Company. While the issuance and exercise of ISOs generally have no ordinary income tax consequences to the holder, upon the exercise of an ISO, the holder will treat the excess of the fair market value on the date of exercise over the exercise price as an item of tax adjustment for alternative minimum tax purposes. If the holder of Class A Common Stock acquired upon the exercise of an ISO disposes of such stock before the later of (i) two years following the grant of the ISO and (ii) one year following the exercise of the ISO (a "Disqualifying Disposition"), the holder will recognize ordinary income for federal income tax purposes in an amount equal to the lesser of (i) the excess of the Class A Common Stock's fair market value on the date of exercise over the option exercise price, and (ii) the excess of the amount realized on disposition of the Class A Common Stock over the option exercise price. Any additional gain upon the disposition will be taxed as capital gains. The disposition of Class A Common Stock acquired from the exercise of an ISO other than in a Disqualifying Disposition will ordinarily result in capital gains or 63 loss to the holder for federal income tax purposes equal to the difference between the amount realized on disposition of the Class A Common Stock and the option exercise price. Any capital gain will be subject to reduced rates of tax if such shares were held more than twelve months, and will be subject to further reduced rates if such shares were held more than eighteen months. The Company will be entitled to a compensation expense deduction for the Company's taxable year in which the disposition occurs equal to the amount of ordinary income recognized by the holder. The issuance of NSOs has no federal income tax consequences to the Company or the holder. Upon the exercise of an NSO, the Company generally will be allowed a federal income tax deduction equal to the amount by which the fair market value of the underlying shares on the date of exercise exceeds the exercise price. NSO holders will recognize ordinary income for federal income tax purposes at the time of option exercise in the same amount. In the event of a sale of shares acquired by exercise of a NSO, any appreciation or depreciation after the exercise date generally will be taxed as capital gain or loss; provided that any gain will be subject to reduced rates of tax if such shares were held for more than twelve months and will be subject to further reduced rates if such shares were held for more than eighteen months. The disposition of shares acquired by exercise of a NSO will result in capital gains or losses to the holder. The Company intends to register the shares underlying the Stock Option Plan as required by the federal securities laws. If such registration is not required, such shares may be issued upon option exercise in reliance upon the private offering exemption codified in Section 4(2) of the Securities Act. Resale of such shares may be permitted subject to the limitations of Rule 144. Employee Stock Purchase Plan In October 1997, the Board of Directors and stockholders of the Company adopted the Sonic Employee Stock Purchase Plan (the "ESPP"). The ESPP is intended to promote the interests of the Company by providing employees of the Company the opportunity to acquire a proprietary interest in the Company through the purchase of Class A Common Stock. The following discussion of the material features of the ESPP is qualified by reference to the text of such Plan filed in an exhibit to the Registration Statement of which this Prospectus is a part. The ESPP is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. The ESPP is administered by the Compensation Committee, which, subject to the terms of the ESPP, has plenary authority in its discretion to interpret and construe the ESPP. The Compensation Committee will construe the provisions of the ESPP so as to extend and limit participation in a manner consistent with the requirements of Section 423 of the Code. A total of 150,000 shares of Class A Common Stock have been reserved for purchase under the ESPP. On January 1 of each year during the term of the ESPP (the "Grant Date"), all eligible employees electing to participate in the ESPP ("Participating Employees") will be granted options to purchase shares of Class A Common Stock. Prior to each Grant Date, the Compensation Committee will determine the number of shares of Class A Common Stock available for purchase under each option, with the same number of shares to be available under each option granted on the same Grant Date. No Participating Employee may be granted an option which would permit such employee to purchase stock under the ESPP and all other employee stock purchase plans of the Company at a rate which exceeds $25,000 of the fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. A Participating Employee may elect to designate a limited percentage of such employee's compensation (as defined in the ESPP) to be deferred by payroll deduction as a contribution to the ESPP. A Participating Employee instead may elect to make contributions by direct cash payment to the ESPP rather than by payroll deduction. To the extent a Participating Employee has accumulated enough funds, his or her contributions to the ESPP will be used to exercise the option granted under the ESPP through purchases of Class A Common Stock on the last business day of March, June, September and December on which the principal trading market for the Class A Common Stock is open for trading and on any other interim dates during the year which the Compensation Committee designates for such purpose (the "Exercise Date"). Contributions which are not enough to purchase a whole share of Class A Common Stock will be carried forward and applied on the next Exercise Date in that calendar year; provided that contributions remaining after the last Exercise Date of the calendar year may be distributed to the Participating Employee at his election. The purchase price at which Class A Common Stock will be purchased through the ESPP shall 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. Any option granted to a Participating Employee will be exercised automatically on each Exercise Date during the calendar year of the option's Grant Date in whole or in part such that the Participating Employee's accumulated contributions as of such Exercise Date, either through direct cash payment or payroll 64 deduction, will be applied to the purchase of the maximum number of whole shares of Class A Common Stock that such contribution will permit at the applicable option price, limited to the number of shares available for purchase under the option. Any option granted to a Participating Employee will expire on the last Exercise Date of the calendar year in which granted. However, if a Participating Employee withdraws from the ESPP or terminates employment prior to such Exercise Date, the option may expire earlier. Upon termination of a Participating Employee's employment for any reason other than cause, death or leave of absence in excess of ninety days, such employee may, at his election, request the return of contributions not yet used to purchase Class A Common Stock or continue participation in the ESPP until the Exercise Date next following the date of termination of employment such that any unexpired option held will be exercised automatically on such Exercise Date. If a Participating Employee dies while employed by the Company or prior to the Exercise Date next following termination of employment, such employee's estate will have the right to elect to withdraw all contributions not yet used to purchase Class A Common Stock or to exercise the Participating Employee's option for the purchase of Class A Common Stock on the Exercise Date next following the date of such employee's death. The Board of Directors of the Company may at any time amend, suspend or terminate the ESPP; provided, however, that the ESPP may not be amended to increase the maximum number of shares of Class A Common Stock for which options may be granted under the ESPP, other than in connection with a change in capitalization, without obtaining the approval of Sonic stockholders. The ESPP is intended to meet the requirements of an "employee stock purchase plan" under Section 423 of the Code. No federal taxable income will be recognized by Participating Employees upon the grant of an option to purchase Class A Common Stock under the ESPP. In addition, a Participating Employee will not recognize federal taxable income on the exercise of an option granted under the ESPP. If the Participating Employee holds shares of Class A Common Stock acquired upon the exercise of an option granted under the ESPP until a date that is more than two years from the grant date of the relevant option and one year from the date of option exercise (or dies while owning such shares), the employee must report as ordinary income in the year of disposition of the shares (or at death) the lesser of (a) the excess of the fair market value of the shares at the time of disposition (or death) over the option exercise price and (b) the excess of the fair market value of the shares on the date the relevant option was granted over the option exercise price. For this purpose, the option exercise price is 85% of the fair market value of the shares on the date the relevant option was granted (assuming the shares are offered at a 15% discount). Any additional income is treated as long-term capital gain. If these holding period requirements are met, the Company is not entitled to any deduction for tax purposes. If the Participating Employee does not meet the holding period requirements, the employee recognizes at the time of disposition of the shares ordinary income equal to the difference between the price paid for the shares and the fair market value on the date of exercise, irrespective of the price at which the employee disposes of the shares, and an amount equal to such ordinary income is generally deductible by the Company. Any gain or loss realized on the disposition of the shares will generally be capital gain or loss; provided that any gain will be subject to reduced rates of tax if the shares were held for more than twelve months and will be subject to further reduced rates if the shares were held for more than eighteen months. Because the ESPP is based on voluntary participation, benefits thereunder are not determinable. The Company intends to register the shares underlying the ESPP as required by the federal securities laws. If such registration is not required, such shares may be issued upon option exercise in reliance upon the private offering exemption codified in Section 4(2) of the Securities Act. Resale of such shares may be permitted subject to the limitations of Rule 144. 65 CERTAIN TRANSACTIONS Registration Rights Agreement As part of the Reorganization, the Company entered into a Registration Rights Agreement dated as of June 30, 1997 (the "Registration Rights Agreements") with Sonic Financial, Bruton Smith, Scott Smith and William S. Egan. Sonic Financial, Bruton Smith, Scott Smith and Egan Group, LLC, an assignee of Mr. Egan (the "Egan Group") currently are the owners of record of 4,440,625, 1,035,625, 478,125 and 295,625 shares of Class B Common Stock, respectively. Upon the registration of any of their shares or as otherwise provided in the Certificate, such shares will automatically be converted into a like number of shares of Class A Common Stock. Subject to certain limitations, the Registration Rights Agreements provide Sonic Financial, Bruton Smith, Scott Smith and the Egan Group with certain piggyback registration rights that permit them to have their shares of Common Stock, as selling security holders, included in any registration statement pertaining to the registration of Class A Common Stock for issuance by the Company or for resale by other selling security holders, with the exception of registration statements on Forms S-4 and S-8 relating to exchange offers (and certain other transactions) and employee stock compensation plans, respectively. These registration rights will be limited or restricted to the extent an underwriter of an offering, if an underwritten offering, or the Company's Board of Directors, if not an underwritten offering, determines that the amount to be registered by Sonic Financial, Bruton Smith, Scott Smith or the Egan Group would not permit the sale of Class A Common Stock in the quantity and at the price originally sought by the Company or the original selling security holders, as the case may be. The Registration Rights Agreement expires on the tenth anniversary of the closing of the Offering. Sonic Financial is controlled by the Company's Chairman and Chief Executive Officer, Bruton Smith. The Smith Advance In connection with the Fort Mill Acquisition, Mr. Smith advanced approximately $3.5 million to the Company (the "Smith Advance"). The Smith Advance was used by the Company to pay a portion of the cash consideration for the Fort Mill Acquisition at closing. The Smith Advance is evidenced by a demand note bearing interest at the minimum statutory rate of 3.83% per annum. The Company anticipates seeking additional cash advances or credit support in the form of guarantees or collateral from Mr. Smith in order to meet cash payment obligations in the remaining Acquisitions which close prior to the consummation of the Offering. The Company intends to repay the principal of and interest on the Smith Advance and any similar future advances from Mr. Smith used to fund the Acquisitions from the proceeds of this Offering. The Smith Guaranties and Pledges Under the Six-Month Facility, Bruton Smith has guaranteed the obligations of the Company and secured his guarantee with a pledge of shares of common stock of Speedway Motorsports, Inc. owned directly by him. Under the Revolving Facility, Mr. Smith guaranteed the obligations of the Company and such obligations are further secured with a pledge of shares of common stock of Speedway Motorsports, Inc. owned directly or indirectly by him. Mr. Smith has pledged securities having an estimated value of approximately $40.0 million to secure the Six-Month Facility (the "Six-Month Pledge"). Should NationsBank foreclose on the Six-Month Pledge, the Company is under no obligation to repay or reimburse Mr. Smith. Mr. Smith pledged securities indirectly owned by him having an estimated value of approximately $50.0 million to secure the Initial Loan Commitment under the Revolving Facility (the "Revolving Pledge"). If net proceeds of the Offering to the Company are $70 million or greater, the Revolving Pledge will be released pursuant to the terms of the Revolving Facility. If net proceeds of the Offering to the Company are less than $70 million, Sonic Financial, a company controlled by Mr. Smith, will be required to provide continued credit support for the Revolving Facility in the form of a pledge of securities owned by Sonic Financial equal in value to three times the amount of the shortfall between $70 million and the actual net proceeds of the Offering to the Company. The Company will be under no obligation to repay or reimburse Mr. Smith or Sonic Financial if Ford Motor Credit forecloses on the Revolving Pledge. For further discussion of these lending arrangements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Certain Dealership Leases Certain of the properties leased by the Company's dealership subsidiaries are owned by officers, directors or holders of 5% or more of the Common Stock of the Company or their affiliates. These leases contain terms comparable to, or more favorable to the Company than, terms that would be obtained from unaffiliated third parties. Town & Country Ford operates at facilities leased from STC Properties, a North Carolina joint venture ("STC"). Town & Country Ford maintains a 5% undivided interest in STC and Sonic Financial owns the remaining 95% of STC. The STC lease on the Town & Country Ford facilities will expire in October 2000. Annual payments under the STC lease were $510,085 for each of 1994, 1995 and 1996. Current minimum rent payments are $409,000 annually ($34,083 monthly) through 1999, and will be decreased to $340,833 66 in 2000, such rents being below market. When this lease expires, the Company anticipates obtaining a long-term lease on the Town & Country Ford facility at fair market rent. Lone Star Ford operates, in part, at facilities leased from Viking Investments Associates, a Texas association ("Viking"), which is controlled by Mr. Bruton Smith. The Viking lease on the Lone Star Ford property expires in 2005. Annual payments under the Viking lease were $351,420, $331,302 and $360,000 for 1994, 1995 and 1996, respectively. Minimum annual rents under this lease are $360,000 ($30,000 monthly), such amount being below market. When this lease expires, the Company anticipates obtaining a long-term lease on the Lone Star Ford facility at fair market rent. The dealership leases discussed below will be executed and effective as of the consummation of the Acquisitions. The terms of these leases are comparable to terms that would be obtained from unaffiliated third parties because they were negotiated at arms-length before the lessors became affiliated with the Company. KIA of Chattanooga operates at facilities leased from KIA Land Development, a company in which Nelson Bowers, the Company's Executive Vice President, maintains an ownership interest. The Company negotiated this lease in connection with the Bowers Acquisition. This triple net lease expires in 2007 and the monthly rent will be $11,070 per month. The Company may renew this lease at its option for two additional five year terms. At each renewal, the lessor may adjust lease rents to reflect fair market rents for the property. European Motors operates at its Chattanooga facilities under a triple net lease from Mr. Bowers. The Company negotiated this lease in connection with the Bowers Acquisition. The European Motors lease expires in 2007 and provides for monthly rent of $16,846. This lease also provides for renewals on terms identical to the KIA of Chattanooga lease. Jaguar of Chattanooga operates at facilities leased from JAG Properties, a company in which Mr. Bowers maintains an ownership interest. The Company negotiated this lease in connection with the Bowers Acquisition. This triple net lease expires in 2017 and provides for monthly rent of $22,010. The Company may renew this lease on terms identical to the KIA of Chattanooga renewal options. Cleveland Chrysler-Plymouth-Jeep-Eagle leases its facilities from Cleveland Properties LLC, a limited liability company in which Mr. Bowers maintains an ownership interest. The Company negotiated this lease in connection with the Bowers Acquisition. This triple net lease expires in 2011, provides for monthly rent of $14,000 and may be renewed on terms identical to the KIA of Chattanooga lease. Cleveland Village Imports operates at facilities leased from Nelson Bowers and another individual. Nelson Bowers, the Company's President and a director, owns a 75% undivided interest in the land and buildings leased by Cleveland Village Imports, with the remaining interests owned by an unrelated party. Such land and buildings are leased under two leases: one is a triple net fixed lease expiring on December 31, 1997 with rent of $8,000 per month and the other, pertaining to a used car lot, is a month-to-month lease with rent of $3,000 per month. In connection with the Bowers Acquisition, the lessors have agreed to allow the expiration of these leases in October 1997, and to replace them with a triple net lease at a negotiated rental rate for a 15-year initial term and two five-year renewals at the option of the Company. Dyer Volvo operates at facilities leased from D&R Investments, an entity in which Richard Dyer, the Company's Executive Manager for Dyer Volvo, maintains an ownership interest. This triple net lease, negotiated by the Company in connection with the Dyer Acquisition, expires in 2009 and provides for monthly rent of $50,000. The Dyer Volvo lease also provides the Company with two optional renewals of five years each with rent at each renewal being adjusted to fair market rent. Ken Marks Ford ("KMF") operates at facilities leased from Marks Holding Company, a corporation that is owned by Ken Marks, the Company's Regional Vice President-Florida. In connection with the Ken Marks Acquisition, the lessor has agreed to enter into a triple net lease with the Company as lessee at a negotiated rental rate of $95,000 per month for an initial term expiring 2007 with two five-year renewals at the option of the Company. Chartown Transactions Chartown is a general partnership engaged in real estate development and management. Before the Reorganization, Town & Country Ford maintained a 49% partnership interest in Chartown with the remaining 51% held by SMDA Properties, LLC, a North Carolina limited liability company ("SMDA"). Mr. Smith owns an 80% direct membership interest in SMDA with the remaining 20% owned indirectly through Sonic Financial. In addition, Sonic Financial also held a demand promissory note for approximately $1.6 million issued by Chartown (the "Chartown Note"), which was uncollectible due to insufficient funds. As part of the Reorganization, the Chartown Note was canceled and Town & Country Ford transferred its partnership interest in Chartown to Sonic Financial for nominal consideration. In connection with that transfer, Sonic Financial 67 agreed to indemnify Town & Country Ford for any and all obligations and liabilities, whether known or unknown, relating to Chartown and Town & Country Ford's ownership thereof. The Bowers Volvo Note In connection with Volvo's approval of the Company's acquisition of a Volvo franchise in the Bowers Acquisition, Volvo, among other things, conditioned its approval upon Nelson Bowers, the Company's Executive Vice President and a director nominee, acquiring and maintaining a 20% interest in the Company's Sonic Automotive of Chattanooga, LLC ("Chattanooga Volvo") subsidiary that will operate the Volvo franchise. Mr. Bowers will finance all of the purchase price for this 20% interest by issuing a promissory note (the "Bowers Volvo Note") in favor of Sonic Automotive of Nevada, Inc. ("Sonic Nevada"), the wholly-owned subsidiary of the Company that controls a majority interest in Chattanooga Volvo. The Bowers Volvo Note will be secured by Mr. Bowers' interest in Chattanooga Volvo. The Bowers Volvo Note will be in a principal amount of $900,000 (subject to adjustment following the closing of the Bowers Acquisition) and bear interest at the lowest applicable federal rate as published by the U.S. Treasury Department in effect on the date Mr. Bowers purchases his interest in Chattanooga Volvo. Accrued interest will be payable annually. The operating agreement of Chattanooga Volvo will provide that profits and distributions are to be allocated first to Mr. Bowers to the extent of interest to be paid on the Bowers Volvo Note and next to the other members of Chattanooga Volvo according to their percentages of ownership. No other profits or any losses of Chattanooga Volvo will be allocated to Mr. Bowers under this arrangement. Mr. Bowers' interest in Chattanooga Volvo will be redeemed and the Bowers Volvo Note will be due and payable in full when Volvo no longer requires Mr. Bowers to maintain his interest in Chattanooga Volvo. Other Transactions During each of the three years ended December 31, 1996, Town & Country Ford paid $48,000 to Sonic Financial as a management fee. Sonic Financial's services to Town & Country Ford have included performance of the following functions, among others: maintenance of lender and creditor relationships; tax planning; preparation of tax returns and representation in tax examinations; record maintenance; internal audits and special audits; assistance to independent public accountants; and litigation support to company counsel. Payments of fees to and receipt of services from Sonic Financial ceased before the Reorganization. Since that time, the Company has been providing these services for itself and its subsidiaries, including Town and Country Ford. Beginning in early 1997, certain of the Sonic Dealerships have entered into arrangements to sell to their customers credit life insurance policies underwritten by American Heritage Life Insurance Company, an insurer unaffiliated with Sonic ("American Heritage"). American Heritage in turn reinsures all of these policies with Provident American Insurance Company, a Texas insurance company ("Provident American"). Under these arrangements, the Sonic Dealerships paid an aggregate of $140,000 to American Heritage in premiums for these policies since January 1, 1997. The Company anticipates terminating this arrangement with American Heritage by 1998. Provident American is a wholly-owned subsidiary of Sonic Financial. Town & Country Ford and Lone Star Ford have each made several non-interest bearing advances to Sonic Financial. As of June 30, 1997, Town & Country Ford had made approximately $2.1 million of such advances. In preparation for the Reorganization, a demand promissory note by Sonic Financial evidencing certain of Town & Country Ford's advances in the amount of $1.6 million was canceled in exchange for the redemption of certain shares of the capital stock of Town & Country Ford held by Sonic Financial. As of June 30, 1997, Lone Star Ford had made approximately $0.5 million of advances to Sonic Financial. In preparation for the Reorganization, a demand promissory note by Sonic Financial evidencing certain of Lone Star Ford's advances in the amount of $363,000 was canceled pursuant to a dividend. At years ended December 31, 1996, 1995 and 1994, the aggregate balances of such advances due from Sonic Financial were approximately $2.5 million, $0 and $0, respectively. Certain subsidiaries of the Company (such subsidiaries together with the Company and Sonic Financial being hereinafter referred to as the "Sonic Group") have joined with Sonic Financial in filing consolidated federal income tax returns for several years. Such subsidiaries will join with Sonic Financial in filing for 1996 and for the period ending on June 30, 1997. Under applicable federal tax law, each corporation included in Sonic Financial's consolidated return is jointly and severally liable for any resultant tax. Under a tax allocation agreement dated as of June 30, 1997, however, the Company agreed to pay to Sonic Financial, in the event that additional federal income tax is determined to be due, an amount equal to the Company's separate federal income tax liability computed for all periods in which any member of the Sonic Group has been a member of Sonic Financial's consolidated group less amounts previously recorded by the Company. Also pursuant to such agreement, Sonic Financial agreed to indemnify the Company for any additional amount determined to be due from Sonic Financial's consolidated group in excess of the federal income tax liability of the Sonic Group for such periods. The tax allocation 68 agreement establishes procedures with respect to tax adjustments, tax claims, tax refunds, tax credits and other tax attributes relating to periods ending prior to the time that the Sonic Group shall leave Sonic Financial's consolidated group. The Company acquired the Sonic Dealerships in the Reorganization pursuant to four separate stock subscription agreements (the "Subscription Agreements"). The Subscription Agreements provide for the acquisition of 100% of the capital stock or membership interests, as the case may be, of each of the Sonic Dealerships from Sonic Financial, Mr. Smith, the Egan Group (an assignee of Mr. Egan) and Bryan Scott Smith in exchange for certain amounts of the Company's issued and outstanding Class B Common Stock. See "Principal Stockholders." For additional information concerning related party transactions of the Company, see Note (7) to the Combined and Consolidated Financial Statements of Sonic and for the businesses being acquired in the Acquisitions, see "The Acquisitions" and the notes to the historical financial statements for each respective business acquired included in this Prospectus. 69 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of October 10, 1997 by (i) each stockholder who is known by the Company to own beneficially more than five percent of the outstanding Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company, and (iv) all directors and executive officers of the Company as a group, and as adjusted to reflect the sale by the Company of the shares of Class A Common Stock in this Offering. Prior to this Offering, no shares of Class A Common Stock were issued and outstanding. However, options to acquire 587,509 shares of Class A Common Stock will be issued on or before the closing of the Offering to certain of the Company's officers and employees, and the Dyer Warrant will be issued upon the closing of the Dyer Acquisition. Holders of Class A Common Stock are entitled to one vote per share on all matters submitted to a vote of the stockholders of the Company. Holders of Class B Common Stock are entitled to ten votes per share on all matters submitted to a vote of the stockholders, except that the Class B Common Stock is entitled to only one vote per share with respect to any transaction proposed or approved by the Board of Directors of the Company or proposed by all the holders of the Class B Common Stock or as to which any member of the Smith Group or any affiliate thereof has a material financial interest other than as a then existing stockholder of the Company constituting a (a) "going private" transaction (as defined herein), (b) disposition of substantially all of the Company's assets, (c) transfer resulting in a change in the nature of the Company's business, or (d) merger or consolidation in which current holders of Common Stock would own less than 50% of the Common Stock following such transaction. In the event of any transfer outside of the Smith Group or the Smith Group holds less than 15% of the total number of shares of Common Stock outstanding, such transferred shares or all shares, respectively, of Class B Common Stock will automatically convert into an equal number of shares of Class A Common Stock. See "Description of Capital Stock."
Percentage of all Outstanding Common Stock Number of Shares Number of Shares ---------------------- of Class A Common of Class B Common Before After Name (1) Stock Owned Stock Owned Offering Offering(2) - ---------- ----------------- ----------------- -------- ----------- O. Bruton Smith (3)(4).......................................... -- 5,476,250 87.6% 48.7% Sonic Financial Corporation (3)................................. -- 4,440,625 71.1% 39.5% Bryan Scott Smith (3)(5)........................................ -- 478,125 7.7% 4.3% William R. Brooks (3)........................................... -- -- -- -- Theodore M. Wright (3)(5)....................................... -- -- -- -- Nelson E. Bowers, II (3)(5)..................................... -- -- -- -- All directors and executive officers as a group (10 persons).... -- 5,954,375 95.27% 52.9%
- --------------- (1) Unless otherwise noted, each person has sole voting and investment power over the shares listed opposite his name subject to community property laws where applicable. (2) The percentages of total voting power would be as follows: Bruton Smith, 81.1%; Sonic Financial, 65.8%; Scott Smith, 7.1%; William Brooks, less than 1%; Theodore Wright, less than 1%; Nelson E. Bowers, II, less than 1%; and all directors and executive officers as a group, 88.2%. Assumes the Underwriters' over-allotment option is not exercised. (3) The address of such person is care of the Company at 5401 East Independence Boulevard, Charlotte, North Carolina 28218. (4) The shares of Common Stock shown as owned by such person or group include all of the shares owned by Sonic Financial as indicated elsewhere in the table. Mr. Smith owns the substantial majority of Sonic Financial's outstanding capital stock. (5) Does not give effect to options granted under the Company's Stock Option Plan to purchase shares of Class A Common Stock at the public offering price since none of such options become exercisable prior to October 1998. See "Management -- Stock Option Plan." 70 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of (i) 50,000,000 shares of Class A Common Stock, $.01 par value, (ii) 15,000,000 shares of Class B Common Stock, $.01 par value, and (iii) 3,000,000 shares of Preferred Stock, $.10 par value. Upon completion of this Offering, the Company will have 5,000,000 outstanding shares of Class A Common Stock and 6,250,000 outstanding shares of Class B Common Stock and no outstanding shares of preferred stock (assuming the Underwriters' over-allotment option is not exercised). The following summary description of the Company's capital stock does not purport to be complete and is qualified in its entirety by reference to the Company's Certificate, which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, and Delaware Law. Reference is made to such exhibit and Delaware Law for a detailed description of the provisions thereof summarized below. Common Stock The Company's Class A Common Stock and Class B Common Stock are equal in all respects except for voting rights, conversion rights of the Class B Common Stock and as required by law, as discussed more fully below. Voting Rights; Conversion of Class B Common Stock to Class A Common Stock The voting powers, preferences and relative rights of the Class A Common Stock and the Class B Common Stock are subject to the following provisions. Holders of Class A Common Stock have one vote per share on all matters submitted to a vote of the stockholders of the Company. Holders of Class B Common Stock are entitled to ten votes per share except as described below. Holders of all classes of Common Stock entitled to vote will vote together as a single class on all matters presented to the stockholders for their vote or approval except as otherwise required by Delaware Law. There is no cumulative voting with respect to the election of directors. In the event any shares of Class B Common Stock held by a member of the Smith Group (as defined below) are transferred outside of the Smith Group, such shares will automatically be converted into shares of Class A Common Stock. In addition, if the total number of shares of Common Stock held by members of the Smith Group is less than 15% of the total number of shares of Common Stock outstanding, all of the outstanding shares of Class B Common Stock automatically will be reclassified as Class A Common Stock. In any merger, consolidation or business combination, the consideration to be received per share by holders of Class A Common Stock must be identical to that received by holders of Class B Common Stock, except that in any such transaction in which shares of common stock are distributed, such shares may differ as to voting rights to the extent that voting rights now differ between the classes of Common Stock. Notwithstanding the foregoing, the holders of Class A Common Stock and Class B Common Stock vote as a single class, with each share of each class entitled to one vote per share, with respect to any transaction proposed or approved by the Board of Directors of the Company or proposed by or on behalf of holders of the Class B Common Stock or as to which any member of the Smith Group or any affiliate thereof has a material financial interest other than as a then existing stockholder of the Company constituting a (a) "going private" transaction, (b) sale or other disposition of all or substantially all of the Company's assets, (c) sale or transfer which would cause the nature of the Company's business to be no longer primarily oriented toward automobile dealership operations and related activities or (d) merger or consolidation of the Company in which the holders of the Common Stock will own less than 50% of the Common Stock following such transaction. A "going private" transaction is defined as any "Rule 13e-3 Transaction," as such term is defined in Rule 13e-3 promulgated under the Securities Exchange Act of 1934. An "affiliate" is defined as (i) any individual or entity who or that, directly or indirectly, controls, is controlled by, or is under common control with any member of the Smith Group, (ii) any corporation or organization (other than the Company or a majority-owned subsidiary of the Company) of which any member of the Smith Group is an officer partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of voting securities, or in which any member of the Smith Group has a substantial beneficial interest, (iii) a voting trust or similar arrangement pursuant to which any member of the Smith Group generally controls the vote of the shares of Common Stock held by or subject to such trust or arrangement, (iv) any other trust or estate in which any member of the Smith Group has a substantial beneficial interest or as to which any member of the Smith Group serves as trustee or in a similar fiduciary capacity, or (v) any relative or spouse of any member of the Smith Group or any relative of such spouse, who has the same residence as any member of the Smith Group. As used in this Prospectus, the term the "Smith Group" consists of the following persons: (i) Mr. Smith and his guardian, conservator, committee, or attorney-in-fact; (ii) William S. Egan and his guardian, conservator, committee, or attorney-in-fact; (iii) each lineal descendant of Messrs. Smith and Egan (a "Descendant") and their respective guardians, conservators, 71 committees or attorneys-in-fact; and (iv) each "Family Controlled Entity" (as defined below). The term "Family Controlled Entity" means (i) any not-for-profit corporation if at least 80% of its board of directors is composed of Mr. Smith, Mr. Egan and/or Descendants; (ii) any other corporation if at least 80% of the value of its outstanding equity is owned by members of the Smith Group; (iii) any partnership if at least 80% of the value of the partnership interests are owned by members of the Smith Group; and (iv) any limited liability or similar company if at least 80% of the value of the company is owned by members of the Smith Group. For a discussion of the effects of the disproportionate voting rights of the Common Stock, see "Risk Factors -- Concentration of Voting Power and Antitakeover Provisions." Under the Company's Certificate and Delaware Law, the holders of Class A Common Stock and/or Class B Common Stock are each entitled to vote as a separate class, as applicable, with respect to any amendment to the Company's Certificate that would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or modify or change the powers, preferences or special rights of the shares of such class so as to affect such class adversely. Dividends Holders of the Class A Common Stock and the Class B Common Stock are entitled to receive ratably such dividends, if any, as are declared by the Company's Board of Directors out of funds legally available for that purpose, provided, that dividends paid in shares of Class A Common Stock or Class B Common Stock shall be paid only as follows: shares of Class A Common Stock shall be paid only to holders of Class A Common Stock and shares of Class B Common Stock shall be paid only to holders of Class B Common Stock. The Company's Certificate provides that if there is any dividend, subdivision, combination or reclassification of either class of Common Stock, a proportionate dividend, subdivision, combination or reclassification of the other class of Common Stock shall simultaneously be made. Other Rights Stockholders of the Company have no preemptive or other rights to subscribe for additional shares. In the event of the liquidation, dissolution or winding up of the Company, holders of Class A Common Stock and Class B Common Stock are entitled to share ratably in all assets available for distribution to holders of Common Stock after payment in full of creditors. No shares of any class of Common Stock are subject to a redemption or a sinking fund. All outstanding shares of Common Stock are, and all shares offered by this Prospectus will be, when sold, validly issued, fully paid and nonassessable. Transfer Agent and Registrar The Company has appointed First Union National Bank as the transfer agent and registrar for the Class A Common Stock. The Company has not appointed a transfer agent for the Class B Common Stock. Preferred Stock No shares of preferred stock are outstanding. The Company's Certificate authorizes the Board of Directors to issue up to 3,000,000 shares of preferred stock in one or more series and to establish such designations and such relative voting, dividend, liquidation, conversion and other rights, preferences and limitations as the Board of Directors may determine without further approval of the stockholders of the Company. The issuance of preferred stock by the Board of Directors could, among other things, adversely affect the voting power of the holders of Class A Common Stock and, under certain circumstances, make it more difficult for a person or group to gain control of the Company. See "Risk Factors -- Concentration of Voting Power and Anti-takeover Provisions." The issuance of any series of preferred stock, and the relative designations, rights, preferences and limitations of such series, if and when established, will depend upon, among other things, the future capital needs of the Company, the then-existing market conditions and other factors that, in the judgment of the Board of Directors, might warrant the issuance of preferred stock. At the date of this Prospectus, there are no plans, agreements or understandings for the issuance of any shares of preferred stock. Delaware Law, Certain Charter and Bylaw Provisions and Certain Franchise Agreement Provisions Certain provisions of Delaware Law and of the Company's Certificate and Bylaws, summarized in the following paragraphs, may be considered to have an antitakeover effect and may delay, deter or prevent a tender offer, proxy contest or other takeover attempt that a stockholder might consider to be in such stockholder's best interest, including such an attempt as might result in payment of a premium over the market price for shares held by stockholders. 72 Delaware Antitakeover Law. The Company, a Delaware corporation, is subject to the provisions of Delaware Law, including Section 203. In general, Section 203 prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which such person became an interested stockholder unless: (i) prior to such date, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; or (ii) upon becoming an interested stockholder, the stockholder then owned at least 85% of the voting stock, as defined in Section 203; or (iii) subsequent to such date, the business combination is approved by both the Board of Directors and by holders of at least 66 2/3% of the corporation's outstanding voting stock, excluding shares owned by the interested stockholder. For these purposes, the term "business combination" includes mergers, asset sales and other similar transactions with an "interested stockholder." An "interested stockholder" is a person who, together with affiliates and associates, owns (or, within the prior three years, did own) 15% or more of the corporation's voting stock. Although Section 203 permits a corporation to elect not to be governed by its provisions, the Company to date has not made this election. Classified Board of Directors. The Company's Bylaws provide for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board of Directors will be elected each year. Classification of the Board of Directors expands the time required to change the composition of a majority of directors and may tend to discourage a takeover bid for the Company. Moreover, under Delaware Law, in the case of a corporation having a classified board of directors, the stockholders may remove a director only for cause. This provision, when coupled with the provision of the Bylaws authorizing only the board of directors to fill vacant directorships, will preclude stockholders of the Company from removing incumbent directors without cause, simultaneously gaining control of the Board of Directors by filing the vacancies with their own nominees. See "Mangement -- Executive Officers and Directors; Key Personnel." Special Meetings of Stockholders. The Company's Bylaws provide that special meetings of stockholders may be called only by the Chairman or by the Secretary or any Assistant Secretary at the request in writing of a majority of the Board of Directors of the Company. The Company's Bylaws also provide that no action required to be taken or that may be taken at any annual or special meeting of stockholders may be taken without a meeting; the powers of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. These provisions may make it more difficult for stockholders to take action opposed by the Board of Directors. Advance Notice Requirements for Stockholder Proposals and Director Nominations. The Company's Bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or a special meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive office of the Company, (i) in the case of an annual meeting that is called for a date that is within 30 days before or after the anniversary date of the immediately preceding annual meeting of stockholders, not less than 60 days nor more than 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 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. The Bylaws also specify certain requirements for a stockholder's notice to be in proper written form. These provisions may preclude some stockholders from bringing matters before the stockholders at an annual or special meeting or from making nominations for directors at an annual or special meeting. Conflict of Interest Procedures. The Company's Certificate contains provisions providing that transactions between the Company and its affiliates must be no less favorable to the Company than would be available in transactions involving arms'-length dealing with unrelated third parties. Moreover, any such transaction involving aggregate payments in excess of $500,000 must be approved by a majority of the Company's directors and a majority of the Company's independent directors. Otherwise, the Company must obtain an opinion as to the financial fairness of the transactions to be issued by an investment banking or appraisal firm of national standing. Restrictions under Franchise Agreements. The Company's franchise agreements impose restrictions on the transfer of the Common Stock. A number of Manufacturers prohibit transactions which affect changes in management control of the Company. For instance, Ford may cause the Company to sell or resign from its Ford franchises if any person or entity acquires 15% or more of the Company's voting securities. Likewise, General Motors, Toyota and Infiniti may force the sale of their respective franchises if 20% or more of the Company's voting securities are so acquired. Honda may force the sale of the Company's Honda franchise if any person or entity, other than members of the Smith Group, acquires 5% of the Common 73 Stock (10% if such entity is an institutional investor), and Honda deems such person or entity to be unsatisfactory. Volkswagen has approved of the public sale of only 25% of the voting control of the Company and requires prior approval of any change in control or management of the Company that would affect the Company's control or management of its Volkswagen franchisee subsidiaries. Chrysler also has approved of the public sale of only 50% of the Common Stock and requires prior approval of any future sales that would result in a change in voting or managerial control of the Company. Such restrictions may prevent or deter prospective acquirers from obtaining control of the Company. See "Risk Factors -- Stock Ownership/Issuance Limits; Limitation on Ability to Issue Additional Equity" and "Business -- Relationships with Manufacturers." 74 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have outstanding 5,000,000 shares of Class A Common Stock (assuming no exercise of the Underwriters' over-allotment option). All of such shares will be freely transferable and may be resold without further registration under the Securities Act, except for any shares purchased by an "affiliate" of the Company (as defined by Rule 144), which shares will be subject to the resale limitations of Rule 144. The 6,250,000 shares (the "Restricted Shares") of Class B Common Stock outstanding, which are convertible into Class A Common Stock, are "restricted" securities within the meaning of Rule 144 irrespective of whether the conversion right is exercised. The 629,696 shares of Class A Common Stock, which underlie options to be granted on or before the closing of the Offering under the Company's Stock Option Plan and the Dyer Warrant, may be resold only pursuant to a registration statement under the Securities Act or an applicable exemption from registration thereunder such as an exemption provided by Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned "restricted securities" for at least one year may, under certain circumstances, resell within any three-month period, such number of shares as does not exceed the greater of one percent of the then-outstanding shares of Class A Common Stock or the average weekly trading volume of Class A Common Stock during the four calendar weeks prior to such resale. Rule 144 also permits, under certain circumstances, the resale of shares without any quantity limitation by a person who has satisfied a two-year holding period and who is not, and has not been for the preceding three months, an affiliate of the Company. In addition, holding periods of successive non-affiliate owners are aggregated for purposes of determining compliance with these one- and two-year holding period requirements. Upon completion of this Offering, none of the 6,250,000 shares of Class B Common Stock outstanding on the date of this Prospectus will have been held for at least one year. Since all such shares are restricted securities, none of them may be resold pursuant to Rule 144 upon completion of this Offering. Any transfer of shares of the Class B Common Stock to any person other than a member of the Smith Group will result in a conversion of such shares to Class A Common Stock. The Restricted Shares will not be eligible for sale under Rule 144 until the expiration of the one-year holding period from the date such Restricted Shares were acquired. The availability of shares for sale or actual sales under Rule 144 and the perception that such shares may be sold may have a material adverse effect on the market price of the Class A Common Stock. Sales under Rule 144 also could impair the Company's ability to market additional equity securities. Additionally, the Company has entered into the Registration Rights Agreement with Sonic Financial, Bruton Smith, Scott Smith and William Egan. The Registration Rights Agreement provides piggyback registration rights with respect to 6,250,000 shares of Common Stock in the aggregate. For further information regarding the Registration Rights Agreement, see "Certain Transactions -- Registration Rights Agreements." The Company, all of the executive officers of the Company and the holders of Class B Common Stock have agreed, subject to certain exceptions, not, directly or indirectly, to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option to purchase, right or warrant to purchase, or otherwise transfer or dispose of any Class A Common Stock or securities convertible into or exchangeable or exercisable for Class A Common Stock, including shares of Class B Common Stock, or file a registration statement under the Securities Act with respect to the foregoing, or (ii) enter into any swap or other agreement or transaction that transfers, in whole or part, directly or indirectly, the economic consequences of ownership of the Class A Common Stock, whether any such swap or transaction described above is to be settled by delivery of Class A Common Stock or such other securities, in cash or otherwise, for 180 days from the date of this Prospectus without the prior written consent of Merrill Lynch; provided that the Company may sell shares of Class A Common Stock to a third party as consideration for the Company's acquisition from such third party of an automobile dealership, so long as such third party executes a lock up agreement on substantially the same terms described above for a period expiring 180 days after the date of this Prospectus. 75 CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS The following is a general discussion of certain United States federal income and estate tax considerations with respect to the ownership and disposition of Class A Common Stock applicable to Non-U.S. Holders. In general, a "Non-U.S. Holder" is any holder other than (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized in the United States or under the laws of the United States or of any state (other than any partnership treated as foreign under U.S. Treasury regulations), or (iii) an estate or trust, the income of which is includable in gross income for United States federal income tax purposes regardless of its source. This discussion is based on current law, which is subject to change (possibly with retroactive effect), and is for general information only. This discussion does not address aspects of United States federal taxation other than income and estate taxation and does not address all aspects of income and estate taxation or any aspects of state, local or non-United States taxes, nor does it consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder (including certain U.S. expatriates), and including the fact that in the case of a Non-U.S. Holder that is a partnership, the U.S. tax consequences of holding and disposing of shares of Common Stock may be affected by certain determinations made at the partner level. This discussion also does not consider the tax consequences to any person who is a shareholder, partner or beneficiary of a holder of Common Stock. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES INCOME AND OTHER TAX CONSIDERATIONS OF HOLDING AND DISPOSING OF SHARES OF CLASS A COMMON STOCK. An individual may, subject to certain exceptions, be deemed to be a resident alien (as opposed to a non-resident alien) by virtue of being present in the United States for at least 31 days in the calendar year and for an aggregate of at least 183 days during a three year period ending in the current calendar year (counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). Resident aliens are subject to U.S. federal income tax as if they were U.S. citizens. Dividends In general, dividends paid to a Non-U.S. Holder will be subject to United States withholding tax at a 30% rate of the gross amount (or a lower rate prescribed by an applicable income tax treaty) unless the dividends are either (i) effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States, or (ii) if certain income tax treaties apply, attributable to a permanent establishment in the United States maintained by the Non-U.S. Holder. Dividends effectively connected with such a United States trade or business or attributable to such a United States permanent establishment generally will not be subject to United States withholding tax if the Non-U.S. Holder files certain forms, including Internal Revenue Service Form 4224, with the payor of the dividend, and generally will be subject to United States federal income tax on a net income basis, in the same manner as if the Non-U.S. Holder were a resident of the United States. A Non-U.S. Holder that is a corporation may be subject to an additional branch profits tax at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty) on the repatriation from the United States of its "effectively connected earnings and profits," subject to certain adjustments. To determine the applicability of a tax treaty providing for a lower rate of withholding, dividends paid to an address in a foreign country are presumed under current Treasury regulations to be paid to a resident of that country absent knowledge to the contrary. Recently finalized Treasury regulations (the "Final Regulations"), which are to be effective for payments made after December 31, 1998, however, generally would require Non-U.S. Holders to file an I.R.S. Form W-8 to obtain the benefit of any applicable tax treaty providing for a lower rate of withholding tax on dividends. In addition, under the Final Regulations, in the case of Common Stock held by a foreign partnership, (i) the certification requirements would generally be applied to each partner, and (ii) the partnership would be required to provide certain information, including a U.S. taxpayer identification number. A look through rule will apply in the case of tiered partnerships. A Non-U.S. Holder that is eligible for a reduced rate of U.S. withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the Internal Revenue Service. Gain on Sale or Other Disposition of Class A Common Stock In general, a Non-U.S. Holder will not be subject to United States federal income tax on any gain realized upon the sale or other disposition of such holder's shares of Class A Common Stock unless (i) the gain either is effective connected with a trade or business carried on by the non-U.S. Holder within the United States or, if certain income tax treaties apply, is attributable to a permanent establishment in the United States maintained by the Non-U.S. Holder (and, in either case, the branch profits tax discussed above may also apply if the Non-U.S. Holder is a corporation); (ii) the Non-U.S. Holder is an individual who holds shares of Class A Common Stock as a capital asset and is present in the United States for 183 days or 76 more in the taxable year of disposition, and either (a) such individual has a "tax home" (as defined for United States federal income tax purposes) in the United States (unless the gain from the disposition is attributable to an office or other fixed place of business maintained by such Non-U.S. Holder in a foreign country and such gain has been subject to a foreign income tax equal to at least 10% of the gain derived form such disposition), or (b) the gain is attributable to an office or other fixed place of business maintained by such individual in the United States; or (iii) the Company is or has been a United States real property holding corporation (a "USRPHC") for United States federal income tax purposes (which the Company does not believe that it is or is likely to become) at any time within the shorter of the five year period preceding such disposition or such Non-U.S. Holder's holding period. If the Company were or were to become a USRPHC at any time during this period, gains realized upon a disposition of Class A Common Stock by a Non-U.S. Holder which did not directly or indirectly own more than 5% of the Class A Common Stock during this period generally would not be subject to United States federal income tax, provided that the Class A Common Stock is regularly traded on an established securities market. Estate Tax Class A Common Stock owned or treated as owned by an individual who is not a citizen or resident (as defined for United States federal estate tax purposes) of the United States at the time of death will be includable in the individual's gross estate for United States federal estate tax purposes unless an applicable estate tax treaty provides otherwise, and therefore may be subject to United States federal estate tax. Backup Withholding, Information Reporting and Other Reporting Requirements The Company must report annually to the Internal Revenue Service and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, each Non-U.S. Holder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of this information also may be made available under the provisions of a specific treaty or agreement with the tax authorities in the country in which the Non-U.S. Holder resides or is established. Under certain circumstances, the IRS requires additional information reporting and "backup withholding" at a rate of 31% with respect to certain payments on Common Stock. Non-U.S. Holders of Common Stock generally would be exempt from these IRS information reporting requirements and backup withholding with respect to dividends payable on Common Stock. Under the Final Regulations (which are to be effective for payments made after December 31, 1998) as a general matter, a withholding agent (whether U.S. or foreign) must ascertain whether the payee is a U.S. or foreign person. Determinations of payee status are generally made at each level of the chain of payment, until, ultimately, the payment is made to the beneficial owner. In the case of dividends and gross proceeds from publicly traded stocks, special rules address the treatment of payments to foreign intermediaries (nominees, agents, etc.) which govern when and how intermediaries can certify as to payee status on behalf of a beneficial owner. If, under the Final Regulations, the withholding agent must treat the payee as a foreign person, the withholding provisions discussed above under "Dividends" (i.e., the 30% withholding tax regime) will apply. Generally, to the extent such withholding is required, or is excused based on documentation that must be provided, the information reporting and the backup withholding requirements will not apply. See the discussion above under "Dividends" with respect to the rules applicable to foreign partnerships under the Final Regulations. Under current regulations, the payment of proceeds from the disposition of Class A Common Stock to or through a United States office of a broker will be subject to information reporting and backup withholding unless the beneficial owner, under penalties of perjury, certifies, among other things, its status as a Non-U.S. Holder or otherwise establishes an exemption. The payment of proceeds from the disposition of Class A Common Stock to or through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding and information reporting. However, in the case of proceeds from a disposition of Class A Common Stock paid to or through a non-U.S. office of a broker that is (i) a United States person, (ii) a "controlled foreign corporation" for United States federal income tax purposes, or (iii) a foreign person 50% or more of whose gross income from certain periods is effectively connected with a United States trade or business, information reporting (but not backup withholding) will apply unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder (and the broker has no actual knowledge to the contrary). Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be refunded or credited against the Non-U.S. Holder's United States federal income tax liability, if any, provided that the required information is furnished to the Internal Revenue Service in a timely manner. 77 UNDERWRITING Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. are acting as representatives (the "U.S. Representatives") of each of the Underwriters named below (the "U.S. Underwriters"). Subject to the terms and conditions set forth in a U.S. purchase agreement (the "U.S. Purchase Agreement") among the Company and the U.S. Underwriters, and concurrently with the sale of 1,000,000 shares of Class A Common Stock to the International Managers (as defined below), the Company has agreed to sell to the U.S. Underwriters, and each of the U.S. Underwriters severally and not jointly has agreed to purchase from the Company, the number of shares of Class A Common Stock set forth opposite its name below.
Number of U.S. Underwriter Shares ---------- Merrill Lynch, Pierce, Fenner & Smith Incorporated........................................................................................ NationsBanc Montgomery Securities, Inc........................................................................... Wheat, First Securities, Inc..................................................................................... ---------- Total............................................................................................... 4,000,000 ---------- ----------
The Company has also entered into an international purchase agreement (the "International Purchase Agreement") with certain underwriters outside the United States and Canada (the "International Managers" and, together with the U.S. Underwriters, the "Underwriters") for whom Merrill Lynch International, NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. are acting as lead managers (the "Lead Managers"). Subject to the terms and conditions set forth in the International Purchase Agreement, and concurrently with the sale of 4,000,000 shares of Class A Common Stock to the U.S. Underwriters pursuant to the U.S. Purchase Agreement, the Company has agreed to sell to the International Managers, and the International Managers severally and not jointly have agreed to purchase from the Company, an aggregate of 1,000,000 shares of Class A Common Stock. The initial public offering price per share and the underwriting discount per share of Class A Common Stock are identical under the U.S. Purchase Agreement and the International Purchase Agreement. In the U.S. Purchase Agreement and the International Purchase Agreement, the several U.S. Underwriters and the several International Managers, respectively, have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Class A Common Stock being sold pursuant to each such agreement if any of the shares of Class A Common Stock being sold pursuant to such agreement are purchased. Under certain circumstances, under the U.S. Purchase Agreement and the International Purchase Agreement, the commitments of non-defaulting Underwriters may be increased. The closings with respect to the sale of shares of Class A Common Stock to be purchased by the U.S. Underwriters and International Managers are conditioned upon one another. The U.S. Representatives have advised the Company that the U.S. Underwriters propose initially to offer the shares of Class A Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share of Class A Common Stock. The U.S. Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share of Class A Common Stock to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. At the request of the Company, the Underwriters have reserved up to 5% of the shares of Class A Common Stock for sale at the initial public offering price, and otherwise on the same terms as sales pursuant to the Offering, to directors, officers, employees, business associates and related persons of the Company. The number of shares of Class A Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any 78 reserved shares which are not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. The Company, all of the executive officers of the Company and all the holders of Class B Common Stock have agreed, subject to certain exceptions, not to, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option to purchase, right or warrant to purchase, or otherwise transfer or dispose of any Class A Common Stock or securities convertible into or exchangeable or exercisable for Class A Common Stock, including shares of Class B Common Stock, or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement or transaction that transfers, in whole or part, directly or indirectly, the economic consequence of ownership of the Class A Common Stock, whether any such swap or transaction described above is to be settled by delivery of Class A Common Stock or such securities, in cash or otherwise, without the prior written consent of Merrill Lynch on behalf of the Underwriters, for a period of 180 days after the date of this Prospectus; provided that the Company may sell shares of Class A Common Stock to a third party as consideration for the Company's acquisition from such third party of an automobile dealership, provided that such third party executes a lock-up agreement on substantially the same terms described above for a period expiring 180 days after the date of this Prospectus. The Company has granted an option to the U.S. Underwriters, exercisable within 30 days after the date of this Prospectus, to purchase up to an aggregate of 600,000 additional shares of Class A Common Stock at the initial public offering price set forth on the cover page of this Prospectus, less the underwriting discount. The U.S. Underwriters may exercise this option only to cover over-allotments, if any, made on the sale of the Class A Common Stock offered hereby. To the extent that the U.S. Underwriters exercise this option, each U.S. Underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares of Class A Common Stock proportionate to such U.S. Underwriter's initial amount reflected in the foregoing table. The Company also has granted an option to the International Managers, exercisable within 30 days after the date of this Prospectus, to purchase up to an aggregate of 150,000 additional shares of Class A Common Stock to cover over-allotments, if any, on terms similar to those granted to the U.S. Underwriters. The U.S. Underwriters and the International Managers have entered into an intersyndicate agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Pursuant to the Intersyndicate Agreement, the U.S. Underwriters and the International Managers are permitted to sell shares of Class A Common Stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell shares of Class A Common Stock will not offer to sell or sell shares of Class A Common Stock to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, and the International Managers and any dealer to whom they sell shares of Class A Common Stock will not offer to sell or sell shares of Class A Common Stock to U.S. persons or to Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions pursuant to the Intersyndicate Agreement. Prior to the Offering, there has been no public market for the Class A Common Stock. The initial public offering price for the Class A Common Stock will be determined by negotiation among the Company, the U.S. Representatives and the Lead Managers. The factors considered in determining the initial public offering price, in addition to prevailing market conditions, are price-earnings ratios of publicly traded companies that the U.S. Representatives and the Lead Managers believe to be comparable to the Company, certain financial information of the Company, the history of, and the prospects for, the Company and the industry in which it competes, an assessment of the Company's management, its past and present operations, the prospects for and the timing of future revenues of the Company, the present state of the Company's development, and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to the Company. There can be no assurance that an active trading market will develop for the Class A Common Stock or that the Class A Common Stock will trade in the public market subsequent to the Offering made hereby at or above the initial public Offering price. The Company has agreed to indemnify the U.S. Underwriters and the International Managers against certain liabilities, including liabilities under the Securities Act, or to contribute to payments which the U.S. Underwriters and the International Managers may be required to make in respect thereof. The Class A Common Stock has been approved for listing on the NYSE, subject to official notice of issuance, under the symbol "SAH." In order to meet the requirements for listing of the Class A Common Stock on that exchange, the U.S. Underwriters and the International Managers have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders. 79 The U.S. Underwriters and the International Managers do not intend to confirm sales of Class A Common Stock offered hereby to any accounts over which they exercise discretionary authority. Until the distribution of the Class A Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Class A Common Stock. As an exception to these rules, the U.S. Representatives are permitted to engage in certain transactions that stabilize the price of Class A Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Class A Common Stock. If the Underwriters create a short position in the Class A Common Stock in connection with the Offering, i.e., if they sell more shares of Class A Common Stock than are set forth on the cover page of this Prospectus, the U.S. Representatives may reduce that short position by purchasing Class A Common Stock in the open market. The U.S. Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The U.S. Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the U.S. Representatives purchase shares of Class A Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Class A Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Class A Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the U.S. Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. NationsBank, an affiliate of NationsBanc Montgomery Securities, Inc., loaned the Company $20 million under the Six-Month Facility to finance the Lake Norman Acquisition and the Williams Acquisition. More than 10% of the net proceeds of the Offering will be received by NationsBank by reason of the use of such proceeds to repay a portion of such borrowings. Accordingly, the Offering will be conducted in accordance with NASD Conduct Rule 2710(c)(8), which requires that the public offering price of the Class A Common Stock be no higher than the price recommended by a Qualified Independent Underwriter which has participated in the preparation of the Registration Statement and performed its usual standard of due diligence with respect thereto. Merrill Lynch will act as the Qualified Independent Underwriter for the Offering, and the public offering price will not be higher than the price recommended by Merrill Lynch. 80 LEGAL MATTERS Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina, counsel to the Company, will render an opinion that the shares of Class A Common Stock offered hereby, when issued and paid for in accordance with the terms of the Underwriting Agreement, will be duly authorized, validly issued, fully paid and nonassessable. Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations), New York, New York, has served as counsel to the Underwriters in connection with this Offering. EXPERTS The combined and consolidated financial statements of Sonic Automotive, Inc. and Affiliated Companies, the financial statements of Dyer & Dyer, Inc., the combined financial statements of Bowers Automotive Group, the combined financial statements of Lake Norman Dodge, Inc. and Affiliated Companies, and the financial statements of Ken Marks Ford, Inc. included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "SEC") a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Class A Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the shares of Class A Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits and schedules filed as part thereof. Statements contained in this Prospectus as to the contents of any contract or any other documents are not necessarily complete, and, in each such instance, reference is made to the copy of the contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference thereto. The Registration Statement, together with its exhibits and schedules, may be inspected at the Public Reference Section of the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of such materials may be obtained from any such office upon payment of the fees prescribed by the SEC. Such information may also be inspected and copied at the office of the NYSE at 20 Broad Street, New York, New York 10005. The Commission also maintains a Website (http://www.sec.gov.) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. 81 INDEX TO FINANCIAL STATEMENTS
Page ----- SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES: INDEPENDENT AUDITORS' REPORT........................................................................................ F-2 COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS: Combined and Consolidated Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997............ F-3 Combined and Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996 and unaudited for the six months ended June 30, 1996 and 1997................................................................. F-4 Combined and Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 and unaudited for the six months ended June 30, 1997.......................... F-5 Combined and Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and unaudited for the six months ended June 30, 1996 and 1997....................................................... F-6 Notes to Combined and Consolidated Financial Statements.......................................................... F-7 DYER & DYER, INC.: INDEPENDENT AUDITORS' REPORT........................................................................................ F-16 FINANCIAL STATEMENTS: Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997...................................... F-17 Statements of Income and Retained Earnings for the years ended December 31, 1994, 1995 and 1996 and unaudited for the six months ended June 30, 1996 and 1997..................................................................... F-18 Statements of Stockholder's Equity for the years ended December 31, 1994, 1995 and 1996 and unaudited for the six months ended June 30, 1997...................................................................................... F-19 Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and unaudited for the six months ended June 30, 1996 and 1997.................................................................................... F-20 Notes to Financial Statements.................................................................................... F-21 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES: INDEPENDENT AUDITORS' REPORT........................................................................................ F-25 COMBINED FINANCIAL STATEMENTS: Combined Balance Sheets at December 31, 1995 and 1996 and unaudited at June 30, 1997............................. F-26 Combined Statements of Income for the years ended December 31, 1995 and 1996 and unaudited for the six months ended June 30, 1996 and 1997.................................................................................... F-27 Combined Statements of Stockholders' Equity for the years ended December 31, 1995 and 1996 and unaudited for the six months ended June 30, 1997................................ F-28 Combined Statements of Cash Flows for the years ended December 31, 1995 and 1996 and unaudited for the six months ended June 30, 1996 and 1997.................................................................................... F-29 Notes to Combined Financial Statements........................................................................... F-30 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES: INDEPENDENT AUDITORS' REPORT........................................................................................ F-37 COMBINED FINANCIAL STATEMENTS: Combined Balance Sheets at December 31, 1996 and unaudited at June 30, 1997...................................... F-38 Combined Statements of Income for the year ended December 31, 1996 and unaudited for the six months ended June 30, 1996 and 1997............................................................................................... F-39 Combined Statements of Stockholders' Equity for the year ended December 31, 1996 and unaudited for the six months ended June 30, 1997............................................................................................. F-40 Combined Statements of Cash Flows for the year ended December 31, 1996 and unaudited for the six months ended June 30, 1996 and 1997.......................................................................................... F-41 Notes to Combined Financial Statements........................................................................... F-42 KEN MARKS FORD, INC.: INDEPENDENT AUDITORS' REPORT........................................................................................ F-46 FINANCIAL STATEMENTS: Balance Sheets at April 30, 1997 and unaudited at July 31, 1997.................................................. F-47 Statements of Income for the year ended April 30, 1997 and unaudited for the three months ended July 31, 1996 and 1997............................................................................................................ F-48 Statements of Stockholders' Equity for the year ended April 30, 1997 and unaudited for the three months ended July 31, 1997................................................................................................... F-49 Statements of Cash Flows for the year ended April 30, 1997 and unaudited for the three months ended July 31, 1996 and 1997........................................................................................................ F-50 Notes to Financial Statements.................................................................................... F-51
F-1 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SONIC AUTOMOTIVE, INC. Charlotte, North Carolina We have audited the accompanying combined balance sheets of Sonic Automotive, Inc. and Affiliated Companies (the "Company"), which are under common ownership and management, as of December 31, 1995 and 1996, and the related combined statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the combined financial position of Sonic Automotive, Inc. and Affiliated Companies as of December 31, 1995 and 1996, and the combined results of their operations and their combined cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Charlotte, North Carolina October 16, 1997 F-2 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES COMBINED AND CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1996 and June 30, 1997
December 31, --------------------------- June 30, 1995 1996 1997 ----------- ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents.................................................. $ 8,993,887 $ 6,679,490 $ 9,237,585 Marketable equity securities............................................... 706,126 638,500 769,123 Receivables (Note 5) (net of allowance for doubtful accounts of $160,031 and $224,789 at December 31, 1995 and 1996, respectively)........................................................... 9,085,376 11,907,786 12,897,264 Inventories (Notes 1, 3 and 5)............................................. 51,347,994 71,549,716 73,409,956 Deferred income taxes (Note 6)............................................. 117,500 279,896 256,032 Other current assets....................................................... 311,019 332,561 818,171 ----------- ------------ ------------ Total current assets.................................................... 70,561,902 91,387,949 97,388,131 PROPERTY AND EQUIPMENT, NET (Notes 4 and 5).................................. 8,527,338 12,466,713 13,269,789 GOODWILL, NET (Note 1)....................................................... -- 4,266,084 9,463,179 DUE FROM AFFILIATES (Note 7)................................................. -- 2,465,929 -- OTHER ASSETS................................................................. 372,610 389,277 263,374 ----------- ------------ ------------ TOTAL ASSETS................................................................. $79,461,850 $110,975,952 $120,384,473 ----------- ------------ ------------ ----------- ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable -- floor plan (Note 3)....................................... $45,151,111 $ 63,893,356 $ 67,855,408 Trade accounts payable..................................................... 3,043,180 3,642,572 3,847,922 Accrued interest........................................................... 503,391 521,190 491,341 Other accrued liabilities.................................................. 1,554,713 3,031,473 4,307,119 Payable to affiliated companies (Note 7)................................... 2,000,000 -- -- Payable to Company's Chairman (Note 2)..................................... -- -- 3,500,000 Current maturities of long-term debt....................................... 169,932 518,979 487,242 ----------- ------------ ------------ Total current liabilities............................................... 52,422,327 71,607,570 80,489,032 ----------- ------------ ------------ LONG-TERM DEBT (Note 5)...................................................... 3,560,766 5,285,862 5,137,210 PAYABLE TO AFFILIATED COMPANIES (Note 7)..................................... 1,219,204 914,339 854,984 DEFERRED INCOME TAXES (Note 6)............................................... 777,600 1,059,380 930,923 INCOME TAX PAYABLE (Note 6).................................................. 4,976,276 5,499,777 4,565,796 MINORITY INTEREST (Note 1)................................................... 199,522 313,912 -- COMMITMENTS AND CONTINGENCIES (Notes 7 and 10) STOCKHOLDERS' EQUITY (Notes 1, 8 and 9): Preferred stock, $.10 par, 3,000,000 shares authorized and unissued........ -- -- -- Class A Common Stock, $.01 par, 50,000,000 shares authorized and unissued................................................................ -- -- -- Class B Common Stock, $.01 par, 15,000,000 shares authorized, 6,250,000 shares issued and outstanding................................. 62,500 62,500 62,500 Paid-in capital............................................................ 6,269,046 13,333,160 14,418,342 Retained earnings.......................................................... 10,010,097 12,993,014 14,023,119 Unrealized loss on marketable equity securities............................ (35,488) (93,562) (97,433) ----------- ------------ ------------ Total stockholders' equity.............................................. 16,306,155 26,295,112 28,406,528 ----------- ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $79,461,850 $110,975,952 $120,384,473 ----------- ------------ ------------ ----------- ------------ ------------
See notes to combined and consolidated financial statements. F-3 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES COMBINED AND CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997
Year ended December 31, Six months ended June 30, -------------------------------------------- ---------------------------- 1994 1995 1996 1996 1997 ------------ ------------ ------------ ------------ ------------ (Unaudited) REVENUES: Vehicle sales............................ $227,959,827 $267,307,949 $326,841,772 $164,332,724 $185,077,493 Parts, service and collision repair...... 33,984,096 35,859,960 42,643,812 21,005,202 22,906,377 Finance and insurance.................... 5,180,998 7,813,408 7,118,217 4,277,094 4,763,248 ------------ ------------ ------------ ------------ ------------ Total revenues........................ 267,124,921 310,981,317 376,603,801 189,615,020 212,747,118 COST OF SALES.............................. 233,011,078 270,878,010 331,047,060 167,191,296 188,422,240 ------------ ------------ ------------ ------------ ------------ GROSS PROFIT............................... 34,113,843 40,103,307 45,556,741 22,423,724 24,324,878 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................. 24,631,532 29,343,430 33,677,529 16,590,478 18,413,226 DEPRECIATION AND AMORTIZATION.............. 838,011 832,261 1,075,618 359,630 395,573 ------------ ------------ ------------ ------------ ------------ OPERATING INCOME........................... 8,644,300 9,927,616 10,803,594 5,473,616 5,516,079 ------------ ------------ ------------ ------------ ------------ OTHER INCOME AND EXPENSE: Interest expense, floor plan............. 3,000,622 4,504,526 5,968,430 2,800,778 3,017,903 Interest expense, other.................. 443,409 436,435 433,250 183,898 269,145 Gain on sale of marketable equity securities............................ -- 107,007 354,922 278,917 134,496 Other income............................. 609,088 342,047 263,676 90,495 139,346 ------------ ------------ ------------ ------------ ------------ Total other expense................... 2,834,943 4,491,907 5,783,082 2,615,264 3,013,206 ------------ ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES AND MINORITY INTEREST........................ 5,809,357 5,435,709 5,020,512 2,858,352 2,502,873 PROVISION FOR INCOME TAXES (Note 6)................................. 2,118,004 2,175,680 1,923,205 1,093,034 916,172 ------------ ------------ ------------ ------------ ------------ INCOME BEFORE MINORITY INTEREST................................. 3,691,353 3,260,029 3,097,307 1,765,318 1,586,701 MINORITY INTEREST IN EARNINGS OF SUBSIDIARY............................ 15,564 22,167 114,390 40,612 46,993 ------------ ------------ ------------ ------------ ------------ NET INCOME................................. $ 3,675,789 $ 3,237,862 $ 2,982,917 $ 1,724,706 $ 1,539,708 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ PRO FORMA NET INCOME PER SHARE (Note 1) (unaudited)..................... $ 0.48 $ 0.25 ------------ ------------ ------------ ------------ PRO FORMA NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA (Note 1) (unaudited)................ 6,250,000 6,250,000 ------------ ------------ ------------ ------------
See notes to combined and consolidated financial statements. F-4 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES COMBINED AND CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997
Class B Unrealized Loss Common Stock (Note 1) on Marketable ------------------------- Paid-in Retained Equity Shares Amount Capital Earnings Securities ----------- ----------- ------------ ------------ --------------- BALANCE AT DECEMBER 31, 1993...................... 6,250,000 $ 62,500 $ 4,774,700 $ 3,096,446 $ -- Net income...................................... -- -- -- 3,675,789 -- ----------- ----------- ------------ ------------ --------------- BALANCE AT DECEMBER 31, 1994...................... 6,250,000 62,500 4,774,700 6,772,235 -- Capital contribution............................ -- -- 1,494,346 -- -- Change in net unrealized loss on marketable equity securities.................................... -- -- -- -- (35,488) Net income...................................... -- -- -- 3,237,862 -- ----------- ----------- ------------ ------------ --------------- BALANCE AT DECEMBER 31, 1995...................... 6,250,000 62,500 6,269,046 10,010,097 (35,488) Capital contribution -- -- 7,064,114 -- -- Change in net unrealized loss on marketable equity securities.................................... -- -- -- -- (58,074) Net income...................................... -- -- -- 2,982,917 -- ----------- ----------- ------------ ------------ --------------- BALANCE AT DECEMBER 31, 1996...................... 6,250,000 62,500 13,333,160 12,993,014 (93,562) Capital contribution (unaudited)................ -- -- 3,208,510 -- -- Stock redemption (unaudited) (Note 7)........... -- -- (2,123,328) -- -- Dividend (unaudited) (Note 7)................... -- -- -- (509,603) -- Change in net unrealized loss on marketable equity securities (unaudited)........................ -- -- -- -- (3,871) Net income (unaudited).......................... -- -- -- 1,539,708 -- ----------- ----------- ------------ ------------ --------------- BALANCE AT JUNE 30, 1997 (UNAUDITED).............. 6,250,000 $ 62,500 $ 14,418,342 $ 14,023,119 $ (97,433) ----------- ----------- ------------ ------------ --------------- ----------- ----------- ------------ ------------ --------------- Total Stockholders' Equity -------------- BALANCE AT DECEMBER 31, 1993...................... $ 7,933,646 Net income...................................... 3,675,789 -------------- BALANCE AT DECEMBER 31, 1994...................... 11,609,435 Capital contribution............................ 1,494,346 Change in net unrealized loss on marketable equity securities.................................... (35,488) Net income...................................... 3,237,862 -------------- BALANCE AT DECEMBER 31, 1995...................... 16,306,155 Capital contribution 7,064,114 Change in net unrealized loss on marketable equity securities.................................... (58,074) Net income...................................... 2,982,917 -------------- BALANCE AT DECEMBER 31, 1996...................... 26,295,112 Capital contribution (unaudited)................ 3,208,510 Stock redemption (unaudited) (Note 7)........... (2,123,328) Dividend (unaudited) (Note 7)................... (509,603) Change in net unrealized loss on marketable equity securities (unaudited)........................ (3,871) Net income (unaudited).......................... 1,539,708 -------------- BALANCE AT JUNE 30, 1997 (UNAUDITED).............. $ 28,406,528 -------------- --------------
See notes to combined and consolidated financial statements. F-5 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997
Year ended December 31, Six months ended June 30, ------------------------------------------ -------------------------- 1994 1995 1996 1996 1997 ----------- ----------- ------------ ----------- ----------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................ $ 3,675,789 $ 3,237,862 $ 2,982,917 $ 1,724,706 $ 1,539,708 ----------- ----------- ------------ ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................... 838,011 832,261 1,075,618 359,630 395,573 Minority interest................................... 15,564 22,167 114,390 40,612 46,993 Loss (gain) on disposal of property and equipment -- (38,721) 79,660 -- -- Gain on sale of marketable equity securities........ -- (107,007) (354,922) (278,917) (134,496) Deferred income taxes............................... 258,400 450,400 (240,548) (62,002) 23,864 Changes in assets and liabilities that relate to operations: (Increase) decrease in receivables................ (2,091,063) (228,084) (2,420,651) 287,459 (989,478) (Increase) decrease in inventories................ (10,392,680) (5,025,452) (14,012,965) (3,511,263) 2,799,710 (Increase) decrease in other current assets....... (66,945) 21,173 (10,455) (189,391) (483,564) Increase (decrease) in other non-current assets... (679) (14,104) (69,883) 2,851 113,403 Increase in notes payable-floor plan.............. 9,489,146 3,431,241 12,984,772 4,117,088 290,190 Increase (decrease) in accounts payable and accrued expenses............................... 676,526 (42,224) 1,439,486 1,285,875 1,309,913 Increase (decrease) in income tax payable......... 558,254 500,780 523,501 -- (933,981) ----------- ----------- ------------ ----------- ----------- Total adjustments.............................. (715,466) (197,570) (891,997) 2,051,942 2,438,127 ----------- ----------- ------------ ----------- ----------- Net cash provided by operating activities...... 2,960,323 3,040,292 2,090,920 3,776,648 3,977,835 ----------- ----------- ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of business, net of cash received............ -- -- (5,126,595) (692,883) (3,627,347) Purchases of property and equipment................... (1,386,877) (1,508,848) (1,906,739) -- (886,149) Proceeds from sale of property and equipment.......... 32,162 556,789 4,036 -- -- Purchase of marketable equity securities.............. (82,801) (1,622,845) (207,400) -- -- Proceeds from sales of marketable equity securities... -- 1,073,539 514,700 88,900 -- Net (advances to) receipts from affiliate companies... (295,578) 1,772,022 (4,770,794) (3,251,199) 65,633 ----------- ----------- ------------ ----------- ----------- Net cash provided by (used in) investing activities................................... (1,733,094) 270,657 (11,492,792) (3,855,182) (4,447,863) ----------- ----------- ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions................................. -- 1,494,346 7,064,114 1,000,000 3,208,510 Proceeds from long-term debt.......................... 107,284 2,899 599,206 -- -- Payments of long-term debt............................ (441,500) (269,254) (575,845) (468,970) (180,387) ----------- ----------- ------------ ----------- ----------- Net cash provided by (used in) financing activities................................... (334,216) 1,227,991 7,087,475 531,030 3,028,123 ----------- ----------- ------------ ----------- ----------- NET INCREASE (DECREASE) IN CASH......................... 893,013 4,538,940 (2,314,397) 452,496 2,558,095 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................. 3,561,934 4,454,947 8,993,887 8,993,887 6,679,490 ----------- ----------- ------------ ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 4,454,947 $ 8,993,887 $ 6,679,490 $ 9,446,383 $ 9,237,585 ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash paid during the period for: Interest.............................................. $ 3,324,678 $ 4,776,504 $ 6,488,657 $ 2,839,031 $ 3,320,996 Income taxes.......................................... $ 998,850 $ 1,522,100 $ 2,042,268 $ 834,000 $ 930,000
See notes to combined and consolidated financial statements. F-6 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business -- Sonic Automotive, Inc ("Sonic" or the "Company") was incorporated in the State of Delaware in February, 1997 in order to effect a reorganization of certain affiliated companies (the "Reorganization") and to undertake an initial public offering of Sonic's common stock (the "Offering"). Sonic and affiliated companies (collectively, the "Company") operate automobile dealerships in the Houston, Texas and Charlotte, North Carolina metropolitan areas. The Company 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. The financial statements for the periods through June 30, 1997 represent the combined data for the entities under common ownership and control which became subsidiaries of Sonic pursuant to the Reorganization on June 30, 1997, including the following entities: Town and Country Ford, Inc.................................................... Charlotte Lone Star Ford, Inc........................................................... Houston FMF Management, Inc. (d/b/a Fort Mill Ford)................................... Charlotte Town and Country Toyota, Inc.................................................. Charlotte Frontier Oldsmobile-Cadillac, Inc............................................. Charlotte
All material intercompany transactions have been eliminated in the combined financial statements. Effective June 30, 1997, these five entities became wholly-owned subsidiaries of Sonic through the exchange of their common stock or membership interests for 6,250,000 shares of Sonic's Class B common stock having a $.01 par value per share. On June 2, 1997 Sonic, through its wholly-owned subsidiary, Fort Mill Chrysler-Plymouth-Dodge, acquired certain dealership assets and liabilities of Jeff Boyd Chrysler-Plymouth-Dodge, Inc. (a previously unrelated entity) for a total purchase price of approximately $3.7 million. The unaudited consolidated financial statements as of and for the six months ended June 30, 1997, which give effect to the Reorganization, include the accounts of the above five entities and also include the accounts and results of operations of Fort Mill Chrysler-Plymouth-Dodge from the date of its acquisition. The Reorganization was accounted for at historical cost in a manner similar to a pooling-of-interests as the entities were under the common management and control of Mr. O. Bruton Smith. The acquisition of Jeff Boyd Chrysler-Plymouth-Dodge was accounted for as a purchase. Prior to the Reorganization, Town and Country Toyota, Inc. was 69% owned by Mr. O. Bruton Smith, the Company's Chairman and Chief Executive Officer, Lone Star Ford, Inc. and Frontier Oldsmobile -- Cadillac, Inc. were 100% owned by Sonic Financial Corporation ("SFC"), which in turn is 100% owned by Mr. Smith and related family trusts. Town and Country Ford, Inc. was owned 80% by SFC and 20% by Mr. Scott Smith (O. Bruton Smith's son). FMF Management, Inc. was owned 50% by SFC and 50% by Mr. O. Bruton Smith. In connection with the Reorganization, the Company purchased the 31% minority interest in Town and Country Toyota, Inc. for $3.2 million in a transaction accounted for using purchase accounting. On a pro forma basis for the six months ended June 30, 1996 and 1997, revenues would have been unchanged and net income and net income per share would not be materially different had the acquisition of this minority interest occurred on January 1, 1996 and January 1, 1997, respectively. In connection with the anticipated Offering, Sonic expects to issue shares of its Class A common stock. The Class B common stock entitles the holder to ten votes per share, except in certain circumstances, while the Class A common stock entitles its holder to one vote per share. Pro Forma Net Income Per Share -- Pro forma net income per share in the accompanying financial statements has been prepared based upon the shares outstanding after the Reorganization and without giving effect to the issuance of common stock related to the Offering. Revenue Recognition -- The Company records revenue when vehicles are delivered to customers, and when vehicle service work is performed. Finance and insurance commission revenue is recognized principally at the time the contract is placed with the financial institution. F-7 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Dealer Agreements -- The Company purchases substantially all of its new vehicles from manufacturers at the prevailing prices charged by the manufacturer to its franchised dealers. The Company's sales could be unfavorably impacted by the manufacturer's unwillingness or inability to supply the dealership with an adequate supply of new car inventory. Each dealership operates under a dealer agreement with the manufacturer which generally restricts the location, management and ownership of the respective dealership. The ability of the Company to acquire additional franchises from a particular manufacturer may be limited due to certain restrictions imposed by manufacturers. Additionally, the Company's ability to enter into other significant acquisitions may be restricted and the acquisition of the Company's stock by third parties may be limited by the terms of the franchise agreement. Cash and Cash Equivalents -- The Company 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 the Company from finance companies related to vehicle purchases, and was $2,644,804 and $5,222,589 at December 31, 1995 and 1996, respectively. Inventories -- In connection with the Offering, the Company intends to convert from the last-in-first-out method (the "LIFO Method") of inventory accounting to the first-in-first-out method (the "FIFO Method"), for its inventories of new vehicles. In accordance with Accounting Principles Board Opinion No. 20, "Accounting Changes", the accompanying financial statements and related notes have been retroactively restated to reflect that change. Accordingly, inventories of new vehicles, including demonstrators, and parts and accessories are stated at the lower of FIFO cost or market. Inventories of used vehicles are stated at the lower of specific cost or market. The new method of accounting for inventories of new vehicles was adopted to provide a better matching of revenues and expenses in the future and to conform with the predominant industry practice for automobile dealerships that are publicly-held. The effect of the accounting change on net income as previously reported is as follows:
1994 1995 1996 ---------- ---------- ---------- Net income on a LIFO Basis.................................. $2,784,032 $2,437,915 $2,146,675 Adjustment for effect of a change in accounting principle that is applied retroactively............................. 891,757 799,947 836,242 ---------- ---------- ---------- Net income as adjusted.................................... $3,675,789 $3,237,862 $2,982,917 ---------- ---------- ---------- ---------- ---------- ----------
Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. The range of estimated useful lives is as follows:
Useful Lives ------------- Building..................................................................... 40 Office equipment and fixtures................................................ 5-7 Parts and service equipment.................................................. 5 Company vehicles............................................................. 5
Leasehold improvements are amortized over the lesser of the terms of their respective leases or the estimated useful lives of the related assets. Expenditures for maintenance and repairs are expensed as incurred. Significant betterments are capitalized. Goodwill -- Goodwill represents the excess of purchase price over the estimated fair value of the net assets acquired and is being amortized over a 40 year period. The cumulative amount of goodwill amortization at December 31, 1996 was approximately $98,000. The Company periodically reviews goodwill to assess recoverability. The Company's policy is to compare the carrying value of goodwill with the expected undiscounted cash flows from operations of the acquired business. F-8 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Marketable Equity Securities -- The Company's marketable equity securities are classified as "available for sale" and are not bought and held principally for the purpose of selling them in the near term. As such, these securities are reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of stockholders' equity. Realized gains and losses on sales of marketable equity securities are determined using the specific identification method. 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 related primarily to the capitalization of additional inventory costs for income tax purposes, the recording of chargebacks and repossession losses on the direct write-off method for income tax purposes, the direct write-off of uncollectible accounts for income tax purposes, and the accelerated depreciation method used for income tax purposes. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. In addition, deferred tax assets are recognized for state operating losses that are available to offset future taxable income. Concentrations of Credit Risk -- Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with financial institutions. At times, amounts invested with financial institutions may exceed FDIC insurance limits. Concentrations of credit risk with respect to receivables are limited primarily to automobile manufacturers and financial institutions. Credit risk arising from trade receivables from commercial customers is reduced by the large number of customers comprising the trade receivables balances. Trade receivables are concentrated in the Company's two market areas of Houston, Texas and Charlotte, North Carolina metropolitan areas. Fair Value of Financial Instruments -- As of December 31, 1995 and 1996 the fair values of the Company's financial instruments including receivables, due from affiliates, notes payable-floor plan, trade accounts payable, payables to affiliated companies and Company Chairman and long-term debt approximate their carrying values. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles 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. Advertising -- The Company expenses advertising costs in the period incurred. Advertising expense amounted to $3,765,363, $4,525,670 and $4,989,283 for 1994, 1995 and 1996, respectively. Impairment of Long-Lived Assets -- Effective January 1, 1996, the Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of SFAS No. 121 did not have a material impact on the Company's results of operations, financial position, and cash flows. New Accounting Standards -- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This Statement specifies the computation, presentation and disclosure requirements for earnings per share. The Company believes that the adoption of such Statement would not result in earnings per share materially different than pro forma earnings per share presented in the accompanying statements of income. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Standard establishes standards of reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement will be effective for the Company's fiscal year ending December 31, 1998, and the Company does not intend to adopt this Statement prior to the effective date. Had the Company early adopted this Statement, it would have reported comprehensive income of $2,784,032, $2,402,427 and $2,088,601 for the years ended December 31, 1994, 1995 and 1996, respectively. F-9 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Interim Financial Information -- The accompanying unaudited financial information for the six months ended June 30, 1996 and 1997 has been prepared on substantially the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. Stock Split -- All share and per share amounts included in the accompanying financial statements for all periods presented have been adjusted to reflect a 625 for 1 stock split of the Class B Common Stock effective as of October 16, 1997. 2. BUSINESS ACQUISITIONS In June 1997, the Company through its wholly-owned subsidiary, Fort Mill Chrysler-Plymouth-Dodge, acquired certain dealership assets and liabilities of Jeff Boyd Chrysler-Plymouth-Dodge for a total purchase price of $3.7 million. Of the total purchase price of $3.7 million, $3.5 million was advanced to the Company by Mr. O. Bruton Smith, with interest charged at 3.83%. It is anticipated that this advance will be repaid in full with proceeds from the Offering. Had the Offering occurred as of June 1997 (the date of the advance), and this $3.5 million advance was repaid with the proceeds, supplemental pro forma earnings per share, using weighted average shares of 6,294,872 would not have resulted in a change to earnings per share as reported. This transaction was accounted for using purchase accounting and the results of the operations of this dealership have been included from the date of acquisition through June 30, 1997 in the accompanying Unaudited Combined and Consolidated Statement of Income. Company management believes that on a pro-forma basis, revenues, net income and earnings per share would not have been materially affected assuming this acquisition had occurred on January 1, 1996. The purchase price has been allocated to the assets and liabilities acquired at their estimated fair market value at the acquisition date as follows: Working capital............................................................. $ 977,000 Property and equipment...................................................... 250,000 Goodwill.................................................................... 2,473,000 ---------- Total....................................................................... $3,700,000 ---------- ----------
In June, July and August the Company entered into definitive agreements to purchase six additional dealership groups for an aggregate purchase price of $94.8 million as follows: Bowers Dealerships.......................... Chattanooga, Tennessee Lake Norman Dodge and Affiliates............ Cornelius, North Carolina Ken Marks Ford.............................. Clearwater, Florida Dyer Volvo.................................. Atlanta, Georgia Jeff Boyd Chrysler-Plymouth-Dodge........... Fort Mill, South Carolina Williams Motors, Inc........................ Rock Hill, South Carolina
The Lake Norman Dodge and Affiliates, Ken Marks Ford, Jeff Boyd Chrysler-Plymouth-Dodge and Williams Motors, Inc. acquisitions have been consummated. The completion of the remaining acquisitions may be dependent upon the successful completion of the Offering. In conjunction with the Lake Norman acquisition, the Company obtained a short-term line of credit with aggregate principal availability of $20 million maturing no later than February 15, 1998. The Company borrowed $18.2 million against this line to fund the purchase of Lake Norman. See Note 5 for additional information regarding this line of credit. In conjunction with the Ken Marks Acquisition, the Company obtained an additional line of credit with an initial aggregate principal availability of $26 million maturing (unless extended by the lender) on October 15, 1999. The Company borrowed $25.5 million against this line to fund the purchase of Ken Marks. See note 5 for additional information regarding this line of credit. F-10 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued 2. BUSINESS ACQUISITIONS -- Continued On February 1, 1996, the Company acquired Fort Mill Ford for a total purchase price of $5,741,114. The acquisition has been accounted for as a purchase and the results of operations of Fort Mill Ford have been included in the accompanying combined financial statements from the date of acquisition. The purchase price has been allocated to the assets and liabilities acquired at their estimated fair market value at the acquisition date as follows: Working capital............................................................. $ 822,000 Property and equipment...................................................... 3,022,000 Goodwill.................................................................... 4,364,000 Non-current liabilities assumed............................................. (2,467,000) ---------- Total....................................................................... $5,741,000 ---------- ----------
The following unaudited pro forma financial data is presented as if Fort Mill Ford had been acquired at January 1, 1995. Pro forma results of operations for 1996 are not presented because the acquisition occurred in February 1996, and the pro forma results for the year ended December 31, 1996 would not be materially different from the historical results presented:
1995 ------------ Revenues.................................................................. $345,198,523 Net income................................................................ $ 2,874,909 Earnings per share........................................................ $ 0.46
The pro forma information presented above is not necessarily indicative of the operating results that would have occurred had Fort Mill Ford been acquired on January 1, 1995. These results are also not necessarily indicative of the results of future operations. 3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN Inventories consist of the following:
December 31, -------------------------- June 30, 1995 1996 1997 ----------- ----------- ----------- (Unaudited) New vehicles.................................................................... $37,895,075 $51,797,883 $56,126,061 Used vehicles................................................................... 8,913,145 14,372,285 11,826,874 Parts and accessories........................................................... 4,185,547 4,939,724 4,997,869 Other........................................................................... 354,227 439,824 459,152 ----------- ----------- ----------- Total........................................................................... $51,347,994 $71,549,716 $73,409,956 ----------- ----------- ----------- ----------- ----------- -----------
The inventory balance is generally reduced by manufacturer's purchase discounts, and such reduction is not reflected in the related floor plan liability. These manufacturer purchase discounts are standard in the industry, typically occur on all new vehicle purchases, and are not used to offset the related floor plan liability. These discounts are aggregated and generally paid by the manufacturer on a quarterly basis. The related floor plan liability becomes due as vehicles are sold. All new and certain used vehicles are pledged to collateralize floor plan notes payable to financial institutions in the amount of $45,151,111 and $63,893,356 at December 31, 1996. The floor plan notes bear interest, payable monthly on the outstanding balance, at the prime rate plus 1% (9 1/4% at December 31, 1995 and 1996). Total floor plan interest expense amounted to $3,000,622, $4,504,526 and $5,968,430 in 1994, 1995 and 1996, respectively. The notes payable are due when the related vehicle is sold. As such, these floor plan notes payable are shown as a current liability in the accompanying combined and consolidated balance sheets. F-11 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued 4. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
December 31, -------------------------- June 30, 1995 1996 1997 ----------- ----------- ----------- (Unaudited) Land............................................................................ $ 1,477,795 $ 2,677,795 $ 2,677,795 Buildings and improvements...................................................... 7,085,878 10,080,659 10,381,145 Office equipment and fixtures................................................... 2,442,965 2,036,980 2,360,424 Parts and service equipment..................................................... 2,955,729 2,866,291 2,941,456 Company vehicles................................................................ 373,683 437,261 512,113 Construction in progress........................................................ 265,677 -- -- ----------- ----------- ----------- Total, at cost.................................................................. 14,601,727 18,098,986 18,872,933 Less accumulated depreciation................................................... (6,074,389) (5,632,273) (5,603,144) ----------- ----------- ----------- Property and equipment, net..................................................... $ 8,527,338 $12,466,713 $13,269,789 ----------- ----------- ----------- ----------- ----------- -----------
5. LONG-TERM DEBT Long-term debt consists of the following:
December 31, ------------------------ 1995 1996 ---------- ---------- Note payable in monthly installments of $8,333 plus interest at the prime rate plus 1 1/2%, through July 2001, collateralized by accounts receivable, inventory and equipment............... $ -- $ 458,335 Mortgage payable in monthly installments of $12,222 plus interest at prime plus 3/4%, through May 2004, collateralized by building................................................................ -- 1,087,778 Unsecured note payable in monthly installments of $9,100, including interest at 8%, through March 2004............................................................................................ -- 599,238 Mortgage note payable in monthly installments of $4,203, including interest at 7%, through November 2008, collateralized by land and building.............................................. 425,751 405,700 Mortgage note payable in monthly installments of $27,415 including interest at prime plus 1/2%, through April 2001, at which time remaining outstanding principal balance is due, collateralized by building..................................................................................... 3,135,379 3,062,926 Other notes payable............................................................................... 169,568 190,864 ---------- ---------- 3,730,698 5,804,841 Less current maturities........................................................................... (169,932) (518,979) ---------- ---------- Long-term debt.................................................................................... $3,560,766 $5,285,862 ---------- ---------- ---------- ----------
Future maturities of debt at December 31, 1996 are as follows: Year ending December 31: 1997........................................................................ $ 518,979 1998........................................................................ 455,505 1999........................................................................ 434,609 2000........................................................................ 446,374 2001........................................................................ 3,096,525 Thereafter.................................................................. 852,849 ---------- Total....................................................................... $5,804,841 ---------- ----------
On August 28, 1997 the Company obtained a short term line of credit in an aggregate principal amount of up to $20 million that matures no later than February 15, 1998. This line of credit is payable upon maturity, bears interest at a fixed rate of F-12 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued 5. LONG-TERM DEBT -- Continued 7.75% per annum and is secured by certain assets of the Company's Chairman and Chief Executive Officer. The Company borrowed $18.2 million on this line of credit in connection with the Lake Norman Acquisition. On October 15, 1997 the Company obtained a two year line of credit with an initial aggregate principal availability of $26 million that matures (unless extended by the lender) on October 15, 1999. This revolving line of credit is payable upon maturity, bears interest at a variable rate equal to the prime rate (currently 8.5% per annum) and is secured by certain assets of the Company's Chairman and Chief Executive Officer. The Company borrowed $25.5 million on this line of credit in connection with the Ken Marks Acquisition. 6. INCOME TAXES The provision (benefit) for income taxes consists of the following components:
1994 1995 1996 ---------- ---------- ---------- Current: Federal........................................................................... $1,814,944 $1,608,418 $1,855,901 State............................................................................. 44,660 116,862 307,852 ---------- ---------- ---------- 1,859,604 1,725,280 2,163,753 ---------- ---------- ---------- Deferred............................................................................ 244,900 427,200 (189,179) Change in valuation allowance....................................................... 13,500 23,200 (51,369) ---------- ---------- ---------- Total............................................................................. $2,118,004 $2,175,680 $1,923,205 ---------- ---------- ---------- ---------- ---------- ----------
The reconciliation of the statutory federal income tax rate with the Company's federal and state overall effective income tax rate is as follows:
1994 1995 1996 ----- ----- ----- Statutory federal rate............................................................................... 34.00% 34.00% 34.00% State income taxes................................................................................... -- 3.84 3.60 Miscellaneous........................................................................................ 2.46 2.19 .71 ----- ----- ----- Effective tax rates.................................................................................. 36.46% 40.03% 38.31% ----- ----- ----- ----- ----- -----
F-13 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued 6. INCOME TAXES -- Continued 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 the Company's deferred tax assets and liabilities as of December 31 are as follows:
1995 1996 ----------- ----------- Deferred tax assets: Allowance for bad debts....................................................................... $ 62,300 $ 85,992 Inventory reserves............................................................................ 126,400 160,820 Net operating loss carryforwards.............................................................. 183,800 74,931 Other......................................................................................... 1,300 75,656 ----------- ----------- Total deferred tax assets..................................................................... 373,800 397,399 Valuation allowance........................................................................... (126,300) (75,000) ----------- ----------- Deferred tax assets, net...................................................................... 247,500 322,399 ----------- ----------- Deferred tax liabilities: Basis difference in fixed assets.............................................................. (155,200) (556,384) Basis difference in equity investment......................................................... (644,400) (478,876) Other......................................................................................... (108,000) (66,623) ----------- ----------- Total deferred tax liability.................................................................... (907,600) (1,101,883) ----------- ----------- Net deferred tax liability...................................................................... $ (660,100) $ (779,484) ----------- ----------- ----------- -----------
The net changes in the valuation allowance against deferred tax assets were an increase of $23,200 for the year ended December 31, 1995 and a decrease of ($51,300) for the year ended December 31, 1996. The increase (decrease) was related primarily to the generation (expiration) of state net operating loss carryforwards. At December 31, 1996, the Company had state net operating loss carryforwards of $1,259,000 which will expire between 1998 and 2002. A change to the FIFO from the LIFO method of inventory for new vehicles resulted in an additional income tax liability. This liability was recorded as $4,976,276 and $5,499,777 at December 31, 1995 and 1996, respectively and is payable over a six year period beginning in January 1998. Certain subsidiaries of Sonic (such subsidiaries together with the Company and Sonic Financial being hereinafter referred to as the "Sonic Group") have joined with Sonic Financial in filing consolidated federal income tax returns for several years. Such subsidiaries will join with Sonic Financial in filing for 1996 and for the period ending on June 30, 1997. Under applicable federal tax law, each corporation included in Sonic Financial's consolidated return is jointly and severally liable for any resultant tax. Under a tax allocation agreement dated as of June 30, 1997, however, the Company agreed to pay to Sonic Financial, in the event that additional federal income tax is determined to be due, an amount equal to the Company's separate federal income tax liability computed for all periods in which any member of the Sonic Group has been a member of Sonic Financial's consolidated group, less amounts previously recorded by the Company. Also pursuant to such agreement, Sonic Financial agreed to indemnify the Company for any additional amount determined to be due from Sonic Financial's consolidated group in excess of the federal income tax liability of the Sonic Group for such periods. The tax allocation agreement establishes procedures with respect to tax adjustments, tax claims, tax refunds, tax credits and other tax attributes relating to periods ending prior to the time that the Sonic Group shall leave Sonic Financial's consolidated group. 7. RELATED PARTIES Town & Country Ford and Lone Star Ford have each made several non-interest bearing advances to Sonic Financial. As of December 31, 1996, Town & Country Ford had made $1,956,326 of such advances ($2,123,328 as of June 30, 1997). In preparation for the Reorganization, a demand promissory note by Sonic Financial evidencing certain of these advances was canceled in exchange for the redemption of certain shares of the capital stock of Town & Country Ford held by Sonic Financial. As of December 31, 1996, Lone Star Ford had made $509,603 of advances to Sonic Financial. In preparation for F-14 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued 7. RELATED PARTIES -- Continued the Reorganization, a demand promissory note by Sonic Financial evidencing certain of Lone Star Ford's advances was canceled pursuant to a dividend. The Company had amounts payable to affiliated companies of $3,219,204 and $914,339, at December 31, 1995 and 1996, respectively. The balance, consisting of non-interest bearing loans from affiliates, is classified as noncurrent based upon its expected repayment date. Town & Country Ford, Inc. operates at facilities leased from an entity owned 5% by Town & Country Ford, Inc. and 95% by Sonic Financial Corporation. This lease expires in October 2000. Annual payments under this lease were $510,085 for each of the 1994, 1995 and 1996 fiscal years. Current minimum rent payments are $409,000 annually ($34,083 monthly) through 1999, and will be decreased to $340,833 in 2000. Lone Star Ford operates in part from an entity controlled by the Company's Chairman and Chief Executive Officer. This lease expires in 2005. Annual payments under this lease were $351,420, $331,302 and $360,000 for the 1994, 1995 and 1996 fiscal years, respectively. Current minimum rent payments are $360,000 annually ($30,000 monthly). During each of the three years ended December 31, 1996, Town & Country Ford paid $48,000 to Sonic Financial as a management fee. Sonic Financial's services to Town & Country Ford have included performance of the following functions, among others: maintenance of lender and creditor relationships; tax planning; preparation of tax returns and representation in tax examinations; record maintenance; internal audits and special audits; assistance to independent public accountants; and litigation support to company counsel. Payments of fees to and receipt of services from Sonic Financial ceased before the Reorganization. Beginning in early 1997, certain of Sonic's dealerships have entered into arrangements to sell to their customers credit life insurance policies underwritten by American Heritage Life Insurance Company, an insurer unaffiliated with Sonic ("American Heritage"). American Heritage in turn reinsures all of these policies with Provident American Insurance Company, a Texas insurance company ("Provident American") and a wholly-owned subsidiary of Sonic Financial. Under these arrangements, the dealerships paid an aggregate of $140,000 to American Heritage in premiums for these policies for the six months ended June 30, 1997. The Company anticipates terminating this arrangement with American Heritage by 1998. Chartown is a general partnership engaged in real estate development and management. Before the Reorganization, Town & Country Ford maintained a 49% partnership interest in Chartown with the remaining 51% held by SMDA Properties, LLC, a North Carolina limited liability company ("SMDA"). The Company's Chairman and Chief Executive Officer owns an 80% direct membership interest in SMDA with the remaining 20% owned indirectly through Sonic Financial. In addition, Sonic Financial also held a demand promissory note for $1,555,528 issued by Chartown (the "Chartown Note"), which was uncollectible due to insufficient funds. As a part of the Reorganization, the Chartown Note was cancelled and Town & Country Ford transferred its partnership interest in Chartown to Sonic Financial for nominal consideration. In connection with that transfer, Sonic Financial agreed to indemnify Town & Country Ford for any and all obligations and liabilities, whether known or unknown, relating to Chartown and Town & Country Ford's ownership thereof. Town & Country Ford's recorded investment in Chartown was nominal for all periods presented in the accompanying financial statements. 8. PREFERRED STOCK In 1997, the Company authorized 3,000,000 shares of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. No preferred shares were issued and outstanding at June 30, 1997. 9. EMPLOYEE BENEFIT PLANS Substantially all of the employees of the Company are eligible to participate in a 401(k) plan maintained by SFC. Contributions by the Company to the plan were not significant in any period presented. F-15 SONIC AUTOMOTIVE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- Continued 9. EMPLOYEE BENEFIT PLANS -- Continued On October 9, 1997 the Company adopted the 1997 Stock Option Plan (the "Plan"). Under the provisions of the Plan, options to purchase 1,125,000 shares of Class A Common Stock may be granted to key employees of the Company and its subsidiaries and to officers, directors, consultants and other individuals providing services to the Company. The exercise price of the options may not be less than the market value of the Class A Common Stock on the date of grant. Vesting periods will range from 5 to 10 years. On or before consummation of the Offering, the Board of Directors intends to grant options to purchase an aggregate of 587,509 shares of Class A Common Stock under the Plan. The Company intends to adopt the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" to account for the Plan's transactions. On October 9, 1997 the Company adopted the Sonic Employee Stock Purchase Plan (the "ESPP"). The ESPP provides employees of the Company the opportunity to purchase Class A Common Stock after completion of the Offering. 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. The Company'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 90% 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. Options will expire on the last exercise date of the calendar year in which granted. A total of 150,000 shares of Class A Common Stock have been reserved for purchase under the ESPP. 10. CONTINGENCIES The Company is contingently liable for customer contracts placed with financial institutions of approximately $675,000 and $741,000 at December 31, 1995 and 1996, respectively. However, the Company's potential loss is limited to the difference between the present value of the installment contract at the date of the repossession and the market value of the vehicle at the date of sale. Other accrued liabilities include a provision for repossession losses. The Company provides a reserve for repossession losses based on the ratio that historical loss experience bears to the amount of outstanding customer contracts. The Company has available $1,500,000 under draft-clearing credit lines with a bank in order to immediately fund the Company's checking account for sold vehicle contracts from other financial institutions. The Company is contingently liable to the bank until the contracts are approved by the financial institutions. At December 31, 1996, $151,227 was outstanding under these lines. In the event that the Company fails to close the acquisitions of Dyer Volvo, Ken Marks Ford, and the Bowers Dealerships by certain dates, the Company will be required to pay termination fees which total approximately $4.0 million. The Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not have a materially adverse effect on the Company's financial position or future results of operations and cash flows. F-16 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF DYER & DYER, INC. Atlanta, Georgia We have audited the accompanying balance sheets of Dyer & Dyer, Inc. (the "Company") as of December 31, 1995 and 1996, and the related statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the financial position of Dyer & Dyer, Inc. as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Charlotte, North Carolina August 7, 1997 F-17 DYER & DYER, INC. BALANCE SHEETS December 31, 1995 and 1996 and June 30, 1997
December 31, -------------------------- June 30, 1995 1996 1997 ----------- ----------- ----------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents..................................................... $ 1,522,546 $ 941,280 $ 172,937 Receivables................................................................... 432,779 1,213,846 2,535,230 Inventories (Notes 1 and 2)................................................... 9,043,156 15,071,313 11,128,333 Prepaid expenses.............................................................. 274,998 103,958 32,267 ----------- ----------- ----------- Total current assets..................................................... 11,273,479 17,330,397 13,868,767 PROPERTY AND EQUIPMENT, NET (Notes 1 and 3)..................................... 774,909 1,279,774 1,156,207 OTHER ASSETS.................................................................... 287,628 292,250 297,424 ----------- ----------- ----------- TOTAL ASSETS.................................................................... $12,336,016 $18,902,421 $15,322,398 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable, floor plan (Note 2)............................................ $ 2,610,935 $ 7,146,245 $ 5,533,925 Trade accounts payable........................................................ 511,292 1,131,472 -- Income taxes payable (Notes 1 and 5).......................................... -- 238,712 238,712 Accrued payroll and bonuses................................................... 82,183 229,297 277,377 Other accrued liabilities..................................................... 196,537 261,932 235,360 ----------- ----------- ----------- Total current liabilities................................................ 3,400,947 9,007,658 6,285,374 INCOME TAXES PAYABLE (Note 5)................................................... 21,012 477,423 238,711 COMMITMENTS (Note 4) STOCKHOLDER'S EQUITY: Common stock, $100 par value -- 3,000 shares authorized; 1,531 shares issued; 781 shares outstanding..................................................... 153,100 153,100 153,100 Paid-in capital............................................................... 27,623 27,623 27,623 Retained earnings............................................................. 13,709,477 14,212,760 13,593,733 ----------- ----------- ----------- Total.................................................................... 13,890,200 14,393,483 13,774,456 Less treasury stock (750 shares at cost)...................................... (4,976,143) (4,976,143) (4,976,143) ----------- ----------- ----------- Total stockholder's equity............................................... 8,914,057 9,417,340 8,798,313 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY...................................... $12,336,016 $18,902,421 $15,322,398 ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. F-18 DYER & DYER, INC. STATEMENTS OF INCOME Years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997
Year ended December 31, Six months ended June 30, ----------------------------------------- -------------------------- 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (Unaudited) REVENUES: Vehicle sales.................................. $52,245,947 $52,613,480 $60,870,919 $30,767,026 $31,373,513 Parts, service and collision repair............ 8,680,440 9,097,763 11,163,230 5,481,708 5,960,212 Finance and insurance.......................... 203,198 404,505 542,474 213,711 128,911 ----------- ----------- ----------- ----------- ----------- Total..................................... 61,129,585 62,115,748 72,576,623 36,462,445 37,462,636 COST OF SALES.................................... 54,121,066 55,776,668 62,547,497 31,969,022 32,377,247 ----------- ----------- ----------- ----------- ----------- GROSS PROFIT..................................... 7,008,519 6,339,080 10,029,126 4,493,423 5,085,389 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 6,160,564 5,621,343 6,997,283 3,353,559 3,498,432 DEPRECIATION AND AMORTIZATION.................... 123,228 90,538 126,359 45,451 150,621 ----------- ----------- ----------- ----------- ----------- OPERATING INCOME................................. 724,727 627,199 2,905,484 1,094,413 1,436,336 OTHER INCOME AND EXPENSE: Interest expense, floor plan................... 56,944 171,690 372,590 178,970 276,393 Other income................................... 609,684 314,788 452,063 234,834 247,213 ----------- ----------- ----------- ----------- ----------- Total other income (expense).............. 552,740 143,098 79,473 55,864 (29,180) ----------- ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES....................... 1,277,467 770,297 2,984,957 1,150,277 1,407,156 PROVISION FOR INCOME TAXES (Notes 1 and 5)......................................... 491,365 295,850 954,846 954,846 -- ----------- ----------- ----------- ----------- ----------- NET INCOME....................................... $ 786,102 $ 474,447 $ 2,030,111 $ 195,431 $ 1,407,156 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- PRO FORMA PROVISION FOR INCOME TAXES (Note 5).... $ 1,149,507 $ 442,972 $ 541,896 ----------- ----------- ----------- ----------- ----------- ----------- PRO FORMA NET INCOME (Note 5).................... $ 1,835,450 $ 707,305 $ 865,260 ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements F-19 DYER & DYER, INC. STATEMENTS OF STOCKHOLDER'S EQUITY Years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997
Total Common Paid-in Treasury Retained Stockholder's Stock Capital Stock Earnings Equity -------- ------- ----------- ----------- ----------- BALANCE DECEMBER 31, 1993...................................... $153,100 $27,623 $(4,976,143) $12,448,928 $ 7,653,508 Net income............................................. -- -- -- 786,102 786,102 -------- ------- ----------- ----------- ----------- BALANCE DECEMBER 31, 1994...................................... 153,100 27,623 (4,976,143) 13,235,030 8,439,610 Net income............................................. -- -- -- 474,447 474,447 -------- ------- ----------- ----------- ----------- BALANCE DECEMBER 31, 1995...................................... 153,100 27,623 (4,976,143) 13,709,477 8,914,057 Dividends.............................................. -- -- -- (1,526,828) (1,526,828) Net income............................................. -- -- -- 2,030,111 2,030,111 -------- ------- ----------- ----------- ----------- BALANCE DECEMBER 31, 1996...................................... 153,100 27,623 (4,976,143) 14,212,760 9,417,340 Dividends (unaudited).................................. -- -- -- (2,026,183) (2,026,183) Net income (unaudited)................................. -- -- -- 1,407,156 1,407,156 -------- ------- ----------- ----------- ----------- BALANCE JUNE 30, 1997 (unaudited).............................. $153,100 $27,623 $(4,976,143) $13,593,733 $ 8,798,313 -------- ------- ----------- ----------- ----------- -------- ------- ----------- ----------- -----------
See notes to financial statements. F-20 DYER & DYER, INC. STATEMENTS OF CASH FLOWS Years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997
Six months ended June Year ended December 31, 30, -------------------------------------- ------------------------ 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................... $ 786,102 $ 474,447 $2,030,111 $ 195,431 $1,407,156 Adjustments to reconcile net income to net cash provided by operating activities: (Gain) loss on disposal of fixed assets........... 8,011 11,757 86,745 -- (116) Depreciation and amortization..................... 123,228 90,538 126,359 45,451 150,621 Changes in assets and liabilities that relate to operations: (Increase) decrease in accounts receivable........ (390,834) 191,714 (768,730) (39,751) (1,355,959) (Increase) decrease in inventories................ 11,184 (4,213,189) (6,028,157) (1,566,226) 3,942,980 (Increase) decrease in prepaid expenses........... 79,966 (177,992) 171,040 218,576 71,691 Increase (decrease) in notes payable, floor plan...................................... (127,470) 2,581,585 4,535,310 290,990 (1,612,320) Increase (decrease) in accounts payable........... 7,048 498,092 620,180 (376,134) (1,131,472) Increase (decrease) in other accrued liabilities..................................... 105,201 (187,726) 147,106 170,944 25,008 Increase (decrease) in income taxes payable....... (20,682) 8,484 760,526 760,526 (242,212) ---------- ---------- ---------- ---------- ---------- Total adjustments............................... (204,348) (1,196,737) (349,621) (495,624) (151,779) ---------- ---------- ---------- ---------- ---------- Net cash provided by (used) in operating activities................................... 581,754 (722,290) 1,680,490 (300,193) 1,255,377 ---------- ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment................... (18,485) (181,259) (717,969) (14,013) (26,938) Increase in cash value of life insurance............. (15,398) (26,316) (4,622) (2,311) (5,174) Deposits held by financial institutions.............. 13,001 10,849 (12,337) 22,238 34,575 ---------- ---------- ---------- ---------- ---------- Net cash provided by (used) in investing activities................................... (20,882) (196,726) (734,928) 5,914 2,463 ---------- ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid....................................... -- -- (1,526,828) (759,810) (2,026,183) ---------- ---------- ---------- ---------- ---------- INCREASE (DECREASE) IN CASH............................ 560,872 (919,016) (581,266) (1,054,089) (768,343) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 1,880,690 2,441,562 1,522,546 1,522,546 941,280 ---------- ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $2,441,562 $1,522,546 $ 941,280 $ 468,457 $ 172,937 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest.......................................... $ 57,766 $ 176,464 $ 509,621 $ 247,970 $ 279,460 Income taxes...................................... $ 399,605 $ 438,810 $ 31,826 $ 31,826 $ 242,237
See notes to financial statements. F-21 DYER & DYER, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business -- Dyer & Dyer, Inc. (the "Company") was incorporated in South Carolina in 1978, and operates a Volvo automobile dealership in Atlanta, Georgia. The Company sells new and used cars, sells replacement parts, provides vehicle maintenance, warranty, paint and repair services and arranges related financing and insurance. In August 1997, the Company signed a definitive purchase agreement whereby its net assets would be acquired by Sonic Automotive, Inc. ("Sonic") for $18 million. This acquisition is to be effective prior to the completion of an anticipated public offering of common stock by Sonic in 1997. In addition to the $18 million, the Company's stockholder will receive a warrant entitling the holder to acquire common stock of Sonic Automotive at an exercise price equal to the public offering stock price. In connection with Volvo's approval of the sale of the Company to Sonic, Volvo, among other things, conditioned its approval upon Richard Dyer, acquiring and maintaining a 20% interest in the subsidiary of Sonic that will operate the Volvo franchise. Mr. Dyer will finance all of the purchase price for this 20% interest by the issuance of a promissory note to be secured by Mr. Dyers' interest in the dealership. The principal amount of the note will be $3.6 million and it will bear interest at the lowest applicable federal rate, payable annually. Mr. Dyers' interest in the dealership will be redeemed and the note will be due and payable in full when Volvo no longer requires Mr. Dyer to maintain his interest in the dealership. Revenue Recognition -- The Company records revenue when vehicles are delivered to customers, and when vehicle service work is performed. Finance and insurance commission revenue is recognized principally at the time the contract is placed with the financial institution. Dealer Agreements -- The Company purchases substantially all of its new vehicles from the manufacturer at the prevailing prices charged by the manufacturer to its franchised dealers. The Company's sales could be unfavorably impacted by the manufacturer's unwillingness or inability to supply the dealership with an adequate supply of new car inventory. The dealership operates under a dealer agreement with the manufacturer which generally restricts the location, management and ownership of the dealership. The ability of the Company to acquire additional franchises may be limited due to certain restrictions imposed by the manufacturer. Additionally, the Company's ability to enter into significant acquisitions may be restricted and the acquisition of the Company's stock by third parties may be limited by the terms of the franchise agreement. The manufacturer has implemented various incentive programs for its dealers that provide for specified payments to the dealers based on the results of customer satisfaction surveys and the implementation of certain standardized policies and procedures. These programs are for a limited duration and remain subject to cancellation by the manufacturer at any time. Incentive payments credited to cost of sales amounted to approximately $210,000, $267,000 and $1,326,000 during 1994, 1995 and 1996, respectively, and $290,000 and $912,000 for the six months ended June 30, 1996 and 1997, respectively. Cash and Cash Equivalents -- The Company 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 the Company from finance companies related to vehicle purchases, and was approximately $1,522,000 and $934,000 at December 31, 1995 and 1996, respectively, and $167,000 at June 30, 1997. Inventories -- Inventories of new vehicles, including demonstators, are valued at the lower of last-in, first-out ("LIFO") cost or market. Inventories of used vehicles are stated at the lower of first-in, first-out ("FIFO") cost or market, and parts and accessories are stated at the lower of specific cost or market. Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. The range of estimated useful lives are as follows:
Useful Lives ------------ Office equipment and fixtures............................................................ 5-7 Parts and service equipment.............................................................. 5 Company vehicles......................................................................... 5
F-22 DYER & DYER, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Leasehold improvements are amortized over the lesser of the terms of their respective leases or the estimated useful lives of the related assets. Expenditures for maintenance and repairs are expensed as incurred. Significant betterments are capitalized. Income Taxes -- For the years ended December 31, 1994 and 1995, the Company was a C Corporation and, therefore, provided for income taxes using the balance sheet method. There were no significant deferred tax assets and liabilities as of December 31, 1995. Effective January 1, 1996, the Company elected to be treated as an S Corporation for federal and state income tax purposes. As such the Company's taxable income is included in the stockholder's annual income tax return. Accordingly, no provision for federal or state income taxes has been included in the Company's statements of income for the periods beginning after December 31, 1995, except for the amounts associated with the Company's change to an S corporation (See Note 5). Concentrations of Credit Risk -- Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with financial institutions. At times, amounts invested with financial institutions may exceed FDIC insurance limits. Concentrations of credit risk with respect to receivables are limited primarily to automobile manufacturers and financial institutions. Credit risk arising from trade receivables from commercial customers is reduced by the large number of customers comprising the trade receivables balances. Trade receivables are concentrated in the Atlanta, Georgia area. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles 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. Advertising -- The Company expenses advertising costs in the period incurred. Advertising expense approximated $709,000, $525,000 and $765,000 during 1994, 1995 and 1996, respectively. Impairment of Long-Lived Assets -- Effective January 1, 1996, the Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of SFAS No. 121 did not have a material impact on the Company's results of operations or financial position. Interim Financial Information -- The accompanying unaudited financial information for the six months ended June 30, 1996 and 1997 has been prepared on substantially the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. The results of interim periods are not necessarily indicative of results to be expected for the entire fiscal year. 2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN Inventories consist of the following:
December 31, -------------------------- June 30, 1995 1996 1997 ----------- ----------- ----------- (Unaudited) New vehicles.................................................................... $ 5,692,043 $ 7,980,256 $ 5,017,765 Used vehicles................................................................... 2,768,230 6,362,410 5,542,979 Parts and accessories........................................................... 503,490 586,129 420,959 Other........................................................................... 79,393 142,518 146,630 ----------- ----------- ----------- Total........................................................................... $ 9,043,156 $15,071,313 $11,128,333 ----------- ----------- ----------- ----------- ----------- -----------
At December 31, 1995 and 1996 and at June 30, 1997, the excess of current replacement cost over the stated LIFO valuation of new vehicles, parts and accessories amount to $2,387,114, $2,503,330 and $2,503,330 (unaudited), respectively. F-23 DYER & DYER, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN -- Continued Had the Company used the FIFO method of valuing new vehicle, parts and accessories inventory, pretax earnings would have been $1,335,380, $1,200,776 and $3,101,173 in 1994, 1995 and 1996, respectively. All new and certain used vehicles are pledged to collateralize floor plan notes payable to financial institutions in the amount of $2,610,935 and $7,146,245 at December 31, 1995 and 1996, respectively. The floor plan notes bear interest, payable monthly on the outstanding balance, at the prime rate plus 1/2% to 1 1/2% (prime rate was 8.25% at December 31, 1996). Total floor plan interest expense amounted to $56,944, $171,690 and $372,590 in 1994, 1995 and 1996, respectively. The notes payable are due when the related vehicle is sold. As such, these floor plan notes payable are shown as a current liability in the accompanying balance sheets. 3. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
December 31, ------------------------ June 30, 1995 1996 1997 ---------- ---------- ---------- (Unaudited) Leasehold improvements.............................................................. $1,479,385 $1,885,415 $1,885,415 Furniture and fixtures.............................................................. 1,372,801 1,546,987 1,550,022 Other equipment..................................................................... 565,398 571,778 571,778 Computer equipment.................................................................. 188,851 195,598 198,428 Service vehicles.................................................................... 117,535 122,916 143,989 ---------- ---------- ---------- 3,723,970 4,322,694 4,349,632 Less accumulated depreciation and amortization...................................... (2,949,061) (3,042,920) (3,193,425) ---------- ---------- ---------- Property and equipment, net......................................................... $ 774,909 $1,279,774 $1,156,207 ---------- ---------- ---------- ---------- ---------- ----------
4. LEASES The Company leases its business premises under noncancelable operating leases for five to twenty-five year terms from a partnership partially owned by the sole stockholder of the Company. Future minimum rental payments required under noncancelable leases at December 31, 1996 are as follows: Year ending December 31: 1997.................................................................................... $ 754,162 1998.................................................................................... 756,956 1999.................................................................................... 759,832 2000.................................................................................... 762,800 2001.................................................................................... 765,856 Thereafter.............................................................................. 5,551,504 ---------- Total................................................................................... $9,351,110 ---------- ----------
Rent expense approximated $711,000, $708,000 and $715,000 during 1994, 1995 and 1996, respectively. F-24 DYER & DYER, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 5. INCOME TAXES The provision for income taxes consists of the following:
December 31, -------------------------------- 1994 1995 1996 -------- -------- -------- Current: Federal................................................................................ $439,714 $231,720 $811,620 State.................................................................................. 47,463 40,864 143,226 -------- -------- -------- 487,177 272,584 954,846 Deferred................................................................................. 4,188 23,266 -- -------- -------- -------- Total.................................................................................... $491,365 $295,850 $954,846 -------- -------- -------- -------- -------- --------
Effective with the Company's S Corporation election, it was required to recapture its December 31, 1995 LIFO reserve of approximately $2,400,000 and pay tax on that amount for both Federal and State income tax purposes. The taxes are payable in four equal annual installments beginning March 15, 1996. This conversion to S Corporation status resulted in the recognition of approximately $955,000 in income tax expense. As a result of the Company's change to S Corporation status on January 1, 1996 (see Note 1), it is exposed to potential future taxes on built-in gains which were present on the date of the conversion. If the planned acquisition of the net assets of the Company described in Note 1 is consummated, the disposal of tangible and intangible property which appreciated prior to the election of S Corporation status will result in the assessment of the built-in gains tax. The pro forma provision for income taxes and the pro forma net income for the year ended December 31, 1996 and the six months ended June 30, 1996 and 1997 reflect amounts that would have been recorded had the Company's income been taxed for federal and state purposes as if it was a C Corporation. 6. RETIREMENT PLAN The Company has a contributory 401(k) plan covering substantially all employees. Company contributions to the Plan are equal to 25% of the first 4% of participant contributions. Company contributions amounted to $1,000, $18,000 and $18,000 in 1994, 1995 and 1996, respectively. F-25 INDEPENDENT AUDITORS' REPORT TO THE BOARDS OF DIRECTORS AND STOCKHOLDERS OF BOWERS DEALERSHIPS AND AFFILIATED COMPANIES Chattanooga, Tennessee We have audited the accompanying combined balance sheets of Bowers Dealerships and Affiliated Companies (the "Company"), which are under common ownership and management, as of December 31, 1995 and 1996, and the related combined statements of income, stockholders' equity, and cash flows for the years then ended. 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 generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the combined financial position of Bowers Dealerships and Affiliated Companies as of December 31, 1995 and 1996, and the combined results of their operations and their combined cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Charlotte, North Carolina August 7, 1997 (October 16, 1997 as to Note 1) F-26 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES COMBINED BALANCE SHEETS December 31, 1995 and 1996 and June 30, 1997
December 31, -------------------------- June 30, 1995 1996 1997 ----------- ----------- ----------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents..................................................... $ 1,385,006 $ 2,738,432 $ 4,766,608 Receivables................................................................... 1,622,865 3,088,329 2,648,740 Inventories (Note 3).......................................................... 10,752,116 19,605,557 30,948,007 Other current assets (Note 7)................................................. 994,715 2,067,241 2,778,937 ----------- ----------- ----------- Total current assets..................................................... 14,754,702 27,499,559 41,142,292 PROPERTY AND EQUIPMENT, NET (Note4)............................................. 870,400 3,825,229 4,105,822 GOODWILL, NET (Note 1).......................................................... 978,735 4,374,573 8,285,460 OTHER ASSETS.................................................................... 560,729 564,240 658,529 ----------- ----------- ----------- TOTAL ASSETS.................................................................... $17,164,566 $36,263,601 $54,192,103 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND EQUITY CURRENT LIABILITIES: Notes payable -- floor plan (Note 3).......................................... $10,187,565 $16,695,482 $26,771,632 Notes payable -- other (Note 6)............................................... 1,770,025 3,256,407 3,684,869 Trade accounts payable........................................................ 185,858 1,012,806 1,189,736 Accrued interest.............................................................. 69,164 105,505 178,143 Other accrued liabilities..................................................... 580,745 1,397,118 1,424,075 Current maturities of long-term debt.......................................... 363,851 285,469 427,557 ----------- ----------- ----------- Total current liabilities................................................ 13,157,208 22,752,787 33,676,012 ----------- ----------- ----------- LONG-TERM DEBT (Note 6)......................................................... 668,390 2,224,813 2,332,276 COMMITMENTS AND CONTINGENCIES (Notes 5 and 10) EQUITY Common stock of combined companies (Note 8):.................................. 300,000 300,000 300,000 Retained earnings and members' and partners' equity........................... 3,038,968 10,986,001 17,883,815 ----------- ----------- ----------- Total equity............................................................. 3,338,968 11,286,001 18,183,815 ----------- ----------- ----------- TOTAL LIABILITIES AND EQUITY.................................................... $17,164,566 $36,263,601 $54,192,103 ----------- ----------- ----------- ----------- ----------- -----------
See notes to combined financial statements F-27 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES COMBINED STATEMENTS OF INCOME Years ended December 31, 1995 and 1996 and the six months ended June 30, 1996 and 1997
Year ended December 31, Six months ended June 30, -------------------------- -------------------------- 1995 1996 1996 1997 ----------- ----------- ----------- ----------- (Unaudited) REVENUES: Vehicle sales.................................. $67,318,855 $91,182,583 $37,133,540 $63,950,004 Parts, service and collision repair............ 3,939,295 7,969,924 3,337,725 9,107,226 Finance and insurance.......................... 1,843,590 2,337,303 1,107,834 1,496,912 ----------- ----------- ----------- ----------- Total revenues............................ 73,101,740 101,489,810 41,579,099 74,554,142 COST OF SALES.................................... 63,581,225 87,756,814 35,532,069 63,945,021 ----------- ----------- ----------- ----------- GROSS PROFIT..................................... 9,520,515 13,732,996 6,047,030 10,609,121 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 8,004,120 11,807,108 5,080,153 8,293,720 DEPRECIATION AND AMORTIZATION.................... 186,545 364,958 137,879 309,048 ----------- ----------- ----------- ----------- OPERATING INCOME................................. 1,329,850 1,560,930 828,998 2,006,353 OTHER INCOME AND EXPENSE: Interest expense, floor plan................... 964,399 1,177,603 569,072 880,676 Interest expense, other........................ 75,365 195,954 64,374 118,666 Other income (expense)......................... (29,827) 120,511 21,714 421,730 ----------- ----------- ----------- ----------- Total other expense....................... 1,069,591 1,253,046 611,732 577,612 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES (Note 1).............. 260,259 307,884 217,266 1,428,741 PROVISION FOR INCOME TAXES....................... 41,879 60,851 60,215 30,927 ----------- ----------- ----------- ----------- NET INCOME....................................... $ 218,380 $ 247,033 $ 157,051 $ 1,397,814 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- PRO FORMA PROVISION FOR INCOME TAXES (Note 1).... $ 101,709 $ 120,321 $ 84,907 $ 558,352 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- PRO FORMA NET INCOME (Note 1).................... $ 158,550 $ 187,563 $ 132,359 $ 870,389 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See notes to combined financial statements F-28 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES COMBINED STATEMENTS OF EQUITY Years ended December 31, 1995 and 1996 and the six months ended June 30, 1997
Retained Earnings and Common Members' Stock of and Combined Partners' Total Companies Equity Equity ---------- ----------- ----------- BALANCE AT DECEMBER 31, 1994..................................................... $ 300,000 $ 1,032,746 $ 1,332,746 Capital contribution........................................................... -- 1,787,842 1,787,842 Net income..................................................................... -- 218,380 218,380 ---------- ----------- ----------- BALANCE AT DECEMBER 31, 1995..................................................... 300,000 3,038,968 3,338,968 Capital contribution........................................................... -- 7,700,000 7,700,000 Net income..................................................................... -- 247,033 247,033 ---------- ----------- ----------- BALANCE AT DECEMBER 31, 1996..................................................... 300,000 10,986,001 11,286,001 Capital contribution (unaudited)............................................... -- 5,500,000 5,500,000 Net income (unaudited)......................................................... -- 1,397,814 1,397,814 ---------- ----------- ----------- BALANCE AT JUNE 30, 1997 (unaudited)............................................. $ 300,000 $17,883,815 $18,183,815 ---------- ----------- ----------- ---------- ----------- -----------
See notes to combined financial statements. F-29 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES COMBINED STATEMENTS OF CASH FLOWS Years ended December 31, 1995 and 1996 and the six months ended June 30, 1996 and 1997
Six months ended June Year ended December 31, 30, -------------------------- ------------------------ 1995 1996 1996 1997 ----------- ----------- ---------- ---------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................................... $ 218,380 $ 247,033 $ 157,051 $1,397,814 ----------- ----------- ---------- ---------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................................. 186,545 364,958 137,879 309,048 Changes in assets and liabilities that relate to operations: (Increase) decrease in receivables.......................... 479,709 (1,465,463) 492,538 439,590 (Increase) decrease in inventories.......................... 149,322 (2,990,886) (129,128) (8,623,984) Increase in other current assets............................ (231,440) (1,072,526) (538,493) (711,698) Increase in other non-current assets........................ (450,803) (3,511) (135,291) (94,289) Increase (decrease) in notes payable -- floor plan.......... (198,815) 6,507,915 2,301,244 10,076,150 Increase (decrease) in accounts payable and accrued expenses................................................. (1,151,902) 1,679,663 1,073,370 276,524 ----------- ----------- ---------- ---------- Total adjustments........................................ (1,217,384) 3,020,150 3,202,119 1,671,341 ----------- ----------- ---------- ---------- Net cash provided by (used in) operating activities......... (999,004) 3,267,183 3,359,170 3,069,155 ----------- ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of business, net of cash received....................... -- (9,840,438) (4,790,970) (6,718,465) Additions to property and equipment.............................. (263,811) (2,737,742) (2,850,697) (500,528) ----------- ----------- ---------- ---------- Net cash used in investing activities....................... (263,811) (12,578,180) (7,641,667) (7,218,993) ----------- ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions............................................ 1,787,842 7,700,000 2,700,000 5,500,000 Proceeds from long-term debt..................................... 272,084 1,872,169 1,872,169 500,000 Payments of long-term debt....................................... (797,363) (394,129) (114,690) (250,448) Proceeds from notes payable -- other............................. 1,410,025 1,486,382 1,600,994 539,000 Payments of notes payable -- other............................... (220,000) -- -- (110,538) ----------- ----------- ---------- ---------- Net cash provided by financing activities................... 2,452,588 10,664,422 6,058,473 6,178,014 ----------- ----------- ---------- ---------- NET INCREASE IN CASH............................................... 1,189,773 1,353,425 1,775,976 2,028,176 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..................... 195,234 1,385,007 1,385,007 2,738,432 ----------- ----------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD........................... $ 1,385,007 $ 2,738,432 $3,160,983 $4,766,608 ----------- ----------- ---------- ---------- ----------- ----------- ---------- ---------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash paid during the period for: Interest......................................................... $ 1,021,118 $ 1,337,216 $ 649,259 $ 926,704 Income taxes..................................................... $ 96,391 $ 76,081 $ 35,636 $ 27,620 SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: Net liabilities recorded from combining affiliated companies..... $ 372,533 $ -- $ -- $ --
See notes to combined financial statements. F-30 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business -- Bowers Dealerships and Affiliated Companies (the "Company") operates automobile dealerships in the Chattanooga and Nashville, Tennessee areas. The Company sells new and used cars and light trucks, sells replacement parts, provides vehicle maintenance, warranty, paint and repair services and arranges financing and insurance. As of December 31, 1996, the Company had eight dealership locations selling new vehicles manufactured by BMW, Chrysler, Ford, Honda, Infiniti, Jaguar, and Volkswagen. Subsequent to December 31, 1996 the Company acquired a Dodge dealership. (see Note 2). The accompanying combined financial statements include the accounts of the following entities:
Name Location Structure ----- ----------- ------------------------- Cleveland Village Imports, Inc.......................... Chattanooga C Corporation Nelson Bowers Ford, L.P................................. Chattanooga Limited Partnership Infiniti of Chattanooga, Inc............................ Chattanooga C Corporation Cleveland Chrysler Plymouth Jeep Eagle, LLC............. Chattanooga Limited Liability Company Jaguar of Chattanooga, LLC.............................. Chattanooga Limited Liability Company KIA of Chattanooga...................................... Chattanooga Limited Liability Company European Motors of Nashville LLC........................ Nashville Limited Liability Company European Motors LLC..................................... Chattanooga Limited Liability Company
The combined financial statements have been prepared in connection with a planned acquisition of the net assets of these entities and the aforementioned Dodge dealership by Sonic Automotive ("Sonic"). Sonic will purchase the net assets of the above entities for a total purchase price of $27.6 million, comprised of $23.6 in cash and a $4 million note payable. This acquisition is to be effective prior to the completion of an anticipated public offering of common stock by Sonic in 1997. The accompanying combined financial statements reflect the financial position, results of operations, and cash flows of each of the above listed dealerships. The combination of these entities has been accounted for at historical cost in a manner similar to a pooling-of-interest because the entities are under common management and control. All material intercompany transactions have been eliminated. In connection with Volvo's approval of the sale of the Company's Volvo dealership to Sonic, Volvo, among other things, conditioned its approval upon Nelson Bowers, acquiring and maintaining a 20% interest in the subsidiary of Sonic that will operate the Volvo franchise. Mr. Bowers will finance all of the purchase price for this 20% interest by issuing a promissory note to the subsidiary of Sonic that controls the majority interest in Chattanooga Volvo. This note will be secured by Mr. Bowers' interest in Chattanooga Volvo. The principal amount of the note will be approximately $900,000 and it will bear interest at the lowest applicable federal rate payable annually. Mr. Bowers' interest in Chattanooga Volvo will be redeemed and this note will be due and payable in full when Volvo no longer requires Mr. Bowers to maintain his interest in Chattanooga Volvo. Revenue Recognition -- The Company records revenue when vehicles are delivered to customers, and when vehicle service work is performed. Finance and insurance commission revenue is recognized principally at the time the contract is placed with the financial institution. Dealer Agreements -- The Company purchases substantially all of its new vehicles from manufacturers at the prevailing prices charged by the manufacturer to its franchised dealers. The Company's sales could be unfavorably impacted by the manufacturer's unwillingness or inability to supply the dealership with an adequate supply of new car inventory. Each dealership operates under a dealer agreement with the manufacturer except Volkswagen of Nashville which operates under a management agreement which generally restricts the location, management and ownership of the respective dealership. The ability of the Company to acquire additional franchises from a particular manufacturer may be limited due to certain restrictions imposed by manufacturers. Additionally, the Company's ability to enter into significant acquisitions may be restricted and the acquisition of the Company's stock by third parties may be limited by the terms of the franchise agreement. F-31 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Cash and Cash Equivalents -- The Company 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 the Company from finance companies related to a vehicle purchase, and was $654,165 and $1,702,294 at December 31, 1995 and 1996, respectively. Inventories -- Inventories of new and used vehicles, including demonstrators, are valued at the lower of first-in, first-out ("FIFO") cost or market, and parts and accessories are stated at the lower of specific cost or market. Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. The range of estimated useful lives is as follows:
Useful Lives ------------- Building..................................................................... 31.5-39 Office equipment and fixtures................................................ 5-7 Parts, service equipment and vehicles........................................ 7
Leasehold improvements are amortized over the lesser of the terms of their respective leases or the estimated useful lives of the related assets. Expenditures for maintenance and repairs are expensed as incurred. Significant betterments are capitalized. Goodwill -- Goodwill represents the excess of purchase price over the estimated fair value of the net assets acquired and is being amortized over a 40 year period. The cumulative amount of goodwill amortization at December 31, 1995 and 1996 was $33,561 and $87,723, respectively. The Company periodically reviews goodwill for impairment by comparing the carrying amount of goodwill with the estimated undiscounted future cash flows from operations of the acquired business. Income Taxes -- With the exception of Infiniti of Chattanooga, Inc. and Cleveland Village Imports, Inc., all entities included in the accompanying combined financial statements are either S Corporations, Limited Partnerships or Limited Liability Companies (LLC). As such, these entities do not pay Federal corporate income taxes on their taxable income. In addition, the Limited Partnerships and LLC's are not subject to state income taxes. The stockholders or partners are liable for individual income taxes on their respective shares of the Company's taxable income. Because Infiniti of Chattanooga, Inc. and Cleveland Village Imports, Inc. is a C Corporation, federal and state income taxes are provided for in the financial statements and consist of taxes currently due plus deferred taxes. In addition, the S Corporations are subject to Tennessee income taxes which are provided for in the financial statements. Income taxes are provided for income taxes using the balance sheet method. Deferred taxes result primarily from warranty accruals and the accelerated depreciation method used for income tax purposes. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. In addition, deferred tax assets are recognized for state operating losses that are available to offset future taxable income. The pro forma provision for income taxes and the pro forma net income for the years ended December 31, 1995 and 1996, and for the six months ended June 30, 1996 and 1997 reflect amounts that would have been recorded had the Company's income been taxed for federal and state purposes as if it was a C Corporation. Concentrations of Credit Risk -- Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash deposits. At times, amounts invested with financial institutions may exceed FDIC insurance limits. F-32 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Concentrations of credit risk with respect to receivables are limited primarily to automobile manufacturers and financial institutions. Credit risk arising from trade receivables from commercial customers is reduced by the large number of customers comprising the trade receivables balances. Trade receivables are concentrated in the Company's two market areas of Chattanooga and Nashville, Tennessee. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles 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. Advertising -- The Company expenses advertising costs in the period incurred. Advertising expense amounted to $744,674 and $1,132,263 for 1995 and 1996, respectively. Impairment of Long-Lived Assets -- Effective January 1, 1996, the Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may be impaired. Adoption of SFAS No. 121 did not have a material impact on the Company's results of operations or financial position. Interim Financial Information -- The accompanying unaudited financial information for the six months ended June 30, 1997 has been prepared on substantially the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. The results of interim periods are not necessarily indicative of results to be expected for the entire fiscal year. 2. BUSINESS ACQUISITIONS European Motors LLC -- In May 1996, the Company acquired European Motors LLC for a total purchase price of $4,790,970. The acquisition has been accounted for as a purchase and the results of operations of European Motors LLC have been included in the accompanying combined financial statements from the date of acquisition. The total purchase price has been allocated to the assets and liabilities acquired at their estiamted fair market value at acquisition date as follows: Inventory................................................................... $3,840,970 Property and equipment...................................................... 250,000 Goodwill.................................................................... 700,000 ---------- Total....................................................................... $4,790,970 ---------- ----------
European Motors of Nashville, Inc. -- In October 1996, the Company acquired European Motors of Nashville, Inc. The total purchase price was $5,049,468. The acquisition has been accounted for using purchase accounting and the results of operations of this dealership has been included in the accompanying combined financial statements from the date of acquisition. The total purchase price has been allocated to the assets and liabilities acquired at their estimated fair market value at acquisition date as follows: Inventory................................................................... $2,003,086 Property and equipment...................................................... 296,382 Goodwill.................................................................... 2,750,000 ---------- Total....................................................................... $5,049,468 ---------- ----------
Dodge of Chattanooga -- On March 1, 1997, the Company acquired Dodge of Chattanooga for a total purchase price of $6,718,465. The acquisition has been accounted for as a purchase and the results of operations of Dodge of Chattanooga have been included in the accompanying unaudited combined financial statements from the date of acquisition through June 30, F-33 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 2. BUSINESS ACQUISITIONS -- Continued 1997. The purchase price has been allocated to the assets and liabilities acquired at their estimated fair market value at acquisition date as follows: Inventory................................................................... $2,718,465 Goodwill.................................................................... 4,000,000 ---------- Total....................................................................... $6,718,465 ---------- ----------
The following unaudited pro forma financial data is presented as if European Motors of Nashville, Inc. and European Motors LLC were acquired on January 1, 1995 and January 1, 1996, respectively.
Year ended December 31, ---------------------------- 1995 1996 ------------ ------------ Revenues....................................................... $130,223,683 $136,389,810 ------------ ------------ ------------ ------------ Net income..................................................... $ 694,050 $ 476,033 ------------ ------------ ------------ ------------
The following unaudited pro forma financial data is presented as if Dodge of Chattanooga, Inc. was acquired on January 1, 1996 and January 1, 1997, respectively:
Six months ended June 30, -------------------------- 1996 1997 ----------- ----------- Revenues......................................................... $57,230,202 $78,452,142 ----------- ----------- ----------- ----------- Net income....................................................... $ 635,737 $ 1,404,814 ----------- ----------- ----------- -----------
The pro forma information presented above is not necessarily indicative of the operating results that would have occurred had European Motors of Nashville, Inc. and European Motors LLC been acquired on January 1, 1995 and 1996, respectively and Dodge of Chattanooga on January 1, 1996 and January 1, 1997. These results are also not necessarily indicative of the results of future operations. 3. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN Inventories consist of the following:
December 31, -------------------------- June 30, 1995 1996 1997 ----------- ----------- ----------- (Unaudited) New vehicles.................................................................... $ 8,261,122 $13,622,029 $19,572,873 Used vehicles................................................................... 1,911,689 4,178,998 9,235,162 Parts and accessories........................................................... 564,263 1,707,880 1,837,802 Other........................................................................... 15,042 96,650 302,170 ----------- ----------- ----------- Total........................................................................... $10,752,116 $19,605,557 $30,948,007 ----------- ----------- ----------- ----------- ----------- -----------
All new and certain used vehicles are pledged to collateralize floor plan notes payable to financial institutions in the amount of $10,187,565 and $16,695,482 at December 31, 1995 and 1996, respectively. The floor plan notes bear interest, that fluctuates with prime and are payable monthly on the outstanding balance, ranging from 6.25% to 9.75% at December 31, 1996. Total floor plan interest expense amounted to $964,399 and $1,177,603 in 1995 and 1996, respectively. The notes payable are due when the related vehicle is sold. As such, these floor plan notes payable are shown as a current liability in the accompanying combined balance sheets. F-34 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 4. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
December 31, -------------------------- June 30, 1995 1996 1997 ----------- ----------- ----------- (Unaudited) Land............................................................................ $ -- $ 608,307 $ 638,557 Buildings and improvements...................................................... 22,149 1,723,644 1,723,644 Office equipment and fixtures................................................... 844,823 1,208,546 1,422,551 Parts and service equipment..................................................... 630,827 1,200,983 1,491,388 Leasehold improvements.......................................................... 254,693 262,260 262,261 ----------- ----------- ----------- 1,752,492 5,003,740 5,538,401 Less accumulated depreciation................................................... 882,092 1,178,511 1,432,579 ----------- ----------- ----------- Property and equipment, net..................................................... $ 870,400 $ 3,825,229 $ 4,105,822 ----------- ----------- ----------- ----------- ----------- -----------
5. OPERATING LEASES The Company leases its business premises under noncancelable operating leases for one to twenty-six year terms. Future minimum rental payments required under nonconcealable leases at December 31, 1996 are as follows: Year ending December 31: 1997........................................................................ $ 929,765 1998........................................................................ 687,431 1999........................................................................ 387,120 2000........................................................................ 387,120 2001........................................................................ 387,120 Thereafter.................................................................. 4,994,184 ---------- Total....................................................................... $7,772,740 ---------- ----------
Rent expense under these noncancelable leases amounted to $458,999 and $740,187 during 1995 and 1996, respectively. 6. FINANCING ARRANGEMENTS Notes payable-other consists of a demand note to a bank and advances principally from a stockholder. The stockholder advances are restricted to investment in a cash management fund sponsored by finance companies. Other current assets at December 31, 1995 and 1996 include $797,000 and $1,041,000, respectively, of restricted cash in the cash management fund. Notes payable-other consist of the following:
December 31, ------------------------ June 30, 1995 1996 1997 ---------- ---------- ----------- (Unaudited) Unsecured stockholder advances restricted for investment -- due on demand, interest ranging from 8.5% to 9.25%......................... $ 552,000 $1,041,000 $ 1,580,000 Other unsecured non-interest bearing stockholder advances due on demand.............................................................. 1,218,025 2,215,407 2,104,869 ---------- ---------- ----------- Notes payable -- other................................................ $1,770,025 $3,256,407 $ 3,684,869 ---------- ---------- ----------- ---------- ---------- -----------
F-35 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 6. FINANCING ARRANGEMENTS -- Continued Long-term debt consists of the following:
December 31, ------------------------ June 30, 1995 1996 1997 ---------- ---------- ----------- (Unaudited) Mortgage note payable on land and building with a carrying value of $2,302,487, interest payable at 8.9%, due June 1, 2001.............. $ -- $1,799,152 $ 1,767,753 Note payable due to stockholder, interest payable at 9.5%, due December 31, 2001................................................... 564,000 564,000 564,000 Note payable related to purchase of dealership, due February 28, 1999................................................................ -- -- 333,333 Notes payable for equipment with a carrying value of $76,608, interest payable ranging from 9.6% to 11.18%, payable in full November 15, 1997................................................................ 109,380 76,199 45,332 Note payable on company owned vehicles, with a carrying value of approximately $20,253, bearing interest at 9.5%..................... 298,861 20,253 -- Note payable to an unrelated car dealership, due December 3, 1999..... 60,000 45,000 45,000 Note payable -- other................................................. -- 5,678 4,415 ---------- ---------- ----------- 1,032,241 2,510,282 2,759,833 Less current maturities............................................... (363,851) (285,469) (427,557) ---------- ---------- ----------- Long-term debt........................................................ $ 668,390 $2,224,813 $ 2,332,276 ---------- ---------- ----------- ---------- ---------- -----------
Future maturities of the above debt at December 31, 1996 are as follows: Year ending December 31: 1997........................................................................ $ 285,469 1998........................................................................ 259,650 1999........................................................................ 372,930 2000........................................................................ 89,829 2001........................................................................ 1,502,404 ---------- Total....................................................................... $2,510,282 ---------- ----------
7. RELATED PARTIES The Company operates certain dealerships at facilities leased from affiliated companies. The leases are classified as operating leases. Future minimum rent payments are $483,390 in 1997, $387,390 annually through 2001 and $4,994,184 thereafter. Rent expense in 1995 and 1996 for these leases amounted to $315,390 and $441,390, respectively. The Company has made non-interest bearing advances to stockholders totaling $403,415, which was outstanding as of December 31, 1995 and 1996 and June 30, 1997, respectively. These amounts are reflected in other non-current assets in the accompanying combined balance sheets. The Company also made advances to stockholders totaling $459,818, which primarily relates to the purchase of real estate and the construction of a facility owned by an entity affiliated through common ownership. This amount is included in other current assets, as it is the opinion of Company management that this amount will be collected in full by December 31, 1997. The Company purchases advertising services from an entity affiliated through common ownership. Advertising expenses from services received from this entity included in the accompanying statements of operations for the years ended December 31, 1995 and 1996 was $422,777 and $412,982, respectively. The Company sells extended warranty contracts to customers related to vehicle sales through warranty contracts procured from an entity affiliated through common ownership. Total premiums paid to this affiliated entity for these contracts totaled $389,620 and $453,850 for the years ended December 31, 1995 and 1996, respectively. F-36 BOWERS DEALERSHIPS AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 7. RELATED PARTIES -- Continued The Company purchases products and services from an entity affiliated through common ownership relative to automobile etching and automobile pack products sold to customers. Total products and services purchased for the years ended December 31, 1995 and 1996 was $69,733 and $97,164 respectively. For the year ended December 31, 1996, the Company paid $23,760 for services provided to an automobile auction entity which is related through common ownership. 8. EQUITY During 1997, an entity affiliated through common ownership began paying the salaries of certain executive officers and other selling, general and administrative expenses relating to the Company. The affiliated company charged the Company management fees during the six months ended June 30, 1997 totaling $864,000 for the reimbursement of amounts paid by the affiliate on behalf of the Company. The capital structure of the entities included in the combined financial statements of the Company at December 31, 1995 is as follows:
Common Stock ------------------------------------------------- Shares Retained Earnings Par Shares Issued and and Members' and Value Authorized Outstanding Amount Partners' Equity ------ ---------- ----------- ---------- ----------------- Cleveland Village Imports, Inc.......................... No par 2,000 2,000 $ 300,000 $ 552,817 Nelson Bowers Ford, L.P................................. -- 759,039 Cleveland Chrysler Plymouth Jeep Eagle, LLC............. -- 562,328 Jaguar of Chattanooga, LLC.............................. -- 1,164,784 ---------- ----------------- $ 300,000 $ 3,038,968 ---------- ----------------- ---------- -----------------
The capital structure of the entities included in the combined financial statements of the Company at December 31, 1996 is as follows:
Common Stock ------------------------------------------------- Shares Retained Earnings Par Shares Issued and and Members' and Value Authorized Outstanding Amount Partners' Equity ------ ---------- ----------- ---------- ----------------- Cleveland Village Imports, Inc.......................... No par 2,000 2,000 $ 300,000 $ 563,672 Nelson Bowers Ford, L.P................................. -- 699,958 Cleveland Chrysler Plymouth Jeep Eagle, LLC............. -- 417,300 Jaguar of Chattanooga, LLC.............................. -- 1,141,782 European Motors of Nashville, LLC....................... -- 5,014,936 European Motors LLC..................................... -- 3,148,353 ---------- ----------------- $ 300,000 $10,986,001 ---------- ----------------- ---------- -----------------
9. EMPLOYEE BENEFIT PLANS In April 1997, the Company established a 401(k) plan, whereby substantially all of the employees of the company meeting certain service requirements are eligible to participate. Contributions by the Company to the plan were not significant in any period presented. 10. CONTINGENCIES The Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not have a materially adverse effect on the Company's financial position or future results of operations and cash flows. F-37 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF LAKE NORMAN DODGE, INC. Cornelius, North Carolina We have audited the accompanying combined balance sheet of Lake Norman Dodge, Inc. and Affiliated Companies (the "Company"), which are under common ownership and management, as of December 31, 1996, and the related combined statements of income, stockholders' equity, and cash flows for the year then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Lake Norman Dodge, Inc. and Affiliated Companies as of December 31, 1996, and the combined results of their operations and their combined cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Charlotte, North Carolina August 7, 1997 (September 29, 1997 as to Note 1) F-38 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES COMBINED BALANCE SHEETS December 31, 1996 and June 30, 1997
December 31, June 30, 1996 1997 ----------- ----------- (Unaudited) ASSETS (Note 4) CURRENT ASSETS: Cash and cash equivalents.................................................................... $ 3,491,358 $ 3,466,789 Receivables.................................................................................. 1,998,315 2,535,247 Inventories (Note 2)......................................................................... 23,603,843 22,778,488 Prepaid expenses............................................................................. -- 243,870 ----------- ----------- Total current assets...................................................................... 29,093,516 29,024,394 ----------- ----------- PROPERTY AND EQUIPMENT, NET (Note 3)........................................................... 485,880 566,875 ----------- ----------- OTHER ASSETS (NOTE 6): Due from employees........................................................................... 281,497 302,628 Due from related partnership................................................................. 159,554 159,554 ----------- ----------- Total other assets........................................................................ 441,051 462,182 ----------- ----------- TOTAL ASSETS................................................................................... $30,020,447 $30,053,451 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable-floor plan (Note 2)............................................................ $25,957,314 $25,865,010 Trade accounts payable....................................................................... 1,364,121 1,351,664 Note payable to bank (Note 4)................................................................ 68,168 27,644 Other accrued liabilities.................................................................... 765,620 472,485 Current maturities of long-term debt......................................................... 142,857 71,429 ----------- ----------- Total current liabilities................................................................. 28,298,080 27,788,232 ----------- ----------- LONG-TERM DEBT (Note 4)........................................................................ 785,715 785,714 ----------- ----------- COMMITMENTS (Note 5) STOCKHOLDERS' EQUITY: Common stock of combined companies........................................................... 75,000 75,000 Paid-in capital.............................................................................. 600,009 600,009 Retained earnings............................................................................ 261,643 804,496 ----------- ----------- Total stockholders' equity................................................................ 936,652 1,479,505 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................................... $30,020,447 $30,053,451 ----------- ----------- ----------- -----------
See notes to combined financial statements. F-39 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF INCOME Year ended December 31, 1996 and six months ended June 30, 1996 and 1997
Year Ended Six months ended June 30, December 31, -------------------------- 1996 1996 1997 ------------ ----------- ----------- (Unaudited) REVENUES: Vehicle sales................................................................ $124,538,878 $55,071,168 $69,798,274 Finance and insurance........................................................ 3,617,296 1,773,355 1,949,987 Parts and service............................................................ 9,543,187 4,371,529 5,321,329 ------------ ----------- ----------- Total revenues............................................................ 137,699,361 61,216,052 77,069,590 COST OF SALES.................................................................. 121,806,212 53,845,015 68,272,355 ------------ ----------- ----------- GROSS PROFIT................................................................... 15,893,149 7,371,037 8,797,235 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................... 14,215,002 6,736,729 6,937,071 DEPRECIATION AND AMORTIZATION.................................................. 88,987 37,414 46,900 ------------ ----------- ----------- OPERATING INCOME............................................................... 1,589,160 596,894 1,813,264 ------------ ----------- ----------- OTHER INCOME AND EXPENSE: Interest expense, floor plan................................................. 1,552,250 588,951 1,185,518 Interest expense, other...................................................... 49,540 2,880 67,647 Other income................................................................. 257,747 113,277 176,322 ------------ ----------- ----------- Total other expense....................................................... 1,344,043 478,554 1,076,843 ------------ ----------- ----------- NET INCOME..................................................................... $ 245,117 $ 118,340 $ 736,421 ------------ ----------- ----------- ------------ ----------- ----------- PRO FORMA INCOME TAX PROVISION (Note 1)..................................................................... $ 97,213 $ 46,934 $ 292,138 ------------ ----------- ----------- ------------ ----------- ----------- PRO FORMA NET INCOME (Note 1)..................................................................... $ 147,904 $ 71,406 $ 444,283 ------------ ----------- ----------- ------------ ----------- -----------
See notes to combined financial statements. F-40 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY Year ended December 31, 1996 and six months ended June 30, 1997
Common Stock Total -------------------- Paid-in Retained Stockholders' Shares Amount Capital Earnings Equity --------- ------- -------- -------- -------------- BALANCE AT DECEMBER 31, 1995.................................. 75 $75,000 $475,009 $728,963 $1,278,972 Capital contribution........................................ -- -- 125,000 -- 125,000 Net income.................................................. -- -- -- 245,117 245,117 Distributions to owners..................................... -- -- -- (712,437) (712,437) --------- ------- -------- -------- -------------- BALANCE AT DECEMBER 31, 1996.................................. 75 75,000 600,009 261,643 936,652 Net income (unaudited)...................................... -- -- -- 736,421 736,421 Distributions to owners (unaudited)......................... -- -- -- (193,568) (193,568) --------- ------- -------- -------- -------------- BALANCE AT JUNE 30, 1997 (unaudited).......................... 75 $75,000 $600,009 $804,496 $1,479,505 --------- ------- -------- -------- -------------- --------- ------- -------- -------- --------------
See notes to combined financial statements. F-41 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF CASH FLOWS Year ended December 31, 1996 and the six months ended June 30, 1996 and 1997
Six months ended June 30, Year ended -------------------------- December 31, 1996 1996 1997 ------------------ ----------- ----------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................... $ 245,117 $ 118,340 $ 736,421 ------------------ ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Bad debts and repossessions........................................... 44,523 -- 9,910 Depreciation and amortization expense................................. 88,987 37,414 46,900 Increase in LIFO reserve.............................................. 169,316 177,898 324,486 Changes in assets and liabilities that relate to operations: Increase in receivable.............................................. (533,128) (417,366) (546,842) Increase (decrease) in inventories.................................. (10,887,995) 1,039,475 500,867 Increase (decrease) in prepaid expenses............................. 15,895 (271,689) (243,870) (Increase) decrease in accounts payable............................. 109,802 (240,517) (12,456) (Increase) decrease in notes payable floor plan..................... 13,226,616 547,291 (92,304) (Increase) decrease in other accrued liabilities.................... 488,012 1,281,747 (293,135) ------------------ ----------- ----------- Total adjustments................................................ 2,722,028 2,154,253 (306,444) ------------------ ----------- ----------- Net cash provided by operating activities........................ 2,967,145 2,272,593 429,977 ------------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment...................................... (282,711) (141,084) (127,895) Advances to employees -- net............................................. (86,179) (87,558) (21,131) Advances to related partnership -- net................................... (159,553) -- -- ------------------ ----------- ----------- Net cash used in investing activities............................ (528,443) (228,642) (149,026) ------------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank note.................................................. 100,000 100,000 -- Payments on bank note.................................................... (69,331) (30,214) (40,524) Proceeds from long-term debt............................................. 1,000,000 1,000,000 -- Payments on long-term debt............................................... (71,429) -- (71,428) Capital contribution..................................................... 125,000 -- -- Distributions to owners.................................................. (712,437) (540,205) (193,568) ------------------ ----------- ----------- Net cash provided by (used in) financing activities.............. 371,803 529,581 (305,520) ------------------ ----------- ----------- NET INCREASE (DECREASE) IN CASH............................................ 2,810,505 2,573,532 (24,569) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 680,853 680,853 3,491,358 ------------------ ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 3,491,358 $ 3,254,385 $ 3,466,789 ------------------ ----------- ----------- ------------------ ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest................................. $ 1,601,790 $ 591,831 $ 1,253,165 ------------------ ----------- ----------- ------------------ ----------- -----------
See notes to combined financial statements. F-42 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business -- Lake Norman Dodge, Inc. and Affiliated Companies' (the "Company") operates two automobile dealerships in the Charlotte, North Carolina area. The Company 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. The combined financial statements include the accounts of Lake Norman Dodge, Inc. ("LND") and its subsidiary, Lake Norman Chrysler-Plymouth-Jeep-Eagle, LLC ("LNCPJE") and certain proprietorships of Phil Gandy and Quinton Gandy. LND is 100% owned by Phil Gandy and Quinton Gandy. All significant intercompany balances and planned transactions have been eliminated in combination. The combined financial statements have been prepared in connection with a planned acquisition of the net assets of these entities by Sonic Automotive, Inc. ("Sonic"). In May 1997, the Company signed a definitive purchase agreement whereby its outstanding capital stock would be acquired by Sonic for $18,200,000. This acquisition was consummated on September 29, 1997, and is being done in contemplation of an anticipated public offering of common stock by Sonic in 1997. The accompanying combined financial statements reflect the financial position, results of operations, and cash flows of each of the above listed entities. The combination of these entities has been accounted for at historical cost in a manner similar to a pooling-of-interest because the entities are under common management and control. All material intercompany transactions have been eliminated. LNCPJE was organized on March 18, 1996, as a North Carolina limited liability company and commenced operations on July 1, 1996. The certain proprietorships of Phil Gandy and Quinton Gandy include commissions earned related to sales of extended warranty contracts through LND and LNCPJE, which were paid directly to Phil Gandy and Quinton Gandy at the option of LND and LNCPJE. Earned commissions relating to the sales of these contracts reflect a recurring transaction relating to the dealerships and therefore these proprietorships have been included in the accompanying combined financial statements. Revenue Recognition -- The Company records revenue when vehicles are delivered to customers, and when vehicle service work is performed. Finance and insurance commission revenue is recognized principally at the time the contract is placed with the financial institutions. Dealer Agreements -- The Company purchases substantially all of its new vehicles from manufacturers at the prevailing prices charged by the manufacturer to its franchised dealers. The Company's sales could be unfavorably impacted by the manufacturers' unwillingness or inability to supply the dealership with an adequate supply of new car inventory. Each dealership operates under a dealer agreement with the manufacturer which generally restricts the location, management and ownership of the respective dealership. The ability of the Company to acquire additional franchises from a particular manufacturer may be limited due to certain restrictions imposed by manufacturers. Additionally, the Company's ability to enter into significant acquisitions may be restricted and the acquisition of the Company's stock by third parties may be limited by the terms of the franchise agreement. Cash and Cash Equivalents -- The Company 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 the Company from finance companies related to vehicle purchases, and was $2,110,467 at December 31, 1996. Inventories -- Inventories of new vehicles, including demonstrators, are valued at the lower of last-in, first-out ("LIFO") cost or market. Inventories of used vehicles are stated at the lower of first-in, first-out ("FIFO") cost or market, and parts and accessories are stated at the lower of specific cost or market. Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets using primarily accelerated methods. The range of estimated useful lives is as follows:
Useful lives ------------ Parts and service equipment................................................... 5 years Office equipment and fixtures................................................. 5-7 years Company vehicles.............................................................. 5 years
F-43 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Leasehold improvements are amortized over the lesser of the terms of their respective leases or the estimated useful lives of the related assets. Expenditures for maintenance and repairs are expensed as incurred. Significant betterments are capitalized. Income Taxes -- LND has elected to be treated as an S Corporation for federal and state income tax purposes, and LNCPJE is a limited liability company (LLC). As such the stockholders and members, respectively, include their pro rata share of the Company's taxable income for the year in their individual income tax returns. The proprietorship income of Phil and Quinton Gandy combined herein is also included in their personal income tax returns. Accordingly, no provision for federal or state income taxes has been included in the accompanying combined statement of income. The pro forma provision for income taxes and the pro forma net income for the year ended December 31, 1996 and for the six months ended June 30, 1996 and 1997 reflect amounts that would have been recorded had the Company's income been taxed for federal and state purposes as if it was a C Corporation. Concentrations of Credit Risk -- Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash deposits. At times, amounts invested with financial institutions may exceed FDIC insurance limits. Concentrations of credit risk with respect to receivables are limited primarily to automobile manufacturers and financial institutions. Credit risk arising from trade receivables from commercial customers is reduced by the large number of customers comprising the trade receivables balances. Trade receivables are concentrated in the Charlotte, North Carolina metropolitan area. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles 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. Advertising Costs -- The Company expenses all costs of advertising when incurred. Advertising costs of $1,828,534 are included in operating expenses for 1996. Interim Financial Information -- The accompanying unaudited financial information for the six months ended June 30, 1997 has been prepared on substantially the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. The combined statement of income for the year ended December 31, 1996 includes expenses approximating $1,200,000 for discretionary bonuses to stockholders determined at year end. Of this amount approximately $565,000 was incurred through June 30, 1996. Given the planned acquisition by Sonic, it is uncertain if a similar discretionary bonus will be awarded in 1997. As such, no bonus has been accrued through June 30, 1997. 2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOORPLAN Inventories consist of the following:
December 31, June 30, 1996 1997 ------------ ----------- (Unaudited) New vehicles................................................................................... $ 16,617,268 $18,626,219 Used vehicles.................................................................................. 6,437,598 3,720,437 Parts and accessories.......................................................................... 548,977 431,832 ------------ ----------- Total.......................................................................................... $ 23,603,843 $22,778,488 ------------ ----------- ------------ -----------
Had the Company used the FIFO method of valuing new vehicle inventory, inventories would have been $1,564,142 higher and net income would have been $414,432 as of and for the year ended December 31, 1996. The inventory balance is generally reduced by the manufacturer's purchase discounts and such reduction is not reflected in the related floor plan F-44 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOORPLAN -- Continued liability. These manufacturer purchase discounts are standard in the industry, typically occur on all new vehicle purchases, and are not used to offset the related floor plan liability. These discounts are aggregated and generally paid by the manufacturer on a quarterly basis. The related floor plan liability becomes due as vehicles are sold. All new and certain used vehicles are pledged to collateralize floor plan notes payable to financial institutions in the amount of $25,957,314 at December 31, 1996. The floor plan notes bear interest, payable monthly on the outstanding balance, at the prime rate plus 0.5% (8.75% at December 31, 1996). Total floor plan interest expense amounted to $1,552,250 in 1996. The notes payable are due when the related vehicle is sold. As such, these floor plan notes payable are shown as a current liability in the accompanying balance sheet. 3. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
December 31, June 30, 1996 1997 ------------ ---------- (Unaudited) Service equipment........................................................ $ 309,944 $ 373,652 Parts and accessory equipment............................................ 35,480 38,876 Vehicles................................................................. 11,809 53,898 Furniture and fixtures................................................... 212,155 278,479 Leasehold improvements................................................... 460,097 497,345 ------------ ---------- 1,029,485 1,242,250 Less accumulated depreciation............................................ (543,605) (675,375) ------------ ---------- Property and equipment, net.............................................. $ 485,880 $ 566,875 ------------ ---------- ------------ ----------
4. NOTE PAYABLE TO BANK AND LONG-TERM DEBT The note payable with a balance of $68,168 at December 31, 1996 is due in monthly installments of $7,172, including interest at 8.25%, through October, 1997. The note is collateralized by modular buildings used in Company operations. In July, 1996, the Company borrowed $1,000,000 from Chrysler Financial Corporation. Payments of $11,905 plus interest at prime plus .5% (8.75% at December 31, 1996) are due monthly, through July, 2003. The loan is collateralized by a security interest in all assets of LNCPJE. Principal is due as follows: Year ending December 31: 1997.......................................................................... $142,857 1998.......................................................................... 142,857 1999.......................................................................... 142,857 2000.......................................................................... 142,857 2001.......................................................................... 142,857 2002.......................................................................... 142,857 Thereafter.................................................................... 71,430 -------- 928,572 Less current maturities....................................................... 142,857 -------- Long-term debt................................................................ $785,715 -------- --------
5. OPERATING LEASES The Company leases its operating facilities from its shareholders under three separate leases expiring March, 2000 and June, 2001. Monthly payments under these leases at December 31, 1996, total $83,000. One of these leases has an option for renewal for two additional five year terms. The Company pays all operating costs such as utilities, repairs, maintenance and F-45 LAKE NORMAN DODGE, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- Continued 5. OPERATING LEASES -- Continued insurance relating to these facilities. Total payments made to related parties under these leases in 1996 were $786,000 exclusive of operating costs. At December 31, 1996 future minimum rental payments under these operating leases are as follows:
Year - ---------------------------------------------------------------------------- 1997........................................................................ $ 996,000 1998........................................................................ 996,000 1999........................................................................ 996,000 2000........................................................................ 564,000 2001........................................................................ 210,000 ---------- Total................................................................ $3,762,000 ---------- ----------
The Company leases automobiles through Chrysler Finance under twenty-four and thirty-six month agreements expiring at various dates. The Company pays monthly rental of varying amounts. In addition, the Company pays all operating costs, including insurance, repairs, and maintenance. Payments under automobile leases were $170,800 in 1996. At December 31, 1996, minimum future lease payments under these leases are as follows: 1997.......................................................................... $216,000 1998.......................................................................... 81,000 -------- Total.................................................................. $297,000 -------- --------
6. RELATED PARTIES Due from Related Parties -- Due from employees includes $219,878 due from shareholders. These amounts bear interest at the prevailing U. S. Treasury rates for short-term debt, are noncollateralized and have no specific repayment terms. Amounts due from related partnership are noninterest bearing, noncollateralized and have no specific repayment terms. 7. EMPLOYEE SAVINGS PLAN The Company operates a savings plan under Section 401(k) of the Internal Revenue Code. This plan allows employees to defer a portion of their income on a pre-tax basis through plan contributions. The Company makes matching contributions up to 2% of employee salary. Company contributions to the plan in 1996 totaled $56,800. The Company also paid plan expenses of $1,312. F-46 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEN MARKS FORD, INC. Clearwater, Florida We have audited the accompanying balance sheet of Ken Marks Ford, Inc. (the "Company") as of April 30, 1997, and the related statements of income, stockholders' equity, and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ken Marks Ford, Inc. as of April 30, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Charlotte, North Carolina August 26, 1997 (October 15, 1997 as to Note 1) F-47 KEN MARKS FORD, INC. BALANCE SHEETS April 30, 1997 and July 31, 1997
April 30, July 31, 1997 1997 ----------- ----------- (Unaudited) ASSETS (Note 4) CURRENT ASSETS: Cash and cash equivalents.................................................................... $ 2,504,102 $ 2,937,429 Receivables.................................................................................. 2,374,483 1,558,416 Inventories (Note 2)......................................................................... 11,216,499 11,809,574 Prepaid expenses and other current assets.................................................... 529,633 265,122 Deferred income taxes (Note 5)............................................................... 91,742 91,742 ----------- ----------- TOTAL CURRENT ASSETS...................................................................... 16,716,459 16,662,283 PROPERTY AND EQUIPMENT (Note 3)................................................................ 470,738 530,257 OTHER ASSETS................................................................................... 14,000 14,000 ----------- ----------- TOTAL ASSETS................................................................................... $17,201,197 $17,206,540 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable -- floor plan (Note 2)......................................................... $12,557,574 $12,720,185 Trade accounts payable....................................................................... 678,252 691,537 Accrued payroll and bonuses.................................................................. 836,425 718,767 Other accrued liabilities (Note 7)........................................................... 777,388 541,500 Allowance for insurance, service contract and finance income chargebacks..................... 224,544 224,544 Income tax payable (Note 5).................................................................. 15,161 0 ----------- ----------- TOTAL CURRENT LIABILITIES................................................................. 15,089,344 14,896,533 ----------- ----------- DEFERRED INCOME TAXES (Note 5)................................................................. 17,705 17,705 COMMITMENTS AND CONTINGENCIES (Notes 6 and 7) STOCKHOLDERS' EQUITY: Common stock, $1.00 par value, 500 shares authorized and issued.............................. 500 500 Paid-in capital.............................................................................. 423,800 423,800 Retained earnings............................................................................ 1,669,848 1,868,002 ----------- ----------- Total stockholders' equity................................................................ 2,094,148 2,292,302 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................................... $17,201,197 $17,206,540 ----------- ----------- ----------- -----------
See notes to financial statements. F-48 KEN MARKS FORD, INC. STATEMENTS OF INCOME Year ended April 30, 1997 and three months ended July 31, 1996 and 1997
Three months ended July Year Ended 31, April 30, -------------------------- 1997 1996 1997 ------------ ----------- ----------- (Unaudited) REVENUES: Vehicle sales................................................................ $130,045,246 $33,823,641 $33,167,639 Parts, service and collision repairs......................................... 13,116,124 3,660,782 2,930,561 Finance and insurance........................................................ 2,188,071 596,854 529,109 ------------ ----------- ----------- Total revenues............................................................ 145,349,441 38,081,277 36,627,309 COST OF SALES.................................................................. 126,870,910 33,111,680 32,195,397 ------------ ----------- ----------- GROSS PROFIT................................................................... 18,478,531 4,969,597 4,431,912 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 7).......................... 15,743,940 4,034,940 3,644,179 DEPRECIATION AND AMORTIZATION.................................................. 100,771 20,846 20,302 ------------ ----------- ----------- OPERATING INCOME............................................................... 2,633,820 913,811 767,431 OTHER INCOME AND EXPENSE: Interest expense, floor plan (Note 2)........................................ 2,008,468 480,132 485,358 Other income................................................................. 140,916 16,189 40,654 ------------ ----------- ----------- Total other income and expense............................................ 1,867,552 463,943 444,704 ------------ ----------- ----------- INCOME BEFORE INCOME TAXES..................................................... 766,268 449,868 322,727 PROVISION FOR INCOME TAXES (Note 5)............................................ 295,988 173,649 124,573 ------------ ----------- ----------- NET INCOME..................................................................... $ 470,280 $ 276,219 $ 198,154 ------------ ----------- ----------- ------------ ----------- -----------
See notes to financial statements. F-49 KEN MARKS FORD, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Year ended April 30, 1997 and three months ended July 31, 1997
Total Common Paid-in Retained Stockholders' Stock Capital Earnings Equity ------ -------- ---------- ------------- BALANCE APRIL 30, 1996.......................................................... $ 500 $423,800 $1,219,568 $ 1,643,868 Dividends............................................................... -- -- (20,000) (20,000) Net income.............................................................. -- -- 470,280 470,280 ------ -------- ---------- ------------- BALANCE APRIL 30, 1997.......................................................... $ 500 $423,800 $1,669,848 $ 2,094,148 Net income (unaudited).................................................. -- -- 198,154 198,154 ------ -------- ---------- ------------- BALANCE JULY 31, 1997 (unaudited)............................................... $ 500 $423,800 $1,868,002 $ 2,292,302 ------ -------- ---------- ------------- ------ -------- ---------- -------------
See notes to financial statements. F-50 KEN MARKS FORD, INC. STATEMENTS OF CASH FLOWS Year ended April 30, 1997 and three months ended July 31, 1996 and 1997
Three months ended July 31, Year ended --------------------------- April 30, 1997 1996 -------------- --------------------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 470,280 $ 276,219 -------------- ------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............................................. 100,771 20,846 Deferred income taxes...................................................... 13,763 6,600 Loss on disposal of property and equipment................................. 45,192 -- Change in operating assets and liabilities: (Increase) decrease in accounts receivable............................... (1,033,143) 323,213 (Increase) decrease in inventories....................................... 5,197,288 1,129,058 (Increase) decrease in prepaid expenses.................................. 429,467 (595,810) Decrease in due from related parties..................................... 134,141 -- Increase (decrease) in notes payable, floor plan......................... (3,401,971) (663,355) Increase in trade accounts payable....................................... 322,319 219,902 Decrease in accrued payroll and bonuses.................................. (284,875) (400,442) Increase (decrease) in accrued expenses and other payables............... (848,544) 484,719 Decrease in allowance for insurance, service contract and finance income chargebacks........................................................... (85,107) -- Increase (decrease) in income tax payable................................ (39,839) 112,049 -------------- ------------- Total adjustments..................................................... 549,462 636,780 -------------- ------------- Net cash provided by operating activities.................................. 1,019,742 912,999 -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment........................................... (183,674) (5,060) -------------- ------------- Net cash used in investing activities...................................... (183,674) (5,060) -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid to stockholders................................................ (20,000) -- -------------- ------------- Net cash used in financing activities...................................... (20,000) -- -------------- ------------- NET INCREASE IN CASH............................................................ 816,068 907,939 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................... 1,688,034 1,688,034 -------------- ------------- CASH AND CASH EQUIVALENTS, END OF YEAR.......................................... $ 2,504,102 $ 2,595,973 -------------- ------------- -------------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest................................................................... $ 2,008,468 $ 480,132 Income taxes............................................................... $ 322,064 $ 55,000 1997 --------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 198,154 ------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............................................. 20,302 Deferred income taxes...................................................... -- Loss on disposal of property and equipment................................. -- Change in operating assets and liabilities: (Increase) decrease in accounts receivable............................... 816,067 (Increase) decrease in inventories....................................... (593,075) (Increase) decrease in prepaid expenses.................................. 264,511 Decrease in due from related parties..................................... -- Increase (decrease) in notes payable, floor plan......................... 162,611 Increase in trade accounts payable....................................... 13,285 Decrease in accrued payroll and bonuses.................................. (117,658) Increase (decrease) in accrued expenses and other payables............... (235,888) Decrease in allowance for insurance, service contract and finance income chargebacks........................................................... -- Increase (decrease) in income tax payable................................ (15,161) ------------- Total adjustments..................................................... 314,994 ------------- Net cash provided by operating activities.................................. 513,148 ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment........................................... (79,821) ------------- Net cash used in investing activities...................................... (79,821) ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid to stockholders................................................ -- ------------- Net cash used in financing activities...................................... -- ------------- NET INCREASE IN CASH............................................................ 433,327 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................... 2,504,102 ------------- CASH AND CASH EQUIVALENTS, END OF YEAR.......................................... $ 2,937,429 ------------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest................................................................... $ 485,358 Income taxes............................................................... $ 144,000
See notes to financial statements. F-51 KEN MARKS FORD, INC. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business -- Ken Marks Ford, Inc. (the "Company") operates an automobile dealership in the Tampa-Clearwater areas in Florida. The Company sells new and used cars, sells replacement parts, provides vehicle maintenance, warranty, paint and repair services and arranges related financing and insurance. In July 1997, the Company signed a definitive purchase agreement whereby its outstanding capital stock would be acquired by Sonic Automotive, Inc. ("Sonic") for $25,482,500. This acquisition was consummated on October 15, 1997, and is being done in contemplation of an anticipated public offering of common stock by Sonic Automotive, Inc. in 1997. Revenue Recognition -- The Company records revenue when vehicles are delivered to customers, and when vehicle service work is performed. Finance and insurance commission revenue is recognized principally at the time the contract is placed with the financial institution. Dealer Agreements -- The Company purchases substantially all of its new vehicles from manufacturers at the prevailing prices charged by the manufacturer to its franchised dealers. The Company's sales could be unfavorably impacted by the manufacturer's unwillingness or inability to supply the dealership with an adequate supply of new car inventory. Each dealership operates under a dealer agreement with the manufacturer. These agreements generally restrict the location, management and ownership of the respective dealership. Cash and Cash Equivalents -- The Company 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 the Company from finance companies related to vehicle purchases, and was approximately $628,000 at April 30, 1997. Inventories -- Inventories of new vehicles, including demonstrators, are valued at the lower of last-in, first-out ("LIFO") cost or market. Inventories of parts and accessories are valued on a LIFO basis using the Current Year Parts Price Index. Inventories of used vehicles are valued on a specific identification basis. Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. The range of estimated useful lives is as follows:
Useful Lives ------------ Leasehold improvements.................................................................. 18-31 years Machinery and equipment................................................................. 5-7 years Furniture and fixtures.................................................................. 5-7 years
Income Taxes -- Deferred income tax assets and liabilities are determined based on the difference between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Concentrations of Credit Risk -- Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash deposits. At times, amounts invested with financial institutions may exceed FDIC insurance limits. Concentrations of credit risk with respect to receivables are limited primarily to automobile manufacturers and financial institutions. Credit risk arising from trade receivables from commercial customers is reduced by the large number of customers comprising the trade receivables balance. Trade receivables are concentrated in the Tampa-Clearwater metropolitan area. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles 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 these estimates. F-52 KEN MARKS FORD, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Advertising -- The Company expenses advertising costs in the period incurred. Advertising expenses approximated $991,000 for the year ended April 30, 1997. 2. INVENTORIES AND RELATED NOTES PAYABLE -- FLOOR PLAN Inventories consist of the following:
April 30, July 31, 1997 1997 ----------- ----------- (Unaudited) New vehicles........................................................... $ 8,477,840 $ 9,270,932 Used vehicles.......................................................... 2,341,929 2,193,166 Parts and accessories.................................................. 396,730 345,476 ----------- ----------- Total.................................................................. $11,216,499 $11,809,574 ----------- ----------- ----------- -----------
At April 30, 1997, the excess of current replacement cost over the stated LIFO valuation of new vehicles, parts and accessories amounts to $2,749,237. The inventory balance generally is reduced by the manufacturer's purchase discounts, and such reduction is not reflected in the related floor plan liability. These manufacturer purchase discounts are standard in the industry, typically occur on all new vehicle purchases, and are not used to offset the related floor plan liability. These discounts are aggregated and generally paid by the manufacturer on a quarterly basis. The related floor plan liability becomes due as vehicles are sold. Had the Company used the FIFO method of valuing new vehicle, parts and accessories inventory, pretax earnings would have been $949,454 for the year ended April 30, 1997. All new vehicles are pledged to collateralize floor plan notes payable to financial institutions in the amount of $12,557,574 at April 30, 1997. The floor plan notes bear interest, payable monthly on the outstanding balance, at the prime rate plus 1% (9.5% at April 30, 1997). Total floor plan interest expense amounted to $2,008,468 during the year ended April 30, 1997. The notes payable become due when the related vehicle is sold. As such, these floor plan notes payable are shown as a current liability in the accompanying balance sheet. Certain inventory items collateralize the revolving line of credit described in Note 4. All new vehicles and demonstrators and substantially all parts and accessories are purchased from Ford Motor Company. 3. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
April 30, July 31, 1997 1997 ---------- ---------- (Unaudited) Parts and service equipment............................................... $ 333,063 $ 340,284 Furniture and fixtures.................................................... 400,152 409,991 Leasehold improvements.................................................... 481,815 544,576 ---------- ---------- 1,215,030 1,294,851 Less accumulated depreciation............................................. (744,292) (764,594) ---------- ---------- Property and equipment, net............................................... $ 470,738 $ 530,257 ---------- ---------- ---------- ----------
F-53 KEN MARKS FORD, INC. NOTES TO FINANCIAL STATEMENTS -- Continued 4. FINANCING ARRANGEMENT The Company has a revolving line of credit with Ford Motor Credit Corporation in the amount of $2,500,000. At April 30, 1997, no amount was outstanding relating to this line of credit, which is collateralized by personal guarantees from the stockholders and the net assets of the Company. 5. INCOME TAXES The provision for income taxes consists of the following:
April 30, 1997 --------- Current taxes............................................................................. $ 282,225 Deferred taxes............................................................................ 13,763 --------- Provision for income taxes................................................................ $ 295,988 --------- ---------
Deferred income tax assets and liabilities consist of the following:
April 30, 1997 --------- Deferred tax asset -- current, primarily from differences relating to finance and insurance reserves and allowance for bad debts..................................................... $ 91,742 Deferred tax liability -- long-term, primarily from differences relating to depreciation... (17,705) --------- Net deferred tax asset..................................................................... $ 74,037 --------- ---------
6. COMMITMENTS AND CONTINGENCIES Ford Motor Company (FMC) owns vehicles which are used as short-term rentals for which the Company pays FMC monthly fees. A portion of the fees are applied against the purchase price the Company must pay for the vehicles when they are no longer used for rental. The contingent liability to FMC to purchase the vehicles under this program was approximately $1,771,000 at April 30, 1997. The Company is a defendant in various legal proceedings incurred in the normal course of business. Management believes that the outcome of such proceedings will not have a materially adverse effect on the Company's financial position or future operations and cashflows. 7. RELATED PARTY TRANSACTIONS The Company leases its operating facility from a corporation which is owned by the Company's stockholders. The lease is currently on a month-to-month basis. Rent charged to expense under this lease was $359,630 for the year ended April 30, 1997. In addition, management fees of $675,000 for the year ended April 30, 1997 were paid by the Company to the above corporation and are included in selling, general and administrative expenses. In addition, related party payables of $270,000 were included in other accrued liabilities at April 30, 1997. F-54 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- No dealer, salesperson, or any other individual has been authorized to give any information or to make any representations not contained in this Prospectus in connection with the offering covered by this Prospectus. If given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the Class A Common Stock in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has not been any change in the facts set forth in this Prospectus or in the affairs of the Company since the date hereof. ----------------- TABLE OF CONTENTS
Page ---- Prospectus Summary................................... 3 Risk Factors......................................... 9 The Reorganization................................... 19 The Acquisitions..................................... 19 Use of Proceeds...................................... 23 Dividend Policy...................................... 23 Capitalization....................................... 24 Dilution............................................. 25 Selected Combined And Consolidated Financial Data.... 26 Pro Forma Combined and Consolidated Financial Data... 28 Management's Discussion and Analysis of Financial Condition and Results of Operations................ 36 Business............................................. 43 Management........................................... 59 Certain Transactions................................. 66 Principal Stockholders............................... 70 Description of Capital Stock......................... 71 Shares Eligible for Future Sale...................... 75 Certain United States Federal Tax Considerations for Non-United States Holders.......................... 76 Underwriting......................................... 79 Legal Matters........................................ 82 Experts.............................................. 82 Additional Information............................... 82 Index to Financial Statements........................ F-1
Until , 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the Class A Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. 5,000,000 Shares (Sonic Automotive Inc. logo) Class A Common Stock ----------------- PROSPECTUS ----------------- Merrill Lynch & Co. NationsBanc Montgomery Securities, Inc. Wheat First Butcher Singer , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] (A redherring appears on the left hand side of this page, rotated 90 degrees. Text follows.) Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED NOVEMBER 5, 1997 PROSPECTUS 5,000,000 Shares (Sonic Automotive Inc. logo) Class A Common Stock ------------------------ All of the 5,000,000 shares of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), offered hereby are being sold by Sonic Automotive, Inc. ("Sonic" or the "Company"). Of the 5,000,000 shares of Class A Common Stock offered hereby, 1,000,000 shares are being offered for sale initially outside the United States and Canada by the International Managers (as defined herein) and 4,000,000 shares are being offered for sale initially in a concurrent offering in the United States and Canada by the U.S. Underwriters (as defined herein). The initial public offering price and the aggregate underwriting discount per share will be identical for both the International Offering and the U.S. Offering. See "Underwriting." Each share of Class A Common Stock entitles its holder to one vote per share. Each share of Class B Common Stock, par value $.01 per share (the "Class B Common Stock," and together with the Class A Common Stock, the "Common Stock"), entitles the holder to ten votes per share, except in certain limited circumstances. All of the shares of Class B Common Stock are held by the members of the Smith Group (as defined herein), who are all of the stockholders of the Company prior to the consummation of the Offering. After consummation of the Offering, the Smith Group will beneficially own shares representing approximately 92.6% of the combined voting power of the Company's Common Stock (approximately 91.6% if the Underwriters' over-allotment option is exercised in full). See "Description of Capital Stock -- Common Stock." Prior to the Offerings, there has been no public market for the Class A Common Stock. It is currently estimated that the initial public offering price will be between $12.00 and $14.00 per share. For a discussion of factors to be considered in determining the initial public offering price, see "Underwriting." The Class A Common Stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol "SAH." See "Risk Factors" beginning on page 9 for a discussion of certain factors that should be considered by prospective purchasers of the Class A Common Stock offered hereby. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [CAPTION] Price to Underwriting Proceeds to Public Discount (1) Company (2) Per Share........................................... $ $ $ Total (3)........................................... $ $ $
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $2,000,000. (3) The Company has granted to the International Managers and the U.S. Underwriters options to purchase up to an additional 150,000 and 600,000 shares of Class A Common Stock, respectively, in each case exercisable within 30 days of the date hereof and solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Class A Common Stock are being offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Class A Common Stock will be made in New York, New York on or about , 1997. ------------------------ Merrill Lynch International NationsBanc Montgomery Securities, Inc. Wheat First Butcher Singer ------------------------ The date of this Prospectus is , 1997. [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. References in this Prospectus to "Sonic" or the "Company" (i) are to Sonic Automotive, Inc. and, unless the context indicates otherwise, its consolidated subsidiaries and their respective predecessors, (ii) give effect to a recently completed Reorganization (as defined below) of the Company, and (iii) assume that the Company has consummated the acquisition of the assets or all the capital stock of six additional dealerships or dealership groups, as described herein, in North Carolina, Tennessee, Florida, Georgia and South Carolina (the "Acquisitions"). See "The Acquisitions." References to the "Offering" are to the offering of 1,000,000 shares of Class A Common Stock made hereby outside the United States and Canada by the International Managers (the "International Offering") and the concurrent offering of 4,000,000 shares of Class A Common Stock in the United States and Canada by the U.S. Underwriters (the "U.S. Offering"), collectively. References to the "Underwriters" are to the International Managers and the U.S. Underwriters, collectively. Unless otherwise indicated, all information in this Prospectus (a) gives retroactive effect to a 625-for-1 stock split (effected in the form of a stock dividend) of the Company's Class B Common Stock to be consummated prior to the consummation of the Offering (the "Stock Split") and (b) assumes that the Underwriters' over-allotment option is not exercised. The Acquisitions will be consummated on or before the closing of the Offering. The Company The Company is one of the leading automotive retailers in the United States, operating 23 dealership franchises, four standalone used vehicle facilities and seven collision repair centers in the southeastern and southwestern United States. 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 ("F&I") for its automotive customers. The Company's business is geographically diverse, with dealership operations in the Charlotte, Chattanooga, Nashville, Tampa-Clearwater, Houston and Atlanta markets, each of which the Company believes is experiencing favorable demographic trends. Sonic sells 15 domestic and foreign brands, which consist of BMW, Cadillac, Chrysler, Dodge, Ford, Honda, Infiniti, Jaguar, Jeep, KIA, Oldsmobile, Plymouth, Toyota, Volkswagen and Volvo. In several of its markets, the Company has a significant market share for new cars and light trucks, including 13.7% in Charlotte and 9.1% in Chattanooga in 1996. Pro forma for the Acquisitions, the Company had revenues of $899.6 million and retail unit sales of 24,206 new and 13,475 used vehicles in 1996. The Company believes that in 1996, based on pro forma retail unit sales, it would have been one of the ten largest dealer groups out of a total of more than 15,000 dealer groups in the United States. The Company's founder and Chief Executive Officer, O. Bruton Smith, has over 30 years of automotive retailing experience. In addition, the Company's other executive officers, regional vice presidents and executive managers have on average 18 years of automotive retailing experience. The Company's dealerships are among those dealerships that have won the highest attainable awards from various manufacturers measuring quality and customer satisfaction. These awards include the Five Star Award from Chrysler, the Chairman's Award from Ford, the President's Award from BMW and the President's Circle Award from Infiniti. In addition, the Company was named to Ford's Top 100 Club, which consists of Ford's top 100 retailers based on retail volume and consumer satisfaction. The Company intends to pursue an acquisition growth strategy led by a management team that has experience in the consolidation of automotive retailing as well as motorsports businesses. Bruton Smith, who is also the Chief Executive Officer of Speedway Motorsports, Inc., the owner and operator of several motorsports facilities, first entered the automotive retailing business in the mid-1960's. Mr. Smith will devote approximately 50% of his business time to the Company. Since 1990, Mr. Smith has successfully acquired three dealerships and increased his dealerships' revenues from $199.4 million in 1992 to $376.6 million in 1996, without giving effect to the Acquisitions. In the Tennessee market, Nelson E. Bowers, II, the Company's Executive Vice President, has acquired or opened eight dealerships since 1992 and increased revenues (primarily through acquisitions) of the dealership group to be acquired by the Company from $13.2 million in 1992 to $101.5 million in 1996. No assurance can be given that Messrs. Smith and Bowers will be successful in acquiring or opening new dealerships for the Company or increasing the Company's revenues. The Company believes the competitive advantages which differentiate it from its local competitors include the reputation of the Company's management in the automotive retailing industry, regional and national economies of scale, brand and geographic diversity, and the established customer base and local name recognition of the Company's dealerships. The Company has developed and implemented several growth strategies to capitalize on these competitive advantages. One of these is to continue to expand its operations in the Southeast and Southwest by acquiring additional dealerships both within its current markets and in new markets. The Company also is seeking additional growth from the increased sale of higher margin products and services such as wholesale parts, after-market products, collision repair services and F&I. The Company believes that an opportunity exists for dealership groups with significant equity capital and experience in identifying, acquiring and professionally managing dealerships, to acquire additional dealerships and capitalize on changes in 3 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] UNDERWRITING Merrill Lynch International, NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. are acting as lead managers (the "Lead Managers") for each of the International Managers named below (the "International Managers"). Subject to the terms and conditions set forth in an international purchase agreement (the "International Purchase Agreement") among the Company and the International Managers and concurrently with the sale of 4,000,000 shares of Class A Common Stock to the U.S. Underwriters (as defined below), the Company has agreed to sell to the International Managers, and each of the International Managers severally and not jointly has agreed to purchase from the Company, the number of shares of Class A Common Stock set forth opposite its name below.
Number of International Manager Shares ---------- Merrill Lynch International...................................................................................... NationsBanc Montgomery Securities, Inc........................................................................... Wheat, First Securities, Inc..................................................................................... ---------- Total............................................................................................... 1,000,000 ---------- ----------
The Company has also entered into a U.S. purchase agreement (the "U.S. Purchase Agreement") with certain underwriters in the United States and Canada (the "U.S. Underwriters" and, together with the International Managers, the "Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. are acting as representatives (the "U.S. Representatives"). Subject to the terms and conditions set forth in the U.S. Purchase Agreement, and concurrently with the sale of 1,000,000 shares of Class A Common Stock to the International Managers pursuant to the International Purchase Agreement, the Company has agreed to sell to the U.S. Underwriters, and the U.S. Underwriters severally and not jointly have agreed to purchase from the Company, an aggregate of 4,000,000 shares of Class A Common Stock. The initial public offering price per share of Class A Common Stock and the underwriting discount per share of Class A Common Stock are identical under the International Purchase Agreement and the U.S. Purchase Agreement. In the International Purchase Agreement and the U.S. Purchase Agreement, the several International Managers and the several U.S. Underwriters, respectively, have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Class A Common Stock being sold pursuant to each such agreement if any of the shares of Class A Common Stock being sold pursuant to such agreement are purchased. Under certain circumstances, under the International Purchase Agreement and the U.S. Purchase Agreement, the commitments of non-defaulting Underwriters may be increased. The closings with respect to the sale of shares of Class A Common Stock to be purchased by the International Managers and the U.S. Underwriters are conditioned upon one another. The Lead Managers have advised the Company that the International Managers propose initially to offer the shares of Class A Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share of Class A Common Stock. The International Managers may allow, and such dealers may reallow, a discount not in excess of $ per share of Class A Common Stock on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. At the request of the Company, the Underwriters have reserved up to 5% of the shares of Class A Common Stock for sale at the initial public offering price, and otherwise on the same terms as sales pursuant to the Offering, to directors, officers, employees, business associates and related persons of the Company. The number of shares of Class A Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any 78 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] reserved shares which are not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. The Company, all of the executive officers of the Company and all the holders of Class B Common Stock have agreed, subject to certain exceptions, not to, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option to purchase, right or warrant to purchase or otherwise transfer or dispose of any Class A Common Stock or securities convertible into or exchangeable or exercisable for Class A Common Stock, including shares of Class B Common Stock, or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement or transaction that transfers, in whole or part, directly or indirectly, the economic consequence of ownership of the Class A Common Stock, whether any such swap or transaction described above is to be settled by delivery of Class A Common Stock or such other securities, in cash or otherwise without the prior written consent of Merrill Lynch on behalf of the Underwriters, for a period of 180 days after the date of this Prospectus; provided that the Company may sell shares of Class A Common Stock to a third party as consideration for the Company's acquisition from such third party of an automobile dealership, provided that such third party executes a lock-up agreement on substantially the same terms described above for a period expiring 180 days after the date of this Prospectus. The Company has granted an option to the International Managers, exercisable within 30 days after the date of this Prospectus, to purchase up to an aggregate of 150,000 additional shares of Class A Common Stock at the initial public offering price set forth on the cover page of this Prospectus, less the underwriting discount. The International Managers may exercise this option only to cover over-allotments, if any, made on the sale of the Class A Common Stock offered hereby. To the extent that the International Managers exercise this option, each International Manager will be obligated, subject to certain conditions, to purchase a number of additional shares of Class A Common Stock proportionate to such International Manager's initial amount reflected in the foregoing table. The Company also has granted options to the U.S. Underwriters, exercisable within 30 days after the date of this Prospectus, to purchase up to an aggregate of 600,000 additional shares of Class A Common Stock to cover over-allotments, if any, on terms similar to those granted to the International Managers. The International Managers and the U.S. Underwriters have entered into an intersyndicate agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Pursuant to the Intersyndicate Agreement, the International Managers and the U.S. Underwriters are permitted to sell shares of Class A Common Stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell shares of Class A Common Stock will not offer to sell or sell shares of Class A Common Stock to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, and the International Managers and any dealer to whom they sell shares of Class A Common Stock will not offer to sell or sell shares of Class A Common Stock to U.S. persons or to Canadian persons or to persons they believe intend to resell to U.S. persons or Canadian persons, except in the case of transactions pursuant to the Intersyndicate Agreement. Prior to the Offering, there has been no public market for the Class A Common Stock. The initial public offering price for the Class A Common Stock will be determined by negotiation among the Company, the U.S. Representatives and the Lead Managers. The factors considered in determining the initial public offering price, in addition to prevailing market conditions, are price-earnings ratios of publicly traded companies that the U.S. Representatives and the Lead Managers believe to be comparable to the Company, certain financial information of the Company, the history of, and the prospects for, the Company and the industry in which it competes, an assessment of the Company's management, its past and present operations, the prospects for and the timing of future revenues of the Company, the present state of the Company's development, and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to the Company. There can be no assurance that an active trading market will develop for the Class A Common Stock or that the Class A Common Stock will trade in the public market subsequent to the Offering made hereby at or above the initial public offering price. The Company has agreed to indemnify the International Managers and the U.S. Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments which the International Managers or the U.S. Underwriters may be required to make in respect thereof. The Class A Common Stock has been approved for listing on the NYSE, subject to official notice of issuance, under the symbol "SAH." In order to meet the requirements for listing of the Class A Common Stock on that exchange, the U.S. Underwriters and the International Managers have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders. 79 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] The International Managers and the U.S. Underwriters do not intend to confirm sales of Class A Common Stock offered hereby to any accounts over which they exercise discretionary authority. Until the distribution of the Class A Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Class A Common Stock. As an exception to these rules, the U.S. Representatives are permitted to engage in certain transactions that stabilize the price of Class A Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Class A Common Stock. If the Underwriters create a short position in the Class A Common Stock in connection with the Offering, i.e., if they sell more shares of Class A Common Stock than are set forth on the cover page of this Prospectus, the U.S. Representatives may reduce that short position by purchasing Class A Common Stock in the open market. The U.S. Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The U.S. Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the U.S. Representatives purchase shares of Class A Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Class A Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Class A Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the U.S. Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Each International Manager has agreed that (i) it has not offered or sold, and, for a period of six months from the date of this Prospectus, will not offer or sell, to persons in the United Kingdom, other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purpose of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied with and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the shares of Class A Common Stock in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of shares of Class A Common Stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996, or is a person to whom such document may otherwise lawfully be issued or passed on. No action has been or will be taken in any jurisdiction (except in the United States) that would permit a public offering of the shares of Class A Common Stock, or the possession, circulation or distribution of this Prospectus or any other material relating to the Company or shares of Class A Common Stock in any jurisdiction where action for that purpose is required. Accordingly, the shares of Class A Common Stock may not be offered or sold, directly or indirectly, and neither this Prospectus nor any other offering material or advertisements in connection with the shares of Class A Common Stock may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction. Purchasers of the shares offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price set forth on the cover page hereof. NationsBank, an affiliate of NationsBanc Montgomery Securities, Inc., loaned the Company $20 million under the Six-Month Facility to finance the Lake Norman Acquisition and the Williams Acquisition. More than 10% of the net proceeds of the Offering will be received by NationsBank by reason of the use of such proceeds to repay a portion of such borrowings. Accordingly, the Offering will be conducted in accordance with NASD Conduct Rule 2710(c)(8), which requires that the public offering price of the Class A Common Stock be no higher than the price recommended by a Qualified Independent Underwriter which has participated in the preparation of the Registration Statement and performed its usual standard of due diligence with respect thereto. Merrill Lynch will act as the Qualified Independent Underwriter for the Offering, and the public offering price will not be higher than the price recommended by Merrill Lynch. 80 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- No dealer, salesperson, or any other individual has been authorized to give any information or to make any representations not contained in this Prospectus in connection with the offering covered by this Prospectus. If given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the Class A Common Stock in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has not been any change in the facts set forth in this Prospectus or in the affairs of the Company since the date hereof. In this Prospectus, references to "dollars" and "$" are to United States dollars. ----------------- TABLE OF CONTENTS
Page ---- Prospectus Summary................................... 3 Risk Factors......................................... 9 The Reorganization................................... 19 The Acquisitions..................................... 19 Use of Proceeds...................................... 23 Dividend Policy...................................... 23 Capitalization....................................... 24 Dilution............................................. 25 Selected Combined And Consolidated Financial Data.... 26 Pro Forma Combined and Consolidated Financial Data... 28 Management's Discussion and Analysis of Financial Condition and Results of Operations................ 36 Business............................................. 43 Management........................................... 59 Certain Transactions................................. 66 Principal Stockholders............................... 70 Description of Capital Stock......................... 71 Shares Eligible for Future Sale...................... 75 Certain United States Federal Tax Considerations for Non-United States Holders.......................... 76 Underwriting......................................... 78 Legal Matters........................................ 81 Experts.............................................. 81 Additional Information............................... 81 Index to Financial Statements........................ F-1
Until , 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the Class A Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. 5,000,000 Shares (Sonic Automotive Inc. logo) Class A Common Stock ----------------- PROSPECTUS ----------------- Merrill Lynch International NationsBanc Montgomery Securities, Inc. Wheat First Butcher Singer , 1997 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the expenses to be borne by the Registrant in connection with the issuance and distribution of the securities being registered hereby other than underwriting discounts and commissions. All the amounts shown are estimates, except for the registration fee with the Securities and Exchange Commission, the NASD filing fee and the NYSE fees. SEC Registration fee.................................................................... $ 31,516 NASD filing fee......................................................................... 10,900 NYSE fees............................................................................... 84,600 Transfer agent and registrar fees....................................................... 15,000 Accounting fees and expenses............................................................ 950,000 Legal fees and expenses................................................................. 450,000 "Blue Sky" fees and expenses (including legal fees)..................................... 15,000 Costs of printing and engraving......................................................... 325,000 Miscellaneous........................................................................... 117,984 ---------- Total................................................................................... $2,000,000 ---------- ----------
Item 14. Indemnification of Directors and Officers. The Registrant's Bylaws effectively provide that the Registrant shall, to the full extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time ("Section 145"), indemnify all persons whom it may indemnify pursuant thereto. In addition, the Registrant's Amended and Restated Certificate of Incorporation eliminates personal liability of its directors to the full extent permitted by Section 102(b)(7) of the General Corporation Law of the State of Delaware, as amended from time to time ("Section 102(b)(7)"). Section 145 permits a corporation to indemnify its directors and officers against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by a third party if such directors or officers acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, indemnification may be made only for expenses actually and reasonably incurred by directors and officers in connection with the defense or settlement of an action or suit and only with respect to matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interest of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant officers or directors are reasonably entitled to indemnify for such expenses despite such adjudication of liability. Section 102(b)(7) provides that a corporation may eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for reach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for willful or negligent conduct in paying dividends or repurchasing stock out of other than lawfully available funds or (iv) for any transaction from which the director derived an improper personal benefit. No such provisions shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. The Company intends to obtain, prior to the effective date of the Registration Statement, insurance against liabilities under the Securities Act of 1933 for the benefit of its officers and directors. Section 7 of the Purchase Agreements (filed as Exhibits 1.1 and 1.2 to this Registration Statement) provide that the Underwriters severally and not jointly will indemnify and hold harmless the Registrant and each director, officer or controlling person of the Registrant from and against any liability caused by any statement or omission in the Registration Statement or Prospectus based upon information furnished to the Registrant by the Underwriters for use therein. Item 15. Recent Sales of Unregistered Securities. Except as hereinafter set forth, there have been no sales of unregistered securities by the Registrant within the past there years. As of January 30, 1997, as part of the original organization of the Company, the Registrant issued to Sonic Financial Corporation 100 shares of Common Stock of the Company (the "Original Shares") in exchange for $500 in cash. II-1 As of June 30, 1997, as part of the Reorganization, the Registrant issued to (i) its Chief Executive Officer, Bruton Smith, 1,657 shares of the Registrant's Class B Common Stock in exchange for all his interests in Town & Country Toyota and Fort Mill Ford, (ii) Sonic Financial Corporation 7,105 shares of its Class B Common Stock in exchange for all its interests in the Original Shares, Town & Country Ford, Fort Mill Ford, Lone Star Ford and Frontier Plymouth-Oldsmobile-Cadillac, (iii) William S. Egan 473 shares of its Class B Common Stock in exchange for all his interest in Town & Country Toyota, and (iv) Bryan Scott Smith 765 shares of its Class B Common Stock in exchange for all his interests in Town & Country Ford and Fort Mill Ford. Also, in connection with the Dyer Acquisition, the Company will issue the Dyer Warrant. In each such transaction, the securities were not or will not be registered under the Securities Act, in reliance upon the exemption from registration provided by Section 4(2) of said Act in view of the sophistication of the foregoing purchasers, their access to material information, the disclosures actually made to them by the Registrant and the absence of any general solicitation or advertising. On or before the consummation of the Offering, the Registrant will issue to nine of its officers and employees, pursuant to the Registrant's Stock Option Plan, options to purchase 562,500 shares of Class A Common Stock in the aggregate and will dividend to holders of its Class B Common Stock 6,240,000 shares of Class B Common Stock in the aggregate. Such securities will not be registered under the Securities Act because such grants and dividend will be without consideration to the Registrant and, consequently, do not constitute offers or sales within the meaning of Section 5 of the Securities Act. Item 16. Exhibits.
Exhibit No. Description - ----------- ---------------------------------------------------------------------------------------------------------- 1.1 Form of U.S. Purchase Agreement 1.2 Form of International Purchase Agreement 3.1* Amended and Restated Certificate of Incorporation of the Company 3.2* Bylaws of the Company 4.1* Form of Class A Common Stock Certificate 4.2* Registration Rights Agreement dated as of June 30, 1997 among the Company, O. Bruton Smith, Bryan Scott Smith, William S. Egan and Sonic Financial Corporation 5.1* Form of opinion letter of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities to be registered 10.1* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Nelson E. Bowers, II or his affiliates 10.2* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Marks Holding Company, Inc. 10.3* Lease Agreement dated as of January 1, 1995 between Lone Star Ford, Inc. and Viking Investment Associates 10.4* Lease Agreement dated as of October 23, 1979 between O. Bruton Smith, Bonnie Smith and Town and Country Ford, Inc. 10.5* North Carolina Warranty Deed dated as of April 24, 1987 between O. Bruton Smith and Bonnie Smith, as Grantors and STC Properties, as Grantee 10.6* Lease dated January 13, 1995 between JAG Properties LLC and Jaguar of Chattanooga LLC 10.7* Lease dated October 18, 1991 by and between Nelson E. Bowers II, Thomas M. Green, Jr., and Infiniti of Chattanooga, Inc. 10.8* Amendment to Lease Agreement dated as of January 13, 1995 among Nelson E. Bowers II, Thomas M. Green, Jr., JAG Properties LLC and Infiniti of Chattanooga, Inc. 10.9* Lease dated March 15, 1996 between Cleveland Properties LLC and Cleveland Chrysler-Plymouth-Jeep-Eagle LLC 10.10* Lease Agreement dated January 2, 1993 among Nelson E. Bowers II, Thomas M. Green, Jr. and Cleveland Village Imports, Inc. 10.11* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing dated August 10, 1972 by Lone Star Ford, Inc. 10.12* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing and Security Agreement dated August 22, 1984 by Town and Country Ford, Inc. 10.13* Wholesale Floor Plan Security Agreement dated October 5, 1990 between Marcus David Corporation (d/b/a Town & Country Toyota) and World Omni Financial Corp. 10.14* Demand Promissory Note dated October 5, 1990 of Marcus David Corporation (d/b/a Town & Country Toyota) in favor of World Omni Financial Corp. 10.15* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 21, 1995 between Cleveland Chrysler-Plymouth-Jeep-Eagle LLC and Chrysler Credit Corporation
II-2
Exhibit No. Description - ----------- ---------------------------------------------------------------------------------------------------------- 10.15a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Cleveland Chrysler Plymouth Jeep Eagle, LLC 10.16* Security Agreement & Master Credit Agreement dated April 21, 1995 between Saturn of Chattanooga, Inc. and Chrysler Credit Corporation 10.16a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Saturn of Chattanooga, Inc. 10.17* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 24, 1995 between Nelson Bowers Ford, L.P. and Chrysler Credit Corporation 10.17a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Nelson Bowers Ford L.P. 10.18* Floor Plan Agreement dated May 6, 1996 between European Motors, LLC and NationsBank, N.A. 10.19* Floor Plan Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A. 10.19a* Security Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A. 10.20* Floor Plan Agreement dated October 17, 1996 between European Motors of Nashville, LLC and NationsBank, N.A. 10.20a* Security Agreement dated October 17, 1996 between European Motors of Nashville, LLC and NationsBank, N.A. 10.21* Floor Plan Agreement dated March 5, 1997 between Nelson Bowers Dodge, LLC (d/b/a Dodge of Chattanooga) and NationsBank, N.A. 10.22* Security Agreement and Master Credit Agreement dated May 15, 1996 between Lake Norman Chrysler Plymouth Jeep Eagle, LLC and Chrysler Financial Corporation 10.22a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Chrysler Plymouth Jeep Eagle, LLC 10.23* Security Agreement & Capital Loan Agreement dated May 15, 1996 between Lake Norman Dodge, Inc and Chrysler Financial Corp. 10.23a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Dodge, Inc. 10.23b* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Dodge, Inc. 10.24* Security Agreement and Master Credit Agreement (Non-Chrysler Corporation Dealer) dated May 15, 1996 between Lake Norman Chrysler Plymouth Jeep Eagle, LLC and Chrysler Financial Corporation 10.24a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Chrysler Plymouth Jeep Eagle, LLC 10.25* Floor Plan Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc. 10.25a* Security Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc. 10.26* Security Agreement and Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 21, 1995 between Cleveland Village Imports, Inc. (d/b/a Cleveland Village Honda, Inc.) and Chrysler Credit Corporation 10.27* Jaguar Credit Corporation Automotive Wholesale Plan Application for Wholesale Financing and Security Agreement dated March 14, 1995 by Jaguar of Chattanooga LLC 10.28* Assignment of Joint Venturer Interest in Chartown dated as of June 30, 1997 among Town and Country Ford, Inc., SMDA LLC and Sonic Financial Corporation 10.29* Form of Employment Agreement between the Company and O. Bruton Smith 10.30* Form of Employment Agreement between the Company and Bryan Scott Smith 10.31* Form of Employment Agreement between the Company and Theodore M. Wright 10.32* Form of Employment Agreement between the Company and Nelson E. Bowers, II 10.33* Tax Allocation Agreement dated as of June 30, 1997 between the Company and Sonic Financial Corporation 10.34* Form of Sonic Automotive, Inc. Stock Option Plan 10.35* Form of Sonic Automotive, Inc. Employee Stock Purchase Plan 10.36* Subscription Agreement dated as of June 30, 1997 between O. Bruton Smith and the Company 10.37* Subscription Agreement dated as of June 30, 1997 between Sonic Financial Corporation and the Company 10.38* Subscription Agreement dated as of June 30, 1997 between Bryan Scott Smith and the Company 10.39* Subscription Agreement dated as of June 30, 1997 between William S. Egan and the Company 10.40* Asset Purchase Agreement dated as of May 27, 1997 by and among Sonic Auto World, Inc., Lake Norman Dodge, Inc., Lake Norman Chrysler-Plymouth-Jeep-Eagle LLC, Quinton M. Gandy and Phil M. Gandy, Jr. (confidential portions omitted and filed separately with the SEC)
II-3
Exhibit No. Description - ----------- ---------------------------------------------------------------------------------------------------------- 10.41* Asset Purchase Agreement dated as of June 24, 1997 by and among Sonic Auto World, Inc., Kia of Chattanooga, LLC, European Motors of Nashville, LLC, European Motors, LLC, Jaguar of Chattanooga LLC, Cleveland Chrysler-Plymouth-Jeep-Eagle LLC, Nelson Bowers Dodge, LLC, Cleveland Village Imports, Inc., Saturn of Chattanooga, Inc., Nelson Bowers Ford, L.P., Nelson E. Bowers II, Jeffrey C. Rachor, and the other shareholders named herein (confidential portions omitted and filed separately with the SEC) 10.41a* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Bowers Acquisition 10.42* Stock Purchase Agreement dated as of July 29, 1997 between Sonic Auto World, Inc. and Ken Marks, Jr., O.K. Marks, Sr. and Michael J. Marks (confidential portions omitted and filed separately with the SEC) 10.43* Asset Purchase Agreement dated as of August 1997 by and among Sonic Automotive, Inc., Dyer & Dyer, Inc. and Richard Dyer (confidential portions omitted and filed separately with the SEC) 10.43a* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Dyer Acquisition 10.44* Security Agreement and Master Credit Agreement dated April 21, 1995 between Cleveland Chrysler Plymouth Jeep Eagle and Chrysler Credit Corporation 10.45* Promissory Note dated as of August 28, 1997 by Sonic Automotive, Inc. in favor of NationsBank, N.A. 10.46* Credit Agreement dated October 15, 1997 by and between Sonic Automotive, Inc. and Ford Motor Credit Company 10.47* Automotive Wholesale Plan Application For Wholesale Financing And Security Agreement dated June 29, 1982 between Ford Motor Credit Company and O.K. Marks Ford, Inc. 10.48 Supplemental Agreement between the Company and Ford Motor Company 10.49 Agreement between Toyota Motors Sales USA and the Company 10.50 Ford Sales and Service Agreement with Town and Country Ford 10.51 Ford Sales and Service Agreement with Lone Star Ford 10.52 Ford Sales and Service Agreement with Fort Mill Ford 10.53 Ford Sales and Service Agreement with Ken Marks Ford 10.54 Ford Sales and Service Agreement with Nelson Bowers Ford 10.55 Chrysler Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge 10.56 Plymouth Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge 10.57 Dodge Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge 10.58 Dodge Sales and Service Agreement with Sonic Dodge, LLC d/b/a Lake Norman Dodge 10.59 Chrysler Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman Chrysler-Plymouth-Jeep-Eagle 10.60 Plymouth Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman Chrysler-Plymouth-Jeep-Eagle 10.61 Jeep Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman Chrysler-Plymouth-Jeep-Eagle 10.62 Chrysler Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle 10.63 Plymouth Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle 10.64 Jeep Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle 10.65 Dodge Sales and Service Agreement with Nelson Bowers Dodge 10.66 Volvo Authorized Retailer Agreement with European Motors, LLC d/b/a Volvo of Chattanooga 10.67 Volvo Sales Agreement with Dyer & Dyer, Inc. 10.68 Toyota Dealer Agreement with Marcus David Corporation d/b/a Town & Country Toyota 21.1 Subsidiaries of the Company 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration Statement) 24* Power of Attorney (included on the signature page to this Registration Statement) 27* Financial Data Schedule 99.1* Consent of Nelson E. Bowers, II 99.2 Reserve Share Program Documentation
- --------------- * Filed previously. II-4 Item 17. Undertakings. The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing or closings specified in the Purchase Agreement, certificates in such denominations and registered in such names as may be required by the Underwriters in order to permit prompt delivery to each purchaser. The undersigned Registrant hereby further undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Charlotte, North Carolina on November 5, 1997. SONIC AUTOMOTIVE, INC. By: /s/______THEODORE M. WRIGHT________ Theodore M. Wright Vice President, Treasurer and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - ------------------------------------------------------ ------------------------------------------- ------------------- /s/* Chairman and Chief Executive Officer November 5, 1997 O. Bruton Smith (principal executive officer) /s/* President, Chief Operating Officer November 5, 1997 Bryan Scott Smith and Director /s/THEODORE M. WRIGHT Vice President, Treasurer, November 5, 1997 Theodore M. Wright Chief Financial Officer (principal financial and accounting officer) and Director /s/* Director November 5, 1997 William R. Brooks *By: /s/THEODORE M. WRIGHT Theodore M. Wright (Attorney-in-fact for each of the persons indicated)
II-6 EXHIBIT INDEX
Sequential Exhibit No. Description Page No. - ----------- ---------------------------------------------------------------------------------------------- ---------- 1.1 Form of U.S. Purchase Agreement 1.2 Form of International Purchase Agreement 3.1* Amended and Restated Certificate of Incorporation of the Company 3.2* Bylaws of the Company 4.1* Form of Class A Common Stock Certificate 4.2* Registration Rights Agreement dated as of June 30, 1997 among the Company, O. Bruton Smith, Bryan Scott Smith, William S. Egan and Sonic Financial Corporation 5.1* Form of opinion letter of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities to be registered 10.1* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Nelson E. Bowers, II or his affiliates 10.2* Form of Lease Agreement to be entered into between the Company (or its subsidiaries) and Marks Holding Company, Inc. 10.3* Lease Agreement dated as of January 1, 1995 between Lone Star Ford, Inc. and Viking Investment Associates 10.4* Lease Agreement dated as of October 23, 1979 between O. Bruton Smith, Bonnie Smith and Town and Country Ford, Inc. 10.5* North Carolina Warranty Deed dated as of April 24, 1987 between O. Bruton Smith and Bonnie Smith, as Grantors and STC Properties, as Grantee 10.6* Lease dated January 13, 1995 between JAG Properties LLC and Jaguar of Chattanooga LLC 10.7* Lease dated October 18, 1991 by and between Nelson E. Bowers II, Thomas M. Green, Jr., and Infiniti of Chattanooga, Inc. 10.8* Amendment to Lease Agreement dated as of January 13, 1995 among Nelson E. Bowers II, Thomas M. Green, Jr., JAG Properties LLC and Infiniti of Chattanooga, Inc. 10.9* Lease dated March 15, 1996 between Cleveland Properties LLC and Cleveland Chrysler- Plymouth-Jeep-Eagle LLC 10.10* Lease Agreement dated January 2, 1993 among Nelson E. Bowers II, Thomas M. Green, Jr. and Cleveland Village Imports, Inc. 10.11* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing dated August 10, 1972 by Lone Star Ford, Inc. 10.12* Ford Motor Credit Company Automotive Wholesale Plan Application for Wholesale Financing and Security Agreement dated August 22, 1984 by Town and Country Ford, Inc. 10.13* Wholesale Floor Plan Security Agreement dated October 5, 1990 between Marcus David Corporation (d/b/a Town & Country Toyota) and World Omni Financial Corp. 10.14* Demand Promissory Note dated October 5, 1990 of Marcus David Corporation (d/b/a Town & Country Toyota) in favor of World Omni Financial Corp. 10.15* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 21, 1995 between Cleveland Chrysler-Plymouth-Jeep-Eagle LLC and Chrysler Credit Corporation 10.15a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Cleveland Chrysler Plymouth Jeep Eagle, LLC 10.16* Security Agreement & Master Credit Agreement dated April 21, 1995 between Saturn of Chattanooga, Inc. and Chrysler Credit Corporation 10.16a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Saturn of Chattanooga, Inc. 10.17* Security Agreement & Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 24, 1995 between Nelson Bowers Ford, L.P. and Chrysler Credit Corporation 10.17a* Promissory Note dated April 21, 1995 in favor of Chrysler Credit Corporation by Nelson Bowers Ford L.P. 10.18* Floor Plan Agreement dated May 6, 1996 between European Motors, LLC and NationsBank, N.A. 10.19* Floor Plan Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A. 10.19a* Security Agreement dated April 11, 1996 between KIA of Chattanooga, LLC and NationsBank, N.A.
Sequential Exhibit No. Description Page No. - ----------- ---------------------------------------------------------------------------------------------- ---------- 10.20* Floor Plan Agreement dated October 17, 1996 between European Motors of Nashville, LLC and NationsBank, N.A. 10.20a* Security Agreement dated October 17, 1996 between European Motors of Nashville, LLC and NationsBank, N.A. 10.21* Floor Plan Agreement dated March 5, 1997 between Nelson Bowers Dodge, LLC (d/b/a Dodge of Chattanooga) and NationsBank, N.A. 10.22* Security Agreement and Master Credit Agreement dated May 15, 1996 between Lake Norman Chrysler Plymouth Jeep Eagle, LLC and Chrysler Financial Corporation 10.22a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Chrysler Plymouth Jeep Eagle, LLC 10.23* Security Agreement & Capital Loan Agreement dated May 15, 1996 between Lake Norman Dodge, Inc and Chrysler Financial Corp. 10.23a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Dodge, Inc. 10.23b* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Dodge, Inc. 10.24* Security Agreement and Master Credit Agreement (Non-Chrysler Corporation Dealer) dated May 15, 1996 between Lake Norman Chrysler Plymouth Jeep Eagle, LLC and Chrysler Financial Corporation 10.24a* Promissory Note dated May 15, 1996 in favor of Chrysler Financial Corporation by Lake Norman Chrysler Plymouth Jeep Eagle, LLC 10.25* Floor Plan Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc. 10.25a* Security Agreement dated September 1, 1996 between NationsBank, N.A. and Dyer & Dyer, Inc. 10.26* Security Agreement and Master Credit Agreement (Non-Chrysler Corporation Dealer) dated April 21, 1995 between Cleveland Village Imports, Inc. (d/b/a Cleveland Village Honda, Inc.) and Chrysler Credit Corporation 10.27* Jaguar Credit Corporation Automotive Wholesale Plan Application for Wholesale Financing and Security Agreement dated March 14, 1995 by Jaguar of Chattanooga LLC 10.28* Assignment of Joint Venturer Interest in Chartown dated as of June 30, 1997 among Town and Country Ford, Inc., SMDA LLC and Sonic Financial Corporation 10.29* Form of Employment Agreement between the Company and O. Bruton Smith 10.30* Form of Employment Agreement between the Company and Bryan Scott Smith 10.31* Form of Employment Agreement between the Company and Theodore M. Wright 10.32* Form of Employment Agreement between the Company and Nelson E. Bowers, II 10.33* Tax Allocation Agreement dated as of June 30, 1997 between the Company and Sonic Financial Corporation 10.34* Form of Sonic Automotive, Inc. Stock Option Plan 10.35* Form of Sonic Automotive, Inc. Employee Stock Purchase Plan 10.36* Subscription Agreement dated as of June 30, 1997 between O. Bruton Smith and the Company 10.37* Subscription Agreement dated as of June 30, 1997 between Sonic Financial Corporation and the Company 10.38* Subscription Agreement dated as of June 30, 1997 between Bryan Scott Smith and the Company 10.39* Subscription Agreement dated as of June 30, 1997 between William S. Egan and the Company 10.40* Asset Purchase Agreement dated as of May 27, 1997 by and among Sonic Auto World, Inc., Lake Norman Dodge, Inc., Lake Norman Chrysler-Plymouth-Jeep-Eagle LLC, Quinton M. Gandy and Phil M. Gandy, Jr. (confidential portions omitted and filed separately with the SEC) 10.41* Asset Purchase Agreement dated as of June 24, 1997 by and among Sonic Auto World, Inc., Kia of Chattanooga, LLC, European Motors of Nashville, LLC, European Motors, LLC, Jaguar of Chattanooga LLC, Cleveland Chrysler-Plymouth-Jeep-Eagle LLC, Nelson Bowers Dodge, LLC, Cleveland Village Imports, Inc., Saturn of Chattanooga, Inc., Nelson Bowers Ford, L.P., Nelson E. Bowers II, Jeffrey C. Rachor, and the other shareholders named herein (confidential portions omitted and filed separately with the SEC) 10.41a* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Bowers Acquisition
Sequential Exhibit No. Description Page No. - ----------- ---------------------------------------------------------------------------------------------- ---------- 10.42* Stock Purchase Agreement dated as of July 29, 1997 between Sonic Auto World, Inc. and Ken Marks, Jr., O.K. Marks, Sr. and Michael J. Marks (confidential portions omitted and filed separately with the SEC) 10.43* Asset Purchase Agreement dated as of August 1997 by and among Sonic Automotive, Inc., Dyer & Dyer, Inc. and Richard Dyer (confidential portions omitted and filed separately with the SEC) 10.43a* Amendment to Asset Purchase Agreement dated October 16, 1997 re: Dyer Acquisition 10.44* Security Agreement and Master Credit Agreement dated April 21, 1995 between Cleveland Chrysler Plymouth Jeep Eagle and Chrysler Credit Corporation 10.45* Promissory Note dated as of August 28, 1997 by Sonic Automotive, Inc. in favor of NationsBank, N.A. 10.46* Credit Agreement dated October 15, 1997 by and between Sonic Automotive, Inc. and Ford Motor Credit Company 10.47* Automotive Wholesale Plan Application For Wholesale Financing And Security Agreement dated June 29, 1982 between Ford Motor Credit Company and O.K. Marks Ford, Inc. 10.48 Supplemental Agreement between the Company and Ford Motor Company 10.49 Agreement between Toyota Motors Sales USA and the Company 10.50 Ford Sales and Service Agreement with Town and Country Ford 10.51 Ford Sales and Service Agreement with Lone Star Ford 10.52 Ford Sales and Service Agreement with Fort Mill Ford 10.53 Ford Sales and Service Agreement with Ken Marks Ford 10.54 Ford Sales and Service Agreement with Nelson Bowers Ford 10.55 Chrysler Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge 10.56 Plymouth Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge 10.57 Dodge Sales and Service Agreement with Fort Mill Chrysler-Plymouth-Dodge 10.58 Dodge Sales and Service Agreement with Sonic Dodge, LLC d/b/a Lake Norman Dodge 10.59 Chrysler Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman Chrysler-Plymouth-Jeep-Eagle 10.60 Plymouth Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman Chrysler-Plymouth-Jeep-Eagle 10.61 Jeep Sales and Service Agreement with Sonic Chrysler-Plymouth-Jeep-Eagle, LLC d/b/a Lake Norman Chrysler-Plymouth-Jeep-Eagle 10.62 Chrysler Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle 10.63 Plymouth Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle 10.64 Jeep Sales and Service Agreement with Cleveland Chrysler-Plymouth-Jeep-Eagle 10.65 Dodge Sales and Service Agreement with Nelson Bowers Dodge 10.66 Volvo Authorized Retailer Agreement with European Motors, LLC d/b/a Volvo of Chattanooga 10.67 Volvo Sales Agreement with Dyer & Dyer, Inc. 10.68 Toyota Dealer Agreement with Marcus David Corporation d/b/a Town & Country Toyota 21.1 Subsidiaries of the Company 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration Statement) 24* Power of Attorney (included on the signature page to this Registration Statement) 27* Financial Data Schedule 99.1* Consent of Nelson E. Bowers, II 99.2 Reserve Share Program Documentation
- --------------- * Filed previously. EX-1 2 EXHIBIT 1.1 - ------------------------------------------------------------------------ EXHIBIT 1.1 SONIC AUTOMOTIVE, INC. A Delaware corporation 5,000,000 Shares of Class A Common Stock U.S. PURCHASE AGREEMENT Dated: November [ ], 1997 ======================================================================== Table of Contents
Page SECTION 1. Representations and Warranties....................................................................4 (a) Representations and Warranties by the Company........................................................4 (i) Compliance with Registration Requirements.....................................................4 (ii) Independent Accountants......................................................................5 (iii) Financial Statements........................................................................5 (iv) No Material Adverse Change in Business.......................................................5 (v) Good Standing of the Company..................................................................6 (vi) Good Standing of Subsidiaries................................................................6 (vii) Capitalization..............................................................................6 (viii) Authorization of Agreement.................................................................7 (ix) Authorization and Description of Securities..................................................7 (x) Absence of Defaults and Conflicts.............................................................7 (xi) Absence of Labor Dispute.....................................................................8 (xii) Absence of Proceedings......................................................................8 (xiii) Accuracy of Exhibits.......................................................................8 (xiv) Possession of Intellectual Property.........................................................8 (xv) Absence of Further Requirements..............................................................8 (xvi) Possession of Licenses and Permits..........................................................9 (xvii) Title to Property..........................................................................9 (xviii) Investment Company Act....................................................................9 (xix) Environmental Laws.........................................................................10 (xx) Registration Rights.........................................................................10 (xxi) Income Taxes...............................................................................10 (xxii) Internal Controls.........................................................................11 (xxiii) Insurance................................................................................11 (xxiv) Offering Material.........................................................................11 (xxv) Suppliers..................................................................................11 (xxvi) Related Party Transactions................................................................11 (xxvii) Reorganization...........................................................................12 (xxviii) Pending Acquisitions....................................................................12 (xxix) Franchise Agreements......................................................................12 (xxx) Credit Agreement...........................................................................12 (b) Officer's Certificates..............................................................................12 SECTION 2. Sale and Delivery to Underwriters; Closing......................................................13 (a) Initial Securities..................................................................................13 (b) Option Securities...................................................................................13 (c) Payment.............................................................................................13 (d) Denominations; Registration.........................................................................14 -1- (e) Appointment of Qualified Independent Underwriter....................................................14 SECTION 3. Covenants of the Company.........................................................................14 (a) Compliance with Securities Regulations and Commission Requests......................................14 (b) Filing of Amendments................................................................................15 (c) Delivery of Registration Statements.................................................................15 (d) Delivery of Prospectus..............................................................................15 (e) Continued Compliance with Securities Laws...........................................................16 (f) Blue Sky Qualifications.............................................................................16 (g) Rule 158............................................................................................16 (h) Use of Proceeds.....................................................................................17 (i) Listing.............................................................................................17 (j) Restriction on Sale of Securities...................................................................17 (k) Reporting Requirements..............................................................................17 (l) Compliance with NASD Rules..........................................................................17 SECTION 4. Payment of Expenses..............................................................................18 (a) Expenses............................................................................................18 (b) Termination of Agreement............................................................................18 SECTION 5. Conditions of U.S. Underwriters' Obligations.....................................................19 (a) Effectiveness of Registration Statement.............................................................19 (b) Opinion of Counsel for Company......................................................................19 (c) Opinion of Counsel for U.S. Underwriters............................................................19 (d) Officers' Certificate...............................................................................20 (e) Accountant's Comfort Letter.........................................................................20 (f) Bring-down Comfort Letter...........................................................................20 (g) Approval of Listing.................................................................................20 (h) No Objection........................................................................................20 (i) Lock-up Agreement...................................................................................21 (j) Acquisition Agreements..............................................................................21 (k) Reorganization......................................................................................21 (l) Manufacturers' Consents.............................................................................21 (m) Credit Agreement...................................................................................21 (n) Subscription Agreements............................................................................21 (o) Purchase of Initial International Securities........................................................21 (p) Additional Documents...............................................................................22 (q) Conditions to Purchase of U.S. Option Securities....................................................22 (r) Termination of Agreement............................................................................23 SECTION 6. Indemnification..................................................................................23 (a) Indemnification of U.S. Underwriters................................................................23 (b) Indemnification of Company, Directors and Officers..................................................24 (c) Actions against Parties; Notification...............................................................24 (d) Settlement without Consent if Failure to Reimburse..................................................25 (e) Indemnification for Reserved Securities.............................................................25 SECTION 7. Contribution.....................................................................................25 -2- SECTION 8. Representations, Warranties and Agreements to Survive Delivery...................................27 SECTION 9. Termination Agreement............................................................................27 (a) Termination; General................................................................................27 (b) Liabilities.........................................................................................27 SECTION 10. Default by One or More of the U.S. Underwriters.................................................27 SECTION 11. Notices.........................................................................................28 SECTION 12. Parties.........................................................................................28 SECTION 13 Governing Law and Time...........................................................................29 SECTION 14 Effect of Headings...............................................................................29 SCHEDULES SCHEDULE A - LIST OF UNDERWRITERS.........................................................SCH A-1 SCHEDULE B - PRICING INFORMATION..........................................................SCH B-1 SCHEDULE C - LIST OF PERSONS SUBJECT TO LOCK-UP...........................................SCH C-1 EXHIBITS...............................................................................................A-1 EXHIBIT A - FORM OF OPINION OF COMPANY'S COUNSEL.............................................A-1 EXHIBIT B - FORM OF LOCK-UP LETTER............................................................B-1 EXHIBIT C - REORGANIZATION DOCUMENTS..........................................................C-1
-3- SONIC AUTOMOTIVE, INC. A Delaware corporation Shares of Class A Common Stock Par Value $0.01 Per Share U.S. PURCHASE AGREEMENT November [ ], 1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated NationsBanc Montgomery Securities, Inc. Wheat, First Securities, Inc. as U.S. Representatives of the several U.S. Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Sonic Automotive, Inc., a Delaware corporation (the "Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters named in Schedule A hereto (collectively, the "U.S. Underwriters", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch, NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. are acting as representatives (in such capacity, the "U.S. Representatives"), with respect to the issue and sale by the Company and the purchase by the U.S Underwriters, acting severally and not jointly, of the respective numbers of shares of Class A Common Stock, par value $0.01 per share, of the Company ("Common Stock") set forth in said Schedule A, and with respect to the grant by the Company to the U.S. Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of 600,000 additional shares of Common Stock to cover over-allotments, if any. The aforesaid -1- 4,000,000 shares of Common Stock (the "Initial U.S. Securities") to be purchased by the U.S. Underwriters and all or any part of the 600,000 shares of Common Stock subject to the option described in Section 2(b) hereof (the "U.S. Option Securities") are hereinafter called, collectively, the "U.S. Securities". It is understood that the Company is concurrently entering into an agreement dated the date hereof (the "International Purchase Agreement") providing for the offering by the Company of an aggregate of 1,000,000 shares of Common Stock (the "Initial International Securities") through arrangements with certain underwriters outside the United States and Canada (the "International Managers") for which Merrill Lynch International, NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. are acting as lead managers (the "Lead Managers") and the grant by the Company to the International Managers, acting severally and not jointly, of an option to purchase all or any part of the International Managers' pro rata portion of up to 150,000 additional shares of Common Stock solely to cover overallotments, if any (the "International Option Securities" and, together with the U.S. Option Securities, the "Option Securities"). The Initial International Securities and the International Option Securities are hereinafter called the "International Securities". It is understood that the Company is not obligated to sell and the U.S. Underwriters are not obligated to purchase, any Initial U.S. Securities unless all of the Initial International Securities are contemporaneously purchased by the International Managers. The U.S. Underwriters and the International Managers are hereinafter collectively called the "Underwriters", the Initial U.S. Securities and the Initial International Securities are hereinafter collectively called the "Initial Securities", and the U.S. Securities, and the International Securities are hereinafter collectively called the "Securities". The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator"). The Company understands that the U.S. Underwriters propose to make a public offering of the U.S. Securities as soon as the U.S. Representatives deem advisable after this Agreement has been executed and delivered. The Company and the U.S. Underwriters agree that up to [ ] shares of the Initial U.S. Securities to be purchased by the U.S. Underwriters (the "Reserved Securities") shall be reserved for sale by the Underwriters to certain eligible employees and persons having business relationships with the Company, as part of the distribution of the Securities by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc. and all other applicable laws, rules and regulations. To the extent that such Reserved Securities are not orally confirmed for purchase by such eligible employees and persons having business relationships with the Company by the end of the first business day after the date of this Agreement, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby. -2- The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-33295) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the U.S. Securities (the "Form of U.S. Prospectus") and one relating to the International Securities (the "Form of International Prospectus"). The Form of U.S. Prospectus is identical to the Form of International Prospectus, except for their respective front cover pages, first page of "Prospectus Summary," "Underwriting" sections and back cover pages. The information included in any such prospectus or in any such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of U.S. Prospectus and the Final Form of International Prospectus in the form first furnished to the Underwriters for use in connection with the offering of the Securities are herein called the "U.S. Prospectus" and the "International Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is relied on, the term "U.S. Prospectus" and "International Prospectus" shall refer to the preliminary U.S. Prospectus dated October 17, 1997 and preliminary International Prospectus dated October 17, 1997, respectively, each together with the applicable Term Sheet and all references in this Agreement to the date of the Prospectuses shall mean the date of the applicable Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company. The Company represents and warrants to each U.S. Underwriter as of the date hereof, as of the Closing Time referred to in -3- Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b), hereof and agrees with each U.S. Underwriter, as follows: (i) Compliance with Registration Requirements. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectuses, any preliminary prospectuses and any supplement thereto or prospectus wrapper prepared in connection therewith, at their respective times of issuance and at the Closing Time, complied and will comply in all material respects with any applicable laws or regulations of foreign jurisdictions in which the Prospectuses and such preliminary prospectuses, as amended or supplemented, if applicable, are distributed in connection with the offer and sale of Reserved Securities. Neither the Prospectuses nor any amendments or supplements thereto (including any prospectus wrapper), at the time the Prospectuses or any amendments or supplements thereto were issued and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectuses shall not be "materially different", as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the U.S. Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement or the U.S. Prospectus. Each preliminary prospectus and the prospectuses filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the -4- electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Independent Accountants. The accountants who certified the financial statements and supporting schedules included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iii) Financial Statements. The financial statements included in the Registration Statement and the Prospectuses, together with the related schedules and notes, present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedules included in the Registration Statement present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectuses present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. The pro forma financial statements and the related notes thereto included in the Registration Statement and the Prospectuses present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (iv) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (v) Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses or as proposed to be conducted and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good -5- standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vi) Good Standing of Subsidiaries. All of the subsidiaries of the Company (each a "Subsidiary") have been duly organized and are validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the Company are the subsidiaries listed on Exhibit 21.1 to the Registration Statement. (vii) Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (viii) Authorization of Agreement. This Agreement and the International Purchase Agreement have been duly authorized, executed and delivered by the Company. (ix) Authorization and Description of Securities. The Securities have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued, fully paid and non-assessable; the Common Stock conforms to all statements relating thereto contained in the Prospectus and such description conforms to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. -6- (x) Absence of Defaults and Conflicts. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, franchise agreement, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the International Purchase Agreement and the consummation of the transactions contemplated in this Agreement, and the International Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use of Proceeds", the reorganization as described in the Prospectuses (the "Reorganization"), entering into the Bank Credit Agreement and consummating the Acquisitions) and compliance by the Company with its obligations under this Agreement and the International Purchase Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments, nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary. (xi) Absence of Labor Dispute. No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any subsidiary's principal suppliers, manufacturers, customers or contractors, which, in any case, may reasonably be expected to result in a Material Adverse Effect. (xii) Absence of Proceedings. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the -7- transactions contemplated in this Agreement and the International Purchase Agreement or the performance by the Company of its obligations hereunder or thereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xiii) Accuracy of Exhibits. There are no contracts or documents which are required to be described in the Registration Statement or the Prospectuses or to be filed as exhibits thereto which have not been so described and filed as required. (xiv) Possession of Intellectual Property. The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xv) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities under this Agreement and the International Purchase Agreement or the consummation of the transactions contemplated by this Agreement and the International Purchase Agreement, except (i) such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations and foreign or state securities or blue sky laws and (ii) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered. (xvi) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental -8- Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xvii) Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectuses or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectuses, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xviii) Investment Company Act.. The Company is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xix) Environmental Laws. Except as described in the Registration Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or -9- proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. (xx) Registration Rights. There are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. (xxi) Income Taxes. All United States federal income tax returns of the Company and its subsidiaries required by law to be filed have been filed (taking into account extensions granted by the applicable federal governmental agency) and all taxes shown by such returns or otherwise assessed, which are due and payable, have been paid, except for such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. All other corporate franchise and income tax returns of the Company and its subsidiaries required to be filed pursuant to applicable foreign, state or local law have been filed, except insofar as the failure to file such returns would not individually or in the aggregate have in a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its subsidiaries, considered together as one enterprise, and all taxes shown on such returns or otherwise assessed which are due and payable have been paid, except for such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Company in respect of any income and corporation tax liability for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined, except to the extent of any inadequacy that would not have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its subsidiaries, considered together as one enterprise. (xxii) Internal Controls. The Company and its subsidiaries maintain (and in the future will maintain) a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxiii) Insurance. The Company and its subsidiaries carry or are entitled to the benefits of insurance, with financially sound and reputable insurers, in such amounts and -10- covering such risks as is generally maintained by companies of established repute engaged in the same or similar business, and all such insurance is in full force and effect. (xxiv) Offering Material. The Company has not distributed and, prior to the later to occur of (i) the Closing Time and (ii) completion of the distribution of the Securities, will not distribute any offering material in connection with the offering and sale of the Securities other than the Registration Statement, any preliminary prospectuses, the Prospectuses or other materials, if any, permitted by the 1933 Act and approved by the Representative(s). (xxv) Suppliers. No supplier of merchandise to the Company or any of its subsidiaries has ceased shipments of merchandise to the Company, other than in the normal and ordinary course of business consistent with past practices, which cessation would not result in a Material Adverse Effect. (xxvi) Related Party Transactions. There are no business relationships or related party transactions of the nature described in Item 404 of Regulation S-K involving the Company or any of businesses being acquired pursuant to the Acquisitions (as defined in the Prospectuses) and any person described in such Item that are required to be disclosed in the Registration Statement and which have not been so disclosed. (xxvii) Reorganization. The representations and warranties of the Company contained in the Reorganization documents (the "Reorganization Agreements") as set forth in Exhibit C hereto are true and correct as of the date hereof and the Reorganization Agreements are enforceable against the Company. All of the transactions contemplated by such agreements have been consummated in accordance with the terms as described therein (and as described in the Prospectuses) and none of such agreements have been amended or modified since the date of their execution. (xxviii) Pending Acquisitions. Each of the agreements (collectively, the "Acquisition Agreements") governing the Acquisitions that are contemplated to occur on or before the Closing Date has been duly authorized, executed and delivered by each of the parties, and constitutes a legally valid and binding obligation of the Company and to the Company's knowledge is enforceable against each such party thereto in accordance with its terms; except as described in the Prospectuses, each of the representations and warranties of the Company and its subsidiaries and, to the best of the Company's knowledge, of each of the other parties set forth in the Acquisition Agreements was true and correct at the time such representations and warranties were made and will be true and correct at and as of the Closing Date and the Company has received manufacturers consents to all of the Acquisitions. (xxix) Franchise Agreements. Each franchise agreement, in each case between a Subsidiary and the applicable Manufacturer (as defined in the Prospectuses) has been duly authorized by the Company and such Subsidiaries, and, as of the Closing Date, the Company shall have obtained all consents, authorizations and approvals from the -11- Manufacturers required to conduct the Acquisitions and the public offering of Common Stock as contemplated hereby except for Jaguar and Kia. (xxx) Credit Agreement. The Company has all necessary corporate power and authority to execute, deliver and perform its obligations under the New Credit Agreement, between the Company and Ford Motor Credit Company (the "New Credit Agreement") and the credit agreement between the Company and NationsBank N.A. (the "NationsBank Credit Agreement"); the New Credit Agreement and the NationsBank Credit Agreement have been duly authorized, executed and delivered by the Company, are in the forms heretofore delivered to you, constitute valid and binding obligations of the Company, enforceable against the Company in accordance with its terms; and at the Closing Date, the Company shall be able to make borrowings thereunder. (b) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Global Coordinator, the U.S. Representatives, or to counsel for the U.S. Underwriters shall be deemed a representation and warranty by the Company to each U.S. Underwriter as to the matters covered thereby. SECTION 2. Sale and Delivery to Underwriters; Closing. (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each U.S. Underwriter, severally and not jointly, and each U.S. Underwriter, severally and not jointly, agrees to purchase from the Company, at the price per share set forth in Schedule B, the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter, plus any additional number of Initial U.S. Securities which such U.S. Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof. (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the U.S. Underwriters, severally and not jointly, to purchase up to an additional 600,000 shares of Common Stock at the price per share set forth in Schedule B, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial U.S. Securities upon notice by the Global Coordinator to the Company setting forth the number of U.S. Option Securities as to which the several U.S. Underwriters are then exercising the option and the time and date of payment and delivery for such U.S. Option Securities. Any such time and date of delivery for the Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the U.S. Option Securities, each of the U.S. Underwriters, acting severally and not jointly, will purchase that proportion of the total number of U.S. Option Securities then being purchased -12- which the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter bears to the total number of Initial U.S. Securities, subject in each case to such adjustments as the Global Coordinator in their discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, NY 10004, or at such other place as shall be agreed upon by the Global Coordinator and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Global Coordinator and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the U.S. Option Securities are purchased by the U.S. Underwriters, payment of the purchase price for, and delivery of certificates for, such U.S. Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator and the Company, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company. Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the U.S. Representatives for the respective accounts of the U.S. Underwriters of certificates for the U.S. Securities to be purchased by them. It is understood that each U.S. Underwriter has authorized the U.S. Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial U.S. Securities and the U.S. Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the U.S. Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial U.S. Securities or the U.S. Option Securities, if any, to be purchased by any U.S. Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such U.S. Underwriter from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, shall be in such denominations and registered in such names as the U.S. Representatives may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, will be made available for examination and packaging by the U.S. Representatives in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. (e) Appointment of Qualified Independent Underwriter. The Company hereby confirms its engagement of Merrill Lynch as, and Merrill Lynch hereby confirms its agreement with the Company to render services as, a "qualified independent underwriter" within the -13- meaning of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. with respect to the offering and sale of the U.S. Securities. Merrill Lynch, solely in its capacity as qualified independent underwriter and not otherwise, is referred to herein as the "Independent Underwriter." SECTION 3. Covenants of the Company. The Company covenants with each U.S. Underwriter as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will give the Global Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectuses, will furnish the Global Coordinator with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the U.S. Underwriters shall object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the U.S. Representatives and counsel for the U.S. Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the U.S. Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the U.S. Underwriters. The copies of the Registration Statement and each amendment thereto -14- furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company has delivered to each U.S. Underwriter, without charge, as many copies of each preliminary prospectus as such U.S. Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each U.S. Underwriter, without charge, during the period when the U.S. Prospectus is required to be delivered under the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"), such number of copies of the U.S. Prospectus (as amended or supplemented) as such U.S. Underwriter may reasonably request. The U.S. Prospectus and any amendments or supplements thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the International Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the U.S. Underwriters or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the U.S. Underwriters such number of copies of such amendment or supplement as the U.S. Underwriters may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the U.S. Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions as the Global Coordinator may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is -15- not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectuses under "Use of Proceeds". (i) Listing. The Company will use its best efforts to effect the listing of the Common Stock (including the Securities) on the New York Stock Exchange (the "NYSE"). (j) Restriction on Sale of Securities. During a period of 180 days from the date of the Prospectus, the Company will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the Securities to be sold hereunder or under the International Purchase Agreement; provided that the Company may sell shares of Class A Common Stock to a third party as consideration for the Company's acquisition from such third party of a car dealership, provided that such third party executes a lock-up agreement on substantially the same terms described above for a period expiring 180 days after the date of the Prospectuses. (k) Reporting Requirements. The Company, during the period when the Prospectus are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder. (l) Compliance with NASD Rules. The Company hereby agrees that it will ensure that the Reserved Securities will be restricted as required by the National -16- Association of Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release. SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters and the transfer of securities between the U.S. Underwriters and the International Managers, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectuses and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities and (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees and expenses incurred in connection with the listing of the Securities on the NYSE and all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, in connection with matters related to the Reserved Securities which are designated by the Company for sale to employees and others having a business relationship with the Company. In addition, the Company will pay all expenses above $90,000 incurred in connection with the lodging, meals and travel costs incurred by or on behalf of Company officers and the Underwriters in connection with the road show presentations to prospective purchasers of the Securities. The Underwriters will pay the first $90,000 of such expenses. (b) Termination of Agreement. If this Agreement is terminated by the U.S. Representatives in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the U.S. Underwriters. -17- SECTION 5. Conditions of U.S. Underwriters' Obligations. The obligations of the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer of the Company or any subsidiary of the Company delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the U.S. Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinion of Counsel for Company. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of Parker, Poe, Adams & Bernstein LLP, counsel for the Company, in form and substance satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters to the effect set forth in Exhibit A hereto and to such further effect as counsel to the U.S. Underwriters may reasonably request. In addition, at Closing Time, the U.S. Representatives shall have received a signed copy of the opinions rendered by Parker, Poe, Adams & Bernstein LLP pursuant to the New Credit Agreement, the NationsBank Credit Agreement and the Acquisition Agreements, accompanied by a letter dated as of the date of such opinions stating that the Underwriters may rely on such opinions as if they were addressed to the Underwriters. (c) Opinion of Counsel for U.S. Underwriters. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of Fried, Frank, Harris, Shriver & Jacobson, counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters with respect to the matters set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising by operation of law or under the charter or by-laws of the Company), (viii) through (x), inclusive, (xii), (xiv) (solely as to the information in the Prospectus under "Description of Capital Stock--Common Stock") and the penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States and the General Corporation Law of the State of -18- Delaware, upon the opinions of counsel satisfactory to the U.S. Representatives which may include counsel to the Company. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (d) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the U.S. Representatives shall have received a certificate of the President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are contemplated by the Commission. (e) Accountant's Comfort Letter. At the time of the execution of this Agreement, the U.S. Representatives shall have received from Deloitte & Touche LLP a letter dated such date, in form and substance satisfactory to the U.S. Representatives, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses. (f) Bring-down Comfort Letter. At Closing Time, the Representatives shall have received from Deloitte & Touche LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (g) Approval of Listing. At Closing Time, the Securities shall have been approved for listing on the NYSE, subject only to official notice of issuance. (h) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. -19- (i) Lock-up Agreements. At the date of this Agreement, the U.S. Representatives shall have received an agreement substantially in the form of Exhibit B hereto signed by the persons listed on Schedule C hereto. (j) Acquisition Agreements. The acquisitions contemplated by the Acquisition Agreements shall have been consummated in accordance with the terms described therein and there have been no amendments or modifications to the Acquisition Agreements since the date of their execution without the consent of the U.S. Representatives and no conditions to the Acquisitions shall have been waived without the consent of the U.S. Representatives. (k) Reorganization. The Reorganization (as described in the Prospectuses) shall have been consummated in accordance with the terms as described therein and in the Reorganization Documents and there have been no amendments or modifications to the Reorganization Documents since the date of their execution. (l) Manufacturers' Consents. The U.S. Representatives shall have received on or as of the Closing Date, as the case may be, a certificate, in a form and substance satisfactory to the U.S. Representative, of two executive officers of the Company certifying that each of the Company and its subsidiaries owns, possesses or has obtained all required consents and approvals from all Manufacturers with respect to the Acquisitions and the public offering of Common Stock hereunder and such consents and approvals shall be in a form satisfactory to the U.S. Representatives other than Jaguar and Kia. (m) Credit Agreement. The New Credit Agreement and the NationsBank Credit Agreement shall have been entered into at or prior to Closing Time. The Company has obtained or assumed floor plan financing for each of the dealerships acquired in the Acquisitions in form and substance satisfactory to the U.S. Representatives and in accordance with the pro forma presentation in the Prospectuses. (n) Subscription Agreements. The subscription agreements and related promissory notes relating to the sale of a 20% interest in the Company's Dyer Volvo and Volvo of Chattanooga dealerships to Richard Dyer and Nelson Bowers, respectively, are substantially in the form provided and there have been no amendments or modifications to such agreements and related notes since the date of their execution. (o) Purchase of Initial International Securities. Contemporaneously with the purchase by the U.S. Underwriters of the Initial U.S. Securities under this Agreement, the International Managers shall have purchased the Initial International Securities under the International Purchase Agreement. (p) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of -20- the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the U.S. Representatives and counsel for the U.S. Underwriters. (q) Conditions to Purchase of U.S. Option Securities. In the event that the U.S. Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the U.S. Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company or any subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the U.S. Representatives shall have received: (i) Officers' Certificate. A certificate, dated such Date of Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery. (ii) Opinion of Counsel for Company. The favorable opinion of Parker, Poe, Adams & Bernstein LLP, counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof. (iii) Opinion of Counsel for U.S. Underwriters. The favorable opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. (iv) Bring-down Comfort Letter. A letter from Deloitte & Touche LLP, in form and substance satisfactory to the U.S. Representatives and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the U.S. Representatives pursuant to Section 5(f) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (r) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of U.S. Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several U.S. Underwriters to purchase the relevant Option Securities, may be terminated by the U.S. Representatives -21- by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. (a) Indemnification of U.S. Underwriters. The Company agrees to indemnify and hold harmless each U.S. Underwriter and each person, if any, who controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto). -22- (b) Indemnification of Company, Directors and Officers. Each U.S. Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary U.S. prospectus or the U.S. Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a) (ii) or (iii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the -23- aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) Indemnification for Reserved Securities. In connection with the offer and sale of the Reserved Securities, the Company agrees, promptly upon a request, in writing to indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, damages and expenses incurred by them as a result of the failure of eligible directors, officers, employees, business associates and related persons of the Company to pay for and accept delivery of Reserved Securities which, by the end of the first business day following the date of this Agreement, were subject to a properly confirmed agreement to purchase. SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the U.S. Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the U.S. Underwriters on the other hand in connection with the offering of the U.S. Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the U.S. Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the U.S. Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the U.S. Securities as set forth on such cover. The relative fault of the Company on the one hand and the U.S. Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the U.S. Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the U.S. Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the U.S. Underwriters were treated as one entity for such purpose) or by any other method of allocation -24- which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the U.S. Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such U.S. Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls a U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such U.S. Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The U.S. Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial U.S. Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any U.S. Underwriter or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the U.S. Underwriters. SECTION 9. Termination of Agreement. (a) Termination; General. The U.S. Representatives may terminate this Agreement, by notice to the Company, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other -25- calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the U.S. Representatives, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission, or the NYSE, if trading generally on the American Stock Exchange or the NYSE or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the U.S. Underwriters. If one or more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting U.S. Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the U.S. Representatives shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of U.S. Securities to be purchased on such date, each of the non-defaulting U.S. Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting U.S. Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the number of U.S. Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the Underwriters to purchase and of the Company to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting U.S. Underwriter. No action taken pursuant to this Section shall relieve any defaulting U.S. Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the U.S. Underwriters to purchase and the Company to sell the -26- relevant U.S. Option Securities, as the case may be, either the U.S. Representatives or the Company shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term " U.S. Underwriter" includes any person substituted for a U.S. Underwriter under this Section 10. SECTION 11. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the U.S. Underwriters shall be directed to the U.S. Representatives at North Tower, World Financial Center, New York, New York 10281-1201, attention of Joel Van Dusen; with a copy to Stuart Gelfond, Esq., Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004; and notices to the Company shall be directed to it at Sonic Automotive, Inc., 5401 East Independence Boulevard, P.O. Box 18747, Charlotte, North Carolina 28218, attention of Theodore Wright; with a copy to Gary C. Ivey, Esq., Parker, Poe, Adams & Bernstein L.L.P, 2500 Charlotte Plaza, Charlotte, North Carolina 28244. SECTION 12. Parties. This Agreement shall each inure to the benefit of and be binding upon the U.S. Underwriters and the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the U.S. Underwriters and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the U.S. Underwriters and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any U.S. Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 14. Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. -27- If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the U.S. Underwriters and the Company in accordance with its terms. Very truly yours, SONIC AUTOMOTIVE, INC By Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED NATIONSBANC MONTGOMERY SECURITIES, INC. WHEAT, FIRST SECURITIES, INC. By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By Authorized Signatory For themselves and as U.S. Representatives of the other U.S. Underwriters named in Schedule A hereto -28- SCHEDULE A
Number of Initial U.S. Name of U.S. Underwriter Securities Merrill Lynch, Pierce, Fenner & Smith Incorporated........................................... NationsBanc Montgomery Securities, Inc............................. Wheat, First Securities, Inc. Total.............................................................. 4,000,000
-1- SCHEDULE B SONIC AUTOMOTIVE, INC. 4,000,000 Shares of Class A Common Stock (Par Value $0.01 Per Share) 1. The initial public offering price per share for the U.S. Securities, determined as provided in said Section 2, shall be $ [ ]. 2. The purchase price per share for the U.S. Securities to be paid by the several U.S. Underwriters shall be $ [ ], being an amount equal to the initial public offering price set forth above less $ [ ] per share; provided that the purchase price per share for any U.S. Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities. -1- SCHEDULE C O. Bruton Smith B. Scott Smith William R. Brooks Sonic Financial Corporation Nelson E. Bowers, II Theodore M. Wright Jeffrey C. Rachor O. Ken Marks, Jr. Ivan A. Tufty William M. Sullivan William S. Egan Richard S. Dyer -1- Exhibit A October [ ], 1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated NationsBanc Montgomery Securities, Inc. Wheat, First Securities, Inc. as U.S. Representatives of the several U.S. Underwriters Merrill Lynch International NationsBanc Montgomery Securities, Inc. Wheat, First Securities, Inc. as Lead Managers of the several Managers c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: We have acted as counsel for Sonic Automotive, Inc., a Delaware corporation (the "Company") in connection with the underwritten public offering of up to 5,750,000 shares (the "Shares") of Class A Common Stock, par value $.01 per share (the "Common Stock"), of the Company, of which 750,000 shares will be sold pursuant to the exercise of an over-allotment option. This opinion is being delivered to you pursuant to (i) Section 5(b) of the U.S. Purchase Agreement between the U.S. Underwriters named in Schedule A thereto and the Company (the " U.S. Purchase Agreement") and (ii) Section 5(b) of the International Purchase Agreement between the International Managers named in Schedule A thereto and the Company (the "International Purchase Agreement " and together with the U.S. Purchase Agreement, the "Purchase Agreements"). All capitalized terms used herein that are defined in, or by reference in, the Purchase Agreement have the meanings assigned to such terms therein or by reference therein, unless otherwise defined herein. -1- In connection with this opinion, we have (i) investigated such questions of law, (ii) examined originals or certified, conformed or reproduction copies of such agreements, instruments, documents and records of the Company, such certificates of public officials and such other documents, and (iii) received such information from officers and representatives of the Company as we have deemed necessary or appropriate for the purposes of this opinion. In all such examinations, we have assumed the legal capacity of all natural persons executing Documents, the genuineness of all signatures, the authenticity of original and certified documents and the conformity to original or certified documents of all copies submitted to us as conformed or reproduction copies. To the extent it may be relevant to the opinions expressed herein, we have assumed that the parties to the Documents other than the Company have the power and authority to enter into and perform such documents and to consummate the transactions contemplated thereby, that the Documents have been duly authorized, executed and delivered by, and constitute legal, valid and binding obligations of such parties enforceable against such parties in accordance with their terms, and that such parties will comply with all of their obligations under the Documents and all laws applicable thereto. Based upon the foregoing, and subject to the limitations, qualifications and assumptions set forth herein, we are of the opinion that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus or as proposed to be conducted and to enter into and perform its obligations under the Purchase Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each state set forth on Schedule A to the opinion. (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the Purchase Agreements or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or options referred to in the Prospectus); the shares of issued and outstanding capital stock have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. -2- (v) The Securities to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to the Purchase Agreements, and, when issued and delivered by the Company pursuant to the Purchase Agreements against payment of the consideration set forth in the Purchase Agreements, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder. (vi) The issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (vii) Each Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and, to the best of our knowledge, is owned by the Company, directly or through subsidiaries, and except as described in the Prospectuses, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity, and except as described in the Prospectuses, none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. (viii) The Purchase Agreements have been duly authorized, executed and delivered by the Company. (ix) The Registration Statement has been declared effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (x) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectuses and each amendment or supplement to the Registration Statement and the Prospectuses as of its effective or issue date (other than the financial statements and supporting schedules included therein or omitted therefrom, as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xi) If Rule 434 has been relied upon, the Prospectuses were not "materially different," as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. -3- (xii) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements, with any applicable requirements of the charter and by-laws of the Company and the requirements of the New York Stock Exchange. (xiii) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any subsidiary is a party, or to which the property of the Company or any subsidiary is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the Purchase Agreements or the performance by the Company of its obligations thereunder. (xiv) The information in the Prospectuses under "Description of Capital Stock--Common Stock", "Business--Governmental Regulation and Environmental Matters ", "Business--Legal Proceedings and Insurance", "Description of Capital Stock--Preferred Stock", and in the Registration Statement under Item 14, to the extent that it constitutes matters of law, summaries of legal matters, the Company's charter and bylaws or legal proceedings, or legal conclusions, has been reviewed by us and is correct in all material respects. (xv) To the best of our knowledge, there are no statutes or regulations that are required to be described in the Prospectuses that are not described as required. (xvi) All descriptions in the Prospectuses of contracts and other documents to which the Company or its subsidiaries are a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. (xvii) To the best of our knowledge, neither the Company nor any subsidiary is in violation of its charter or by-laws and no default by the Company or any subsidiary exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any item that is listed on Exhibit B to this opinion. (xviii) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement or for the offering, issuance, sale or delivery of the Securities. (xix) The execution, delivery and performance of the Purchase Agreements and the consummation of the Acquisitions transactions contemplated in Purchase Agreements -4- (including the issuance and sale of the Securities, and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use Of Proceeds") and the consummation of the Acquisitions and the financing thereof and compliance by the Company with its obligations under the Purchase Agreements do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(x) of the Purchase Agreements) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company or any subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject, nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their respective properties, assets or operations. (xx) To the best of our knowledge, there are no persons, except as disclosed in the Prospectuses, with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. (xxi) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. (xxii) To the best of our knowledge, the Company contained in the Reorganization documents as set forth in Exhibit C of the Purchase Agreements have been duly authorized, executed and delivered by each of the parties thereto and constitute a legally valid and binding obligation of the Company and is enforceable against the Company in accordance with their terms. (xxiii) To the best of our knowledge, each of the Acquisition Agreements governing the acquisitions that are contemplated to occur on or before the Closing Date has been duly authorized, executed and delivered by the Company, and constitutes a legally valid and binding obligation of the Company and is enforceable against the Company in accordance with its terms. (xxiv) To the best of our knowledge, each franchise agreement, in each case between a Subsidiary and the applicable Manufacturer (as defined in the Prospectuses) has been duly authorized by the Company and such Subsidiaries, enforceable in accordance with its terms, and the Company has obtained all consents, authorizations and approvals from the Manufacturers required to conduct the Acquisitions and the public offering of Common Stock as contemplated hereby other than Jaguar and Kia. (xxv) To the best of our knowledge, the Company has all necessary corporate power and authority to execute, deliver and perform its obligations under the New Credit Agreement and the NationsBank Credit Agreement; and the New Credit Agreement and -5- the NationsBank Credit Agreement have been duly authorized, executed and delivered by the Company, are in the form heretofore delivered to you, and constitute valid and binding obligations of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws relating to or affecting enforcement of creditors' rights generally or by general principles of equity. Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable), (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectuses or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectuses were issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Very truly yours PARKER, POE, ADAMS & BERNSTEIN L.L.P. By:_______________________________________ -6- Exhibit B October [ ], 1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated NationsBanc Montgomery Securities, Inc. Wheat, First Securities, Inc. as U.S. Representatives of the several U.S. Underwriters to be named in the within-mentioned U.S. Purchase Agreement Merrill Lynch International NationsBanc Montgomery Securities, Inc. Wheat, First Securities, Inc. as Lead Managers of the several Managers to be named in the within- mentioned International Purchase Agreement c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Re: Proposed Public Offering by Sonic Automotive, Inc. Dear Sirs: The undersigned, a stockholder [and an officer and/or director] of Sonic Automotive, Inc., a Delaware corporation (the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. propose to enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the Company, and Merrill Lynch International, NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. propose to enter into an International Purchase Agreement (the "International Purchase Agreement") with the Company, providing for the public offering of shares (the "Securities") of the Company's Class A -1- common stock, par value $0.01 per share (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder [and an officer and/or director] of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the U.S. Purchase Agreement and with each manager to be named in the International Purchase Agreement that, during a period of 180 days from the date of the U.S. Purchase Agreement and the International Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Very truly yours, Signature: Print Name: -2- EX-1 3 EXHIBIT 1.2 EXHIBIT 1.2 ======================================================================== SONIC AUTOMOTIVE, INC. A Delaware corporation 5,000,000 Shares of Class A Common Stock INTERNATIONAL PURCHASE AGREEMENT Dated: November [ ], 1997 ======================================================================== TABLE OF CONTENTS PAGE SECTION 1. Representations and Warranties................................3 (a) Representations and Warranties by the Company....................3 (i) Compliance with Registration Requirements.................3 (ii) Independent Accountants..................................4 (iii) Financial Statements....................................4 (iv) No Material Adverse Change in Business...................5 (v) Good Standing of the Company..............................5 (vi) Good Standing of Subsidiaries............................5 (vii) Capitalization..........................................6 (viii) Authorization of Agreement.............................6 (ix) Authorization and Description of Securities..............6 (x) Absence of Defaults and Conflicts.........................6 (xi) Absence of Labor Dispute.................................7 (xii) Absence of Proceedings..................................7 (xiii) Accuracy of Exhibits...................................7 (xiv) Possession of Intellectual Property.....................7 (xv) Absence of Further Requirements..........................8 (xvi) Possession of Licenses and Permits......................8 (xvii) Title to Property......................................8 (xviii) Investment Company Act................................8 (xix) Environmental Laws......................................9 (xx) Registration Rights......................................9 (xxi) Income Taxes............................................9 (xxii) Internal Controls.....................................10 (xxiii) Insurance............................................10 (xxiv) Offering Material.....................................10 (xxv) Suppliers..............................................10 (xxvi) Related Party Transactions............................10 (xxvii) Reorganization.......................................10 (xxviii) Pending Acquisitions................................10 (xxix) Franchise Agreements..................................11 (xxx) Credit Agreement.......................................11 (b) Officer's Certificates..........................................11 SECTION 2. Sale and Delivery to International Managers; Closing.........11 (a) Initial Securities..............................................11 (b) Option Securities...............................................11 (c) Payment.........................................................12 (d) Denominations; Registration.....................................13 -1- (e) Appointment of Qualified Independent Underwriter................13 SECTION 3. Covenants of the Company.....................................13 (a) Compliance with Securities Regulations and Commission Requests...........................................13 (b) Filing of Amendments............................................13 (c) Delivery of Registration Statements.............................14 (d) Delivery of Prospectus..........................................14 (e) Continued Compliance with Securities Laws.......................14 (f) Blue Sky Qualifications.........................................15 (g) Rule 158........................................................15 (h) Use of Proceeds.................................................15 (i) Listing.........................................................15 (j) Restriction on Sale of Securities...............................15 (k) Reporting Requirements..........................................16 (l) Compliance with NASD Rules......................................16 SECTION 4. Payment of Expenses..........................................16 (a) Expenses........................................................16 (b) Termination of Agreement........................................17 SECTION 5. Conditions of International Managers' Obligations............17 (a) Effectiveness of Registration Statement........................17 (b) Opinion of Counsel for Company.................................17 (c) Opinion of Counsel for International Managers..................18 (d) Officers' Certificate..........................................18 (e) Accountant's Comfort Letter....................................18 (f) Bring-down Comfort Letter.....................................18 (g) Approval of Listing............................................19 (h) No Objection...................................................19 (i) Lock-up Agreement.............................................19 (j) Acquisition Agreements........................................19 (k) Reorganization.................................................19 (l) Manufacturers' Consents.......................................19 (m) Credit Agreement................................................19 (n) Subscription Agreements........................................19 (o) Purchase of Initial International Securities...................19 (o) Additional Documents...........................................20 (p) Conditions to Purchase of International Option Securities......20 (q) Termination of Agreement.......................................20 SECTION 6. Indemnification..............................................21 (a) Indemnification of International Managers.......................21 (b) Indemnification of Company, Directors and Officers..............22 (c) Actions against Parties; Notification...........................22 (d) Settlement without Consent if Failure to Reimburse..............22 (e) Indemnification for Reserved Securities.........................23 SECTION 7. Contribution.................................................23 -2- SECTION 8. Representations, Warranties and Agreements to Survive Delivery...........................................24 SECTION 9. Termination Agreement........................................24 (a) Termination; General............................................24 (b) Liabilities.....................................................25 SECTION 10. Default by One or More of the International Managers........25 SECTION 11. Notices.....................................................26 SECTION 12. Parties.....................................................26 SECTION 13 Governing Law and Time.......................................26 SECTION 14 Effect of Headings...........................................26 SCHEDULES SCHEDULE A - LIST OF INTERNATIONAL MANAGERS...........SCH A-1 SCHEDULE B - PRICING INFORMATION......................SCH B-1 SCHEDULE C - LIST OF PERSONS SUBJECT TO LOCK-UP.......SCH C-1 EXHIBITS.......................................................... A-1 EXHIBIT A - FORM OF OPINION OF COMPANY'S COUNSEL.........A-1 EXHIBIT B - FORM OF LOCK-UP LETTER........................B-1 EXHIBIT C - REORGANIZATION DOCUMENTS......................C-1 -3- SONIC AUTOMOTIVE, INC. A Delaware corporation Shares of Class A Common Stock Par Value $0.01 Per Share INTERNATIONAL PURCHASE AGREEMENT November [ ], 1997 MERRILL LYNCH INTERNATIONAL NationsBanc Montgomery Securities, Inc. Wheat, First Securities, Inc. as Lead Managers of the several International Managers c/o Merrill Lynch International Ropemaker Place 25 Ropemaker Street London ECSY 9LY ENGLAND Ladies and Gentlemen: Sonic Automotive, Inc., a Delaware corporation (the "Company"), confirms its agreement with Merrill Lynch International ("Merrill Lynch") and each of the other international underwriters named in Schedule A hereto (collectively, the "International Managers", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch, NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. are acting as representatives (in such capacity, the "Lead Managers"), with respect to the issue and sale by the Company and the purchase by the International Managers, acting severally and not jointly, of the respective numbers of shares of Class A Common Stock, par value $0.01 per share, of the Company ("Common Stock") set forth in said Schedule A, and with respect to the grant by the Company to the International Managers, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of 150,000 additional shares of Common Stock to cover over-allotments, if any. The aforesaid 1,000,000 shares of Common Stock (the "Initial International Securities") to be purchased by the International Managers and all or any part of the 150,000 shares of Common Stock subject to the option described in Section 2(b) hereof (the "International Option Securities") are hereinafter called, collectively, the "International Securities". -1- It is understood that the Company is concurrently entering into an agreement dated the date hereof (the "U.S. Purchase Agreement") providing for the offering by the Company of an aggregate of 4,000,000 shares of Common Stock (the "Initial U.S. Securities") through arrangements with certain underwriters in the United States (the "U.S. Underwriters") for which Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. are acting as representatives (the "U.S. Representatives") and the grant by the Company to the U.S. Underwriters, acting severally and not jointly, of an option to purchase all or any part of the U.S. Underwriters' pro rata portion of up to 600,000 additional shares of Common Stock solely to cover overallotments, if any (the "U.S. Option Securities" and, together with the International Option Securities, the "Option Securities"). The Initial U.S. Securities and the U.S. Option Securities are hereinafter called the "U.S. Securities". It is understood that the Company is not obligated to sell and the International Managers are not obligated to purchase, any Initial International Securities unless all of the Initial U.S. Securities are contemporaneously purchased by the U.S. Underwriters. The U.S. Underwriters and the International Managers are hereinafter collectively called the "Underwriters", the Initial U.S. Securities and the Initial International Securities are hereinafter collectively called the "Initial Securities", and the U.S. Securities, and the International Securities are hereinafter collectively called the "Securities". The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator"). The Company understands that the International Managers propose to make a public offering of the International Securities as soon as the Lead Managers deem advisable after this Agreement has been executed and delivered. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-33295) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the U.S. Securities (the "Form of U.S. Prospectus") and one relating to the International Securities (the "Form of International Prospectus"). The Form of International Prospectus is identical to the Form of U.S. Prospectus, except for their respective front cover pages, first page of "Prospectus Summary," "Underwriting" sections and back cover pages. The information included in any such prospectus or in any such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the -2- time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of U.S. Prospectus and the Final Form of International Prospectus in the form first furnished to the Underwriters for use in connection with the offering of the Securities are herein called the "U.S. Prospectus" and the "International Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is relied on, the term "U.S. Prospectus" and "International Prospectus" shall refer to the preliminary U.S. Prospectus dated October 23, 1997 and preliminary International Prospectus dated October 23, 1997, respectively, each together with the applicable Term Sheet and all references in this Agreement to the date of the Prospectuses shall mean the date of the applicable Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company. The Company represents and warrants to each International Manager as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b), hereof and agrees with each International Manager, as follows: (i) Compliance with Registration Requirements. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to -3- be stated therein or necessary to make the statements therein not misleading, and the Prospectuses, any preliminary prospectuses and any supplement thereto or prospectus wrapper prepared in connection therewith, at their respective times of issuance and at the Closing Time, complied and will comply in all material respects with any applicable laws or regulations of foreign jurisdictions in which the Prospectuses and such preliminary prospectuses, as amended or supplemented, if applicable, are distributed in connection with the offer and sale of Reserved Securities. Neither the Prospectuses nor any amendments or supplements thereto (including any prospectus wrapper), at the time the Prospectuses or any amendments or supplements thereto were issued and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectuses shall not be "materially different", as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the Prospectuses made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through the Lead Managers or the U.S. Representatives expressly for use in the Registration Statement or the Prospectuses. Each preliminary prospectus and the prospectuses filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Independent Accountants. The accountants who certified the financial statements and supporting schedules included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iii) Financial Statements. The financial statements included in the Registration Statement and the Prospectuses, together with the related schedules and notes, present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedules included in the Registration Statement present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectuses present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial -4- statements included in the Registration Statement. The pro forma financial statements and the related notes thereto included in the Registration Statement and the Prospectuses present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (iv) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (v) Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses or as proposed to be conducted and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vi) Good Standing of Subsidiaries. All of the subsidiaries of the Company (each a "Subsidiary") have been duly organized and are validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the Company are the subsidiaries listed on Exhibit 21.1 to the Registration Statement. -5- (vii) Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (viii) Authorization of Agreement. This Agreement and the U.S. Purchase Agreement have been duly authorized, executed and delivered by the Company. (ix) Authorization and Description of Securities. The Securities have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued, fully paid and non-assessable; the Common Stock conforms to all statements relating thereto contained in the Prospectus and such description conforms to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (x) Absence of Defaults and Conflicts. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, franchise agreement, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the U.S. Purchase Agreement and the consummation of the transactions contemplated in this Agreement, and the U.S. Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use of Proceeds", the reorganization as described in the Prospectuses (the "Reorganization"), entering into the Bank Credit Agreement and consummating the Acquisitions) and compliance by the Company with its obligations under this Agreement and the U.S. Purchase Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments, nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or -6- foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary. (xi) Absence of Labor Dispute. No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any subsidiary's principal suppliers, manufacturers, customers or contractors, which, in any case, may reasonably be expected to result in a Material Adverse Effect. (xii) Absence of Proceedings. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement and the U.S. Purchase Agreement or the performance by the Company of its obligations hereunder or thereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xiii) Accuracy of Exhibits. There are no contracts or documents which are required to be described in the Registration Statement or the Prospectuses or to be filed as exhibits thereto which have not been so described and filed as required. (xiv) Possession of Intellectual Property. The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. -7- (xv) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities under this Agreement and the U.S. Purchase Agreement or the consummation of the transactions contemplated by this Agreement and the U.S. Purchase Agreement, except (i) such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations and foreign or state securities or blue sky laws and (ii) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered. (xvi) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xvii) Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectuses or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectuses, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xviii) Investment Company Act. The Company is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). -8- (xix) Environmental Laws. Except as described in the Registration Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. (xx) Registration Rights. There are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. (xxi) Income Taxes. All United States federal income tax returns of the Company and its subsidiaries required by law to be filed have been filed (taking into account extensions granted by the applicable federal governmental agency) and all taxes shown by such returns or otherwise assessed, which are due and payable, have been paid, except for such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. All other corporate franchise and income tax returns of the Company and its subsidiaries required to be filed pursuant to applicable foreign, state or local law have been filed, except insofar as the failure to file such returns would not individually or in the aggregate have in a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its subsidiaries, considered together as one enterprise, and all taxes shown on such returns or otherwise assessed which are due and payable have been paid, except for such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Company in respect of any income and corporation tax liability for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined, except to the extent of any inadequacy that would not have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or -9- business prospects of the Company and its subsidiaries, considered together as one enterprise. (xxii) Internal Controls. The Company and its subsidiaries maintain (and in the future will maintain) a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxiii) Insurance. The Company and its subsidiaries carry or are entitled to the benefits of insurance, with financially sound and reputable insurers, in such amounts and covering such risks as is generally maintained by companies of established repute engaged in the same or similar business, and all such insurance is in full force and effect. (xxiv) Offering Material. The Company has not distributed and, prior to the later to occur of (i) the Closing Time and (ii) completion of the distribution of the Securities, will not distribute any offering material in connection with the offering and sale of the Securities other than the Registration Statement, any preliminary prospectuses, the Prospectuses or other materials, if any, permitted by the 1933 Act and approved by the Lead Managers. (xxv) Suppliers. No supplier of merchandise to the Company or any of its subsidiaries has ceased shipments of merchandise to the Company, other than in the normal and ordinary course of business consistent with past practices, which cessation would not result in a Material Adverse Effect. (xxvi) Related Party Transactions. There are no business relationships or related party transactions of the nature described in Item 404 of Regulation S-K involving the Company or any of businesses being acquired pursuant to the Acquisitions (as defined in the Prospectuses) and any person described in such Item that are required to be disclosed in the Registration Statement and which have not been so disclosed. (xxvii) Reorganization. The representations and warranties of the Company contained in the Reorganization documents (the "Reorganization Agreements") as set forth in Exhibit C hereto are true and correct as of the date hereof and the Reorganization Agreements are enforceable against the Company. All of the transactions contemplated by such agreements have been consummated in accordance with the terms as described therein (and as described in the Prospectuses) and none of such agreements have been amended or modified since the date of their execution. (xxviii) Pending Acquisitions. Each of the agreements (collectively, the "Acquisition Agreements") governing the Acquisitions that are contemplated to occur on -10- or before the Closing Date has been duly authorized, executed and delivered by each of the parties, and constitutes a legally valid and binding obligation of the Company and to the Company's knowledge is enforceable against each such party thereto in accordance with its terms; except as described in the Prospectuses, each of the representations and warranties of the Company and its subsidiaries and, to the best of the Company's knowledge, of each of the other parties set forth in the Acquisition Agreements was true and correct at the time such representations and warranties were made and will be true and correct at and as of the Closing Date and the Company has received manufacturers consents to all of the Acquisitions. (xxix) Franchise Agreements. Each franchise agreement, in each case between a Subsidiary and the applicable Manufacturer (as defined in the Prospectuses) has been duly authorized by the Company and such Subsidiaries, and, as of the Closing Date, the Company shall have obtained all consents, authorizations and approvals from the Manufacturers required to conduct the Acquisitions and the public offering of Common Stock as contemplated hereby except for Jaguar and Kia. (xxx) Credit Agreement. The Company has all necessary corporate power and authority to execute, deliver and perform its obligations under the New Credit Agreement, between the Company and Ford Motor Credit Company (the "New Credit Agreement") and the credit agreement between the Company and NationsBank N.A. (the "NationsBank Credit Agreement"); the New Credit Agreement and the NationsBank Credit Agreement have been duly authorized, executed and delivered by the Company, are in the forms heretofore delivered to you, constitute valid and binding obligations of the Company, enforceable against the Company in accordance with its terms; and at the Closing Date, the Company shall be able to make borrowings thereunder. (b) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Global Coordinator, the Lead Managers, or to counsel for the International Managers shall be deemed a representation and warranty by the Company to each International Managers as to the matters covered thereby. SECTION 2. Sale and Delivery to International Managers; Closing. (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each International Manager, severally and not jointly, and each International Manager, severally and not jointly, agrees to purchase from the Company, at the price per share set forth in Schedule B, the number of Initial International Securities set forth in Schedule A opposite the name of such International Manager, plus any additional number of Initial International Securities which such International Manager may become obligated to purchase pursuant to the provisions of Section 10 hereof. (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the International Managers, severally and not jointly, to purchase up to an -11- additional 150,000 shares of Common Stock at the price per share set forth in Schedule B, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial International Securities but not payable on the International Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial International Securities upon notice by the Global Coordinator to the Company setting forth the number of International Option Securities as to which the several International Managers are then exercising the option and the time and date of payment and delivery for such International Option Securities. Any such time and date of delivery for the International Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the International Option Securities, each of the International Managers, acting severally and not jointly, will purchase that proportion of the total number of International Option Securities then being purchased which the number of Initial International Securities set forth in Schedule A opposite the name of such International Managers bears to the total number of Initial International Securities, subject in each case to such adjustments as the Global Coordinator in their discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, NY 10004, or at such other place as shall be agreed upon by the Global Coordinator and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Global Coordinator and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the International Option Securities are purchased by the International Managers, payment of the purchase price for, and delivery of certificates for, such International Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator and the Company, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company. Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the Lead Managers for the respective accounts of the International Managers of certificates for the International Securities to be purchased by them. It is understood that each International Manager has authorized the Lead Manager, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial International Securities and the International Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the International Managers, may (but shall not be obligated to) make payment of the purchase price for the Initial International Securities or the International Option Securities, if any, to be purchased by any International Managers whose funds have not been received by the Closing -12- Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such International Managers from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial International Securities and the International Option Securities, if any, shall be in such denominations and registered in such names as the Lead Managers may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial International Securities and the International Option Securities, if any, will be made available for examination and packaging by the Lead Managers in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. (e) Appointment of Qualified Independent Underwriter. The Company hereby confirms its engagement of Merrill Lynch as, and Merrill Lynch hereby confirms its agreement with the Company to render services as, a "qualified independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. with respect to the offering and sale of the U.S. Securities. Merrill Lynch, solely in its capacity as qualified independent underwriter and not otherwise, is referred to herein as the "Independent Underwriter." SECTION 3. Covenants of the Company. The Company covenants with each International Manager as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will give the Global Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement -13- or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectuses, will furnish the Global Coordinator with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the International Managers shall object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the Lead Managers and counsel for the International Managers, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the Lead Managers, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the International Managers. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectus. The Company has delivered to each International Manager, without charge, as many copies of each preliminary prospectus as such International Manager reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each International Manager, without charge, during the period when the International Prospectus is required to be delivered under the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"), such number of copies of the International Prospectus (as amended or supplemented) as such International Manager may reasonably request. The International Prospectus and any amendments or supplements thereto furnished to the International Managers will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the U.S. Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the International Managers or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such -14- statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the International Managers such number of copies of such amendment or supplement as the International Managers may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the International Managers, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions as the Global Coordinator may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectuses under "Use of Proceeds". (i) Listing. The Company will use its best efforts to effect the listing of the Common Stock (including the Securities) on the New York Stock Exchange (the "NYSE"). (j) Restriction on Sale of Securities. During a period of 180 days from the date of the Prospectus, the Company will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the Securities to be sold hereunder or under the International Purchase Agreement; provided that the Company may sell -15- shares of Class A Common Stock to a third party as consideration for the Company's acquisition from such third party of a car dealership, provided that such third party executes a lock-up agreement on substantially the same terms described above for a period expiring 180 days after the date of the Prospectuses. (k) Reporting Requirements. The Company, during the period when the Prospectus are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder. (l) Compliance with NASD Rules. The Company hereby agrees that it will ensure that the Reserved Securities will be restricted as required by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release. SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters and the transfer of securities between the U.S. Underwriters and the International Managers, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectuses and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities and (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees and expenses incurred in connection with the listing of the Securities on the NYSE and all costs and expenses of the Underwriters, including the fees and disbursements of counsel -16- for the Underwriters, in connection with matters related to the Reserved Securities which are designated by the Company for sale to employees and others having a business relationship with the Company. In addition, the Company will pay all expenses above $90,000 incurred in connection with the lodging, meals and travel costs incurred by or on behalf of Company officers and the Underwriters in connection with the road show presentations to prospective purchasers of the Securities. The Underwriters will pay the first $90,000 of such expenses. (b) Termination of Agreement. If this Agreement is terminated by the Lead Managers in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall reimburse the International Managers for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the International Managers. SECTION 5 Conditions of International Managers' Obligations. The obligations of the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer of the Company or any subsidiary of the Company delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the International Managers. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinion of Counsel for Company. At Closing Time, the Lead Managers shall have received the favorable opinion, dated as of Closing Time, of Parker, Poe, Adams & Bernstein LLP, counsel for the Company, in form and substance satisfactory to counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers to the effect set forth in Exhibit A hereto and to such further effect as counsel to the International Managers may reasonably request. In addition, at Closing Time, the Lead Managers shall have received a signed copy of the opinions rendered by Parker, Poe, Adams & Bernstein LLP pursuant to the New Credit Agreement, the NationsBank Credit Agreement and the Acquisition Agreements, accompanied by a letter dated as of the date of such opinions stating that the Underwriters may rely on such opinions as if they were addressed to the Underwriters. -17- (c) Opinion of Counsel for International Managers. At Closing Time, the Lead Managers shall have received the favorable opinion, dated as of Closing Time, of Fried, Frank, Harris, Shriver & Jacobson, counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers with respect to the matters set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising by operation of law or under the charter or by-laws of the Company), (viii) through (x), inclusive, (xii), (xiv) (solely as to the information in the Prospectus under "Description of Capital Stock--Common Stock") and the penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to the Lead Managers which may include counsel to the Company. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (d) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Lead Managers shall have received a certificate of the President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are contemplated by the Commission. (e) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Lead Managers shall have received from Deloitte & Touche LLP a letter dated such date, in form and substance satisfactory to the Lead Managers, together with signed or reproduced copies of such letter for each of the other International Managers containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses. (f) Bring-down Comfort Letter. At Closing Time, the Lead Managers shall have received from Deloitte & Touche LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. -18- (g) Approval of Listing. At Closing Time, the Securities shall have been approved for listing on the NYSE, subject only to official notice of issuance. (h) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (i) Lock-up Agreement. At the date of this Agreement, the Lead Managers shall have received an agreement substantially in the form of Exhibit B hereto signed by the persons listed on Schedule C hereto. (j) Acquisition Agreements. The acquisitions contemplated by the Acquisition Agreements shall have been consummated in accordance with the terms described therein and there have been no amendments or modifications to the Acquisition Agreements since the date of their execution without the consent of the Lead Managers and no conditions to the Acquisitions shall have been waived without the consent of the Lead Managers. (k) Reorganization. The Reorganization (as described in the Prospectuses) shall have been consummated in accordance with the terms as described therein and in the Reorganization Documents and there have been no amendments or modifications to the Reorganization Documents since the date of their execution. (l) Manufacturers' Consents. The Lead Managers shall have received on or as of the Closing Date, as the case may be, a certificate, in a form and substance satisfactory to the Lead Managers, of two executive officers of the Company certifying that each of the Company and its subsidiaries owns, possesses or has obtained all required consents and approvals from all Manufacturers with respect to the Acquisitions and the public offering of Common Stock hereunder and such consents and approvals shall be in a form satisfactory to the Lead Managers other than Jaguar and Kia. (m) Credit Agreement. The New Credit Agreement and the NationsBank Credit Agreement shall have been entered into at or prior to Closing Time. The Company has obtained or assumed floor plan financing for each of the dealerships acquired in the Acquisitions in form and substance satisfactory to the Lead Managers and in accordance with the pro forma presentation in the Prospectuses. (n) Subscription Agreements. The subscription agreements and related promissory notes relating to the sale of a 20% interest in the Company's Dyer Volvo and Volvo of Chattanooga dealerships to Richard Dyer and Nelson Bowers, respectively, are substantially in the form provided and there have been no amendments or modifications to such agreements and related notes since the date of their execution. (o) Purchase of Initial International Securities. Contemporaneously with the purchase by the International Managers of the Initial International Securities under this Agreement, the U.S. Underwriters shall have purchased the Initial U.S. Securities under the U.S. Purchase Agreement. -19- (p) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Lead Managers and counsel for the International Managers. (q) Conditions to Purchase of International Option Securities. In the event that the International Managers exercise their option provided in Section 2(b) hereof to purchase all or any portion of the International Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company or any subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Lead Managers shall have received: (i) Officers' Certificate. A certificate, dated such Date of Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery. (ii) Opinion of Counsel for Company. The favorable opinion of Parker, Poe, Adams & Bernstein LLP, counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof. (iii) Opinion of Counsel for International Managers. The favorable opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel for the International Managers, dated such Date of Delivery, relating to the International Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. (iv) Bring-down Comfort Letter. A letter from Deloitte & Touche LLP, in form and substance satisfactory to the Lead Managers and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Lead Managers pursuant to Section 5(f) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (r) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of International Option Securities on a Date of Delivery -20- which is after the Closing Time, the obligations of the several International Managers to purchase the relevant International Option Securities, may be terminated by the Lead Managers by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. (a) Indemnification of International Managers. The Company agrees to indemnify and hold harmless each International Manager and each person, if any, who controls any International Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Lead Managers or the U.S. Representatives expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the International Prospectus (or any amendment or supplement thereto). -21- (b) Indemnification of Company, Directors and Officers. Each International Manager severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary International Prospectus or the International Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such International Manager through the Lead Managers expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the International Prospectus (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a) (ii) or (iii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying -22- party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) Indemnification for Reserved Securities. In connection with the offer and sale of the Reserved Securities, the Company agrees, promptly upon a request, in writing to indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, damages and expenses incurred by them as a result of the failure of eligible directors, officers, employees, business associates and related persons of the Company to pay for and accept delivery of Reserved Securities which, by the end of the first business day following the date of this Agreement, were subject to a properly confirmed agreement to purchase. SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the International Managers on the other hand from the offering of the International Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the International Managers on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the International Managers on the other hand in connection with the offering of the International pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the International Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the International Managers, in each case as set forth on the cover of the International Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the International Securities as set forth on such cover. The relative fault of the Company on the one hand and the International Managers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the International Managers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the International Managers agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if International Managers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal -23- or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no International Managers shall be required to contribute any amount in excess of the amount by which the total price at which the International Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such International Managers has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an International Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such International Manager, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The International Managers' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial International Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any International Manager or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the International Managers. SECTION 9. Termination of Agreement. (a) Termination; General. The Lead Managers may terminate this Agreement, by notice to the Company, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the International Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Lead Managers, impracticable to market the Securities or to enforce contracts -24- for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission, or the NYSE, if trading generally on the American Stock Exchange or the NYSE or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the International Managers. If one or more of the International Managers shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Lead Managers shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting International Managers, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Lead Managers shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of International Securities to be purchased on such date, each of the non-defaulting International Managers shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting International Managers, or (b) if the number of Defaulted Securities exceeds 10% of the number of International Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the International Managers to purchase and of the Company to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting International Manager. No action taken pursuant to this Section shall relieve any defaulting International Manager from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the International Manager to purchase and the Company to sell the relevant International Option Securities, as the case may be, either the Lead Managers or the Company shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used -25- herein, the term "International Manager" includes any person substituted for an International Manager under this Section 10. SECTION 11. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the International Managers shall be directed to the Lead Managers at North Tower, World Financial Center, New York, New York 10281-1201, attention of Joel Van Dusen; with a copy to Stuart Gelfond, Esq., Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004; and notices to the Company shall be directed to it at Sonic Automotive, Inc., 5401 East Independence Boulevard, P.O. Box 18747, Charlotte, North Carolina 28218, attention of Theodore Wright; with a copy to Gary C. Ivey, Esq., Parker, Poe, Adams & Bernstein L.L.P, 2500 Charlotte Plaza, Charlotte, North Carolina 28244. SECTION 12. Parties. This Agreement shall each inure to the benefit of and be binding upon the International Managers and the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the International Managers and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the International Managers and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any International Managers shall be deemed to be a successor by reason merely of such purchase. SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 14. Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. -26- If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the U.S. Underwriters and the Company in accordance with its terms. Very truly yours, SONIC AUTOMOTIVE, INC By ---------------------------------------- Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH INTERNATIONAL NATIONSBANC MONTGOMERY SECURITIES, INC. WHEAT, FIRST SECURITIES, INC. By: MERRILL LYNCH INTERNATIONAL By -------------------------------- Authorized Signatory For themselves and as Lead Managers of the other International Managers named in Schedule A hereto -27- SCHEDULE A Number of Initial Name of International Manager International Securities Merrill International................................. NationsBanc Montgomery Securities, Inc................ Wheat, First Securities, Inc. Total................................................. --------- 1,000,000 ========= -1- SCHEDULE B SONIC AUTOMOTIVE, INC. 1,000,000 Shares of Class A Common Stock (Par Value $0.01 Per Share) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $ [ ]. 2. The purchase price per share for the International Securities to be paid by the several International Managers shall be $ [ ], being an amount equal to the initial public offering price set forth above less $ [ ] per share; provided that the purchase price per share for any International Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial International Securities but not payable on the International Option Securities. -1- SCHEDULE C O. Bruton Smith B. Scott Smith William R. Brooks Sonic Financial Corporation Nelson E. Bowers, II Theodore M. Wright Jeffrey C. Rachor O. Ken Marks, Jr. Ivan A. Tufty William M. Sullivan William S. Egan Richard S. Dyer -1- Exhibit A October [ ], 1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated NationsBanc Montgomery Securities, Inc. Wheat, First Securities, Inc. as U.S. Representatives of the several U.S. Underwriters Merrill Lynch International NationsBanc Montgomery Securities, Inc. Wheat, First Securities, Inc. as Lead Managers of the several Managers c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: We have acted as counsel for Sonic Automotive, Inc., a Delaware corporation (the "Company") in connection with the underwritten public offering of up to 5,750,000 shares (the "Shares") of Class A Common Stock, par value $.01 per share (the "Common Stock"), of the Company, of which 750,000 shares will be sold pursuant to the exercise of an over-allotment option. This opinion is being delivered to you pursuant to (i) Section 5(b) of the U.S. Purchase Agreement between the U.S. Underwriters named in Schedule A thereto and the Company (the "U.S. Purchase Agreement") and (ii) Section 5(b) of the International Purchase Agreement between the International Managers named in Schedule A thereto and the Company (the "International Purchase Agreement " and together with the U.S. Purchase Agreement, the "Purchase Agreements"). All capitalized terms used herein that are defined in, or by reference in, the Purchase Agreement have the meanings assigned to such terms therein or by reference therein, unless otherwise defined herein. In connection with this opinion, we have (i) investigated such questions of law, (ii) examined originals or certified, conformed or reproduction copies of such agreements, instruments, documents and records of the Company, such certificates of public officials and such -1 other documents, and (iii) received such information from officers and representatives of the Company as we have deemed necessary or appropriate for the purposes of this opinion. In all such examinations, we have assumed the legal capacity of all natural persons executing Documents, the genuineness of all signatures, the authenticity of original and certified documents and the conformity to original or certified documents of all copies submitted to us as conformed or reproduction copies. To the extent it may be relevant to the opinions expressed herein, we have assumed that the parties to the Documents other than the Company have the power and authority to enter into and perform such documents and to consummate the transactions contemplated thereby, that the Documents have been duly authorized, executed and delivered by, and constitute legal, valid and binding obligations of such parties enforceable against such parties in accordance with their terms, and that such parties will comply with all of their obligations under the Documents and all laws applicable thereto. Based upon the foregoing, and subject to the limitations, qualifications and assumptions set forth herein, we are of the opinion that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus or as proposed to be conducted and to enter into and perform its obligations under the Purchase Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each state set forth on Schedule A to the opinion. (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the Purchase Agreements or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or options referred to in the Prospectus); the shares of issued and outstanding capital stock have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (v) The Securities to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to the Purchase Agreements, and, when issued and delivered by the Company pursuant to the Purchase Agreements against payment of the consideration set forth in the Purchase Agreements, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder. (vi) The issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. -2- (vii) Each Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and, to the best of our knowledge, is owned by the Company, directly or through subsidiaries, and except as described in the Prospectuses, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity, and except as described in the Prospectuses, none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. (viii) The Purchase Agreements have been duly authorized, executed and delivered by the Company. (ix) The Registration Statement has been declared effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (x) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectuses and each amendment or supplement to the Registration Statement and the Prospectuses as of its effective or issue date (other than the financial statements and supporting schedules included therein or omitted therefrom, as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xi) If Rule 434 has been relied upon, the Prospectuses were not "materially different," as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. (xii) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements, with any applicable requirements of the charter and by-laws of the Company and the requirements of the New York Stock Exchange. (xiii) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any subsidiary is a party, or to which the property of the Company or any subsidiary is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably -3- be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the Purchase Agreements or the performance by the Company of its obligations thereunder. (xiv) The information in the Prospectuses under "Description of Capital Stock--Common Stock", "Business--Governmental Regulation and Environmental Matters ", "Business--Legal Proceedings and Insurance", "Description of Capital Stock--Preferred Stock", and in the Registration Statement under Item 14, to the extent that it constitutes matters of law, summaries of legal matters, the Company's charter and bylaws or legal proceedings, or legal conclusions, has been reviewed by us and is correct in all material respects. (xv) To the best of our knowledge, there are no statutes or regulations that are required to be described in the Prospectuses that are not described as required. (xvi) All descriptions in the Prospectuses of contracts and other documents to which the Company or its subsidiaries are a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. (xvii) To the best of our knowledge, neither the Company nor any subsidiary is in violation of its charter or by-laws and no default by the Company or any subsidiary exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any item that is listed on Exhibit B to this opinion. (xviii) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement or for the offering, issuance, sale or delivery of the Securities. (xix) The execution, delivery and performance of the Purchase Agreements and the consummation of the Acquisitions transactions contemplated in Purchase Agreements (including the issuance and sale of the Securities, and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use Of Proceeds") and the consummation of the Acquisitions and the financing thereof and compliance by the Company with its obligations under the Purchase Agreements do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(x) of the Purchase Agreements) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company or any subsidiary is a party or by which it or any of them may be bound, or to which any of the property or -4 assets of the Company or any subsidiary is subject, nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their respective properties, assets or operations. (xx) To the best of our knowledge, there are no persons, except as disclosed in the Prospectuses, with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. (xxi) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. (xxii) To the best of our knowledge, the Reorganization documents as set forth in Exhibit C of the Purchase Agreements have been duly authorized, executed and delivered by each of the parties thereto and constitute a legally valid and binding obligation of the Company and are enforceable against the Company in accordance with their terms. (xxiii) To the best of our knowledge, each of the Acquisition Agreements governing the acquisitions that are contemplated to occur on or before the Closing Date has been duly authorized, executed and delivered by the Company, and constitutes a legally valid and binding obligation of the Company and is enforceable against the Company in accordance with its terms. (xxiv) To the best of our knowledge, each franchise agreement, in each case between a Subsidiary and the applicable Manufacturer (as defined in the Prospectuses) has been duly authorized by the Company and such Subsidiaries, enforceable in accordance with its terms, and the Company has obtained all consents, authorizations and approvals from the Manufacturers required to conduct the Acquisitions and the public offering of Common Stock as contemplated hereby other than Jaguar and Kia. (xxv) To the best of our knowledge, the Company has all necessary corporate power and authority to execute, deliver and perform its obligations under the New Credit Agreement and the NationsBank Credit Agreement; and the New Credit Agreement and the NationsBank Credit Agreement have been duly authorized, executed and delivered by the Company, are in the form heretofore delivered to you, and constitute valid and binding obligations of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws relating to or affecting enforcement of creditors' rights generally or by general principles of equity. Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable), (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became -5 effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectuses or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectuses were issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Very truly yours PARKER, POE, ADAMS & BERNSTEIN L.L.P. By:______________________________________ -6- Exhibit B October [ ], 1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated NationsBanc Montgomery Securities, Inc. Wheat, First Securities, Inc. as U.S. Representatives of the several U.S. Underwriters to be named in the within-mentioned U.S. Purchase Agreement Merrill Lynch International NationsBanc Montgomery Securities, Inc. Wheat, First Securities, Inc. as Lead Managers of the several Managers to be named in the within- mentioned International Purchase Agreement c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Re: Proposed Public Offering by Sonic Automotive, Inc. Dear Sirs: The undersigned, a stockholder [and an officer and/or director] of Sonic Automotive, Inc., a Delaware corporation (the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. propose to enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the Company, and Merrill Lynch International, NationsBanc Montgomery Securities, Inc. and Wheat, First Securities, Inc. propose to enter into an International Purchase Agreement (the "International Purchase Agreement") with the Company, providing for the public offering of shares (the "Securities") of the Company's Class A common stock, par value $0.01 per share (the "Common Stock"). In recognition of the benefit that such -1- an offering will confer upon the undersigned as a stockholder [and an officer and/or director] of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the U.S. Purchase Agreement and with each manager to be named in the International Purchase Agreement that, during a period of 180 days from the date of the U.S. Purchase Agreement and the International Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Very truly yours, Signature: ------------------------------------ Print Name: ----------------------------------- -2- EX-10 4 EXHIBIT 10.48 SUPPLEMENTAL TERMS AND CONDITIONS Supplemental Terms and Conditions This Agreement is made this 19th day of September, 1997 by and between Ford Motor Company, a Delaware corporation with its principal place of business at The American Road, Dearborn, Michigan (hereinafter called "Ford"), and Sonic Automotive, Inc., a Delaware corporation with its principal place of business at 5401 E. Independence Blvd., Charlotte, NC 28212 (hereinafter called "Sonic Automotive"). AGREEMENT 1. Definitions. For purposes hereof, the following definitions shall apply: a. "Agreement" shall mean the Ford, Lincoln or Mercury Sales and Service Agreement. b. "General Manager" shall mean the person designated by Sonic Automotive pursuant to paragraph F (ii) of the Agreement with full day to day management authority and approved by Ford in writing. c. "Securities Act" shall mean the Securities Act of 1933, as amended. d. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. e. "SEC" shall mean the Securities and Exchange Commission. f. "Dealership" shall mean each Ford, Mercury or Lincoln authorized dealership owned or controlled directly or indirectly by Sonic Automotive. g. "Delegation Certificate" shall be the instrument executed by an authorized officer of Sonic Automotive granting full day to day operational and management control of the Dealership to the General Manager. h. "CSI" shall mean the Customer Satisfaction Index used by Ford to measure customer satisfaction in terms of the selling process as well as after sales service, as such may be modified from time to time by Ford. i. "Supplemental Terms" shall mean these Supplemental Terms and Conditions. 2. Scope. Sonic Automotive has indicated that it will seek to acquire or to apply for Ford, Mercury and Lincoln authorized dealerships. In order to simplify future discussions and to avoid any misunderstanding, these Supplemental Terms are intended to apply to those situations where Ford is willing to approve Sonic Automotive (or its designated wholly-owned or controlled direct or indirect subsidiary) as the purchaser of the capital stock or assets of a Ford, Mercury or Lincoln authorized dealership or where it is willing to enter into an Agreement with Sonic Automotive with respect to a new dealership location. 2 In each situation where Ford is willing to enter into an Agreement, Sonic Automotive will cause the Dealership to execute an Agreement and will cause such Dealership to be bound by these Supplemental Terms. 3. Sole Ownership. To maintain financial and operational autonomy and accountability, each Dealership will be a separate corporation with the Ford, Mercury and/or Lincoln dealership operation being its sole business unless otherwise agreed in writing by Ford; provided, however, that if, at the time of acquisition of any Dealership, such Dealership is not a separate corporation, Sonic Automotive will use reasonable efforts to cause the Dealership to be held as a separate corporation as soon as practicable. Sonic Automotive shall furnish to Ford a copy of the certificate of incorporation and bylaws of each Dealership. As is required of all Ford authorized dealerships, each Dealership shall submit monthly financial and operating performance data to Ford. 4. Capitalization. Each Dealership will be separately and fully capitalized to ensure the maintenance of net cash, working capital and operating investment in accordance with Ford guidelines. Other than through dividends permitted by the law of the state of incorporation of each Dealership, the effect of which shall not impair the ability of the Dealership to meet the above mentioned Ford capitalization guidelines, or through arms-length transactions, all cash and other assets generated by each Dealership will remain within the Dealership and none of the assets of any Dealership owned or controlled by Sonic Automotive shall be used directly or indirectly to secure the debt or liability of Sonic Automotive or any other Dealership or other business owned or controlled by Sonic Automotive; provided, however, that nothing herein shall prevent the cross collateralization of capital stock or assets among the Dealerships owned by Sonic Automotive. 5. General Manager. Sonic Automotive shall delegate in writing the complete day to day management control of each Dealership to the General Manager of such Dealership whose appointment shall be subject to Ford's prior written approval which shall not be unreasonably withheld. The General Manager shall be designated in paragraph F (ii) of the Agreement and shall have full managerial authority and accountability for operating the Dealership in accordance with the terms of the Agreement and the Supplemental Terms. Each person nominated by Sonic Automotive as a General Manager must have substantial, successful retail automotive experience and must meet Ford's high standards for moral and ethical behavior. Upon the appointment of a General Manager, a copy of the Delegation Certificate shall be submitted to Ford. All proposed changes to the Delegation Certificate shall be in writing, submitted to Ford and subject to Ford's prior written approval. Sonic Automotive will notify Ford and obtain Ford's prior written approval of any proposed change to the General Manager, such approval not to be unreasonably withheld. Sonic Automotive shall have the right to appoint an interim General Manager as a temporary replacement for any General Manager who is terminated for cause or who voluntarily resigns, in each case without the prior written approval of Ford. In the event that an interim General Manager is appointed, Sonic Automotive shall work with Ford to appoint a permanent General Manager within 90 days after the appointment of the interim General Manager. In addition to meeting the criteria Ford customarily applies to new dealer candidates, the General Manager will be assigned to the Dealership for a sufficient time (being a minimum of 3 years unless otherwise agreed by Ford in writing) to allow the 3 General Manager to develop and maintain ties to the local community evidenced by involvement in community civic and charitable organizations. The General Manager must reside in the Dealer Locality as required by the Agreement. 6. Compensation Plans. Sonic Automotive will cause each Dealership to provide to its General Manager and other key employees of the Dealership, as deemed appropriate, as part of their compensation, incentive programs that will provide specific financial rewards to the General Manager and such other employees that are payable to them at least annually and are based upon the achievement and maintenance by the Dealership of the long term and short term operating performance objectives described in paragraph 7 hereof. 7. Performance Criteria. Should any Dealership fail to meet reasonable performance criteria established by Ford relating to such matters as sales performance, CSI and such other performance criteria that Ford may reasonably apply to all its authorized dealers, Ford will have the right to implement the following procedure. Ford shall notify Sonic Automotive and the General Manager in writing of such failure and shall grant Sonic Automotive and the General Manager 90 days to either cure the failure in total or, with respect to sales performance and CSI only, to present to Ford evidence of progress to cure the failure indicating in Ford's reasonable judgment that the failure will be cured within one year of Ford's notice. Should the failure not be cured within the above period, persons delegated with authority from Sonic Automotive immediately shall meet with authorized personnel from Ford to arrange for the orderly and expeditious replacement of the General Manager. Should agreement not be reached upon the identity of an appropriate replacement General Manager within 90 days of the end of the cure period, Ford may terminate the Agreement with immediate effect. Requirements that each Dealership consistently meet or exceed Ford's regional average retail car and truck market share and comparable dealer group average customer satisfaction ratings, as measured by CSI or other criteria established by Ford, shall be considered reasonable performance requirements. Ford will not unreasonably withhold its consent to the appointment of an appropriate replacement General Manager. 8. Additional Appointments. Should any Dealership fail to maintain for any 12 month period the level of CSI at substantially the same level that was reported for such Dealership as of the date of its acquisition by Sonic Automotive, Sonic Automotive shall not seek or apply for another Ford authorized dealership until such time as such level of CSI is restored to Ford's reasonable satisfaction. Ford will provide each Dealership a report monthly, summarizing its CSI performance for the preceding month and for the calendar year to date. Sonic Automotive may not acquire more than two Ford and two Lincoln Mercury dealerships within any single twelve-month period. Further, unless otherwise agreed by Ford in writing, Sonic Automotive shall not seek or apply for a Ford authorized dealership if, once owning such dealership, Sonic Automotive would own or control, directly or indirectly, the lesser of (a) 15 Ford and 15 Lincoln Mercury Dealerships or (b) that number of Ford authorized dealerships with total retail sales of new vehicles in the immediately preceding calendar year of more than 2% of the total Ford and Lincoln Mercury branded vehicles sold at retail in the United States; provided, however, that in no event shall Sonic Automotive seek or apply for a Ford authorized dealership in any market area, as defined from time to time by Ford for its dealership network, that would result in 4 Sonic Automotive owning or controlling, directly or indirectly, more than one Ford authorized dealership in those market areas having 3 or less Ford authorized dealerships in them, or in Sonic Automotive owning or controlling, directly or indirectly, more than 25% of the Ford authorized dealerships in market areas, as defined from time to time by Ford for its dealership network, having 4 or more authorized Ford dealerships in them, it being understood that this proviso is intended to apply separately to Ford and to Lincoln Mercury dealerships. Should the above limitations be reached, Ford will give consideration to extending the limitations, other than the limitation relating to individual market areas, should circumstances warrant it. However, Ford's refusal to extend any limitation shall be deemed to be a reasonable action by Ford. 9. Major Changes. Sonic Automotive shall submit to Ford copies of all effective registration statements and final reports, proxies and information statements it files with the SEC pursuant to the Securities Act or the Exchange Act within five (5) business days of filing with the SEC. Sonic Automotive, shall submit to Ford all filings submitted to the SEC by third parties that are required to disclose significant holdings or substantial acquisitions of, or changes in, the ownership of the voting securities (or other securities convertible into voting securities) of Sonic Automotive including, without limitation, Schedules 13D or 13G. Should any SEC filing disclose that (a) a person, entity or group has a binding agreement to acquire, or has acquired, voting securities (or other securities convertible into voting securities) of Sonic Automotive that would place 15% or more of the voting securities (or other securities convertible into voting securities) of Sonic Automotive into the hands of such person, entity or group, or (b) a person or entity that owns or controls fifteen percent (15%) of the voting securities (or other securities convertible into voting securities) of Sonic Automotive intends or may intend to acquire additional voting securities (or other securities convertible into voting securities) of Sonic Automotive, or (c) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving Sonic Automotive or any of its subsidiaries is planned or anticipated or (d) a sale or transfer of a material amount of assets of Sonic Automotive, or any of its subsidiaries, is planned or anticipated, or (e) a change has been made or is planned to be made in the Board of Directors or management of Sonic Automotive or (f) any other material change in Sonic Automotive's business or corporate structure or (g) any action similar to those noted above, Sonic Automotive shall provide 30 days prior written notice to Ford describing the matter disclosed in such filing in detail. If any such action is believed by Ford in its reasonable judgment to have a material and adverse effect on its reputation in the market place with respect to an action described in (e), (f), or (g) or with respect to the other actions should Ford reasonably conclude that such action will not be compatible with the interests of Ford, Sonic Automotive agrees that within 90 days of Ford's notice thereof, Sonic Automotive shall sell or cause to be sold one or more of the Dealerships, as specified in the notice, to Ford or its designee at fair market value, determined in accordance with Attachment A or resign the Agreements, or provide evidence to Ford that the proposed action which gave rise to the issuance of Ford's notice will not take place. Should Sonic Automotive enter into an agreement to transfer the assets or capital stock of any Dealership to a third party, Ford's right of first refusal provided in paragraph 24(b) of the Agreement shall apply. 10. Exclusive Dealership Facilities. Each Dealership shall operate as an exclusive fully-dedicated Ford and/or Mercury and/or Lincoln dealership, as the case may be, and 5 Sonic Automotive will not accept a sales and service agreement with any other automobile manufacturer or importer or allow the merchandising, display, sale or service of new vehicles other than Ford, Mercury or Lincoln vehicles at the facilities and locations approved by Ford and used by any Dealership for the conduct of its business ("Ford Approved Facilities"). Unless otherwise agreed in writing, should Sonic Automotive acquire a Dealership having a sales and service agreement with a competitive automobile manufacturer or importer and related sales and service operations at the Ford Approved Facilities, it shall cause the Dealership to relocate such competitive sales and service operations from the Ford Approved Facilities within one year of acquisition; provided, however, that Ford shall grant Sonic Automotive additional time to effect such relocation if Ford believes Sonic Automotive is making reasonable progress in so doing. No Dealership will merchandise, display or sell new Ford, Mercury or Lincoln vehicles at any unauthorized location including those owned or controlled by Sonic Automotive. In conducting its advertising programs each Dealership shall portray the products it is authorized to sell and service under the Agreement in a distinctive manner taking care not to mingle such advertising with advertising of competitive make new vehicles or used vehicles. 11. Advertising. Sonic Automotive recognizes the benefit of local cooperative advertising and has indicated that it will cause each Dealership to become a fully participating member of the local Ford, Lincoln or Mercury dealer advertising group (FDAF/LMDA). 12. Auctions. Used vehicle purchases from Ford sponsored auctions will be governed by a separate "Sponsored Auction Agreement" which will be executed by each Dealership. 13. Dealership Name. The trade name and corporate name of each Dealership will be subject to Ford's approval and will not include any reference to any non-Ford, Mercury or Lincoln make vehicle. 14. Site Control. Any existing agreement covering a Dealership or its assets relating to site control will be assumed by Sonic Automotive and shall remain in full force and effect. 15. Dispute Settlement. Any dispute concerning the Agreement or the Supplemental Terms shall be resolved using the arbitration plan described in paragraph 18 of the Agreement; provided, however, that notwithstanding anything in the Agreement to the contrary, the use of such Plan shall be mandatory and not optional and; provided, further, that no dispute need be brought before the Ford Dealer Policy Board. 16. Agreement and Supplemental Terms. Sonic Automotive confirms that the provisions of these Supplemental Terms are material to its relationship with Ford and that a failure by Sonic Automotive to fully comply with any material term hereof, after having been given a reasonable opportunity to cure such failure, will constitute good and just cause for Ford, in its discretion, to terminate the Agreement and these Supplemental Terms with immediate effect. 6 17. Binding Effect. These Supplemental Terms are intended to modify certain provisions of the Agreement and to be incorporated as a part of the Agreement. Should there be an inconsistency between the terms of these Supplemental Terms and any provision of the Agreement, the terms of these Supplemental Terms shall apply. 18. Parent-Subsidiary. Sonic Automotive shall cause each Dealership to carry out the actions and to assume the responsibilities provided herein. IN WITNESS WHEREOF, Sonic Automotive and Ford, through their authorized officers, have set there hands on the day and year above written. Ford Motor Company Sonic Automotive By: /s/ ILLEGIBLE By: /s/ O. Bruton Smith --------------------- ------------------------------------- Its: Assistant Secretary Its: Chairman and Chief Executive Officer 7 ATTACHMENT A The Fair Market Value shall be determined as follows: (a) Within 10 days after Ford has given notice to Sonic Automotive of its intention to cause Sonic Automotive to sell one or more Dealerships (herein called the "Valuation Date"), Ford and Sonic Automotive each shall designate a nationally recognized investment banking firm ("Investment Banker"). If either Ford or Sonic Automotive shall fail to designate an Investment Banker within such 10-day period, the Investment Banker designated by the other party shall determine the Fair Market Value, and such determination shall be binding on the parties. (b) Within 30 days after the Valuation Date, each Investment Banker shall submit to Ford and Sonic Automotive its written determination of the Fair Market Value of the Dealership or group of Dealerships. If only one Investment Banker submits a written determination within such 30-day period, the Fair Market Value shall be deemed to be the value stated in such determination. (c) If the two values established by the first two Investment Bankers are within ten percent (10%) of one another (as measured from the lower value), the average of the two values shall be deemed to be the Fair Market Value. If the two values established by the Investment Bankers differ by more than ten percent (10%) (measured from the lower value), the first two Investment Bankers shall, within 10 days of the Valuation Date, jointly select a third Investment Banker meeting the criteria specified in paragraph (a) who shall submit to Ford and Sonic Automotive a written determination of the Fair Market Value of the Dealership or group of Dealerships within 30 days of its appointment. If the first two Investment Bankers fail to appoint the third Investment Banker within the period specified, such appointment shall be made by the American Arbitration Association. The average of the two valuations that are closer in value shall be deemed to be the Fair Market Value of the Dealership or group of Dealerships. (d) Ford and Sonic Automotive each shall bear the expense of the Investment Banker hired by it and shall share equally in the expense of the third Investment Banker. EX-10 5 EXHIBIT 10.49 AGREEMENT AGREEMENT BETWEEN TOYOTA MOTOR SALES, U.S.A., INC. AND SONIC AUTOMOTIVE, INC. Agreement, dated September 23, 1997, entered between Sonic Automotive, Inc., ("Sonic"), a Delaware corporation, with its principal place of business at 5401 Independence Blvd., Charlotte, NC, 28212, and Toyota Motor Sales, U.S.A., Inc.("TMS"), a California corporation, with its principal place of business at 19001 South Western Avenue, Torrance, CA, 90509. WHEREAS, Sonic is currently the owner, directly or through its Affiliates (as defined in Paragraph 1 below) of Town & Country Toyota; and WHEREAS, Sonic may wish to acquire, directly or through an Affiliate, additional Toyota and Lexus dealerships; and WHEREAS, Sonic wants to issue stock in a public offering of securities anticipated to be traded on the New York Stock Exchange; and WHEREAS, TMS has advised Sonic of TMS' policy limiting the number of commonly owned or controlled, directly or through an Affiliate (as defined below), dealerships by a single entity, which is currently as follows: A. TOYOTA A single entity shall not hold an ownership interest, directly or through an Affiliate, in more than: (a) the greater of one (1) dealership or 20% of the Toyota dealer count in a "Metro" market ("Metro" markets are multiple Toyota dealership markets as defined by TMS); (b) the lesser of five (5) dealerships or 5% of the Toyota dealerships in any Toyota Region ("Toyota Region" currently includes nine TMS Regions, Central Atlantic Toyota, Southeast Toyota Distributors, Inc., and Gulf States Toyota); and (c) seven (7) Toyota dealerships nationally. LEXUS A single entity shall not hold an ownership interest, directly or through an Affiliate, in more than: (a) two (2) Lexus dealerships in any Area ("Area" currently includes Eastern, Southern, Central and Western); and (b) three (3) Lexus dealerships nationally. "Affiliate" of, or a person or entity "affiliated" with, a specified person or entity, means a person or entity that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the person or entity specified. For the purpose of this definition, the term "control" (including the terms "controlling," "controlled by" and "under common control with") means the possession, directly or indirectly, or the power to direct or cause the direction of the management and policies of a person or entity, whether through the ownership of securities, by contract or otherwise. B. In order for an entity to acquire additional Toyota or Lexus dealerships, within the limits of this Agreement, each Toyota or Lexus dealership which it owns, directly or through an Affiliate, must: a) be in full compliance with all of the terms of its Dealer Agreement; b) meet all of the applicable Toyota or Lexus Market Representation policies and standards; and c) meet applicable performance criteria for the most recent twelve (12) month period. C. In order to allow TMS sufficient time to evaluate performance at its existing dealerships, an entity may not acquire any additional Toyota or Lexus dealership within nine {9) months of its prior acquisition of a similar make dealership. D. If the purchase of any Toyota or Lexus dealership would result in exceeding the limits set forth in Paragraph 1 above, TMS will reject a dealer's application for approval of the ownership transfer until such time as the dealer shall divest itself of the appropriate number of dealerships to bring it into compliance with the requirements of this Agreement. WHEREAS, Sonic and TMS are willing to resolve these issues in accordance with the terms set forth herein, NOW THEREFORE, Sonic and TMS agree as follows: 1. CHANGE IN OWNERSHIP OF SONIC TMS shall have the right to approve any ownership or voting rights of Sonic of twenty percent (20%) or greater by any individual or entity; PROVIDED HOWEVER, that if TMS reasonably determines that such individual or entity is unqualified to own a Toyota or Lexus dealership, or has interests incompatible with TMS, and such transfer is effected, Sonic must, within ninety (90) days from the date of notification by TMS of its determination, either: a) transfer the assets of its Toyota and Lexus dealerships to a third party acceptable to TMS; b) voluntarily terminate its Toyota and Lexus Dealership Agreements; or c) demonstrate that such individual or entity in fact owns less that 20% of the outstanding shares of Sonic, or does not have 20% of the voting rights in Sonic. 2. OWNERSHIP OF CONTIGUOUS DEALERSHIPS Sonic shall not own contiguous dealerships (as that term is defined in the applicable Toyota or Lexus Dealer Agreement or policy) with common boundaries. 3. SEPARATE ENTITIES FOR EACH TOYOTA AND LEXUS DEALERSHIP Sonic shall create separate legal entities for each Toyota and Lexus dealership which it owns, directly or through an Affiliate, shall obtain a separate motor vehicle license for each dealership, and shall maintain separate financial statements for each such dealership. Consistent with TMS policy, the name "Toyota" or "Lexus," as applicable shall appear in the d/b/a of each dealership. 4. FACILITY STANDARDS In no instance shall a Toyota or Lexus dealership or any department(s) thereof be dualled with any other brand without TMS' prior written approval. 3 5. GENERAL MANAGERS Each Toyota and Lexus dealership owned or controlled by Sonic shall have a qualified, approved (subject to the exception noted in Paragraph 6 below) General Manager. Each General Manager shall work at the Toyota or Lexus dealership premises, shall devote all of his/her efforts to the management of the dealership and shall have no other business interests or management responsibilities. 6. APPROVAL OF THE GENERAL MANAGER Whenever Sonic nominates a new General Manager candidate for a Toyota or Lexus dealership, TMS shall have the right to withhold a decision concerning approval or rejection of the candidate for a period of up to one year, at its sole discretion; PROVIDED, HOWEVER, that the candidate may operate in the capacity of General Manager until TMS has approved or rejected him/her. 7. LIMITATIONS ON THE AUTHORITY OF THE GENERAL MANAGER Sonic shall advise TMS of the limitations, by category and, where applicable, by specific action, on the authority of the General Manager regarding the operation of the dealership, and shall provide the name of the individual at Sonic who has such authority with respect to each listed category or specific action, in accordance with Paragraph 8 below. 8. IDENTIFICATION OF SONIC CONTACT OFFICIAL Sonic shall identify, in each Toyota and Lexus Dealer Agreement, the Sonic executive (other than the General Manager of the dealership) who will respond directly to any Toyota or Lexus concerns regarding the operation or performance of the dealership, which executive will have full authority, in accordance with Sonic management policies, to resolve issues raised by TMS in connection with the operation of the dealership. 4 9. SELLING TOYOTA AND LEXUS PRODUCTS Sonic shall make available to the customers at its Toyota and Lexus dealerships, all Toyota products, including vehicles, Genuine Parts and Accessories, retail financing (whether for purchases or leases) and extended service contracts. 10. REPRESENTATION ON TOYOTA AND LEXUS DEALER ORGANIZATIONS No more than one representative each from the Toyota, and, separately, Lexus, dealerships owned, directly or through an Affiliate, by Sonic, may serve on the National Dealer Council or any future Toyota or Lexus national board(s) which may be established, and no more than one representative each may serve on either a Regional or Area Dealer Council, or Toyota or Lexus Dealer Association Board of Directors. 11. DEALERSHIP PERSONNEL TRAINING Sonic shall not substitute training courses or certification programs of its own for those provided or sponsored by TMS without the prior approval of TMS. 12. PUBLIC OFFERING OF SECURITIES BY SONIC TMS shall not object to a public offering of securities by Sonic so long as the limitations on ownership of voting control of Sonic contained in this agreement are not exceeded or breached in any way. In addition, TMS hereby approves the increase to 100% in equity interest in each Toyota and Lexus dealership in which subsidiaries of Sonic now have a majority equity interest. 13. FINANCIAL DISCLOSURES Sonic shall provide TMS with copies of all information and materials filed with the Securities Exchange Commission, including, but not limited to, quarterly and annual financial statement filings, prospectuses and other materials related to Sonic. 5 14. PROSPECTUS DISCLAIMER AND INDEMNIFICATION AND HOLD HARMLESS AGREEMENT Sonic shall place in its registration statement and its prospectus, as well as in any other document offering shares in Sonic to public or private investors, the following disclaimer: No Manufacturer (as defined in this Prospectus) has been involved, directly or indirectly, in the preparation of this Prospectus or in the Offering being made hereby. No Manufacturer has made any statements or representations in connection with the Offering or has provided any information or materials that were used in connection with the Offering, and no Manufacturer has any responsibility for the accuracy or completeness of this Prospectus. Sonic shall indemnify and hold harmless TMS pursuant to the terms of the Indemnification and Hold Harmless Agreement set forth in Attachment 1 to this Agreement. 15. SOLE AGREEMENT OF THE PARTIES There are no prior agreements or understandings, either oral or written, between the Parties affecting this Agreement, except as otherwise specified or referred to in this Agreement. No change or addition to, or deletion of any portion of this Agreement shall be valid or binding upon the parties hereto unless approved in writing signed by an officer of each of the parties hereto. 16. SEVERABILITY If any provision of this Agreement should be held invalid or unenforceable for any reason whatsoever, or conflicts with any applicable law, this Agreement will be considered divisible as to such provision(s), and such provision(s) will be deemed amended to comply with such law, or if it (they) cannot be so amended without materially affecting the tenor of the Agreement, then it (they) will be deemed 6 deleted from this Agreement in such jurisdiction, and in either case, the remainder of the Agreement will be valid and binding. 17. NO IMPLIED WAIVERS The failure of either party at any time to require performance by the other party of any provision herein shall in no way affect the right of such party to require such performance an any time thereafter, nor shall any waiver by any party of a breach of any provision herein constitute a waiver of any succeeding breach of the same or any other provision, nor constitute a waiver of the provision itself. 18. TMS POLICIES This Agreement refers to certain policies and standards. Sonic acknowledges that these policies and standards are prepared by TMS in its sole discretion based upon TMS' evaluation of the marketplace. TMS may reasonably amend its policies and standards from time to time 19. APPLICABLE LAW This Agreement shall be governed by and construed according to the laws of California. 20. BENEFIT This Agreement is entered into by and between TMS and Sonic for their sole and mutual benefit. Neither this Agreement nor any specific provision contained in it is intended or shall be construed to be for the benefit of any third party. 21. NOTICE TO THE PARTIES Any notices permitted or required under the terms of this Agreement shall be directed to the following respective addresses of the parties, or if either of the parties shall have specified another address by notice in writing to the other party, then to the address last specified: 7 TOYOTA MOTOR SALES, U.S.A., INC. 19001 South Western Avenue Torrance, California 90509 SONIC AUTOMOTIVE, INC. P.O. Box 18747 Charlotte, NC 28218 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SONIC AUTOMOTIVE, INC. BY: /s/ O. Bruton Smith ------------------------------ ITS: Chief Executive Officer ----------------------------- TOYOTA MOTOR SALES, U.S.A., INC. BY: ------------------------------- ITS: ------------------------------ 8 EX-10 6 EXHIBIT 10.50 FORD SALES AND SERVICE AGREEMENT [LOGO]Ford Motor Company Charlotte District Ford Sales and Service Agreement AGREEMENT made as of the 24th day of Feb, 1978, by and between Town & Country Ford, Inc. (Name of Entity) a North Carolina corporation (State whether an individual, (if the latter, show name of the state partnership or corporation) in which incorporated) doing business as Town & Country Ford, Inc. (Trade Name) and with a principal place of business at 4120 E. Independence Blvd. (Street Address) Charlotte Mecklenburg North Carolina 28205 (City) (County) (State) (Zip Code) (hereafter called the "Dealer") and Ford Motor Company, a Delaware corporation with its principal place of business at Dearborn, Michigan (hereinafter called the "Company"). PREAMBLE The purpose of this agreement is to (i) establish the Dealer as an authorized dealer in COMPANY PRODUCTS including VEHICLES (as herein defined), (ii) set forth the respective responsibilities of the Company in producing and selling those products to the Dealer and of the Dealer in reselling and providing service for them and (iii) recognize the interdependence of both parties in achieving their mutual objectives of satisfactory sales, service and profits by continuing to develop and retain a broad base of satisfied owners of COMPANY PRODUCTS. In entering into this agreement, the Company and the Dealer recognize that the success of the Company and of each of its authorized dealers depends largely on the reputation and competitiveness of COMPANY PRODUCTS and dealers' services, and on how well each fulfills its responsibilities under this agreement. It is the opinion of the Company that sales and service of COMPANY PRODUCTS usually can best be provided to the public through a system of independent franchised dealers, with each dealer fulfilling its responsibilities in a given locality from properly located, adequate, well-equipped and attractive dealerships, which are staffed by competent personnel and provided with the necessary working capital. The Dealer recognizes that, in such a franchise system, the Company must plan for the establishment and maintenance of the numbers, locations and sizes of dealers necessary for satisfactory and proper sales and service representa- i FD925 GEN. SALE 1-76 tion in each market area as it exists and as it develops and changes. At the same time, the Company endeavors to provide each of its dealers with a reasonable profit opportunity based on the potential for sales and service of COMPANY PRODUCTS within its locality. The Company endeavors to make available to its dealers a variety of quality products, responsive to broad wants and needs of the buying public, which are attractively styled, of sound engineering design and produced on a timely basis at competitive prices. The development, production and sale of such products require that the Company and its manufacturing sources make large continuing investments in plants, equipment, tools and other facilities, engineering and styling research and development, quality control procedures, trained personnel and marketing programs. Heavy commitments must also be made in advance for raw materials and finished parts. For purposes of making these investments and commitments, planning production and estimating costs for setting prices, the Company assumes in advance an estimated volume of sales for each of it products. Within each year, it develops production schedules from orders submitted by its franchised dealers and its and their best estimates of the market demand for COMPANY PRODUCTS. In turn, each of the Company's franchised dealers makes important investments or commitments in retail sales and service facilities and equipment, in working capital, in inventories of vehicles, parts and accessories, and trained sales and service personnel based on annual planning volumes for their markets. If satisfactory volumes for either the Company or a dealer are not realized, each may suffer because of commitments already made and the cost of manufacturing and of selling each product may be increased. Each dealer must give the Company orders for the products needed to serve its market. The Company seeks to adjust production schedules, to the extent feasible, to fill dealer orders, and to allocate fairly any product in short supply, but inevitably both the Company and its dealers suffer loss of profits to the extent they cannot meet market demands. Thus, the automotive business is a high risk business in which the Company, its manufacturing sources and its dealers can succeed only through cooperative and competitive effort in their respective areas of manufacturing, sales, service and customer satisfaction. Since it is the dealer who deals directly with, and develops the sale of COMPANY PRODUCTS to, the consuming public, the Company substantially relies on its dealers to provide successful sales and merchandising programs, competent service operations and effective owner relations programs. To do this, dealers must carry out their responsibilities of establishing and maintaining adequate wholesale and retail finance plans, new and used vehicle sales programs, parts and service sales programs, personnel training and supportive capitalization and working capital. To assist its dealers in these responsibilities, the Company establishes and periodically updates standards of operation and planning guides based on its experience and current conditions. It also offers sales and service training courses, advice as to facilities, counseling in the various phases of dealership operations and, through other agreements and the activities of its affiliates, assistance in financing, new and used vehicle merchandising, parts and service merchandising, leasing, daily rentals and facilities development. It also conducts national advertising, promotional and other marketing programs and assists dealers in developing complementary group and individual programs. To enable the Company to provide such assistance, it requires dealers to submit uniform and accurate sales, operating and financial reports from which it can derive and disseminate analytical and comparative operating data and advice to dealers. The Company also solicits dealers to bring to its attention through their National Dealer Council organization any mutual dealer problems or complaints as they arise. Because the Company relies heavily on its dealers for success, it reserves the right to cease doing business with any dealer who is not contributing sufficiently to such success. Similarly, the Company recognizes that its dealers look to it to provide competitive products and programs and that, if it does not do so, any dealer may elect to cease doing business with the Company. The Company has elected to enter into this agreement with the Dealer with confidence in the Dealer's integrity and ability, its intention to carry out its responsibilities set forth in this agreement, and its desire ii to provide courteous, competent and satisfying sales and service representation to consumers for COMPANY PRODUCTS, and in reliance upon its representations as to the persons who will participate in the ownership and management of the dealership. The Dealer has elected to enter into this agreement with the Company with confidence in its integrity and ability, its intention to provide competitive products and assist the Dealer to market them successfully, and its desire to maintain high quality dealers. Both parties recognize the rights of the Dealer and the Company under this agreement are defined and limited by the terms of this agreement and applicable law. The Company and the Dealer further acknowledge that their methods of operation and business practices have an important effect on the reputation of the Dealer, the Company, COMPANY PRODUCTS and other franchised dealers of the Company. The Company and the Dealer also acknowledge that certain practices are detrimental to their interests, such as deceptive, misleading or confusing advertising, pricing, merchandising or business practices, or misrepresenting the characteristics, quality, condition or origin of any item of sale. It is the expectation of each of the parties that by entering into this agreement, and by the full and faithful observance and performance of its duties, a mutually satisfactory relationship will be established and maintained. IN CONSIDERATION of the mutual agreements and acknowledgments hereinafter made, the parties hereto agree as follows: A. The Company hereby appoints the Dealer as an authorized dealer at retail in VEHICLES and at retail and wholesale in other COMPANY PRODUCTS and grants the Dealer the privilege of buying COMPANY PRODUCTS from the Company for sale in its DEALERSHIP OPERATIONS (as herein defined). The Company also grants to the Dealer the privilege of displaying, at approved locations(s), the Company's trademarks and trade names applicable to COMPANY PRODUCTS. The Dealer hereby accepts such appointment. B. Subject to and in accordance with the terms and conditions of this agreement, the Company shall sell COMPANY PRODUCTS to the Dealer and the Dealer shall purchase COMPANY PRODUCTS from the Company. C. The Ford Motor Company Ford Sales and Service Agreement Standard Provisions (Form "FD925-A Gen. Sale 1-76"), a duplicate original of which is attached to the Dealer's duplicate original of this agreement, have been read and agreed to by the Company and by the Dealer, and such Standard Provisions and any duly executed and delivered supplement or amendment thereto, are hereby made a part of this agreement with the same force and effect as if set forth herein in full. D. This agreement shall bind the Company when it bears the facsimile signature of the General Manager, and the manual countersignature of the General Sales Manager, Market Representation Manager, or a Regional or District Sales Manager, of the Ford Division of the Company and a duplicate original thereof is delivered personally or by mail to the Dealer or the Dealer's principal place of business. E. The Dealer acknowledges that (i) this agreement may be executed only in the manner provided in paragraph D hereof, (ii) no one except the General Manager, The General Sales Manager, or Market Representation Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to make or execute any other agreement relating to the subject matter hereof on behalf of the Company, or in any manner to enlarge, vary or modify the terms of this agreement, and then only by an instrument in writing, and (iii) no one except the General Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to terminate this agreement on behalf of the Company, and then only by an instrument in writing. F. In view of the personal nature of this agreement and its objectives and purposes, the Company expressly reserves to itself the right to execute a Ford Sales and Service Agreement with individuals or other entities specifically selected and approved by the Company. Accordingly, this agreement and the rights and privileges conferred on the Dealer hereunder are not transferable, assignable or salable by the Dealer and no property right or interest, direct or indirect, is sold, conveyed or transferred to the Dealer under this agreement. This agreement has been entered into by the Company with the Dealer in reliance (i) upon the representation and iii agreement that the following person(s), and only the following person(s) shall be the principal owners of the Dealer: NAME HOME PERCENTAGE ADDRESS OF INTEREST Bruton Smith Rockford, Ill. 80 (ii) upon the representation and agreement that the following person(s) and only the following person(s), shall have full managerial authority for the operating management of the Dealer in the performance of this agreement: NAME HOME TITLE ADDRESS Bruton Smith Rockford, Ill. President and (iii) upon representation and agreement that the following person(s), and only the following person(s), shall be the remaining owners of the Dealer: NAME HOME PERCENTAGE ADDRESS OF INTEREST Anne K. Davis Charlotte, N.C. 20 The Dealer shall give the Company prior notice of any proposed change in the said ownership or managerial authority, and immediate notice of the death or incapacity of any such person. No such change or notice, and no assignment of this agreement or of any right or interest herein, shall be effective against the Company unless and until embodied in an appropriate amendment to or assignment of this agreement, as the case may be, duly executed and delivered by the Company and by the Dealer. The Company shall not unreasonably withhold its consent to any such change. G. (Strike out either subparagraph (1) or (2)whichever is not applicable.) (1) This agreement shall continue in force and effect from the date of its execution until terminated by either party under the provisions of paragraph 17 hereof. [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX H. Both the Company and the Dealer assume and agree to carry out and perform their respective responsibilities under this agreement. IN WITNESS WHEREOF the parties hereto have duly executed this agreement in duplicate as of the day and year first above written. [LOGO] Ford Motor Company Town & Country Ford, Inc. (Dealers Trade Name) Countersigned by /s/ [ILLEGIBLE] By:/s/ Bruton Smith - ----------------------------- ------------------------------ General Manager, Ford Division (Title) President Countersigned by /s/ [ILLEGIBLE] - ----------------------------- Distric Sales manager iv Date December 1, 1983 To: Mr. J.R. Slough District Sales Manager Ford Division Ford Motor Company P.O. Box 220307 Charlotte, North Carolina 28222 In accordance with your request, we are furnishing you herewith certain information concerning the present ownership and management of our dealership. Principal Owners: Names and Titles % of Ownership - ----------------- ---------------- -------------- Bruton Smith 100 Persons(s) Having Full Managerial Authority and Responsibility: Bruton Smith Nominee Successor (if any): - --------------------------- If Above Manager Does Not Own Majority Interest in the Dealership Does He Have Buy-Out Option: - ----------------------------------- Yes_____ No_____ Dealership is Operating as a: - ----------------------------- Propietorship ___ Partnership ___ Corporation _X_ Trade Name Incorrect: _____ Address Incorrect: _____ Town & Country Ford, Inc --------------------------------------- (Dealership Trade Name) 5401 East Independence Blvd. --------------------------------------- (Dealership Street Address) Charlotte, N.C. 28212 --------------------------------------- (City and State) By /s/ Bruton Smith ------------------------------------ (Signature and Title) President (LOGO) Ford Motor Company Charlotte District Amendment To FORD SALES AND SERVICE AGREEMENT dated February 24, 1978 FOREIGN VEHICLE SALES AGREEMENT (COURIER) dated February 24, 1978 FOREIGN VEHICLE SALES AGREEMENT (FIESTA) dated February 24, 1978 [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX SUPPLEMENTAL AGREEMENT, made at Dearborn, Michigan as of this 27th day of Jan, 1984 by and between Town & Country Ford, Inc. (Name of Entity) a North Carolina Corporation (State whether partnership or corporation) (If the latter, show name of state in which incorporated) doing business as Town & Country Ford, Inc. (Trade Name) and with a principal place of business at 5401 E. Independence Boulevard (Street Address) Charlotte Mecklenburg North Carolina 28205 (City) (County) (State) (Zip Code) (hereinafter called the "Dealer") and Ford Motor Company, a Delaware corporation with its principal place of business at Dearborn, Michigan (hereinafter called the "Company"). The parties hereto have previously entered into the above designated Sales and Service or Sales Agreements (hereinafter "Agreements") and now desire to make certain changes therein. NOW, THEREFORE, in consideration of these premises, the parties hereto mutually agree that said Agreements be amended by changing Paragraph F to read as follows: F. In view of the personal nature of these Agreements and their objectives and purposes, the Company expressly reserves to itself the right to execute said Agreements with individuals or other entities specifically selected and approved by the Company. Accordingly, these Agreements and the rights and privileges conferred on the Dealer hereunder are not transferable, assignable or salable by the Dealer and no property right or interest, direct or indirect, is sold, conveyed or transferred to the Dealer under these Agreements. These Agreements have been entered into by the Company with the Dealer in reliance (i) upon the representation and agreement that the following person(s), and only the following person(s), shall be the principal owners of the Dealer: HOME PERCENTAGE NAME ADDRESS OF INTEREST Bruton Smith Charlotte, North Carolina 100 (ii) upon the representation and agreement that the following person(s), and only the following person(s), shall have full managerial authority for the operating management of the Dealer in the performance of these Agreements: HOME NAME ADDRESS TITLE Bruton Smith Charlotte, North Carolina President and (iii) upon the representation and agreement that the following person(s), and only the following person(s), shall be the remaining owners of the Dealer: HOME PERCENTAGE NAME ADDRESS OF INTEREST - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The Dealer shall give the Company prior notice of any proposed change in the said ownership or managerial authority of said Dealer, and immediate notice of the death or incapacity of any such person. No such change or notice, and no amendment or assignment of these Agreements or of any right or interest herein, shall be effective against the Company unless and until embodied in an appropriate amendment to or assignment of these Agreements as the case may be, duly executed and delivered by the Company and by the Dealer. The Company shall not unreasonably withhold its consent to any such change. If the Company's restriction regarding amendment or assignment of these Agreements is illegal under a valid law of any jurisdiction where such change is to take place, this amendment will be modified to the minimum extent necessary to comply with such law if it was effective on the date of execution of these Agreements. This Supplemental Agreement is subject to all the terms and conditions contained in said Agreements, except insofar as such terms and conditions may be inconsistent with the express terms hereof. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written and the Company is authorized to deliver the same to the Dealer by placing the Dealer's copy thereof in the United States Mail, duly stamped and addressed to the Dealer at his principal place of business, or by delivery to such place of business or to the Dealer in person. FORD MOTOR COMPANY Town & Country Ford, Inc. ---------------------------------------- (Dealer's Trade Name) By /s/ [ILLEGIBLE] By /s/ Bruton Smith -------------------------- ------------------------------------- Assistant Secretary Bruton Smith, President - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- (LOGO) Ford Motor Company Atlanta Region Amendment To FORD SALES AND SERVICE AGREEMENT dated February 24, 1978 FOREIGN VEHICLE SALES AGREEMENT (COURIER) dated February 24, 1978 FOREIGN VEHICLE SALES AGREEMENT (FIESTA) dated February 24, 1978 [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX SUPPLEMENTAL AGREEMENT, made at Dearborn, Michigan as of this 17th day of Nov, 1993, by and between Town & Country Ford, Inc. (Name of Entity) Corporation North Carolina (State whether partnership or corporation) (If the latter, show name of state in which incorporated) doing business as Town & Country Ford, Inc. (Trade Name) and with a principal place of business at 5401 E. Independence Boulevard (Street Address) Charlotte Mecklenburg North Carolina 28205 (City) (County) (State) (Zip Code) (hereinafter called the "Dealer") and Ford Motor Company, a Delaware corporation with its principal place of business at Dearborn, Michigan (hereinafter called the "Company"). The parties hereto have previously entered into the above designated Sales and Service or Sales Agreements (hereinafter "Agreements") and now desire to make certain changes therein. NOW, THEREFORE, in consideration of these premises, the parties hereto mutually agree that said Agreements be amended by changing Paragraph F to read as follows: F. In view of the personal nature of these Agreements and their objectives and purposes, the Company expressly reserves to itself the right to execute said Agreements with individuals or other entities specifically selected and approved by the Company. Accordingly, these Agreements and the rights and privileges conferred on the Dealer hereunder are not transferable, assignable or salable by the Dealer and no property right or interest, direct or indirect, is sold, conveyed or transferred to the Dealer under these Agreements. These Agreements have been entered into by the Company with the Dealer in reliance (i) upon the representation and agreement that the following person(s), and only the following person(s), shall be the principal owners of the Dealer: HOME PERCENTAGE NAME ADDRESS OF INTEREST Bruton Smith 2259 Sharon Lane 80% Charlotte, NC 28211 Scott Smith 2259 Sharon Lane 20% Charlotte, NC 28211 (ii) upon the representation and agreement that the following person(s), and only the following person(s), shall have full managerial authority for the operating management of the Dealer in the performance of these Agreements: HOME NAME ADDRESS TITLE Bruton Smith 2259 Sharon Lane President Charlotte, NC 28211 Scott Smith 2259 Sharon Lane Vice President Charlotte, NC 28211 EX-10 7 EXHIBIT 10.51 FORD SALES AND SERVICE AGREEMENT [LOGO]Ford Marketing Corporation Houston District Ford Sales and Service Agreement AGREEMENT made as of the 30th day of August, 1972, by and between Lone Star Ford, Inc. (Name of Entity) a Texas Corporation (State whether an individual, (if the latter, show name of the state partnership or corporation) in which incorporated) doing business as Lone Star Ford, Inc. and with (Trade Name) a principal place of business at 8477 North Freeway (Street Address) Houston Harris Texas 77037 (City) (County) (State) (Zip Code) (hereafter called the "Dealer") and Ford Motor Company, a Delaware corporation with its principal place of business at Dearborn, Michigan (hereinafter called the "Company"). PREAMBLE The purpose of this agreement is to (i) establish the Dealer as an authorized dealer in COMPANY PRODUCTS including VEHICLES (as herein defined), (ii) set forth the respective responsibilities of the Company in producing and selling those products to the Dealer and of the Dealer in reselling and providing service for them and (iii) recognize the interdependence of both parties in achieving their mutual objectives of satisfactory sales, service and profits by continuing to develop and retain a broad base of satisfied owners of COMPANY PRODUCTS. In entering into this agreement, the Company and the Dealer recognize that the success of the Company and of each of its authorized dealers depends largely on the reputation and competitiveness of COMPANY PRODUCTS and dealers' services, and on how well each fulfills its responsibilities under this agreement. It is the opinion of the Company that sales and service of COMPANY PRODUCTS usually can best be provided to the public through a system of independent franchised dealers, with each dealer fulfilling its responsibilities in a given locality from properly located, adequate, well-equipped and attractive dealerships, which are staffed by competent personnel and provided with the necessary working capital. The Dealer recognizes that, in such a franchise system, the Company must plan for the establishment and maintenance of the numbers, locations and sizes of dealers necessary for satisfactory and proper sales and service representa- i [LOGO] FORD FD925 GEN. SALE 1-72 tion in each market area as it exists and as it develops and changes. At the same time, the Company endeavors to provide each of its dealers with a reasonable profit opportunity based on the potential for sales and service of COMPANY PRODUCTS within its locality. The Company endeavors to make available to its dealers a variety of quality products, responsive to broad wants and needs of the buying public, which are attractively styled, of sound engineering design and produced on a timely basis at competitive prices. The development, production and sale of such products require that the Company and its manufacturing sources make large continuing investments in plants, equipment, tools and other facilities, engineering and styling research and development, quality control procedures, trained personnel and marketing programs. Heavy commitments must also be made in advance for raw materials and finished parts. For purposes of making these investments and commitments, planning production and estimating costs for setting prices, the Company assumes in advance an estimated volume of sales for each of its products. Within each year, it develops production schedules from orders submitted by its franchised dealers and its and their best estimates of the market demand for COMPANY PRODUCTS. In turn, each of the Company's franchised dealers makes important investments or commitments in retail sales and service facilities and equipment, in working capital, in inventories of vehicles, parts and accessories, and trained sales and service personnel based on annual planning volumes for their markets. If satisfactory volumes for either the Company or a dealer are not realized, each may suffer because of commitments already made and the cost of manufacturing and of selling each product may be increased. Each month each dealer must give the Company orders for the products needed to serve his market. During the month each dealer should submit specific orders for products covered by his basic order. If dealers' specific orders for any product are greater than or different from their basic orders, the Company seeks to adjust production schedules to the extent feasible, and to allocate fairly any product in short supply, but inevitably both the Company and its dealers suffer loss of profits to the extent they cannot meet market demands. Thus, the automotive business is a high risk business in which the Company, its manufacturing sources and its dealers can succeed only through cooperative and competitive effort in their respective areas of manufacturing, sales, service and customer satisfaction. Since it is the dealer who deals directly with, and develops the sale of COMPANY PRODUCTS to, the consuming public, the Company substantially relies on its dealers to provide successful sales and merchandising programs, competent service operations and effective owner relations programs. To do this, dealers must carry out their responsibilities of establishing and maintaining adequate wholesale and retail finance plans, new and used vehicle sales programs, parts and service sales programs, personnel training and supportive capitalization and working capital. To assist its dealers in these responsibilities, the Company establishes and periodically updates standards of operation and planning guides based on its experience and current conditions. It also offers sales and service training courses, advice as to facilities, counseling in the various phases of dealership operations and, through other agreements and the activities of its affiliates, assistance in financing, new and used vehicle merchandising, parts and service merchandising, leasing, daily rentals and facilities development. It also conducts national advertising, promotional and other marketing programs and assists dealers in developing complementary group and individual programs. To enable the Company to provide such assistance, it requires dealers to submit uniform and accurate sales, operating and financial reports from which it can derive and disseminate analytical and comparative operating data and advice to dealers. The Company also solicits dealers to bring to its attention through their National Dealer Council organization any mutual dealer problems or complaints as they arise. Because the Company relies heavily on its dealers for success, it reserves the right to cease doing business with any dealer who is not contributing sufficiently to such success. Similarly, the Company recognizes that its dealers look to it to provide competitive products and programs and that, if it does not do so, any dealer may elect to cease doing business with the Company. The Company has elected to enter into this agreement with the Dealer with confidence in the Dealer's integrity and ability, his intention to carry out his responsibilities set forth in this agreement, and his desire ii to provide courteous, competent and satisfying sales and service representation to consumers for COMPANY PRODUCTS, and in reliance upon its representations as to the persons who will participate in the ownership and management of the dealership. The Dealer has elected to enter into this agreement with the Company with confidence in its integrity and ability, its intention to provide competitive products and assist the Dealer to market them successfully, and its desire to maintain high quality dealers. Both parties recognize the rights of the Dealer and the Company under this agreement are defined and limited by the terms of this agreement and applicable law. The Company and the Dealer further acknowledge that their methods of operation and business practices have an important effect on the reputation of the Dealer, the Company, COMPANY PRODUCTS and other franchised dealers of the Company. The Company and the Dealer also acknowledge that certain practices are detrimental to their interests, such as deceptive, misleading or confusing advertising, pricing, merchandising or business practices, or misrepresenting the characteristics, quality, condition or origin of any item of sale. It is the expectation of each of the parties that by entering into this agreement, and by the full and faithful observance and performance of its duties, a mutually satisfactory relationship will be established and maintained. IN CONSIDERATION of the mutual agreements and acknowledgments hereinafter made, the parties hereto agree as follows: A. The Company hereby appoints the Dealer as an authorized dealer at retail in VEHICLES and at retail and wholesale in other COMPANY PRODUCTS and grants the Dealer the privilege of buying COMPANY PRODUCTS from the Company for sale in its DEALERSHIP OPERATIONS (as herein defined). The Company also grants to the Dealer the privilege of displaying, at approved locations(s), the Company's trademarks and trade names applicable to COMPANY PRODUCTS. The Dealer hereby accepts such appointment. B. Subject to and in accordance with the terms and conditions of this agreement, the Company shall sell COMPANY PRODUCTS to the Dealer and the Dealer shall purchase COMPANY PRODUCTS from the Company. C. The Ford Marketing Corporation Ford Sales and Service Agreement Standard Provisions (Form "FD925-A GEN.SALE 4-72"), a duplicate original of which is attached to the Dealer's duplicate original of this agreement, have been read and agreed to by the Company and by the Dealer, and such Standard Provisions and any duly executed and delivered supplement or amendment thereto, are hereby made a part of this agreement with the same force and effect as if set forth herein in full. D. This agreement shall bind the Company when it bears the facsimile signature of the General Manager, and the manual countersignature of the General Sales Manager, Market Representation Manager, or a Regional or District Sales Manager, of the Ford Division of the Company and a duplicate original thereof is delivered personally or by mail to the Dealer or the Dealer's principal place of business. E. The Dealer acknowledges that (i) this agreement may be executed only in the manner provided in paragraph D hereof, (ii) no one except the General Manager, the General Sales Manager, or Market Representation Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to make or execute any other agreement relating to the subject matter hereof on behalf of the Company, or in any manner to enlarge, vary or modify the terms of this agreement, and then only by an instrument in writing, and (iii) no one except the General Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to terminate this agreement on behalf of the Company, and then only by an instrument in writing. F. In view of the personal nature of this agreement and its objectives and purposes, the Company expressly reserves to itself the right to execute a Ford Sales and Service Agreement with individuals or other entities specifically selected and approved by the Company. Accordingly, this agreement and the rights and privileges conferred on the Dealer hereunder are not transferable, assignable or salable by the Dealer and no property right or interest, direct or indirect, is sold, conveyed or transferred to the Dealer under this agreement. This agreement has been entered into by the Company with the Dealer in reliance (i) upon the representation and iii agreement that the following person(s), and only the following person(s) shall be the principal owners of the Dealer: NAME HOME PERCENTAGE ADDRESS OF INTEREST Bruton Smith Rockford, Illinois 95% (ii) upon the representation and agreement that the following person(s) and only the following person(s), shall have full managerial authority for the operating management of the Dealer in the performance of this agreement, NAME HOME TITLE ADDRESS Charles A. West Houston, Texas Vice President and (iii) upon representation and agreement that the following person(s), and only the following person(s), shall be the remaining owners of the Dealer NAME HOME PERCENTAGE ADDRESS OF INTEREST Charles A. West Houston, Texas 5% The Dealer shall give the Company prior notice of any proposed change in the said ownership or managerial authority, and immediate notice of the death or incapacity of any such person. No such change or notice, and no assignment of this agreement or of any right or interest herein, shall be effective against the Company unless and until embodied in an appropriate amendment to or assignment of this agreement, as the case may be, duly executed and delivered by the Company and by the Dealer. The Company shall not unreasonably withhold its consent to any such change. G. (Strike out either subparagraph (1) or (2) whichever is not applicable.) (1) This agreement shall continue in force and effect from the date of its execution until terminated by either party under the provisions of paragraph 17 hereof. [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX H. Both the Company and the Dealer assume and agree to carry out and perform their respective responsibilities under this agreement. IN WITNESS WHEREOF the parties hereto have duly executed this agreement in duplicate as of the day and year first above written. [LOGO] Ford Marketing Corporation Lone Star Ford, Inc. /s/ [ILLEGIBLE] (Dealers Trade Name) General Manager, Ford Division By: /s/ Bruton Smith ------------------------------ Bruton Smith (Title) President ----------------------- Countersigned by /s/ D.M. Shultz - ----------------------------- D.M. Shultz District Sales Manager iv EX-10 8 EXHIBIT 10.52 FORD SALES AND SERVICE AGREEMENT [LOGO]Ford Motor Company Atlanta Region Ford Sales and Service Agreement AGREEMENT made as of the 27th day of August, 1996, by and between Fort Mill Ford LLC (Name of Entity) Limited Liability Corporation South Carolina (State whether an individual, (Show name of the State in which partnership or corporation) incorporated or registered) doing business as Fort Mill Ford (Trade Name) and with a principal place of business at 788 Gold Hill Road (Street Address) Fort Mill York SC 29715 (CITY) (COUNTY) (STATE) (ZIP-CODE) (hereafter called the "Dealer") and Ford Motor Company, a Delaware corporation with its principal place of business at Dearborn, Michigan (hereinafter called the "Company"). -PREAMBLE- The purpose of this agreement is to (i) establish the Dealer as an authorized dealer in COMPANY PRODUCTS including VEHICLES (as herein defined), (ii) set forth the respective responsibilities of the Company in producing and selling those products to the Dealer and of the Dealer in reselling and providing service for them and (iii) recognize the interdependence of both parties in achieving their mutual objectives of satisfactory sales, service and profits by continuing to develop and retain a broad base of satisfied owners of COMPANY PRODUCTS. In entering into this agreement, the Company and the Dealer recognize that the success of the Company and of each of its authorized dealers depends largely on the reputation and competitiveness of COMPANY PRODUCTS and dealers' services, and on how well each fulfills its responsibilities under this agreement. It is the opinion of the Company that sales and service of COMPANY PRODUCTS usually can best be provided to the public through a system of independent franchised dealers, with each dealer fulfilling its responsibilities in a given locality from properly located, adequate, well-equipped and attractive dealerships, which are staffed by competent personnel and provided with the necessary working capital. The Dealer recognizes that, in such a franchise system, the Company must plan for the establishment and maintenance of the numbers, locations and sizes of dealers necessary for satisfactory and proper sales and service representation in each market area as it exists and as it develops and changes. At the same time, the Company endeavors to provide each of its dealers with a reasonable profit opportunity based on the potential for sales and service of COMPANY PRODUCTS within its locality. FD925 GEN. SALE 9/94 The Company endeavors to make available to its dealers a variety of quality products, responsive to broad wants and needs of the buying public, which are attractively styled, of sound engineering design and produced on a timely basis at competitive prices. The development, production and sale of such products require that the Company and its manufacturing sources make large continuing investments in plants, equipment, tools and other facilities, engineering and styling research and development, quality control procedures, trained personnel and marketing programs. Heavy commitments must also be made in advance for raw materials and finished parts. For purposes of making these investments and commitments, planning production and estimating costs for setting prices, the Company assumes in advance an estimated volume of sales for each of it products. Within each year, it develops production schedules from orders submitted by its franchised dealers and its and their best estimates of the market demand for COMPANY PRODUCTS. In turn, each of the Company's franchised dealers makes important investments or commitments in retail sales and service facilities and equipment, in working capital, in inventories of vehicles, parts and accessories, and trained sales and service personnel based on annual planning volumes for their markets. If satisfactory volumes for either the Company or a dealer are not realized, each may suffer because of commitments already made and the cost of manufacturing and of selling each product may be increased. Each dealer must give the Company orders for the products needed to serve its market. The Company seeks to adjust production schedules, to the extent feasible, to fill dealer orders, and to allocate fairly any product in short supply, but inevitably both the Company and its dealers suffer loss of profits to the extent they cannot meet market demands. Thus, the automotive business is a high risk business in which the Company, its manufacturing sources and its dealers can succeed only through cooperative and competitive effort in their respective areas of manufacturing, sales, service and customer satisfaction. Because it is the dealer who deals directly with, and develops the sale of COMPANY PRODUCTS to the consuming public, the Company substantially relies on its dealers to provide successful sales and merchandising programs, competent service operations and effective owner relations programs. To do this, dealers must carry out their responsibilities of establishing and maintaining adequate wholesale and retail finance plans, new and used vehicle sales programs, parts and service sales programs, personnel training and supportive capitalization and working capital. To assist its dealers in these responsibilities, the Company establishes and periodically updates standards of operation and planning guides based on its experience and current conditions. It also offers sales and service training courses, advice as to facilities, counseling in the various phases of new and used vehicle merchandising, parts and service merchandising, leasing, daily rentals and facilities development. It also conducts national advertising, promotional and other marketing programs and assists dealers in developing complementary group and individual programs. To enable the Company to provide such assistance, it requires dealers to submit uniform and accurate sales, operating and financial reports from which it can derive and disseminate analytical and comparative operating data and advice to dealers. The Company also solicits dealers to bring to its attention through their National Dealer Council organization any mutual dealer problems or complaints as they arise. Because the Company relies heavily on its dealers for success, it reserves the right to cease doing business with any dealer who is not contributing sufficiently to such success. Similarly, the Company recognizes that its dealers look to it to provide competitive products and programs and that, if it does not do so, any dealer may elect to cease doing business with the Company. The Company has elected to enter into this agreement with the Dealer with confidence in the Dealer's integrity and ability, its intention to carry out its responsibilities set forth in this agreement, and its desire to provide courteous, competent and satisfying sales and service representation to consumers for COMPANY PRODUCTS, and in reliance upon its representations as to the persons who will participate in the ownership and management of the dealership. The Dealer has elected to enter into this agreement with the Company with confidence in its integrity and ability, its intention to provide competitive products and assist the Dealer to market them successfully, and its desire to maintain high quality dealers. ii Both parties recognize the rights of the Dealer and the Company under this agreement are defined and limited by the terms of this agreement and applicable law. The Company and the Dealer further acknowledge that their methods of operation and business practices have an important effect on the reputation of the Dealer, the Company, COMPANY PRODUCTS and other franchised dealers of the Company. The Company and the Dealer also acknowledge that certain practices are detrimental to their interests, such as deceptive, misleading or confusing advertising, pricing, merchandising or business practices, or misrepresenting the characteristics, quality, condition or origin of any item of sale. It is the expectation of each of the parties that by entering into this agreement, and by the full and faithful observance and performance of its duties, a mutually satisfactory relationship will be established and maintained. -TERMS OF THE AGREEMENT- IN CONSIDERATION of the mutual agreements and acknowledgments hereinafter made, the parties hereto agree as follows: A. The Company hereby appoints the Dealer as an authorized dealer at retail in VEHICLES and at retail and wholesale in other COMPANY PRODUCTS and grants the Dealer the privilege of buying COMPANY PRODUCTS from the Company for sale in its DEALERSHIP OPERATIONS (as herein defined). The Company also grants to the Dealer the privilege of displaying, at approved locations(s), the Company's trademarks and trade names applicable to COMPANY PRODUCTS. The Dealer hereby accepts such appointment. B. Subject to and in accordance with the terms and conditions of this agreement, the Company shall sell COMPANY PRODUCTS to the Dealer and the Dealer shall purchase COMPANY PRODUCTS from the Company. C. The Ford Motor Company Ford Sales and Service Agreement Standard Provisions (Form "FD925-A"), a duplicate original of which is attached to the Dealer's duplicate original of this agreement, have been read and agreed to by the Company and by the Dealer, and such Standard Provisions and any duly executed and delivered supplement or amendment thereto, are hereby made a part of this agreement with the same force and effect as if set forth herein in full. D. This agreement shall bind the Company when it bears the facsimile signature of the General Manager, and the manual countersignature of the General Sales Manager, Market Representation Manager, or a Regional or District Sales Manager, of the Ford Division of the Company and a duplicate original thereof is delivered personally or by mail to the Dealer or the Dealer's principal place of business. E. The Dealer acknowledges that (i) this agreement may be executed only in the manner provided in paragraph D hereof, (ii) no one except the General Manager, The General Sales Manager, or Market Representation Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to make or execute any other agreement relating to the subject matter hereof on behalf of the Company, or in any manner to enlarge, vary or modify the terms of this agreement, and then only by an instrument in writing, and (iii) no one except the General Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to terminate this agreement on behalf of the Company, and then only by an instrument in writing. F. In view of the personal nature of this agreement and its objectives and purposes, the Company expressly reserves to itself the right to execute a Ford Sales and Service Agreement with individuals or other entities specifically selected and approved by the Company. Accordingly, this agreement and the rights and privileges conferred on the Dealer hereunder are not transferable, assignable or salable by the Dealer and no property right or interest, direct or indirect, is sold, conveyed or transferred to the Dealer under this agreement. This agreement has been entered into by the Company with the Dealer in reliance (i) upon the representation and agreement that the following person(s), and only the following person(s) shall be the principal owners of the Dealer: iii FD925 GEN. SALE 9/94 NAME HOME PERCENTAGE ADDRESS OF INTEREST FMF Management, Inc. 5501 East Independence Blvd. 80 Charlotte, NC 28218 Bryan Scott Smith 1820 Dilworth Road West 20 Charlotte, NC 28203 (ii) upon the representation and agreement that the following person(s) and only the following person(s), shall have full managerial authority for the operating management of the Dealer in the performance of this agreement, NAME HOME TITLE ADDRESS O. Bruton Smith 2259 Sharon Lane President Charlotte, NC 28211 Bryan Scott Smith 1820 Dilworth Road West Vice-President Charlotte, NC 28203 and (iii) upon representation and agreement that the following person(s), and only the following person(s), shall be the remaining owners of the Dealer NAME HOME PERCENTAGE ADDRESS OF INTEREST - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Dealer shall give the Company prior notice of any proposed change in the said ownership or managerial authority, and immediate notice of the death or incapacity of any such person. No such change or notice, and no assignment of this agreement or of any right or interest herein, shall be effective against the Company unless and until embodied in an appropriate amendment to or assignment of this agreement, as the case may be, duly executed and delivered by the Company and by the Dealer. The Company shall not unreasonably withhold its consent to any such change. G. (Strike out either subparagraph (1) or (2)whichever is not applicable.) (1) This agreement shall continue in force and effect from the date of its execution until terminated by either party under the provisions of paragraph 17 hereof. [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX H. Both the Company and the Dealer assume and agree to carry out and perform their respective responsibilities under this agreement. The parties hereto have duly executed this agreement in duplicate as of the day and year first above written. [LOGO] Ford Motor Company /s/ILLEGIBLE Fort Mill Ford ---------------- (Dealers Trade Name) General Manager, Ford Division By: --------------------------------- Countersigned by (Title)/s/ O. Bruton Smith President /s/ILLEGIBLE ------------- By /s/ Bryan Scott Smith --------------------------------- (Title) Vice President iv (LOGO) Ford Motor Company Atlanta Region Addendum To FORD SALES AND SERVICE AGREEMENT Dated 8-27-96 [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX by and between Fort Mill Ford LLC (Name of Dealership Entity) Limited Liability Corporation in the State of South Carolina (State whether Partnership or Corporation) (Show Name of State in which incorporated or registered) doing business as Fort Mill Ford (Trade Name) (the "Dealer") and Ford Motor Company, a Delaware corporation (the "Company"). THE PARTIES AGREE that the following addendum to Paragraph (F) containing clause (i)(a) is annexed and made part of the Agreements. F(i)(a) upon the representation and agreement that the following person(s) and/or entity(ies), and only the following person(s) and/or entity(ies), shall have ownership interests in the principal owner(s) referred to in clause (i) of this Paragraph F:
NAME OF PRINCIPAL OWNER(S) WHICH ARE PARTNERSHIPS OR NAME AND ADDRESS OF PERSON(S) OF ENTITY(IES) PERCENTAGE CORPORATIONS HAVING OWNERSHIP INTEREST(S) IN PRINCIPAL OWNER(S) OF OWNERSHIP (STATE OF INCORPORATION) (INDICATE STOCKHOLDER OR PARTNER) INTEREST FMF Management, Inc. O. Bruton Smith, (Stockholder) SC 2259 Sharon Lane, Charlotte, NC 28211 100
The provisions of this paragraph F requiring notice to and consent by the Company to any changes in ownership shall apply to any change in the person(s) or entity(ies) having an ownership interest in the principal owner(s) set forth in this clause F(i)(a). IN WITNESS WHEREOF, The Company and the Dealer have duly executed this addendum in duplicate as of the 27th day of Aug, 1996. FORD MOTOR COMPANY Fort Mill Ford (Dealer's Trade Name) By /s/ILLEGIBLE By /s/ O. Bruton Smith, President --------------------- ------------------------------------ (Signature and Title) By /s/ILLEGIBLE By Bryan Scott Smith, Vice President --------------------- ------------------------------------ Assistant Secretary (Signature and Title) FD925-AD 9/89 EX-10 9 EXHIBIT 10.53 FORD SALES AND SERVICE AGREEMENT [LOGO]Ford Motor Company Jacksonville District Ford Sales and Service Agreement AGREEMENT made as of the 11th day of November, 1982, by and between Ken Marks Ford, Inc. (Name of Entry) a Florida Corporation (State whether an individual, (if the latter, show name of the state partnership or corporation) in which incorporated) doing business as Ken Marks Ford, Inc. and with (Trade Name) a principal place of business at 814 Cleveland Street (Street Address) Clearwater Pinellas Florida 33515 (CITY) (COUNTY) (STATE) (ZIP-CODE) (hereafter called the "Dealer") and Ford Motor Company, a Delaware corporation with its principal place of business at Dearborn, Michigan (hereinafter called the "Company"). PREAMBLE The purpose of this agreement is to (i) establish the Dealer as an authorized dealer in COMPANY PRODUCTS including VEHICLES (as herein defined), (ii) set forth the respective responsibilities of the Company in producing and selling those products to the Dealer and of the Dealer in reselling and providing service for them and (iii) recognize the interdependence of both parties in achieving their mutual objectives of satisfactory sales, service and profits by continuing to develop and retain a broad base of satisfied owners of COMPANY PRODUCTS. In entering into this agreement, the Company and the Dealer recognize that the success of the Company and of each of its authorized dealers depends largely on the reputation and competitiveness of COMPANY PRODUCTS and dealers' services, and on how well each fulfills its responsibilities under this agreement. It is the opinion of the Company that sales and service of COMPANY PRODUCTS usually can best be provided to the public through a system of independent franchised dealers, with each dealer fulfilling its responsibilities in a given locality from properly located, adequate, well-equipped and attractive dealerships, which are staffed by competent personnel and provided with the necessary working capital. The Dealer recognizes that, in such a franchise system, the Company must plan for the establishment and maintenance of the numbers, locations and sizes of dealers necessary for satisfactory and proper sales and service representa- i FD925 GEN. SALE 1-76 tion in each market area as it exists and as it develops and changes. At the same time, the Company endeavors to provide each of its dealers with a reasonable profit opportunity based on the potential for sales and service of COMPANY PRODUCTS within its locality. The Company endeavors to make available to its dealers a variety of quality products, responsive to broad wants and needs of the buying public, which are attractively styled, of sound engineering design and produced on a timely basis at competitive prices. The development, production and sale of such products require that the Company and its manufacturing sources make large continuing investments in plants, equipment, tools and other facilities, engineering and styling research and development, quality control procedures, trained personnel and marketing programs. Heavy commitments must also be made in advance for raw materials and finished parts. For purposes of making these investments and commitments, planning production and estimating costs for setting prices, the Company assumes in advance an estimated volume of sales for each of it products. Within each year, it develops production schedules from basic orders submitted by its franchised dealers for the following month and its and their best estimates of the market for subsequent months. In turn, each of the Company's franchised dealers makes important investments or commitments in retail sales and service facilities and equipment, in working capital, in inventories of vehicles, parts and accessories, and trained sales and service personnel based on annual planning volumes for their markets. If satisfactory volumes for either the Company or a dealer are not realized, each may suffer because of commitments already made and the cost of manufacturing and of selling each product may be increased. Each month each dealer must give the Company orders for the products needed to serve his market. During the month each dealer should submit specific orders for products covered by his basic order. If dealer's specific orders for any product are greater than or different from their basic orders, the Company seeks to revise production schedules to the extent feasible, and to allocate fairly any product in short supply, but inevitably both the Company and its dealers suffer loss of profits to the extent they cannot meet market demands. Thus, the automotive business is a high risk business in which the Company, its manufacturing sources and its dealers can succeed only through cooperative and competitive effort in their respective areas of manufacturing, sales, service and customer satisfaction. Since it is the dealer who deals directly with, and develops the sale of COMPANY PRODUCTS to the consuming public, the Company substantially relies on its dealers to provide successful sales and merchandising programs, competent service operations and effective owner relations programs. To do this, dealers must carry out their responsibilities of establishing and maintaining adequate wholesale and retail finance plans, new and used vehicle sales programs, parts and service sales programs, personnel training and supportive capitalization and working capital. To assist its dealers in these responsibilities, the Company establishes and periodically updates standards of operation and planning guides based on its experience and current conditions. It also offers sales and service training courses, advice as to facilities, counseling in the various phases of dealership operations and, through other agreements and the activities of its affiliates, assistance in financing, new and used vehicle merchandising, parts and service merchandising, leasing, daily rentals and facilities development. It also conducts national advertising, promotional and other marketing programs and assists dealers in developing complementary group and individual programs. To enable the Company to provide such assistance, it requires dealers to submit uniform and accurate sales, operating and financial reports from which it can derive and disseminate analytical and comparative operating data and advice to dealers. The Company also solicits dealers to bring to its attention through their National Dealer Council organization any mutual dealer problems or complaints as they arise. Because the Company relies heavily on its dealers for success, it reserves the right to cease doing business with any dealer who is not contributing sufficiently to such success. Similarly, the Company recognizes that its dealers look to it to provide competitive products and programs and that, if it does not do so, any dealer may elect to cease doing business with the Company. The Company has elected to enter into this agreement with the Dealer with confidence in the Dealer's integrity and ability, his intention to carry out his responsibilities set forth in this agreement, and his desire ii to provide courteous, competent and satisfying sales and service representation to consumers for COMPANY PRODUCTS, and in reliance upon his representations as to the persons who will participate in the ownership and management of the dealership. The Dealer has elected to enter into this agreement with the Company with confidence in its integrity and ability, its intention to provide competitive products and assist the Dealer to market them successfully, and its desire to maintain high quality dealers. Both parties recognize the rights of the Dealer and the Company under this agreement are defined and limited by the terms of this agreement and applicable law. The Company and the Dealer further acknowledge that their methods of operation and business practices have an important effect on the reputation of the Dealer, the Company, COMPANY PRODUCTS and other franchised dealers of the Company. The Company and the Dealer also acknowledge that certain practices are detrimental to their interests, such as deceptive, misleading or confusing advertising, pricing, merchandising or business practices, or misrepresenting the characteristics, quality, condition or origin of any item of sale. It is the expectation of each of the parties that by entering into this agreement, and by the full and faithful observance and performance of its duties, a mutually satisfactory relationship will be established and maintained. IN CONSIDERATION of the mutual agreements and acknowledgments hereinafter made, the parties hereto agree as follows: A. The Company hereby appoints the Dealer as an authorized dealer at retail in VEHICLES and at retail and wholesale in other COMPANY PRODUCTS and grants the Dealer the privilege of buying COMPANY PRODUCTS from the Company for sale in its DEALERSHIP OPERATIONS (as herein defined). The Company also grants to the Dealer the privilege of displaying, at approved locations(s), the Company's trademarks and trade names applicable to COMPANY PRODUCTS. The Dealer hereby accepts such appointment. B. Subject to and in accordance with the terms and conditions of this agreement, the Company shall sell COMPANY PRODUCTS to the Dealer and the Dealer shall purchase COMPANY PRODUCTS from the Company. C. The Ford Motor Company Ford Sales and Service Agreement Standard Provisions (Form "FD925-A GEN. SALE 1-76"), a duplicate original of which is attached to the Dealer's duplicate original of this agreement, have been read and agreed to by the Company and by the Dealer, and such Standard Provisions and any duly executed and delivered supplement or amendment thereto, are hereby made a part of this agreement with the same force and effect as if set forth herein in full. D. This agreement shall bind the Company when it bears the facsimile signature of the General Manager, and the manual countersignature of the General Sales Manager, Market Representation Manager, or a Regional or District Sales Manager, of the Ford Division of the Company and a duplicate original thereof is delivered personally or by mail to the Dealer or the Dealer's principal place of business. E. The Dealer acknowledges that (i) this agreement may be executed only in the manner provided in paragraph D hereof, (ii) no one except the General Manager, the General Sales Manager, or Market Representation Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to make or execute any other agreement relating to the subject matter hereof on behalf of the Company, or in any manner to enlarge, vary or modify the terms of this agreement, and then only by an instrument in writing, and (iii) no one except the General Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to terminate this agreement on behalf of the Company, and then only by an instrument in writing. F. In view of the personal nature of this agreement and its objectives and purposes, the Company expressly reserves to itself the right to execute a Ford Sales and Service Agreement with individuals or other entities specifically selected and approved by the Company. Accordingly, this agreement and the rights and privileges conferred on the Dealer hereunder are not transferable, assignable or salable by the Dealer and no property right or interest, direct or indirect, is sold, conveyed or transferred to the Dealer under this agreement. This agreement has been entered into by the Company with the Dealer in reliance (i) upon the representation and iii agreement that the following person(s), and only the following person(s) shall be the principal owners of the Dealer: NAME HOME PERCENTAGE ADDRESS OF INTEREST O.K. Marks 3053 Eagles Landing Circle W. 100.0 Clearwater, FL 33519 (ii) upon the representation and agreement that the following person(s) and only the following person(s), shall have full managerial authority for the operating management of the Dealer in the performance of this agreement, NAME HOME TITLE ADDRESS O.K. Marks 3053 Eagles Landing Circle W. President Clearwater, FL 33519 and (iii) upon representation and agreement that the following person(s), and only the following person(s), shall be the remaining owners of the Dealer NAME HOME PERCENTAGE ADDRESS OF INTEREST - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Dealer shall give the Company prior notice of any proposed change in the said ownership or managerial authority, and immediate notice of the death or incapacity of any such person. No such change or notice, and no assignment of this agreement or of any right or interest herein, shall be effective against the Company unless and until embodied in an appropriate amendment to or assignment of this agreement, as the case may be, duly executed and delivered by the Company and by the Dealer. The Company shall not unreasonably withhold its consent to any such change. G. (Strike out either subparagraph (1) or (2) whichever is not applicable.) (1) This agreement shall continue in force and effect from the date of its execution until terminated by either party under the provisions of paragraph 17 hereof. [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX H. Both the Company and the Dealer assume and agree to carry out and perform their respective responsibilities under this agreement. The parties hereto have duly executed this agreement in duplicate as of the day and year first above written. [LOGO] Ford Motor Company Ken Marks Ford, Inc. (Dealer's Trade Name) Countersigned by /s/ [ILLEGIBLE] By:/s/ O. Ken Marks - ----------------------------- ------------------------------ District Sales Manager (Title) President (LOGO) Ford Motor Company Orlando Region Addendum To FORD SALES AND SERVICE AGREEMENT dated November 11, 1982 FOREIGN VEHICLE SALES AGREEMENT (COURIER) dated November 11, 1982 FOREIGN VEHICLE SALES AGREEMENT (FIESTA) dated November 11, 1982 [INIT] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX SUPPLEMENTAL AGREEMENT, made at Dearborn, Michigan as of this 13th day of June, 1994 by and between Ken Marks Ford, Inc. (Name of Entity) Corporation Florida (State whether Partnership or Corporation) (If the latter, show name of the state which Incorporated) doing business as Ken Marks Ford, Inc. (Trade Name) and with a principal place of business at 24825 U.S. Highway 19 North (Street Address) Clearwater Pinellas Florida 34623-3999 (City) (County) (State) (Zip Code) (hereinafter called the "Dealer") and Ford Motor Company, a Delaware corporation with its principal place of business at Dearborn, Michigan (hereinafter called the "Company"). The parties hereto have previously entered into the above designated Sales and Service or Sales Agreements (hereinafter "Agreements") and now desire to make certain changes therein. NOW, THEREFORE, in consideration of these premises, the parties hereto mutually agree that said Agreements be amended by changing Paragraph F to read as follows: F. In view of the personal nature of these Agreements and their objectives and purposes, the Company expressly reserves to itself the right to execute said Agreements with individuals or other entities specifically selected and approved by the Company. Accordingly, these Agreements and the rights and privileges conferred on the Dealer hereunder are not transferable, assignable or salable by the Dealer and no property right or interest, direct or indirect, is sold, conveyed or transferred to the Dealer under these Agreements. These Agreements have been entered into by the Company with the Dealer in reliance (i) upon the representation and agreement that the following person(s), and only the following person(s), shall be the principal owners of the Dealer: HOME PERCENTAGE NAME ADDRESS OF INTEREST O. Ken Marks, Jr. 2408 Hampton Lane West 52% Safety Harbor, FL 34695 Michael J. Marks 2481 NE Coachman Road, #215 25% Clearwater, FL 34625 O. K. Marks, Sr. P.O. Box 428 23% Ozona, FL 34660 (ii) upon the representation and agreement that the following person(s), and only the following person(s), shall have full managerial authority for the operating management of the Dealer in the performance of these Agreements: HOME NAME ADDRESS TITLE Ken Marks, Jr. 2408 Hampton Lane West President Safety Harbor, FL 34695 and (iii) upon the representation and agreement that the following person(s), and only the following person(s), shall be the remaining owners of the Dealer HOME PERCENTAGE NAME ADDRESS OF INTEREST None The Dealer shall give the Company prior notice of any proposed change in the said ownership or managerial authority of said Dealer, and immediate notice of the death or incapacity of any such person. No such change or notice, and no amendment or assignment of these Agreements or of any right or interest herein, shall be effective against the Company unless and until embodied in an appropriate amendment to or assignment of these Agreements as the case may be, duly executed and delivered by the Company and by the Dealer. The Company shall not unreasonably withhold its consent to any such change. If the Company's restriction regarding amendment or assignment of these Agreements is illegal under a valid law of any jurisdiction where such change is to take place, this amendment will be modified to the minimum extent necessary to comply with such law if it was effective on the date of execution of these Agreements. This Supplemental Agreement is subject to all the terms and conditions contained in said Agreements, except insofar as such terms and conditions may be inconsistent with the express terms hereof. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written and the Company is authorized to deliver the same to the Dealer by placing the Dealer's copy thereof in the United States Mail, duly stamped and addressed to the Dealer at his principal place of business, or by delivery to such place of business or to the Dealer in person. FORD MOTOR COMPANY Ken Marks Ford, Inc. ---------------------------------------- (Dealer's Trade Name) By [ILLEGIBLE] By /s/ O. Ken Marks, Jr. -------------------------- ------------------------------------- Assistant Secretary O. Ken Marks, Jr., President - ---------------------------------------- - ---------------------------------------- /s/ Mack Ratchford - ---------------------------------------- Mack Ratchford Regional Sales Manager EX-10 10 EXHIBIT 10.54 FORD SALES AND SERVICE AGREEMENT [LOGO]Ford Motor Company Atlanta District Ford Sales and Service Agreement AGREEMENT made as of the 7th day of June, 1993, by and between Nelson Bowers Ford, L.P. (Name of Entry) Limited Partnership Tennessee (State whether an individual, (if the latter, show name of the state partnership or corporation) in which incorporated) doing business as Nelson Bowers Ford and with (Trade Name) a principal place of business at 717 South Lee Highway P.O. Box 4288 (Street Address) Cleveland Bradley Tennessee 37320-4288 (CITY) (COUNTY) (STATE) (ZIP-CODE) (hereafter called the "Dealer") and Ford Motor Company, a Delaware corporation with its principal place of business at Dearborn, Michigan (hereinafter called the "Company"). PREAMBLE The purpose of this agreement is to (i) establish the Dealer as an authorized dealer in COMPANY PRODUCTS including VEHICLES (as herein defined), (ii) set forth the respective responsibilities of the Company in producing and selling those products to the Dealer and of the Dealer in reselling and providing service for them and (iii) recognize the interdependence of both parties in achieving their mutual objectives of satisfactory sales, service and profits by continuing to develop and retain a broad base of satisfied owners of COMPANY PRODUCTS. In entering into this agreement, the Company and the Dealer recognize that the success of the Company and of each of its authorized dealers depends largely on the reputation and competitiveness of COMPANY PRODUCTS and dealers' services, and on how well each fulfills its responsibilities under this agreement. It is the opinion of the Company that sales and service of COMPANY PRODUCTS usually can best be provided to the public through a system of independent franchised dealers, with each dealer fulfilling its responsibilities in a given locality from properly located, adequate, well-equipped and attractive dealerships, which are staffed by competent personnel and provided with the necessary working capital. The Dealer recognizes that, in such a franchise system, the Company must plan for the establishment and maintenance of the numbers, locations and sizes of dealers necessary for satisfactory and proper sales and service representation in each market area as it exists and as it develops and changes. At the same time, the Company endeavors to provide each of its dealers with a reasonable profit opportunity based on the potential for sales and service of COMPANY PRODUCTS within its locality. The Company endeavors to make available to its dealers a variety of quality products, responsive to broad wants and needs of the buying public, which are attractively styled, of sound engineering FD925 GEN. SALE 10-87 (wpa 6/89) design and produced on a timely basis at competitive prices. The development, production and sale of such products require that the Company and its manufacturing sources make large continuing investments in plants, equipment, tools and other facilities, engineering and styling research and development, quality control procedures, trained personnel and marketing programs. Heavy commitments must also be made in advance for raw materials and finished parts. For purposes of making these investments and commitments, planning production and estimating costs for setting prices, the Company assumes in advance an estimated volume of sales for each of it products. Within each year, it develops production schedules from orders submitted by its franchised dealers and its and their best estimates of the market demand for COMPANY PRODUCTS. In turn, each of the Company's franchised dealers makes important investments or commitments in retail sales and service facilities and equipment, in working capital, in inventories of vehicles, parts and accessories, and trained sales and service personnel based on annual planning volumes for their markets. If satisfactory volumes for either the Company or a dealer are not realized, each may suffer because of commitments already made and the cost of manufacturing and of selling each product may be increased. Each dealer must give the Company orders for the products needed to serve its market. The Company seeks to adjust production schedules, to the extent feasible, to fill dealer orders, and to allocate fairly any product in short supply, but inevitably both the Company and its dealers suffer loss of profits to the extent they cannot meet market demands. Thus, the automotive business is a high risk business in which the Company, its manufacturing sources and its dealers can succeed only through cooperative and competitive effort in their respective areas of manufacturing, sales, service and customer satisfaction. Because it is the dealer who deals directly with, and develops the sale of COMPANY PRODUCTS to the consuming public, the Company substantially relies on its dealers to provide successful sales and merchandising programs, competent service operations and effective owner relations programs. To do this, dealers must carry out their responsibilities of establishing and maintaining adequate wholesale and retail finance plans, new and used vehicle sales programs, parts and service sales programs, personnel training and supportive capitalization and working capital. To assist its dealers in these responsibilities, the Company establishes and periodically updates standards of operation and planning guides based on its experience and current conditions. It also offers sales and service training courses, advice as to facilities, counseling in the various phases of new and used vehicle merchandising, parts and service merchandising, leasing, daily rentals and facilities development. It also conducts national advertising, promotional and other marketing programs and assists dealers in developing complementary group and individual programs. To enable the Company to provide such assistance, it requires dealers to submit uniform and accurate sales, operating and financial reports from which it can derive and disseminate analytical and comparative operating data and advice to dealers. The Company also solicits dealers to bring to its attention through their National Dealer Council organization any mutual dealer problems or complaints as they arise. Because the Company relies heavily on its dealers for success, it reserves the right to cease doing business with any dealer who is not contributing sufficiently to such success. Similarly, the Company recognizes that its dealers look to it to provide competitive products and programs and that, if it does not do so, any dealer may elect to cease doing business with the Company. The Company has elected to enter into this agreement with the Dealer with confidence in the Dealer's integrity and ability, its intention to carry out its responsibilities set forth in this agreement, and its desire to provide courteous, competent and satisfying sales and service representation to consumers for COMPANY PRODUCTS, and in reliance upon its representations as to the persons who will participate in the ownership and management of the dealership. The Dealer has elected to enter into this agreement with the Company with confidence in its ii integrity and ability, its intention to provide competitive products and assist the Dealer to market them successfully, and its desire to maintain high quality dealers. Both parties recognize the rights of the Dealer and the Company under this agreement are defined and limited by the terms of this agreement and applicable law. The Company and the Dealer further acknowledge that their methods of operation and business practices have an important effect on the reputation of the Dealer, the Company, COMPANY PRODUCTS and other franchised dealers of the Company. The Company and the Dealer also acknowledge that certain practices are detrimental to their interests, such as deceptive, misleading or confusing advertising, pricing, merchandising or business practices, or misrepresenting the characteristics, quality, condition or origin of any item of sale. It is the expectation of each of the parties that by entering into this agreement, and by the full and faithful observance and performance of its duties, a mutually satisfactory relationship will be established and maintained. IN CONSIDERATION of the mutual agreements and acknowledgments hereinafter made, the parties hereto agree as follows: A. The Company hereby appoints the Dealer as an authorized dealer at retail in VEHICLES and at retail and wholesale in other COMPANY PRODUCTS and grants the Dealer the privilege of buying COMPANY PRODUCTS from the Company for sale in its DEALERSHIP OPERATIONS (as herein defined). The Company also grants to the Dealer the privilege of displaying, at approved locations(s), the Company's trademarks and trade names applicable to COMPANY PRODUCTS. The Dealer hereby accepts such appointment. B. Subject to and in accordance with the terms and conditions of this agreement, the Company shall sell COMPANY PRODUCTS to the Dealer and the Dealer shall purchase COMPANY PRODUCTS from the Company. C. The Ford Motor Company Ford Sales and Service Agreement Standard Provisions (Form "FD925-A"), a duplicate original of which is attached to the Dealer's duplicate original of this agreement, have been read and agreed to by the Company and by the Dealer, and such Standard Provisions and any duly executed and delivered supplement or amendment thereto, are hereby made a part of this agreement with the same force and effect as if set forth herein in full. D. This agreement shall bind the Company when it bears the facsimile signature of the General Manager, and the manual countersignature of the General Sales Manager, Market Representation Manager, or a Regional or District Sales Manager, of the Ford Division of the Company and a duplicate original thereof is delivered personally or by mail to the Dealer or the Dealer's principal place of business. E. The Dealer acknowledges that (i) this agreement may be executed only in the manner provided in paragraph D hereof, (ii) no one except the General Manager, The General Sales Manager, or Market Representation Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to make or execute any other agreement relating to the subject matter hereof on behalf of the Company, or in any manner to enlarge, vary or modify the terms of this agreement, and then only by an instrument in writing, and (iii) no one except the General Manager of the Ford Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to terminate this agreement on behalf of the Company, and then only by an instrument in writing. F. In view of the personal nature of this agreement and its objectives and purposes, the Company expressly reserves to itself the right to execute a Ford Sales and Service Agreement with individuals or other entities specifically selected and approved by the Company. Accordingly, this agreement and the rights and privileges conferred on the Dealer hereunder are not transferable, assignable or salable by the Dealer and no property right or interest, direct or indirect, is sold, conveyed or transferred to the Dealer under this agreement. This agreement has been entered into by the iii FD925 GEN. SALE 10-87 (wpa 6/89) COPY OF ORIGINAL Company with the Dealer in reliance (i) upon the representation and agreement that the following person(s), and only the following person(s) shall be the principal owners of the Dealer: NAME HOME PERCENTAGE ADDRESS OF INTEREST NEBCO of Southeast Tennessee, Inc. 633 Chestnut St., Ste. 900 10% Chattanooga, TN 37450 Nelson E. Bowers, II 217 Colmore Circle 42% Lookout Mtn, TN 37350 (ii) upon the representation and agreement that the following person(s) and only the following person(s), shall have full managerial authority for the operating management of the Dealer in the performance of this agreement, NAME HOME TITLE ADDRESS Nelson E. Bowers, II 217 Colmore Circle President of General Lookout Mtn, TN 37350 Partner John Larry Williams 6220 Shallowford Rd General Manager Chattanooga, TN 37421 and (iii) upon representation and agreement that the following person(s), and only the following person(s), shall be the remaining owners of the Dealer NAME HOME PERCENTAGE ADDRESS OF INTEREST Frank E. Fowler 1213 Ft. Stephenson Oval, Lookout Mtn, TN 16% 37350 DeWayne B. McCamish 205 Primrose Way, Signal Mtn, TN 37377 16% Rex Allen 57 Cool Springs Rd., Signal Mtn, TN 37377 16% The Dealer shall give the Company prior notice of any proposed change in the said ownership or managerial authority, and immediate notice of the death or incapacity of any such person. No such change or notice, and no assignment of this agreement or of any right or interest herein, shall be effective against the Company unless and until embodied in an appropriate amendment to or assignment of this agreement, as the case may be, duly executed and delivered by the Company and by the Dealer. The Company shall not unreasonably withhold its consent to any such change. G. (Strike out either subparagraph (1) or (2)whichever is not applicable.) (1) This agreement shall continue in force and effect from the date of its execution until terminated by either party under the provisions of paragraph 17 hereof. [NEB] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [NEB] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [NEB] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX H. Both the Company and the Dealer assume and agree to carry out and perform their respective responsibilities under this agreement. The parties hereto have duly executed this agreement in duplicate as of the day and year first above written. /s/ILLEGIBLE Nelson Bowers Ford ---------------- (Dealers Trade Name) [LOGO] Ford Motor Company General Manager, Ford Division By:/s/Nelson E. Bowers ------------------------------ Countersigned by (Title)President OF General Partner /s/ILLEGIBLE NEBCO of Southeast Tennessee, INC. ---------------- (LOGO) Ford Motor Company Atlanta District Addendum To FORD SALES AND SERVICE AGREEMENT Dated 6-7-93 [NEB] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [NEB] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [NEB] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX [NEB] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX by and between Nelson Bowers Ford, L.P. (Name of Entity) A Partnership in the State of Tennessee (State whether Partnership or Corporation) (If the latter, show Name of State in which Incorporated) doing business as Nelson Bowers Ford (Trade Name) (the "Dealer") and Ford Motor Company, a Delaware corporation (the "Company"). THE PARTIES AGREE that the following addendum to Paragraph (F) containing clause (i)(a) is annexed and made part of the Agreements. F(i)(a) upon the representation and agreement that the following person(s) and/or entity(ies), and only the following person(s) and/or entity(ies), shall have ownership interests in the principal owner(s) referred to in clause (i) of this Paragraph F:
NAME AND ADDRESS OF PERSON(S) OF ENTITY(IES) PERCENTAGE NAME OF PRINCIPAL OWNER(S) HAVING OWNERSHIP INTEREST(S) IN PRINCIPAL OWNER(S) OF OWNERSHIP (STATE OF INCORPORATION) (INDICATE STOCKHOLDER OR PARTNER) INTEREST NEBCO of Southeast Nelson E. Bowers, II 100% Tennessee, Inc. 217 Colmore Circle (A Corporation of the Lookout Mountain, TN 37350 State of Tennessee)
The provisions of this paragraph F requiring notice to and consent by the Company to any changes in ownership shall apply to any change in the person(s) or entity(ies) having an ownership interest in the principal owner(s) set forth in this clause F(i)(a). IN WITNESS WHEREOF, The Company and the Dealer have duly executed this addendum in duplicate as of the 7th day of June, 1993. FORD MOTOR COMPANY Nelson Bowers Ford (Dealer's Trade Name) By /s/ILLEGIBLE By:/s/Nelson Bowers --------------------- ------------------------ Assistant Secretary (Signature and Title) /s/ILLEGIBLE - ------------------ FD925-AD 9/89 (wpa 6/89) EX-10 11 EXHIBIT 10.55 SALES AND SERVICE AGREEMENT CHRYSLER CORPORATION CHRYSLER SALES AND SERVICE AGREEMENT Fort Mill Chrysler-Plymouth-Dodge, Inc. (DEALER Firm Name and D/B/A, if applicable) located at 3310 Highway 51 at Carowinds, Fort Mill, South Carolina, (STREET) (CITY) (STATE) a(n) corporation, (INDIVIDUAL, CORPORATION OR PARTNERSHIP) hereinafter called DEALER, and Chrysler Corporation, a Delaware corporation, hereinafter sometimes referred to as "CC", have entered into this Chrysler Corporation Chrysler Sales and Service Agreement, hereinafter referred to as "Agreement", the terms of which are as follows: - -------------------------------------------------------------------------------- INTRODUCTION The purpose of the relationship established by this Agreement is to provide a means for the sale and service of specified Chrysler vehicles and the sale of CC vehicle parts and accessories in a manner that will maximize customer satisfaction and be of benefit to DEALER and CC. While the following provisions, each of which is material, set forth the undertakings of this relationship, the success of those undertakings rests on a recognition of the mutuality of interests of DEALER and CC, and a spirit of understanding and cooperation by both parties in the day to day performance of their respective functions. As a result of such considerations, CC has entered into this Agreement in reliance upon and has placed its trust in the personal abilities, expertise, knowledge and integrity of DEALER's principal owners and management personnel, which CC anticipates will enable DEALER to perform the personal services contemplated by this Agreement. It is the mutual goal of this relationship to promote the sale and service of specified CC products by maintaining and advancing their excellence and reputation by earning, holding and furthering the public regard for CC and all CC dealers. - -------------------------------------------------------------------------------- 1 PRODUCTS COVERED DEALER has the right to order and purchase from CC and to sell at retail only those specific models of CC vehicles, sometimes referred to as "specified CC vehicles," listed on the Motor Vehicle Addendum, attached hereto and incorporated herein by reference. CC may change the models of CC vehicles listed on the Motor Vehicle Addendum by furnishing DEALER a superseding Motor Vehicle Addendum. Such a superseding Motor Vehicle Addendum will not be deemed or construed or to be an amendment to this Agreement. - -------------------------------------------------------------------------------- 2 DEALER'S MANAGEMENT CC has entered into this Agreement relying on the active, substantial and continuing personal participation in the management of DEALER's organization by: NAME POSITION William Saddler Anderson General Manager ------------------------ ------------------- Bryan Scott Smith Vice President ------------------------ ------------------- DEALER represents and warrants that at least one of the above-named individuals will be physically present at the DEALER's facility (sometimes referred to as "Dealership Facilities") during most of its operating hours and will manage all of DEALER's business relating to the sale and service of CC products. DEALER shall not change the personnel holding the above described position(s) or the nature and extent of his/her/their management participation without the prior written approval of CC. - -------------------------------------------------------------------------------- 3 DEALER'S CAPITAL STOCK OR PARTNERSHIP INTEREST If DEALER is a corporation or partnership, DEALER represents and agrees that the persons named below own beneficially the capital stock or partnership interest of DEALER in the percentages indicated below. DEALER warrants there will be no change affecting more than 50% of the ownership interest of DEALER, nor will there be any other change in the ownership interest of DEALER which may affect the managerial control of DEALER without CC's prior written approval.
Voting Non-Voting Partnership Active Name Stock Stock Interest Yes/No Sonic Auto World, Inc. 100.00% % % No - ---------------------------- ----------- ---------- ----------- -------- % % % - ---------------------------- ----------- ---------- ----------- -------- % % % - ---------------------------- ----------- ---------- ----------- -------- % % % - ---------------------------- ----------- ---------- ----------- -------- % % % - ---------------------------- ----------- ---------- ----------- -------- Total 100.00% % % - ---------------------------- ----------- ---------- ----------- --------
- -------------------------------------------------------------------------------- 4 SALES LOCALITY DEALER shall have the non-exclusive right, subject to the provisions of this Agreement, to purchase from CC those new specified CC vehicles, vehicle parts, accessories and other CC products for resale at the DEALER's facilities and location described in the Dealership Facilities and Location Addendum, attached hereto and incorporated herein by reference. DEALER will actively and effectively sell and promote the retail sale of CC vehicles, vehicle parts and accessories in DEALER's Sales Locality. As used herein, "Sales Locality" shall mean the area designated in writing to DEALER by CC from time to time as the territory of DEALER's responsibility for the sale of CC vehicles, vehicle parts and accessories, although DEALER is free to sell said products to customers wherever they may be located. Said Sales Locality may be shared with other CC dealers of the same line-make as CC determines to be appropriate. - -------------------------------------------------------------------------------- 5 ADDITIONAL TERMS AND PROVISIONS The additional terms and provisions set forth in the document entitled "Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions" marked "Form 91 (C-P-D)," as may hereafter be amended from time to time, constitute a part of this Agreement with the same force and effect as if set forth at length herein, and the term "this Agreement" includes said additional terms and provisions. - -------------------------------------------------------------------------------- 6 FORMER AGREEMENTS, REPRESENTATIONS OR STATEMENTS This Chrysler Corporation Chrysler Sales and Service Agreement and other documents (or their successors as specifically provided for herein) which are specifically incorporated herein by reference constitute the entire agreement between the parties relating to the purchase by DEALER of those new specified CC vehicles, parts and accessories from CC for resale; and it cancels and supersedes all earlier agreements, written or oral, between CC and DEALER relating to the purchase by DEALER of Chrysler vehicles, parts and accessories, except for (a) amounts owing by CC to DEALER, such as payments for warranty service performed and incentive programs, or (b) amounts owing or which may be determined to be owed, as a result of an audit or investigation, by DEALER to CC due to DEALER's purchase from CC of vehicles, parts, accessories and other goods or services, or (c) amounts DEALER owes to CC, as a result of other extensions of credit by CC to DEALER. No representations or statements, other than those expressly set forth herein or those set forth in the applications for this Agreement submitted to CC by DEALER or DEALER's representatives, are made or relied upon by any party hereto in entering into this Agreement. - -------------------------------------------------------------------------------- 7 WAIVER AND MODIFICATION No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except the filling in of blank spaces and lines) will be valid or binding on CC unless approved in writing by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. - -------------------------------------------------------------------------------- 8 AMENDMENT DEALER and CC recognize that this Agreement does not have an expiration date and will continue in effect unless terminated under the limited circumstances set forth in Paragraph 28. DEALER and CC further recognize that the passage of time, changes in the industry, ways of doing business and other unforeseen circumstances may cause CC to determine that it should amend all Chrysler Corporation Chrysler Sales and Service Agreements. Therefore, CC will have the right to amend this Agreement to the extent that CC deems advisable, provided that CC makes the same amendment in Chrysler Corporation Chrysler Sales and Service Agreements generally. Each such amendment will be issued in a notice sent by certified mail or delivered in person to DEALER and signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. Thirty-five (35) days after mailing or delivery of such notice to DEALER, this Agreement will be deemed amended in the manner and to the extent set forth in the notice. - -------------------------------------------------------------------------------- 9 ARBITRATION Any and all disputes arising out of or in connection with the interpretation, performance or non-performance of this Agreement or any and all disputes arising out of or in connection with transactions in any way related to this Agreement (including, but not limited to, the validity, scope and enforceability of this arbitration provision, or disputes under rights granted pursuant to the statutes of the state in which DEALER is licensed) shall be finally and completely resolved by arbitration pursuant to the arbitration laws of the United States of America as codified in Title 9 of the United States Code, ss.ss.1-14, under the Rules of Commercial Arbitration of the American Arbitration Association (hereinafter referred to as the "Rules") by a majority vote of a panel of three arbitrators. One arbitrator will be selected by DEALER (DEALER's arbitrator). One arbitrator will be selected by CC (CC's arbitrator). These arbitrators must be selected by the respective parties within ten (10) business days after receipt by either DEALER or CC of a written notification from the other party of a decision to arbitrate a dispute pursuant to this Agreement. Should either CC or DEALER fail to select an arbitrator within said ten-day period, the party who so fails to select an arbitrator will have its arbitrator selected by the American Arbitration Association upon the application of the other party. The third arbitrator must be an individual who is familiar with business transactions and be a licensed attorney admitted to the practice of law within the United States of America, or a judge. The third arbitrator will be selected by DEALER's and CC's arbitrators. If said arbitrators cannot agree on a third arbitrator within thirty (30) days from the date of the appointment of the last selected arbitrator, then either DEALER's or CC's arbitrator may apply to the American Arbitration Association to appoint said third arbitrator pursuant to the criteria set forth above. The arbitration panel shall conduct the proceedings pursuant to the then existing Rules. Notwithstanding the foregoing, to the extent any provision of the Rules conflict with any provision of this Paragraph 9, the provisions of this Paragraph 9 will be controlling. CC and DEALER agree to facilitate the arbitration by: (a) each party paying to the American Arbitration Association one-half (1/2) of the required deposit before the proceedings commence; (b) making available to one another and to the arbitration panel, for inspection and photocopying all documents, books and records, if determined by the arbitrator to be relevant to the dispute; (c) making available to one another and to the arbitration panel personnel directly or indirectly under their control, for testimony during hearings and prehearing proceedings if determined by the arbitration panel to be relevant to the dispute; (d) conducting arbitration hearings to the greatest extent possible on consecutive business days; and (e) strictly observing the time periods established by the Rules or by the arbitration panel for the submission of evidence and of briefs. Unless otherwise agreed by CC and DEALER, a stenographic record of the arbitration shall be made and a transcript thereof shall be ordered for each party, with each party paying one-half (1/2) of the total cost of such recording and transcription. The stenographer shall be state-certified, if certification is made by the state, and the party to whom it is most convenient shall be responsible for securing and notifying such stenographer of the time and place of the arbitration hearing(s). If the arbitration provision is invoked when the dispute between the parties is either the legality of terminating this Agreement or of adding a new CC dealer of the same line-make or relocating an existing CC dealer of the same line-make, CC will stay the implementation of the decision to terminate this Agreement or add such new CC dealer or approve the relocation of an existing CC dealer of the same line-make until the decision of the arbitrator has been announced, providing DEALER does not in any way attempt to avoid the obligations of this Paragraph 9, in which case the decision at issue will be immediately implemented. Except as limited hereby, the arbitration panel shall have all powers of law and equity, which it can lawfully assume, necessary to resolve the issues in dispute including, without limiting the generality of the foregoing, making awards of compensatory damages, issuing both prohibitory and mandatory orders in the nature of injunctions and compelling the production of documents and witnesses for pre-arbitration discovery and/or presentation at the arbitration hearing on the merits of the case. The arbitration panel shall not have legal or equitable authority to issue a mandatory or prohibitory order which: (a) extends or has effect beyond the subject matter of this Agreement, or (b) will govern the activities of either party for a period of more than two years; nor shall the arbitration panel have authority to award punitive, consequential or any damages whatsoever beyond or in addition to the compensatory damages allowed to be awarded under this Agreement. The decision of the arbitration panel shall be in written form and shall include findings of fact and conclusions of law. It is the intent and desire of DEALER and CC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and binding, subject to no judicial or administrative review, except on those grounds set forth in 9 USC sections 10 and 11. Judgment on the award and/or orders may be entered in any court having jurisdiction over the parties or their assets. In the final award and/or order, the arbitration panel shall divide all costs (other than attorney fees, which shall be borne by the party incurring such fees and other costs specifically provided for herein) incurred in conducting the arbitration in accordance with what the arbitration panel deems just and equitable under the circumstances. The fees of DEALER's arbitrator shall be paid by DEALER. The fees of CC's arbitrator shall be paid by CC. - -------------------------------------------------------------------------------- 10 SIGNATURE This Agreement becomes valid only when signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation and by a duly authorized officer or executive of DEALER if a corporation; or by one of the general partners of DEALER if a partnership; or by DEALER if an individual. IN WITNESS WHEREOF, the parties hereto have signed this Agreement which is finally executed at Auburn Hills, Michigan, in triplicate, on June 04, 1997. Fort Mill Chrysler-Plymouth-Dodge, Inc. ------------------------------------------- (DEALER Firm Name and D/B/A, if applicable) By: /s/ O. Bruton Smith --------------------------------------- (Individual Duly Authorized to Sign) --------------------------------------- (Title) CHRYSLER CORPORATION By: /s/ ILLEGIBLE --------------------------------------- National Dealer Placement Manager --------------------------------------- (Title) EX-10 12 EXHIBIT 10.56 SALES AND SERVICE AGREEMEN Chrysler Corporation Plymouth SALES AND SERVICE AGREEMENT Fort Mill Chrysler-Plymouth-Dodge, Inc. (DEALER Firm Name and D/B/A, if applicable) located at 3310 Highway 51 & Carowinds Fort Mill, South Carolina (STREET) (CITY) (STATE) a(n) Corporation, hereinafter called DEALER and (INDIVIDUAL, CORPORATION OR PARTNERSHIP) Chrysler Corporation, a Delaware corporation, hereinafter sometimes referred to as "CC", have entered into this Chrysler Corporation Plymouth Sales and Service Agreement, hereinafter referred to as "Agreement", the terms of which are as follows: - -------------------------------------------------------------------------------- INTRODUCTION The purpose of the relationship established by this Agreement is to provide a means for the sale and service of specified Plymouth vehicles and the sale of CC vehicle parts and accessories in a manner that will maximize customer satisfaction and be of benefit to DEALER and CC. While the following provisions, each of which is material, set forth the undertakings of this relationship, the success of those undertakings rests on a recognition of the mutuality of interests of DEALER and CC, and a spirit of understanding and cooperation by both parties in the day to day performance of their respective functions. As a result of such considerations, CC has entered into this Agreement in reliance upon and has placed its trust in the personal abilities, expertise, knowledge and integrity of DEALER's principal owners and management personnel, which CC anticipates will enable DEALER to perform the personal services contemplated by this Agreement. It is the mutual goal of this relationship to promote the sale and service of specified CC products by maintaining and advancing their excellence and reputation by earning, holding and furthering the public regard for CC and all CC dealers. - -------------------------------------------------------------------------------- 1 PRODUCTS COVERED DEALER has the right to order and purchase from CC and to sell at retail only those specific models of CC vehicles, sometimes referred to as "specified CC vehicles," listed on the Motor Vehicle Addendum, attached hereto and incorporated herein by reference. CC may change the models of CC vehicles listed on the Motor Vehicle Addendum by furnishing DEALER a superseding Motor Vehicle Addendum. Such a superseding Motor Vehicle Addendum will not be deemed or construed to be an amendment to this Agreement. - -------------------------------------------------------------------------------- 2 DEALER'S MANAGEMENT CC has entered into this Agreement relying on the active, substantial and continuing personal participation in the management of DEALER's organization by: NAME POSITION William Saddler Anderson General Manager - -------------------------------------- ------------------------------- Bryan Scott Smith Vice President - -------------------------------------- ------------------------------- DEALER represents and warrants that at least one of the above-named individuals will be physically present at the DEALER's facility (sometimes referred to as "Dealership Facilities") during most of its operating hours and will manage all of DEALER's business relating to the sale and service of CC products. DEALER shall not change the personnel holding the above described position(s) or the nature and extent of his/her/their management participation without the prior written approval of CC. - -------------------------------------------------------------------------------- 3 DEALER'S CAPITAL STOCK OR PARTNERSHIP INTEREST If DEALER is a corporation or partnership, DEALER represents and agrees that the persons named below own beneficially the capital stock or partnership interest of DEALER in the percentages indicated below. DEALER warrants there will be no change affecting more than 50% of the ownership interest of DEALER, nor will there be any other change in the ownership interest of DEALER which may affect the managerial control of DEALER without CC's prior written approval. Voting Non-Voting Partnership Active Name Stock Stock Interest Yes/No Sonic Auto World, Inc. 100.00 No - ---------------------- -----------% -----------% -------------% ----- - ---------------------- -----------% -----------% -------------% ----- - ---------------------- -----------% -----------% -------------% ----- - ---------------------- -----------% -----------% -------------% ----- - ---------------------- -----------% -----------% -------------% ----- Total 100.00 - ---------------------- -----------% -----------% -------------% - -------------------------------------------------------------------------------- 4 SALES LOCALITY DEALER shall have the non-exclusive right, subject to the provisions of this Agreement, to purchase from CC those new specified CC vehicles, vehicle parts, accessories and other CC products for resale at the DEALER's facilities and location described in the Dealership Facilities and Location Addendum, attached hereto and incorporated herein by reference. DEALER will actively and effectively sell and promote the retail sale of CC vehicles, vehicle parts and accessories in DEALER's Sales Locality. As used herein, "Sales Locality" shall mean the area designated in writing to DEALER by CC from time to time as the territory of DEALER's responsibility for the sale of CC vehicles, vehicle parts and accessories, although DEALER is free to sell said products to customers wherever they may be located. Said Sales Locality may be shared with other CC dealers of the same line-make as CC determines to be appropriate. - -------------------------------------------------------------------------------- 5 ADDITIONAL TERMS AND PROVISIONS The additional terms and provisions set forth in the document entitled "Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions" marked "Form 91 (C-P-D)," as may hereafter be amended from time to time, constitute a part of this Agreement with the same force and effect as if set forth at length herein, and the term "this Agreement" includes said additional terms and provisions. - -------------------------------------------------------------------------------- 6 FORMER AGREEMENTS, REPRESENTATIONS OR STATEMENTS This Chrysler Corporation Plymouth Sales and Service Agreement and other documents (or their successors as specifically provided for herein) which are specifically incorporated herein by reference constitute the entire agreement between the parties relating to the purchase by DEALER of those new specified CC vehicles, parts and accessories from CC for resale; and it cancels and supersedes all earlier agreements, written or oral, between CC and DEALER relating to the purchase by DEALER of Plymouth vehicles, parts and accessories, except for (a) amounts owing by CC to DEALER, such as payments for warranty service performed and incentive programs, or (b) amounts owing or which may be determined to be owed, as a result of an audit or investigation, by DEALER to CC due to DEALER's purchase from CC of vehicles, parts, accessories and other goods or services, or (c) amounts DEALER owes to CC, as a result of other extensions of credit by CC to DEALER. No representations or statements, other than those expressly set forth herein or those set forth in the applications for this Agreement submitted to CC by DEALER or DEALER's representatives, are made or relied upon by any party hereto in entering into this Agreement. - -------------------------------------------------------------------------------- 7 WAIVER AND MODIFICATION No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except the filling in of blank spaces and lines) will be valid or binding on CC unless approved in writing by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. - -------------------------------------------------------------------------------- 8 AMENDMENT DEALER and CC recognize that this Agreement does not have an expiration date and will continue in effect unless terminated under the limited circumstances set forth in Paragraph 28. DEALER and CC further recognize that the passage of time, changes in the industry, ways of doing business and other unforeseen circumstances may cause CC to determine that it should amend all Chrysler Corporation Sales and Service Agreements. Therefore, CC will have the right to amend this Agreement to the extent that CC deems advisable, provided that CC makes the same amendment in Chrysler Corporation Sales and Service Agreements generally. Each such amendment will be issued in a notice sent by certified mail or delivered in person to DEALER and signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. Thirty-five (35) days after mailing or delivery of such notice to DEALER, this Agreement will be deemed amended in the manner and to the extent set forth in the notice. - -------------------------------------------------------------------------------- 9 ARBITRATION Any and all disputes arising out of or in connection with the interpretation, performance or non-performance of this Agreement or any and all disputes arising out of or in connection with transactions in any way related to this Agreement (including, but not limited to, the validity, scope and enforceability of this arbitration provision, or disputes under rights granted pursuant to the statutes of the state in which DEALER is licensed) shall be finally and completely resolved by arbitration pursuant to the arbitration laws of the United States of America as codified in Title 9 of the United States Code, ss. ss.1-14, under the Rules of Commercial Arbitration of the American Arbitration Association (hereinafter referred to as the "Rules") by a majority vote of a panel of three arbitrators. One arbitrator will be selected by DEALER (DEALER's arbitrator). One arbitrator will be selected by CC (CC's arbitrator). These arbitrators must be selected by the respective parties within ten (10) business days after receipt by either DEALER or CC of a written notification from the other party of a decision to arbitrate a dispute pursuant to this Agreement. Should either CC or DEALER fail to select an arbitrator within said ten-day period, the party who so fails to select an arbitrator will have its arbitrator selected by the American Arbitration Association upon the application of the other party. The third arbitrator must be an individual who is familiar with business transactions and be a licensed attorney admitted to the practice of law within the United States of America, or a judge. The third arbitrator will be selected by DEALER's and CC's arbitrators. If said arbitrators cannot agree on a third arbitrator within thirty (30) days from the date of the appointment of the last selected arbitrator, then either DEALER's or CC's arbitrator may apply to the American Arbitration Association to appoint said third arbitrator pursuant to the criteria set forth above. The arbitration panel shall conduct the proceedings pursuant to the then existing Rules. Notwithstanding the foregoing, to the extent any provision of the Rules conflict with any provision of this Paragraph 9, the provisions of this Paragraph 9 will be controlling. CC and DEALER agree to facilitate the arbitration by: (a) each party paying to the American Arbitration Association one-half (1/2) of the required deposit before the proceedings commence; (b) making available to one another and to the arbitration panel, for inspection and photocopying all documents, books and records, if determined by the arbitrator to be relevant to the dispute; (c) making available to one another and to the arbitration panel personnel directly or indirectly under their control, for testimony during hearings and prehearing proceedings if determined by the arbitration panel to be relevant to the dispute; (d) conducting arbitration hearings to the greatest extent possible on consecutive business days; and (e) strictly observing the time periods established by the Rules or by the arbitration panel for the submission of evidence and of briefs. Unless otherwise agreed by CC and DEALER, a stenographic record of the arbitration shall be made and a transcript thereof shall be ordered for each party, with each party paying one-half (1/2) of the total cost of such recording and transcription. The stenographer shall be state-certified, if certification is made by the state, and the party to whom it is most convenient shall be responsible for securing and notifying such stenographer of the time and place of the arbitration hearing(s). If the arbitration provision is invoked when the dispute between the parties is either the legality of terminating this Agreement or of adding a new CC dealer of the same line-make or relocating an existing CC dealer of the same line-make, CC will stay the implementation of the decision to terminate this Agreement or add such new CC dealer or approve the relocation of an existing CC dealer of the same line-make until the decision of the arbitrator has been announced, providing DEALER does not in any way attempt to avoid the obligations of this Paragraph 9, in which case the decision at issue will be immediately implemented. Except as limited hereby, the arbitration panel shall have all powers of law and equity, which it can lawfully assume, necessary to resolve the issues in dispute including, without limiting the generality of the foregoing, making awards of compensatory damages, issuing both prohibitory and mandatory orders in the nature of injunctions and compelling the production of documents and witnesses for pre-arbitration discovery and/or presentation at the arbitration hearing on the merits of the case. The arbitration panel shall not have legal or equitable authority to issue a mandatory or prohibitory order which: (a) extends or has effect beyond the subject matter of this Agreement, or (b) will govern the activities of either party for a period of more than two years; nor shall the arbitration panel have authority to award punitive, consequential or any damages whatsoever beyond or in addition to the compensatory damages allowed to be awarded under this Agreement. The decision of the arbitration panel shall be in written form and shall include findings of fact and conclusions of law. It is the intent and desire of DEALER and CC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and binding, subject to no judicial or administrative review, except on those grounds set forth in 9 USC ss.10 and ss.11. Judgment on the award and/or orders may be entered in any court having jurisdiction over the parties or their assets. In the final award and/or order, the arbitration panel shall divide all costs (other than attorney fees, which shall be borne by the party incurring such fees and other costs specifically provided for herein) incurred in conducting the arbitration in accordance with what the arbitration panel deems just and equitable under the circumstances. The fees of DEALER's arbitrator shall be paid by DEALER. The fees of CC's arbitrator shall be paid by CC. - -------------------------------------------------------------------------------- 10. SIGNATURE. This Agreement becomes valid only when signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation and by a duly authorized officer or executive of DEALER if a corporation; or by one of the general partners of DEALER if a partnership; or by DEALER if an individual. IN WITNESS WHEREOF, the parties hereto have signed this Agreement which is finally executed at Auburn Hills, Michigan, in triplicate, on June 04, 1997. FORT MILL CHRYSLER-PLYMOUTH-DODGE, INC. - ------------------------------------------- (DEALER Firm Name and D/B/A, if applicable) By: /s/ O. Bruton Smith --------------------------------------- (Individual Duly Authorized to Sign) - ------------------------------------------- (Title) CHRYSLER CORPORATION By: /s/ ILLEGIBLE --------------------------------------- National Dealer Placement Manager - ------------------------------------------- (Title) EX-10 13 EXHIBIT 10.57 SALES AND SERVICE AGREEMENT CHRYSLER CORPORATION DODGE SALES AND SERVICE AGREEMENT Fort Mill Chrysler-Plymouth-Dodge, Inc. (DEALER Firm Name and D/B/A, if applicable) located at 3310 Highway 51 at Carowinds Boulevard Fort Mill South Carolina (STREET) (CITY) (STATE) a(n) Corporation hereinafter called DEALER and (INDIVIDUAL, CORPORATION OR PARTNERSHIP) Chrysler Corporation, a Delaware corporation, hereinafter sometimes referred to as "CC", have entered into this Chrysler Corporation Dodge Sales and Service Agreement, hereinafter referred to as "Agreement", the terms of which are as follows: - -------------------------------------------------------------------------------- INTRODUCTION The purpose of the relationship established by this Agreement is to provide a means for the sale and service of specified Dodge vehicles and the sale of CC vehicle parts and accessories in a manner that will maximize customer satisfaction and be of benefit to DEALER and CC. While the following provisions, each of which is material, set forth the undertakings of this relationship, the success of those undertakings rests on a recognition of the mutuality of interests of DEALER and CC, and a spirit of understanding and cooperation by both parties in the day to day performance of their respective functions. As a result of such considerations, CC has entered into this Agreement in reliance upon and has placed its trust in the personal abilities, expertise, knowledge and integrity of DEALER's principal owners and management personnel, which CC anticipates will enable DEALER to perform the personal services contemplated by this Agreement. It is the mutual goal of this relationship to promote the sale and service of specified CC products by maintaining and advancing their excellence and reputation by earning, holding and furthering the public regard for CC and all CC dealers. - -------------------------------------------------------------------------------- 1 PRODUCTS COVERED DEALER has the right to order and purchase from CC and to sell at retail only those specific models of CC vehicles, sometimes referred to as "specified CC vehicles," listed on the Motor Vehicle Addendum, attached hereto and incorporated herein by reference. CC may change the models of CC vehicles listed on the Motor Vehicle Addendum by furnishing DEALER a superseding Motor Vehicle Addendum. Such a superseding Motor Vehicle Addendum will not be deemed or construed to be an amendment to this Agreement. - -------------------------------------------------------------------------------- 2 DEALER'S MANAGEMENT CC has entered into this Agreement relying on the active, substantial and continuing personal participation in the management of DEALER's organization by: NAME POSITION William Saddler Anderson General Manager - ------------------------------------- ------------------------------ Bryan Scott Smith Vice President - ------------------------------------- ------------------------------ DEALER represents and warrants that at least one of the above-named individuals will be physically present at the DEALER's facility (sometimes referred to as "Dealership Facilities") during most of its operating hours and will manage all of DEALER's business relating to the sale and service of CC products. DEALER shall not change the personnel holding the above described position(s) or the nature and extent of his/her/their management participation without the prior written approval of CC. - -------------------------------------------------------------------------------- 3 DEALER'S CAPITAL STOCK OR PARTNERSHIP INTEREST If DEALER is a corporation or partnership, DEALER represents and agrees that the persons named below own beneficially the capital stock or partnership interest of DEALER in the percentages indicated below. DEALER warrants there will be no change affecting more than 50% of the ownership interest of DEALER, nor will there be any other change in the ownership interest of DEALER which may affect the managerial control of DEALER without CC's prior written approval. Voting Non-Voting Partnership Active Name Stock Stock Interest Yes/No Sonic Auto World, Inc. 100.00 % % % No - ------------------------- ---------- --------- ---------- ------ % % % - ------------------------- ---------- --------- ---------- ------ % % % - ------------------------- ---------- --------- ---------- ------ % % % - ------------------------- ---------- --------- ---------- ------ Total 100.00 % % % ---------- --------- ---------- - ------------------------------------------------------------------------------- 4 SALES LOCALITY. DEALER shall have the non-exclusive right, subject to the provisions of this Agreement, to purchase from CC those new specified CC vehicles, vehicle parts, accessories and other CC products for resale at the DEALER's facilities and location described in the Dealership Facilities and Location Addendum, attached hereto and incorporated herein by reference. DEALER will actively and effectively sell and promote the retail sale of CC vehicles, vehicle parts and accessories in DEALER's Sales Locality. As used herein, "Sales Locality" shall mean the area designated in writing to DEALER by CC from time to time as the territory of DEALER's responsibility for the sale of CC vehicles, vehicle parts and accessories, although DEALER is free to sell said products to customers wherever they may be located. Said Sales Locality may be shared with other CC dealers of the same line-make as CC determines to be appropriate. - -------------------------------------------------------------------------------- 5 ADDITIONAL TERMS AND PROVISIONS The additional terms and provisions set forth in the document entitled "Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions" marked "Form 91 (C-P-D)," as may hereafter be amended from time to time, constitute a part of this Agreement with the same force and effect as if set forth at length herein, and the term "this Agreement" includes said additional terms and provisions. - -------------------------------------------------------------------------------- 6 FORMER AGREEMENTS, REPRESENTATIONS OR STATEMENTS This Chrysler Corporation Dodge Sales and Service Agreement and other documents (or their successors as specifically provided for herein) which are specifically incorporated herein by reference constitute the entire agreement between the parties relating to the purchase by DEALER of those new specified CC vehicles, parts and accessories from CC for resale; and it cancels and supersedes all earlier agreements, written or oral, between CC and DEALER relating to the purchase by DEALER of Dodge vehicles, parts and accessories, except for (a) amounts owing by CC to DEALER, such as payments for warranty service performed and incentive programs, or (b) amounts owing or which may be determined to be owed, as a result of an audit or investigation, by DEALER to CC due to DEALER's purchase from CC of vehicles, parts, accessories and other goods or services, or (c) amounts DEALER owes to CC, as a result of other extensions of credit by CC to DEALER. No representations or statements, other than those expressly set forth herein or those set forth in the applications for this Agreement submitted to CC by DEALER or DEALER's representatives, are made or relied upon by any party hereto in entering into this Agreement. - -------------------------------------------------------------------------------- 7 WAIVER AND MODIFICATION No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except the filling in of blank spaces and lines) will be valid or binding on CC unless approved in writing by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. - -------------------------------------------------------------------------------- 8 AMENDMENT DEALER and CC recognize that this Agreement does not have an expiration date and will continue in effect unless terminated under the limited circumstances set forth in Paragraph 28. DEALER and CC further recognize that the passage of time, changes in the industry, ways of doing business and other unforeseen circumstances may cause CC to determine that it should amend all Chrysler Corporation Dodge Sales and Service Agreements. Therefore, CC will have the right to amend this Agreement to the extent that CC deems advisable, provided that CC makes the same amendment in Chrysler Corporation Dodge Sales and Service Agreements generally. Each such amendment will be issued in a notice sent by certified mail or delivered in person to DEALER and signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. Thirty-five (35) days after mailing or delivery of such notice to DEALER, this Agreement will be deemed amended in the manner and to the extent set forth in the notice. - -------------------------------------------------------------------------------- 9 ARBITRATION Any and all disputes arising out of or in connection with the interpretation, performance or non-performance of this Agreement or any and all disputes arising out of or in connection with transactions in any way related to this Agreement (including, but not limited to, the validity, scope and enforceability of this arbitration provision, or disputes under rights granted pursuant to the statutes of the state in which DEALER is licensed) shall be finally and completely resolved by arbitration pursuant to the arbitration laws of the United States of America as codified in Title 9 of the United States Code, ss.ss.1-14, under the Rules of Commercial Arbitration of the American Arbitration Association (hereinafter referred to as the "Rules") by a majority vote of a panel of three arbitrators. One arbitrator will be selected by DEALER (DEALER's arbitrator). One arbitrator will be selected by CC (CC's arbitrator). These arbitrators must be selected by the respective parties within ten (10) business days after receipt by either DEALER or CC of a written notification from the other party of a decision to arbitrate a dispute pursuant to this Agreement. Should either CC or DEALER fail to select an arbitrator within said ten-day period, the party who so fails to select an arbitrator will have its arbitrator selected by the American Arbitration Association upon the application of the other party. The third arbitrator must be an individual who is familiar with business transactions and be a licensed attorney admitted to the practice of law within the United States of America, or a judge. The third arbitrator will be selected by DEALER's and CC's arbitrators. If said arbitrators cannot agree on a third arbitrator within thirty (30) days from the date of the appointment of the last selected arbitrator, then either DEALER's or CC's arbitrator may apply to the American Arbitration Association to appoint said third arbitrator pursuant to the criteria set forth above. The arbitration panel shall conduct the proceedings pursuant to the then existing Rules. Notwithstanding the foregoing, to the extent any provision of the Rules conflict with any provision of this Paragraph 9, the provisions of this Paragraph 9 will be controlling. CC and DEALER agree to facilitate the arbitration by: (a) each party paying to the American Arbitration Association one-half (1/2) of the required deposit before the proceedings commence; (b) making available to one another and to the arbitration panel, for inspection and photocopying all documents, books and records, if determined by the arbitrator to be relevant to the dispute; (c) making available to one another and to the arbitration panel personnel directly or indirectly under their control, for testimony during hearings and prehearing proceedings if determined by the arbitration panel to be relevant to the dispute; (d) conducting arbitration hearings to the greatest extent possible on consecutive business days; and (e) strictly observing the time periods established by the Rules or by the arbitration panel for the submission of evidence and of briefs. Unless otherwise agreed to by CC and DEALER, a stenographic record of the arbitration shall be made and a transcript thereof shall be ordered for each party, with each party paying one-half (1/2) of the total cost of such recording and transcription. The stenographer shall be state-certified, if certification is made by the state, and the party to whom it is most convenient shall be responsible for securing and notifying such stenographer of the time and place of the arbitration hearing(s). If the arbitration provision is invoked when the dispute between the parties is either the legality of terminating this Agreement or of adding a new CC dealer of the same line-make or relocating an existing CC dealer of the same line-make, CC will stay the implementation of the decision to terminate this Agreement or add such new CC dealer or approve the relocation of an existing CC dealer of the same line-make until the decision of the arbitrator has been announced, providing DEALER does not in any way attempt to avoid the obligations of this Paragraph 9, in which case the decision at issue will be immediately implemented. Except as limited hereby, the arbitration panel shall have all powers of law and equity, which it can lawfully assume, necessary to resolve the issues in dispute including, without limiting the generality of the foregoing, making awards of compensatory damages, issuing both prohibitory and mandatory orders in the nature of injunctions and compelling the production of documents and witnesses for pre-arbitration discovery and/or presentation at the arbitration hearing on the merits of the case. The arbitration panel shall not have legal or equitable authority to issue a mandatory or prohibitory order which: (a) extends or has effect beyond the subject matter of this Agreement, or (b) will govern the activities of either party for a period of more than two years; nor shall the arbitration panel have authority to award punitive, consequential or any damages whatsoever beyond or in addition to the compensatory damages allowed to be awarded under this Agreement. The decision of the arbitration panel shall be in written form and shall include findings of fact and conclusions of law. It is the intent and desire of DEALER and CC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and binding, subject to no judicial or administrative review, except on those grounds set forth in 9 USC ss.10 and ss.11. Judgment on the award and/or orders may be entered in any court having jurisdiction over the parties or their assets. In the final award and/or order, the arbitration panel shall divide all costs (other than attorney fees, which shall be borne by the party incurring such fees and other costs specifically provided for herein) incurred in conducting the arbitration in accordance with what the arbitration panel deems just and equitable under the circumstances. The fees of DEALER's arbitrator shall be paid by DEALER. The fees of CC's arbitrator shall be paid by CC. - -------------------------------------------------------------------------------- 10 SIGNATURE This Agreement becomes valid only when signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation and by a duly authorized officer or executive of DEALER if a corporation; or by one of the general partners of DEALER if a partnership; or by DEALER if an individual. IN WITNESS WHEREOF, the parties hereto have signed this Agreement which is finally executed at Auburn Hills, Michigan, in triplicate, on June 4, 1997. FORT MILL CHRYSLER-PLYMOUTH-DODGE, INC. ---------------------------------------------- (DEALER Firm Name and D/B/A/, if applicable) By: /s/ O. Bruton Smith ------------------------------------------ (Individual Duly Authorized to Sign) ---------------------------------------------- (Title) CHRYSLER CORPORATION By: /s/ [ILLEGIBLE] ------------------------------------------- National Dealer Placement Manager ---------------------------------------------- (Title) EX-10 14 EXHIBIT 10.58 SALES AND SERVICE AGREEMENT CHRYSLER CORPORATION DODGE SALES AND SERVICE AGREEMENT Sonic Dodge, L.L.C. dba Lake Norman Dodge located at 20700 Torrence Chapel Road, Cornelius, North Carolina, a corporation, hereinafter called DEALER and Chrysler Corporation, a Delaware corporation, hereinafter sometimes referred to as "CC", have entered into this Chrysler Corporation Dodge Sales and Service Agreement, hereinafter referred to as "Agreement", the terms of which are as follows: INTRODUCTION. The purpose of the relationship established by this Agreement is to provide a means for the sale and service of specified Dodge vehicles and the sale of CC vehicle parts and accessories in a manner that will maximize customer satisfaction and be of benefit to DEALER and CC. While the following provisions, each of which is material, set forth the undertakings of this relationship, the success of those undertakings rests on a recognition of the mutuality of interests of DEALER and CC, and a spirit of understanding and cooperation by both parties in the day to day performance of their respective functions. As a result of such considerations, CC has entered into this Agreement in reliance upon and has placed its trust in the personal abilities, expertise, knowledge and integrity of DEALER's principal owners and management personnel, which CC anticipates will enable DEALER to perform the personal services contemplated by this Agreement. It is the mutual goal of this relationship to promote the sale and service of specified CC products by maintaining and advancing their excellence and reputation by earning, holding and furthering the public regard for CC and all CC dealers. 1. PRODUCTS COVERED. DEALER has the right to order and purchase from CC and to sell at retail only those specific models of CC vehicles, sometimes referred to as "specified CC vehicles," listed on the Motor Vehicle Addendum, attached hereto and incorporated herein by reference. CC may change the models of CC vehicles listed on the Motor Vehicle Addendum by furnishing DEALER a superseding Motor Vehicle Addendum. Such a superseding Motor Vehicle Addendum will not be deemed or construed or to be an amendment to this Agreement. 2. DEALER'S MANAGEMENT. CC has entered into this Agreement relying on the active, substantial and continuing personal participation in the management of DEALER's organization by: NAME POSITION Phil M. Gandy, III General Manager Bryan Scott Smith C.E.O. DEALER represents and warrants that at least one of the above-named individuals will be physically present at the DEALER's facility (sometimes referred to as "Dealership Facilities") during most of its operating hours and will manage all of DEALER's business relating to the sale and service of CC products. DEALER shall not change the personnel holding the above described position(s) or the nature and extent of his/her/their management participation without the prior written approval of CC. 3. DEALER'S CAPITAL STOCK OR PARTNERSHIP INTEREST. If DEALER is a corporation or partnership, DEALER represents and agrees that the persons named below own beneficially the capital stock or partnership interest of DEALER in the percentages indicated below. DEALER warrants there will be no change affecting more than 50% of the ownership interest of DEALER, nor will there be any other change in the ownership interest of DEALER which may affect the managerial control of DEALER without CC's prior written approval. Voting Non-Voting Partnership Active Name Stock Stock Interest Yes/No Sonic Automotive, Inc. 100.00% % % No - ------------------------- ----------- -------------- --------------- ------- - ------------------------- -----------% --------------% ---------------% ------- - ------------------------- -----------% --------------% ---------------% ------- - ------------------------- -----------% --------------% ---------------% ------- - ------------------------- -----------% --------------% ---------------% ------- Total 100.00% % % ----------- -------------- --------------- 4. SALES LOCALITY. DEALER shall have the non-exclusive right, subject to the provisions of this Agreement, to purchase from CC those new specified CC vehicles, vehicle parts, accessories and other CC products for resale at the DEALER's facilities and location described in the Dealership Facilities and Location Addendum, attached hereto and incorporated herein by reference. DEALER will actively and effectively sell and promote the retail sale of CC vehicles, vehicle parts and accessories in DEALER's Sales Locality. As used herein, "Sales Locality" shall mean the area designated in writing to DEALER by CC from time to time as the territory of DEALER's responsibility for the sale of CC vehicles, vehicle parts and accessories, although DEALER is free to sell said products to customers wherever they may be located. Said Sales Locality may be shared with other CC dealers of the same line-make as CC determines to be appropriate. 2 5. ADDITIONAL TERMS AND PROVISIONS. The additional terms and provisions set forth in the document entitled "Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions" marked "Form 91 (C-P-D)," as may hereafter be amended from time to time, constitute a part of this Agreement with the same force and effect as if set forth at length herein, and the term "this Agreement" includes said additional terms and provisions. 6. FORMER AGREEMENTS, REPRESENTATIONS OR STATEMENTS. This Chrysler Corporation Dodge Sales and Service Agreement and other documents (or their successors as specifically provided for herein) which are specifically incorporated herein by reference constitute the entire agreement between the parties relating to the purchase by DEALER of those new specified CC vehicles, parts and accessories from CC for resale; and it cancels and supersedes all earlier agreements, written or oral, between CC and DEALER relating to the purchase by DEALER of Dodge vehicles, parts and accessories, except for (a) amounts owing by CC to DEALER, such as payments for warranty service performed and incentive programs, or (b) amounts owing or which may be determined to be owed, as a result of an audit or investigation, by DEALER to CC due to DEALER's purchase from CC of vehicles, parts, accessories and other goods or services, or (c) amounts DEALER owes to CC, as a result of other extensions of credit by CC to DEALER. No representations or statements, other than those expressly set forth herein or those set forth in the applications for this Agreement submitted to CC by DEALER or DEALER's representatives, are made or relied upon by any party hereto in entering into this Agreement. 7. WAIVER AND MODIFICATION. No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except the filling in of blank spaces and lines) will be valid or binding on CC unless approved in writing by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. 8. AMENDMENT. DEALER and CC recognize that this Agreement does not have an expiration date and will continue in effect unless terminated under the limited circumstances set forth in Paragraph 28. DEALER and CC further recognize that the passage of time, changes in the industry, ways of doing business and other unforeseen circumstances may cause CC to determine that it should amend all Chrysler Corporation Dodge Sales and Service Agreements. Therefore, CC will have the right to amend this Agreement to the extent that CC deems advisable, provided that CC makes the same amendment in Chrysler Corporation Dodge Sales and Service Agreements generally. Each such amendment will be issued in a notice sent by certified mail or delivered in person to DEALER and signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. Thirty-five (35) days after mailing or delivery of 3 such notice to DEALER, this Agreement will be deemed amended in the manner and to the extent set forth in the notice. 9. ARBITRATION. Any and all disputes arising out of or in connection with the interpretation, performance or non-performance of this Agreement or any and all disputes arising out of or in connection with transactions in any way related to this Agreement (including, but not limited to, the validity, scope and enforceability of this arbitration provision, or disputes under rights granted pursuant to the statutes of the state in which DEALER is licensed) shall be finally and completely resolved by arbitration pursuant to the arbitration laws of the United States of America as codified in Title 9 of the United States Code, ss.ss.1-14, under the Rules of Commercial Arbitration of the American Arbitration Association (hereinafter referred to as the "Rules") by a majority vote of a panel of three arbitrators. One arbitrator will be selected by DEALER (DEALER's arbitrator). One arbitrator will be selected by CC (CC's arbitrator). These arbitrators must be selected by the respective parties within ten (10) business days after receipt by either DEALER or CC of a written notification from the other party of a decision to arbitrate a dispute pursuant to this Agreement. Should either CC or DEALER fail to select an arbitrator within said ten-day period, the party who so fails to select an arbitrator will have its arbitrator selected by the American Arbitration Association upon the application of the other party. The third arbitrator must be an individual who is familiar with business transactions and be a licensed attorney admitted to the practice of law within the United States of America, or a judge. The third arbitrator will be selected by DEALER's and CC's arbitrators. If said arbitrators cannot agree on a third arbitrator within thirty (30) days from the date of the appointment of the last selected arbitrator, then either DEALER's or CC's arbitrator may apply to the American Arbitration Association to appoint said third arbitrator pursuant to the criteria set forth above. The arbitration panel shall conduct the proceedings pursuant to the then existing Rules. Notwithstanding the foregoing, to the extent any provision of the Rules conflict with any provision of this Paragraph 9, the provisions of this Paragraph 9 will be controlling. CC and DEALER agree to facilitate the arbitration by: (a) each party paying to the American Arbitration Association one-half (1/2) of the required deposit before the proceedings commence; (b) making available to one another and to the arbitration panel, for inspection and photocopying all documents, books and records, if determined by the arbitrator to be relevant to the dispute; (c) making available to one another and to the arbitration panel personnel directly or indirectly under their control, for testimony during hearings and prehearing proceedings if determined by the arbitration panel to be relevant to the dispute; (d) conducting arbitration hearings to the greatest extent possible on consecutive business days; and (e) strictly observing the time periods established by the Rules or by the arbitration panel for the submission of evidence and of briefs. Unless otherwise agreed to by CC and DEALER, a stenographic record of the arbitration shall be made and a transcript thereof shall be ordered for each party, with each party paying 4 one-half (1/2) of the total cost of such recording and transcription. The stenographer shall be state-certified, if certification is made by the state, and the party to whom it is most convenient shall be responsible for securing and notifying such stenographer of the time and place of the arbitration hearing(s). If the arbitration provision is invoked when the dispute between the parties is either the legality of terminating this Agreement or of adding a new CC dealer of the same line-make or relocating an existing CC dealer of the same line-make, CC will stay the implementation of the decision to terminate this Agreement or add such new CC dealer or approve the relocation of an existing CC dealer of the same line-make until the decision of the arbitrator has been announced, providing DEALER does not in any way attempt to avoid the obligations of this Paragraph 9, in which case the decision at issue will be immediately implemented. Except as limited hereby, the arbitration panel shall have all powers of law and equity, which it can lawfully assume, necessary to resolve the issues in dispute including, without limiting the generality of the foregoing, making awards of compensatory damages, issuing both prohibitory and mandatory orders in the nature of injunctions and compelling the production of documents and witnesses for pre-arbitration discovery and/or presentation at the arbitration hearing on the merits of the case. The arbitration panel shall not have legal or equitable authority to issue a mandatory or prohibitory order which: (a) extends or has effect beyond the subject matter of this Agreement, or (b) will govern the activities of either party for a period of more than two years; nor shall the arbitration panel have authority to award punitive, consequential or any damages whatsoever beyond or in addition to the compensatory damages allowed to be awarded under this Agreement. The decision of the arbitration panel shall be in written form and shall include findings of fact and conclusions of law. It is the intent and desire of DEALER and CC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and binding, subject to no judicial or administrative review, except on those grounds set forth in 9 USC ss.10 and ss.11. Judgment on the award and/or orders may be entered in any court having jurisdiction over the parties or their assets. In the final award and/or order, the arbitration panel shall divide all costs (other than attorney fees, which shall be borne by the party incurring such fees and other costs specifically provided for herein) incurred in conducting the arbitration in accordance with what the arbitration panel deems just and equitable under the circumstances. The fees of DEALER's arbitrator shall be paid by DEALER. The fees of CC's arbitrator shall be paid by CC. 10. SIGNATURE. This Agreement becomes valid only when signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation and by a duly authorized 5 officer or executive of DEALER if a corporation; or by one of the general partners of DEALER if a partnership; or by DEALER if an individual. IN WITNESS WHEREOF, the parties hereto have signed this Agreement which is finally executed at Auburn Hills, Michigan, in triplicate, on September 29, 1997. SONIC DODGE, L.L.C. dba Lake Norman Dodge By: /s/ O. Bruton Smith -------------------------------- (Individual Duly Authorized to Sign) ---------------------------------------------- (Title) CHRYSLER CORPORATION By: /s/ V. W. Gray ------------------------------------------- National Dealer Placement Manager -------------------------------------- (Title) 6 EX-10 15 EXHIBIT 10.59 SALES AND SERVICE AGREEMENT CHRYSLER CORPORATION CHRYSLER SALES AND SERVICE AGREEMENT Sonic Chrysler-Plymouth-Jeep-Eagle, L.L.C. dba Lake Norman Chrysler Plymouth Jeep located at 20435 Chartwell Center Drive, Cornelius, North Carolina, a corporation hereinafter called DEALER, and Chrysler Corporation, a Delaware corporation, hereinafter sometimes referred to as "CC", have entered into this Chrysler Corporation Chrysler Sales and Service Agreement, hereinafter referred to as "Agreement", the terms of which are as follows: INTRODUCTION The purpose of the relationship established by this Agreement is to provide a means for the sale and service of specified Chrysler vehicles and the sale of CC vehicle parts and accessories in a manner that will maximize customer satisfaction and be of benefit to DEALER and CC. While the following provisions, each of which is material, set forth the undertakings of this relationship, the success of those undertakings rests on a recognition of the mutuality of interests of DEALER and CC, and a spirit of understanding and cooperation by both parties in the day to day performance of their respective functions. As a result of such considerations, CC has entered into this Agreement in reliance upon and has placed its trust in the personal abilities, expertise, knowledge and integrity of DEALER's principal owners and management personnel, which CC anticipates will enable DEALER to perform the personal services contemplated by this Agreement. It is the mutual goal of this relationship to promote the sale and service of specified CC products by maintaining and advancing their excellence and reputation by earning, holding and furthering the public regard for CC and all CC dealers. 1. PRODUCTS COVERED DEALER has the right to order and purchase from CC and to sell at retail only those specific models of CC vehicles, sometimes referred to as "specified CC vehicles," listed on the Motor Vehicle Addendum, attached hereto and incorporated herein by reference. CC may change the models of CC vehicles listed on the Motor Vehicle Addendum by furnishing DEALER a superseding Motor Vehicle Addendum. Such a superseding Motor Vehicle Addendum will not be deemed or construed to be an amendment to this Agreement. 2. DEALER'S MANAGEMENT CC has entered into this Agreement relying on the active, substantial and continuing personal participation in the management of DEALER's organization by: NAME POSITION William Martin Sullivan General Manager Bryan Scott Smith C.E.O. DEALER represents and warrants that at least one of the above named individuals will be physically present at the DEALER's facility (sometimes referred to as "Dealership Facilities") during most of its operating hours and will manage all of DEALER's business relating to the sale and service of CC products. DEALER shall not change the personnel holding the above described position(s) or the nature and extent of his/her/their management participation without the prior written approval of CC. 3. DEALER'S CAPITAL STOCK OR PARTNERSHIP INTEREST If DEALER is a corporation or partnership, DEALER represents and agrees that the persons named below own beneficially the capital stock or partnership interest of DEALER in the percentages indicated below. DEALER warrants there will be no change affecting more than 50% of the ownership interest of DEALER nor will there be any other change in the ownership interest of DEALER which may affect the managerial control of DEALER without CC's prior written approval. Voting Non-Voting Partnership Active Name Stock Stock Interest Yes/No Sonic Automotive,Inc. 100.00% % % No - ------------------------- ----------- -------------- --------------- ------- - ------------------------- -----------% --------------% ---------------% ------- - ------------------------- -----------% --------------% ---------------% ------- - ------------------------- -----------% --------------% ---------------% ------- - ------------------------- -----------% --------------% ---------------% ------- Total 100.00% % % ----------- -------------- --------------- 4. SALES LOCALITY DEALER shall have the non-exclusive right, subject to the provisions of this Agreement, to purchase from CC those new specified CC vehicles, vehicle parts, accessories and other CC products for resale at the DEALER's facilities and location described in the Dealership Facilities and Location Addendum, attached hereto and incorporated herein by reference. DEALER will actively and effectively sell and promote the retail sale of CC vehicles, vehicle parts and accessories in DEALER's Sales Locality. As used herein, "Sales Locality" shall mean the area designated in writing to DEALER by CC from time to time as the territory of DEALER's responsibility for the sale of CC vehicles, vehicle parts and accessories, although DEALER is free to sell said products to customers wherever they may be located. Said Sales Locality may be shared with other CC dealers of the same line-make as CC determines to be appropriate. 2 5. ADDITIONAL TERMS AND PROVISIONS The additional terms and provisions set forth in the document entitled "Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions" marked "Form 91 (C-P-D)," as may hereafter be amended from time to time, constitute a part of this Agreement with the same force and effect as if set forth at length herein, and the term "this Agreement" includes said additional terms and provisions. 6. FORMER AGREEMENTS, REPRESENTATIONS OR STATEMENTS This Chrysler Corporation Chrysler Sales and Service Agreement and other documents, (or their successors as specifically provided for herein) which are specifically incorporated herein by reference constitute the entire agreement between the parties relating to the purchase by DEALER of those new specified CC vehicles, parts and accessories from CC for resale; and it cancels and supersedes all earlier agreements, written or oral, between CC and DEALER relating to the purchase by DEALER of Chrysler vehicles, parts and accessories, except for (a) amounts owing by CC to DEALER, such as payments for warranty service performed and incentive programs, or (b) amounts owing or which may be determined to be owed, as a result of an audit or investigation, by DEALER to CC due to DEALER's purchase from CC of vehicles, parts, accessories and other goods or services, or (c) amounts DEALER owes to CC as a result of other extensions of credit by CC to DEALER. No representations or statements, other than those expressly set forth herein or those set forth in the applications for this Agreement submitted to CC by DEALER or DEALER's representatives, are made or relied upon by any party hereto in entering into this Agreement. 7. WAIVER AND MODIFICATION No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except the filling in of blank spaces and lines) will be valid or binding on CC unless approved in writing by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. 8. AMENDMENT DEALER and CC recognize that this Agreement does not have an expiration date and will continue in effect unless terminated under the limited circumstances set forth in Paragraph 28. DEALER and CC further recognize that the passage of time, changes in the industry, ways of doing business and other unforeseen circumstances may cause CC to determine that it should amend all Chrysler Corporation Chrysler Sales and Service Agreements. Therefore, CC will have the right to amend this Agreement to the extent that CC deems advisable, provided that CC makes the same amendment in Chrysler Corporation Chrysler Sales and Service Agreements generally. Each such amendment will be issued in a notice sent by certified mail or delivered in person to DEALER and signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. Thirty-five (35) days after mailing or delivery of 3 such notice to DEALER, this Agreement will be deemed amended in the manner and to the extent set forth in the notice. 9. ARBITRATION Any and all disputes arising out of or in connection with the interpretation, performance or non-performance of this Agreement or any and all disputes arising out of or in connection with transactions in any way related to this Agreement (including, but not limited to, the validity, scope and enforceability of this arbitration provision, or disputes under rights granted pursuant to the statutes of the state in which DEALER is licensed) shall be finally and completely resolved by arbitration pursuant to the arbitration laws of the United States of America as codified in Title 9 of the United States Code, ss.ss.1-14, under the Rules of Commercial Arbitration of the American Arbitration Association (hereinafter referred to as the "Rules") by a majority vote of a panel of three arbitrators. One arbitrator will be selected by DEALER (DEALER's arbitrator). One arbitrator will be selected by CC (CC's arbitrator). These arbitrators must be selected by the respective parties within ten (10) business days after receipt by either DEALER or CC of a written notification from the other party of a decision to arbitrate a dispute pursuant to this Agreement. Should either CC or DEALER fail to select an arbitrator within said ten-day period, the party who so fails to select an arbitrator will have its arbitrator selected by the American Arbitration Association upon the application of the other party. The third arbitrator must be an individual who is familiar with business transactions and be a licensed attorney admitted to the practice of law within the United States of America, or a judge. The third arbitrator will be selected by DEALER's and CC's arbitrators. If said arbitrators cannot agree on a third arbitrator within thirty (30) days from the date of the appointment of the last selected arbitrator, then either DEALER's or CC's arbitrator may apply to the American Arbitration Association to appoint said third arbitrator pursuant to the criteria set forth above. The arbitration panel shall conduct the proceedings pursuant to the then existing Rules. Notwithstanding the foregoing, to the extent any provision of the Rules conflict with any provision of this Paragraph 9, the provisions of this Paragraph 9 will be controlling. CC and DEALER agree to facilitate the arbitration by: (a) each party paying to the American Arbitration Association one-half (1/2) of the required deposit before the proceedings commence; (b) making available to one another and to the arbitration panel, for inspection and photocopying all documents, books and records, if determined by the arbitrator to be relevant to the dispute; (c) making available to one another and to the arbitration panel personnel directly or indirectly under their control, for testimony during hearings and prehearing proceedings if determined by the arbitration panel to be relevant to the dispute; (d) conducting arbitration hearings to the greatest extent possible on consecutive business days; and (e) strictly observing the time periods established by the Rules or by the arbitration panel for the submission of evidence and of briefs. Unless otherwise agreed to by CC and DEALER, a stenographic record of the arbitration shall be made and a transcript thereof shall be ordered for each party, with each party paying 4 one-half (1/2) of the total cost of such recording and transcription. The stenographer shall be state-certified, if certification is made by the state, and the party to whom it is most convenient shall be responsible for securing and notifying such stenographer of the time and place of the arbitration hearing(s). If the arbitration provision is invoked when the dispute between the parties is either the legality of terminating this Agreement or of adding a new CC dealer of the same line-make or relocating an existing CC dealer of the same line-make, CC will stay the implementation of the decision to terminate this Agreement or add such new CC dealer or approve the relocation of an existing CC dealer of the same line-make until the decision of the arbitrator has been announced, providing DEALER does not in any way attempt to avoid the obligations of this Paragraph 9, in which case the decision at issue will be immediately implemented. Except as limited hereby, the arbitration panel shall have all powers of law and equity, which it can lawfully assume, necessary to resolve the issues in dispute including, without limiting the generality of the foregoing, making awards of compensatory damages, issuing both prohibitory and mandatory orders in the nature of injunctions and compelling the production of documents and witnesses for pre-arbitration discovery and/or presentation at the arbitration hearing on the merits of the case. The arbitration panel shall not have legal or equitable authority to issue a mandatory or prohibitory order which: (a) extends or has effect beyond the subject matter of this Agreement, or (b) will govern the activities of either party for a period of more than two years; nor shall the arbitration panel have authority to award punitive, consequential or any damages whatsoever beyond or in addition to the compensatory damages allowed to be awarded under this Agreement. The decision of the arbitration panel shall be in written form and shall include findings of fact and conclusions of law. It is the intent and desire of DEALER and CC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and binding, subject to no judicial or administrative review, except on those grounds set forth in 9 USC ss.10 and ss.11. Judgment on the award and/or orders may be entered in any court having jurisdiction over the parties or their assets. In the final award and/or order, the arbitration panel shall divide all costs (other than attorney fees, which shall be borne by the party incurring such fees and other costs specifically provided for herein) incurred in conducting the arbitration in accordance with what the arbitration panel deems just and equitable under the circumstances. The fees of DEALER's arbitration shall be paid by DEALER. The fees of CC's arbitrator shall be paid by CC. 10. SIGNATURE This Agreement becomes valid only when signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation and by a duly authorized 5 officer or executive of DEALER if a corporation; or by one of the general partners of DEALER if a partnership; or by DEALER if an individual. IN WITNESS WHEREOF, the parties hereto have signed this Agreement which is finally executed at Auburn Hills, Michigan, in triplicate, on September 29, 1997. SONIC CHRYSLER-PLYMOUTH-JEEP-EAGLE, L.L.C. dba Lake Norman Chrysler Plymouth Jeep ----------------------------------------------------- (DEALER Firm Name and DBA if applicable) By /s/ O. Bruton Smith -------------------------------------------------- (Individual Duly Authorized to Sign) ----------------------------------------------------- (Title) CHRYSLER CORPORATION By /s/ V. W. Gray -------------------------------------------------- National Dealer Placement Manager -------------------------------------------- (Title) 6 EX-10 16 EXHIBIT 10.60 SALES AND SERVICE AGREEMENT CHRYSLER CORPORATION PLYMOUTH SALES AND SERVICE AGREEMENT Sonic Chrysler-Plymouth-Jeep-Eagle, L.L.C. dba Lake Norman Chrysler Plymouth Jeep, located at 20435 Chartwell Center Drive, Cornelius, North Carolina, a corporation, hereinafter called DEALER and Chrysler Corporation, a Delaware corporation, hereinafter sometimes referred to as "CC", have entered into this Chrysler Corporation Plymouth Sales and Service Agreement, hereinafter referred to as "Agreement", the terms of which are as follows: INTRODUCTION. The purpose of the relationship established by this Agreement is to provide a means for the sale and service of specified Plymouth vehicles and the sale of CC vehicle parts and accessories in a manner that will maximize customer satisfaction and be of benefit to DEALER and CC. While the following provisions, each of which is material, set forth the undertakings of this relationship, the success of those undertakings rests on a recognition of the mutuality of interests of DEALER and CC, and a spirit of understanding and cooperation by both parties in the day to day performance of their respective functions. As a result of such considerations, CC has entered into this Agreement in reliance upon and has placed its trust in the personal abilities, expertise, knowledge and integrity of DEALER's principal owners and management personnel, which CC anticipates will enable DEALER to perform the personal services contemplated by this Agreement. It is the mutual goal of this relationship to promote the sale and service of specified CC products by maintaining and advancing their excellence and reputation by earning, holding and furthering the public regard for CC and all CC dealers. 1. PRODUCTS COVERED. DEALER has the right to order and purchase from CC and to sell at retail only those specific models of CC vehicles, sometimes referred to as "specified CC vehicles," listed on the Motor Vehicle Addendum, attached hereto and incorporated herein by reference. CC may change the models of CC vehicles listed on the Motor Vehicle Addendum by furnishing DEALER a superseding Motor Vehicle Addendum. Such a superseding Motor Vehicle Addendum will not be deemed or construed or to be an amendment to this Agreement. 2. DEALER'S MANAGEMENT. CC has entered into this Agreement relying on the active, substantial and continuing personal participation in the management of DEALER's organization by: NAME POSITION William Martin Sullivan General Manager Bryan Scott Smith C.E.O. DEALER represents and warrants that at least one of the above-named individuals will be physically present at the DEALER's facility (sometimes referred to as "Dealership Facilities") during most of its operating h ours and will manage all of DEALER's business relating to the sale and service of CC products. DEALER shall not change the personnel holding the above described position(s) or the nature and extent of his/her/their management participation without the prior written approval of CC. 3. DEALER'S CAPITAL STOCK OR PARTNERSHIP INTEREST. If DEALER is a corporation or partnership, DEALER represents and agrees that the persons named below own beneficially the capital stock or partnership interest of DEALER in the percentages indicated below. DEALER warrants there will be no change affecting more than 50% of the ownership interest of DEALER, nor will there be any other change in the ownership interest of DEALER which may affect the managerial control of DEALER without CC's prior written approval. Voting Non-Voting Partnership Active Name Stock Stock Interest Yes/No Sonic Automotive,Inc. 100.00% % % No _________________________ __________ ______________ _____________ ________ _________________________ __________% ______________% _____________% ________ _________________________ __________% ______________% _____________% ________ _________________________ __________% ______________% _____________% ________ _________________________ __________% ______________% _____________% ________ Total 100.00% % % __________ ______________ _____________ 4. SALES LOCALITY. DEALER shall have the non-exclusive right, subject to the provisions of this Agreement, to purchase from CC those new specified CC vehicles, vehicle parts, accessories and other CC products for resale at the DEALER's facilities and location described in the Dealership Facilities and Location Addendum, attached hereto and incorporated herein by reference. DEALER will actively and effectively sell and promote the retail sale of CC vehicles, vehicle parts and accessories in DEALER's Sales Locality. As used herein, "Sales Locality" shall mean the area 2 designated in writing to DEALER by CC from time to time as the territory of DEALER's responsibility for the sale of CC vehicles, vehicle parts and accessories, although DEALER is free to sell said products to customers wherever they may be located. Said Sales Locality may be shared with other CC dealers of the same line-make as CC determines to be appropriate. 5. ADDITIONAL TERMS AND PROVISIONS. The additional terms and provisions set forth in the document entitled "Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions" marked "Form 91 (C-P-D)," as may hereafter be amended from time to time, constitute a part of this Agreement with the same force and effect as if set forth at length herein, and the term "this Agreement" includes said additional terms and provisions. 6. FORMER AGREEMENTS, REPRESENTATIONS OR STATEMENTS. This Chrysler Corporation Plymouth Sales and Service Agreement and other documents (or their successors as specifically provided for herein) which are specifically incorporated herein by reference constitute the entire agreement between the parties relating to the purchase by DEALER of those new specified CC vehicles, parts and accessories from CC for resale; and it cancels and supersedes all earlier agreements, written or oral, between CC and DEALER relating to the purchase by DEALER of Plymouth vehicles, parts and accessories, except for (a) amounts owing by CC to DEALER, such as payments for warranty service performed and incentive programs, or (b) amounts owing or which may be determined to be owed, as a result of an audit or investigation, by DEALER to CC due to DEALER's purchase from CC of vehicles, parts, accessories and other goods or services, or (c) amounts DEALER owes to CC, as a result of other extensions of credit by CC to DEALER. No representations or statements, other than those expressly set forth herein or those set forth in the applications for this Agreement submitted to CC by DEALER or DEALER's representatives, are made or relied upon by any party hereto in entering into this Agreement. 7. WAIVER AND MODIFICATION. No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except the filling in of blank spaces and lines) will be valid or binding on CC unless approved in writing by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. 8. AMENDMENT. DEALER and CC recognize that this Agreement does not have an expiration date and will continue in effect unless terminated under the limited circumstances set forth in Paragraph 28. DEALER and CC further recognize that the passage of time, changes in the industry, ways of doing business and other unforeseen circumstances may cause CC to determine that it should amend all Chrysler Corporation Plymouth Sales and Service Agreements. Therefore, CC will 3 have the right to amend this Agreement to the extent that CC deems advisable, provided that CC makes the same amendment in Chrysler Corporation Plymouth Sales and Service Agreements generally. Each such amendment will be issued in a notice sent by certified mail or delivered in person to DEALER and signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. Thirty-five (35) days after mailing or delivery of such notice to DEALER, this Agreement will be deemed amended in the manner and to the extent set forth in the notice. 9. ARBITRATION. Any and all disputes arising out of or in connection with the interpretation, performance or non-performance of this Agreement or any and all disputes arising out of or in connection with transactions in any way related to this Agreement (including, but not limited to, the validity, scope and enforceability of this arbitration provision, or disputes under rights granted pursuant to the statutes of the state in which DEALER is licensed) shall be finally and completely resolved by arbitration pursuant to the arbitration laws of the United States of America as codified in Title 9 of the United States Code, ss.ss.1-14, under the Rules of Commercial Arbitration of the American Arbitration Association (hereinafter referred to as the "Rules") by a majority vote of a panel of three arbitrators. One arbitrator will be selected by DEALER (DEALER's arbitrator). One arbitrator will be selected by CC (CC's arbitrator). These arbitrators must be selected by the respective parties within ten (10) business days after receipt by either DEALER or CC of a written notification from the other party of a decision to arbitrate a dispute pursuant to this Agreement. Should either CC or DEALER fail to select an arbitrator within said ten-day period, the party who so fails to select an arbitrator will have its arbitrator selected by the American Arbitration Association upon the application of the other party. The third arbitrator must be an individual who is familiar with business transactions and be a licensed attorney admitted to the practice of law within the United States of America, or a judge. The third arbitrator will be selected by DEALER's and CC's arbitrators. If said arbitrators cannot agree on a third arbitrator within thirty (30) days from the date of the appointment of the last selected arbitrator, then either DEALER's or CC's arbitrator may apply to the American Arbitration Association to appoint said third arbitrator pursuant to the criteria set forth above. The arbitration panel shall conduct the proceedings pursuant to the then existing Rules. Notwithstanding the foregoing, to the extent any provision of the Rules conflict with any provision of this Paragraph 9, the provisions of this Paragraph 9 will be controlling. CC and DEALER agree to facilitate the arbitration by: (a) each party paying to the American Arbitration Association one-half (1/2) of the required deposit before the proceedings commence; (b) making available to one another and to the arbitration panel, for inspection and photocopying all documents, books and records, if determined by the arbitrator to be relevant to the dispute; (c) making available to one another and to the arbitration panel personnel directly or indirectly under their control, for testimony during hearings and prehearing proceedings if determined by the arbitration panel to be relevant to the dispute; (d) conducting arbitration hearings to the greatest extent possible on consecutive business days; and (e) strictly observing 4 the time periods established by the Rules or by the arbitration panel for the submission of evidence and of briefs. Unless otherwise agreed to by CC and DEALER, a stenographic record of the arbitration shall be made and a transcript thereof shall be ordered for each party, with each party paying one-half (1/2) of the total cost of such recording and transcription. The stenographer shall be state-certified, if certification is made by the state, and the party to whom it is most convenient shall be responsible for securing and notifying such stenographer of the time and place of the arbitration hearing(s). If the arbitration provision is invoked when the dispute between the parties is either the legality of terminating this Agreement or of adding a new CC dealer of the same line-make or relocating an existing CC dealer of the same line-make, CC will stay the implementation of the decision to terminate this Agreement or add such new CC dealer or approve the relocation of an existing CC dealer of the same line-make until the decision of the arbitrator has been announced, providing DEALER does not in any way attempt to avoid the obligations of this Paragraph 9, in which case the decision at issue will be immediately implemented. Except as limited hereby, the arbitration panel shall have all powers of law and equity, which it can lawfully assume, necessary to resolve the issues in dispute including, without limiting the generality of the foregoing, making awards of compensatory damages, issuing both prohibitory and mandatory orders in the nature of injunctions and compelling the production of documents and witnesses for pre-arbitration discovery and/or presentation at the arbitration hearing on the merits of the case. The arbitration panel shall not have legal or equitable authority to issue a mandatory or prohibitory order which: (a) extends or has effect beyond the subject matter of this Agreement, or (b) will govern the activities of either party for a period of more than two years; nor shall the arbitration panel have authority to award punitive, consequential or any damages whatsoever beyond or in addition to the compensatory damages allowed to be awarded under this Agreement. The decision of the arbitration panel shall be in written form and shall include findings of fact and conclusions of law. It is the intent and desire of DEALER and CC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and binding, subject to no judicial or administrative review, except on those grounds set forth in 9 USC ss.10 and ss.11. Judgment on the award and/or orders may be entered in any court having jurisdiction over the parties or their assets. In the final award and/or order, the arbitration panel shall divide all costs (other than attorney fees, which shall be borne by the party incurring such fees and other costs specifically provided for herein) incurred in conducting the arbitration in accordance with what the arbitration panel deems just and equitable under the circumstances. The fees of DEALER's arbitrator shall be paid by DEALER. The fees of CC's arbitrator shall be paid by CC. 5 10. SIGNATURE. This Agreement becomes valid only when signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation and by a duly authorized officer or executive of DEALER if a corporation; or by one of the general partners of DEALER if a partnership; or by DEALER if an individual. IN WITNESS WHEREOF, the parties hereto have signed this Agreement which is finally executed at Auburn Hills, Michigan, in triplicate, on September 29, 1997. Sonic Chrysler-Plymouth-Jeep-Eagle, L.L.C. dba Lake Norman Chrysler Plymouth Jeep --------------------------------------------------- By: /s/ O. Bruton Smith ----------------------------------------------- (Individual Duly Authorized to Sign) -------------------------------------------------- (Title) CHRYSLER CORPORATION By: /s/ V. W. Gray ---------------------------------------------- National Dealer Placement Manager ---------------------------------------- (Title) 6 EX-10 17 EXHIBIT 10.61 SALES AND SERVICE AGREEMENT CHRYSLER CORPORATION JEEP SALES AND SERVICE AGREEMENT Sonic Chrysler-Plymouth-Jeep-Eagle, L.L.C. dba Lake Norman Chrysler Plymouth Jeep, located at 20435 Chartwell Center Drive, Cornelius, North Carolina, a corporation, hereinafter called DEALER and Chrysler Corporation, a Delaware corporation, hereinafter sometimes referred to as "CC", have entered into this Chrysler Corporation Jeep Sales and Service Agreement, hereinafter referred to as "Agreement", the terms of which are as follows: INTRODUCTION. The purpose of the relationship established by this Agreement is to provide a means for the sale and service of specified Jeep vehicles and the sale of CC vehicle parts and accessories in a manner that will maximize customer satisfaction and be of benefit to DEALER and CC. While the following provisions, each of which is material, set forth the undertakings of this relationship, the success of those undertakings rests on a recognition of the mutuality of interests of DEALER and CC, and a spirit of understanding and cooperation by both parties in the day to day performance of their respective functions. As a result of such considerations, CC has entered into this Agreement in reliance upon and has placed its trust in the personal abilities, expertise, knowledge and integrity of DEALER's principal owners and management personnel, which CC anticipates will enable DEALER to perform the personal services contemplated by this Agreement. It is the mutual goal of this relationship to promote the sale and service of specified CC products by maintaining and advancing their excellence and reputation by earning, holding and furthering the public regard for CC and all CC dealers. 1. PRODUCTS COVERED. DEALER has the right to order and purchase from CC and to sell at retail only those specific models of CC vehicles, sometimes referred to as "specified CC vehicles," listed on the Motor Vehicle Addendum, attached hereto and incorporated herein by reference. CC may change the models of CC vehicles listed on the Motor Vehicle Addendum by furnishing DEALER a superseding Motor Vehicle Addendum. Such a superseding Motor Vehicle Addendum will not be deemed or construed to be an amendment to this Agreement. 2. DEALER'S MANAGEMENT. CC has entered into this Agreement relying on the active, substantial and continuing personal participation in the management of DEALER's organization by: NAME POSITION William Martin Sullivan General Manager Bryan Scott Smith C.E.O. DEALER represents and warrants that at least one of the above-named individuals will be physically present at the DEALER's facility (sometimes referred to as "Dealership Facilities") during most of its operating hours and will manage all of DEALER's business relating to the sale and service of CC products. DEALER shall not change the personnel holding the above described position(s) or the nature and extent of his/her/their management participation without the prior written approval of CC. 3. DEALER'S CAPITAL STOCK OR PARTNERSHIP INTEREST. If DEALER is a corporation or partnership, DEALER represents and agrees that the persons named below own beneficially the capital stock or partnership interest of DEALER in the percentages indicated below. DEALER warrants there will be no change affecting more than 50% of the ownership interest of DEALER, nor will there be any other change in the ownership interest of DEALER which may affect the managerial control of DEALER without CC's prior written approval. Voting Non-Voting Partnership Active Name Stock Stock Interest Yes/No Sonic Automotive,Inc. 100.00% % % No - ------------------------- ----------- -------------- --------------- ------- - ------------------------- -----------% --------------% ---------------% ------- - ------------------------- -----------% --------------% ---------------% ------- - ------------------------- -----------% --------------% ---------------% ------- - ------------------------- -----------% --------------% ---------------% ------- Total 100.00% % % ----------- -------------- --------------- 4. SALES LOCALITY. DEALER shall have the non-exclusive right, subject to the provisions of this Agreement, to purchase from CC those new specified CC vehicles, vehicle parts, accessories and other CC products for resale at the DEALER's facilities and location described in the Dealership Facilities and Location Addendum, attached hereto and incorporated herein by reference. DEALER will actively and effectively sell and promote the retail sale of CC vehicles, vehicle parts and accessories in DEALER's Sales Locality. As used herein, "Sales Locality" shall mean the area designated in writing to DEALER by CC from time to time as the territory of DEALER's responsibility for the sale of CC vehicles, vehicle parts and accessories, although DEALER is free to sell said products to customers wherever they may be located. Said Sales Locality may be shared with other CC dealers of the same line-make as CC determines to be appropriate. 2 5. ADDITIONAL TERMS AND PROVISIONS. The additional terms and provisions set forth in the document entitled "Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions" marked "Form 91 (J-E)," as may hereafter be amended from time to time, constitute a part of this Agreement with the same force and effect as if set forth at length herein, and the term "this Agreement" includes said additional terms and provisions. 6. FORMER AGREEMENTS, REPRESENTATIONS OR STATEMENTS. This Chrysler Corporation Jeep Sales and Service Agreement and other documents (or their successors as specifically provided for herein) which are specifically incorporated herein by reference constitute the entire agreement between the parties relating to the purchase by DEALER of those new specified CC vehicles, parts and accessories from CC for resale; and it cancels and supersedes all earlier agreements, written or oral, between CC and DEALER relating to the purchase by DEALER of Jeep vehicles, parts and accessories, except for (a) amounts owing by CC to DEALER, such as payments for warranty service performed and incentive programs, or (b) amounts owing or which may be determined to be owed, as a result of an audit or investigation, by DEALER to CC due to DEALER's purchase from CC of vehicles, parts, accessories and other goods or services, or (c) amounts DEALER owes to CC, as a result of other extensions of credit by CC to DEALER. No representations or statements, other than those expressly set forth herein or those set forth in the applications for this Agreement submitted to CC by DEALER or DEALER's representatives, are made or relied upon by any party hereto in entering into this Agreement. 7. WAIVER AND MODIFICATION. No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except the filling in of blank spaces and lines) will be valid or binding on CC unless approved in writing by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. 8. AMENDMENT. DEALER and CC recognize that this Agreement does not have an expiration date and will continue in effect unless terminated under the limited circumstances set forth in Paragraph 28. DEALER and CC further recognize that the passage of time, changes in the industry, ways of doing business and other unforeseen circumstances may cause CC to determine that it should amend all Chrysler Corporation Jeep Sales and Service Agreements. Therefore, CC will have the right to amend this Agreement to the extent that CC deems advisable, provided that CC makes the same amendment in Chrysler Corporation Jeep Sales and Service Agreements generally. Each such amendment will be issued in a notice sent by certified mail or delivered in person to DEALER and signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. Thirty-five (35) days after mailing or delivery of 3 such notice to DEALER, this Agreement will be deemed amended in the manner and to the extent set forth in the notice. 9. ARBITRATION. Any and all disputes arising out of or in connection with the interpretation, performance or non-performance of this Agreement or any and all disputes arising out of or in connection with transactions in any way related to this Agreement (including, but not limited to, the validity, scope and enforceability of this arbitration provision, or disputes under rights granted pursuant to the statutes of the state in which DEALER is licensed) shall be finally and completely resolved by arbitration pursuant to the arbitration laws of the United States of America as codified in Title 9 of the United States Code, ss.ss.1-14, under the Rules of Commercial Arbitration of the American Arbitration Association (hereinafter referred to as the "Rules") by a majority vote of a panel of three arbitrators. One arbitrator will be selected by DEALER (DEALER's arbitrator). One arbitrator will be selected by CC (CC's arbitrator). These arbitrators must be selected by the respective parties within ten (10) business days after receipt by either DEALER or CC of a written notification from the other party of a decision to arbitrate a dispute pursuant to this Agreement. Should either CC or DEALER fail to select an arbitrator within said ten-day period, the party who so fails to select an arbitrator will have its arbitrator selected by the American Arbitration Association upon the application of the other party. The third arbitrator must be an individual who is familiar with business transactions and be a licensed attorney admitted to the practice of law within the United States of America, or a judge. The third arbitrator will be selected by DEALER's and CC's arbitrators. If said arbitrators cannot agree on a third arbitrator within thirty (30) days from the date of the appointment of the last selected arbitrator, then either DEALER's or CC's arbitrator may apply to the American Arbitration Association to appoint said third arbitrator pursuant to the criteria set forth above. The arbitration panel shall conduct the proceedings pursuant to the then existing Rules. Notwithstanding the foregoing, to the extent any provision of the Rules conflict with any provision of this Paragraph 9, the provisions of this Paragraph 9 will be controlling. CC and DEALER agree to facilitate the arbitration by: (a) each party paying to the American Arbitration Association one-half (1/2) of the required deposit before the proceedings commence; (b) making available to one another and to the arbitration panel, for inspection and photocopying all documents, books and records, if determined by the arbitrator to be relevant to the dispute; (c) making available to one another and to the arbitration panel personnel directly or indirectly under their control, for testimony during hearings and prehearing proceedings if determined by the arbitration panel to be relevant to the dispute; (d) conducting arbitration hearings to the greatest extent possible on consecutive business days; and (e) strictly observing the time periods established by the Rules or by the arbitration panel for the submission of evidence and of briefs. Unless otherwise agreed to by CC and DEALER, a stenographic record of the arbitration shall be made and a transcript thereof shall be ordered for each party, with each party paying 4 one-half (1/2) of the total cost of such recording and transcription. The stenographer shall be state-certified, if certification is made by the state, and the party to whom it is most convenient shall be responsible for securing and notifying such stenographer of the time and place of the arbitration hearing(s). If the arbitration provision is invoked when the dispute between the parties is either the legality of terminating this Agreement or of adding a new CC dealer of the same line-make or relocating an existing CC dealer of the same line-make, CC will stay the implementation of the decision to terminate this Agreement or add such new CC dealer or approve the relocation of an existing CC dealer of the same line-make until the decision of the arbitrator has been announced, providing DEALER does not in any way attempt to avoid the obligations of this Paragraph 9, in which case the decision at issue will be immediately implemented. Except as limited hereby, the arbitration panel shall have all powers of law and equity, which it can lawfully assume, necessary to resolve the issues in dispute including, without limiting the generality of the foregoing, making awards of compensatory damages, issuing both prohibitory and mandatory orders in the nature of injunctions and compelling the production of documents and witnesses for pre-arbitration discovery and/or presentation at the arbitration hearing on the merits of the case. The arbitration panel shall not have legal or equitable authority to issue a mandatory or prohibitory order which: (a) extends or has effect beyond the subject matter of this Agreement, or (b) will govern the activities of either party for a period of more than two years; nor shall the arbitration panel have authority to award punitive, consequential or any damages whatsoever beyond or in addition to the compensatory damages allowed to be awarded under this Agreement. The decision of the arbitration panel shall be in written form and shall include findings of fact and conclusions of law. It is the intent and desire of DEALER and CC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and binding, subject to no judicial or administrative review, except on those grounds set forth in 9 USC ss.10 and ss.11. Judgment on the award and/or orders may be entered in any court having jurisdiction over the parties or their assets. In the final award and/or order, the arbitration panel shall divide all costs (other than attorney fees, which shall be borne by the party incurring such fees and other costs specifically provided for herein) incurred in conducting the arbitration in accordance with what the arbitration panel deems just and equitable under the circumstances. The fees of DEALER's arbitrator shall be paid by DEALER. The fees of CC's arbitrator shall be paid by CC. 10. SIGNATURE. This Agreement becomes valid only when signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation and by a duly authorized 5 officer or executive of DEALER if a corporation; or by one of the general partners of DEALER if a partnership; or by DEALER if an individual. IN WITNESS WHEREOF, the parties hereto have signed this Agreement which is finally executed at Auburn Hills, Michigan, in triplicate, on September 29, 1997. Sonic Chrysler-Plymouth-Jeep-Eagle, L.L.C. dba Lake Norman Chrysler Plymouth Jeep By: /s/ O. Bruton Smith ----------------------------------------------- (Individual Duly Authorized to Sign) ---------------------------------------------- (Title) CHRYSLER CORPORATION By: /s/ V. W. Gray ----------------------------------------------- National Dealer Placement Manager ------------------------------------------ (Title) 6 EX-10 18 EXHIBIT 10.62 SALES AND SERVICE AGREEMENT CHRYSLER CORPORATION CHRYSLER SALES AND SERVICE AGREEMENT Cleveland Chry Plym Jeep Eagle LLC dba Cleveland Chrysler Plymouth Jeep Eagle (DEALER Firm Name and D/B/A, if applicable) located at 2496 S. Lee Highway Cleveland TN 37311 (STREET) (CITY) (STATE) a(n) Corporation, hereinafter called DEALER, and (INDIVIDUAL, CORPORATION OR PARTNERSHIP) Chrysler Corporation, a Delaware corporation, hereinafter sometimes referred to as "CC", have entered into this Chrysler Corporation Chrysler Sales and Service Agreement, hereinafter referred to as "Agreement", the terms of which are as follows: - -------------------------------------------------------------------------------- INTRODUCTION The purpose of the relationship established by this Agreement is to provide a means for the sale and service of specified Chrysler vehicles and the sale of CC vehicle parts and accessories in a manner that will maximize customer satisfaction and be of benefit to DEALER and CC. While the following provisions, each of which is material, set forth the undertakings of this relationship, the success of those undertakings rests on a recognition of the mutuality of interests of DEALER and CC, and a spirit of understanding and cooperation by both parties in the day to day performance of their respective functions. As a result of such considerations, CC has entered into this Agreement in reliance upon and has placed its trust in the personal abilities, expertise, knowledge and integrity of DEALER's principal owners and management personnel, which CC anticipates will enable DEALER to perform the personal services contemplated by this Agreement. It is the mutual goal of this relationship to promote the sale and service of specified CC products by maintaining and advancing their excellence and reputation by earning, holding and furthering the public regard for CC and all CC dealers. - -------------------------------------------------------------------------------- 1 PRODUCTS COVERED DEALER has the right to order and purchase from CC and to sell at retail only those specific models of CC vehicles, sometimes referred to as "specified CC vehicles," listed on the Motor Vehicle Addendum, attached hereto and incorporated herein by reference. CC may change the models of CC vehicles listed on the Motor Vehicle Addendum by furnishing DEALER a superseding Motor Vehicle Addendum. Such a superseding Motor Vehicle Addendum will not be deemed or construed or to be an amendment to this Agreement. - -------------------------------------------------------------------------------- 2 DEALER'S MANAGEMENT CC has entered into this Agreement relying on the active, substantial and continuing personal participation in the management of DEALER's organization by: NAME POSITION Jeffrey C. Rachor GM/Member ------------------------ ------------------- ------------------------ ------------------- DEALER represents and warrants that at least one of the above-named individuals will be physically present at the DEALER's facility (sometimes referred to as "Dealership Facilities") during most of its operating hours and will manage all of DEALER's business relating to the sale and service of CC products. DEALER shall not change the personnel holding the above described position(s) or the nature and extent of his/her/their management participation without the prior written approval of CC. - -------------------------------------------------------------------------------- 3 DEALER'S CAPITAL STOCK OR PARTNERSHIP INTEREST If DEALER is a corporation or partnership, DEALER represents and agrees that the persons named below own beneficially the capital stock or partnership interest of DEALER in the percentages indicated below. DEALER warrants there will be no change affecting more than 50% of the ownership interest of DEALER, nor will there be any other change in the ownership interest of DEALER which may affect the managerial control of DEALER without CC's prior written approval.
Voting Non-Voting Partnership Active Name Stock Stock Interest Yes/No Jeffrey C. Rachor 5 % % % Yes - ---------------------------- ----------- ---------- ----------- -------- Nelson E. Bowers 40 % % % Yes - ---------------------------- ----------- ---------- ----------- -------- John T. Lupton Trust 50 % % % No - ---------------------------- ----------- ---------- ----------- -------- Frank E. Fowler 5 % % % No - ---------------------------- ----------- ---------- ----------- -------- Total 100.00% % % ----------- ---------- -----------
- -------------------------------------------------------------------------------- 4 SALES LOCALITY DEALER shall have the non-exclusive right, subject to the provisions of this Agreement, to purchase from CC those new specified CC vehicles, vehicle parts, accessories and other CC products for resale at the DEALER's facilities and location described in the Dealership Facilities and Location Addendum, attached hereto and incorporated herein by reference. DEALER will actively and effectively sell and promote the retail sale of CC vehicles, vehicle parts and accessories in DEALER's Sales Locality. As used herein, "Sales Locality" shall mean the area designated in writing to DEALER by CC from time to time as the territory of DEALER's responsibility for the sale of CC vehicles, vehicle parts and accessories, although DEALER is free to sell said products to customers wherever they may be located. Said Sales Locality may be shared with other CC dealers of the same line-make as CC determines to be appropriate. - -------------------------------------------------------------------------------- 5 ADDITIONAL TERMS AND PROVISIONS The additional terms and provisions set forth in the document entitled "Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions" marked "Form 91 (C-P-D)," as may hereafter be amended from time to time, constitute a part of this Agreement with the same force and effect as if set forth at length herein, and the term "this Agreement" includes said additional terms and provisions. - -------------------------------------------------------------------------------- 6 FORMER AGREEMENTS, REPRESENTATIONS OR STATEMENTS This Chrysler Corporation Chrysler Sales and Service Agreement and other documents (or their successors as specifically provided for herein) which are specifically incorporated herein by reference constitute the entire agreement between the parties relating to the purchase by DEALER of those new specified CC vehicles, parts and accessories from CC for resale; and it cancels and supersedes all earlier agreements, written or oral, between CC and DEALER relating to the purchase by DEALER of Chrysler vehicles, parts and accessories, except for (a) amounts owing by CC to DEALER, such as payments for warranty service performed and incentive programs, or (b) amounts owing or which may be determined to be owed, as a result of an audit or investigation, by DEALER to CC due to DEALER's purchase from CC of vehicles, parts, accessories and other goods or services, or (c) amounts DEALER owes to CC, as a result of other extensions of credit by CC to DEALER. No representations or statements, other than those expressly set forth herein or those set forth in the applications for this Agreement submitted to CC by DEALER or DEALER's representatives, are made or relied upon by any party hereto in entering into this Agreement. - -------------------------------------------------------------------------------- 7 WAIVER AND MODIFICATION No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except the filling in of blank spaces and lines) will be valid or binding on CC unless approved in writing by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. - -------------------------------------------------------------------------------- 8 AMENDMENT DEALER and CC recognize that this Agreement does not have an expiration date and will continue in effect unless terminated under the limited circumstances set forth in Paragraph 28. DEALER and CC further recognize that the passage of time, changes in the industry, ways of doing business and other unforeseen circumstances may cause CC to determine that it should amend all Chrysler Corporation Chrysler Sales and Service Agreements. Therefore, CC will have the right to amend this Agreement to the extent that CC deems advisable, provided that CC makes the same amendment in Chrysler Corporation Chrysler Sales and Service Agreements generally. Each such amendment will be issued in a notice sent by certified mail or delivered in person to DEALER and signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. Thirty-five (35) days after mailing or delivery of such notice to DEALER, this Agreement will be deemed amended in the manner and to the extent set forth in the notice. - -------------------------------------------------------------------------------- 9 ARBITRATION Any and all disputes arising out of or in connection with the interpretation, performance or non-performance of this Agreement or any and all disputes arising out of or in connection with transactions in any way related to this Agreement (including, but not limited to, the validity, scope and enforceability of this arbitration provision, or disputes under rights granted pursuant to the statutes of the state in which DEALER is licensed) shall be finally and completely resolved by arbitration pursuant to the arbitration laws of the United States of America as codified in Title 9 of the United States Code, ss.ss.1-14, under the Rules of Commercial Arbitration of the American Arbitration Association (hereinafter referred to as the "Rules") by a majority vote of a panel of three arbitrators. One arbitrator will be selected by DEALER (DEALER's arbitrator). One arbitrator will be selected by CC (CC's arbitrator). These arbitrators must be selected by the respective parties within ten (10) business days after receipt by either DEALER or CC of a written notification from the other party of a decision to arbitrate a dispute pursuant to this Agreement. Should either CC or DEALER fail to select an arbitrator within said ten-day period, the party who so fails to select an arbitrator will have its arbitrator selected by the American Arbitration Association upon the application of the other party. The third arbitrator must be an individual who is familiar with business transactions and be a licensed attorney admitted to the practice of law within the United States of America, or a judge. The third arbitrator will be selected by DEALER's and CC's arbitrators. If said arbitrators cannot agree on a third arbitrator within thirty (30) days from the date of the appointment of the last selected arbitrator, then either DEALER's or CC's arbitrator may apply to the American Arbitration Association to appoint said third arbitrator pursuant to the criteria set forth above. The arbitration panel shall conduct the proceedings pursuant to the then existing Rules. Notwithstanding the foregoing, to the extent any provision of the Rules conflict with any provision of this Paragraph 9, the provisions of this Paragraph 9 will be controlling. CC and DEALER agree to facilitate the arbitration by: (a) each party paying to the American Arbitration Association one-half (1/2) of the required deposit before the proceedings commence; (b) making available to one another and to the arbitration panel, for inspection and photocopying all documents, books and records, if determined by the arbitrator to be relevant to the dispute; (c) making available to one another and to the arbitration panel personnel directly or indirectly under their control, for testimony during hearings and prehearing proceedings if determined by the arbitration panel to be relevant to the dispute; (d) conducting arbitration hearings to the greatest extent possible on consecutive business days; and (e) strictly observing the time periods established by the Rules or by the arbitration panel for the submission of evidence and of briefs. Unless otherwise agreed by CC and DEALER, a stenographic record of the arbitration shall be made and a transcript thereof shall be ordered for each party, with each party paying one-half (1/2) of the total cost of such recording and transcription. The stenographer shall be state-certified, if certification is made by the state, and the party to whom it is most convenient shall be responsible for securing and notifying such stenographer of the time and place of the arbitration hearing(s). If the arbitration provision is invoked when the dispute between the parties is either the legality of terminating this Agreement or of adding a new CC dealer of the same line-make or relocating an existing CC dealer of the same line-make, CC will stay the implementation of the decision to terminate this Agreement or add such new CC dealer or approve the relocation of an existing CC dealer of the same line-make until the decision of the arbitrator has been announced, providing DEALER does not in any way attempt to avoid the obligations of this Paragraph 9, in which case the decision at issue will be immediately implemented. Except as limited hereby, the arbitration panel shall have all powers of law and equity, which it can lawfully assume, necessary to resolve the issues in dispute including, without limiting the generality of the foregoing, making awards of compensatory damages, issuing both prohibitory and mandatory orders in the nature of injunctions and compelling the production of documents and witnesses for pre-arbitration discovery and/or presentation at the arbitration hearing on the merits of the case. The arbitration panel shall not have legal or equitable authority to issue a mandatory or prohibitory order which: (a) extends or has effect beyond the subject matter of this Agreement, or (b) will govern the activities of either party for a period of more than two years; nor shall the arbitration panel have authority to award punitive, consequential or any damages whatsoever beyond or in addition to the compensatory damages allowed to be awarded under this Agreement. The decision of the arbitration panel shall be in written form and shall include findings of fact and conclusions of law. It is the intent and desire of DEALER and CC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and binding, subject to no judicial or administrative review, except on those grounds set forth in 9 USC ss.10 and ss.11. Judgment on the award and/or orders may be entered in any court having jurisdiction over the parties or their assets. In the final award and/or order, the arbitration panel shall divide all costs (other than attorney fees, which shall be borne by the party incurring such fees and other costs specifically provided for herein) incurred in conducting the arbitration in accordance with what the arbitration panel deems just and equitable under the circumstances. The fees of DEALER's arbitrator shall be paid by DEALER. The fees of CC's arbitrator shall be paid by CC. - -------------------------------------------------------------------------------- 10 SIGNATURE This Agreement becomes valid only when signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation and by a duly authorized officer or executive of DEALER if a corporation; or by one of the general partners of DEALER if a partnership; or by DEALER if an individual. IN WITNESS WHEREOF, the parties hereto have signed this Agreement which is finally executed at AUBURN HILLS, Michigan, in triplicate, on APR 04 1996. Cleveland Chry Plym Jeep Eagle LLC dba Cleveland Chrysler Plymouth Jeep Eagle --------------------------------------------- (DEALER Firm Name and D/B/A, if applicable) By /s/ Nelson E. Bowers II ----------------------------------------- (Individual Duly Authorized to Sign) Pres. ----------------------------------------- (Title) CHRYSLER CORPORATION By /s/ ILLEGIBLE ----------------------------------------- National Dealer Placement Manager ----------------------------------------- (Title) EX-10 19 EXHIBIT 10.63 SALES AND SERVICE AGREEMENT CHRYSLER CORPORATION Plymouth SALES AND SERVICE AGREEMENT Cleveland Chry Plym Jeep Eagle LLC dba Cleveland Chrysler Plymouth Jeep Eagle (DEALER Firm Name and D/B/A, if applicable) located at 2496 S. Lee Highway Cleveland TN 37311 (STREET) (CITY) (STATE) a(n) Corporation, hereinafter called DEALER, and (INDIVIDUAL, CORPORATION OR PARTNERSHIP) Chrysler Corporation, a Delaware corporation, hereinafter sometimes referred to as "CC", have entered into this Chrysler Corporation Plymouth Sales and Service Agreement, hereinafter referred to as "Agreement", the terms of which are as follows: - -------------------------------------------------------------------------------- INTRODUCTION The purpose of the relationship established by this Agreement is to provide a means for the sale and service of specified Plymouth vehicles and the sale of CC vehicle parts and accessories in a manner that will maximize customer satisfaction and be of benefit to DEALER and CC. While the following provisions, each of which is material, set forth the undertakings of this relationship, the success of those undertakings rests on a recognition of the mutuality of interests of DEALER and CC, and a spirit of understanding and cooperation by both parties in the day to day performance of their respective functions. As a result of such considerations, CC has entered into this Agreement in reliance upon and has placed its trust in the personal abilities, expertise, knowledge and integrity of DEALER's principal owners and management personnel, which CC anticipates will enable DEALER to perform the personal services contemplated by this Agreement. It is the mutual goal of this relationship to promote the sale and service of specified CC products by maintaining and advancing their excellence and reputation by earning, holding and furthering the public regard for CC and all CC dealers. - -------------------------------------------------------------------------------- 1 PRODUCTS COVERED DEALER has the right to order and purchase from CC and to sell at retail only those specific models of CC vehicles, sometimes referred to as "specified CC vehicles," listed on the Motor Vehicle Addendum, attached hereto and incorporated herein by reference. CC may change the models of CC vehicles listed on the Motor Vehicle Addendum by furnishing DEALER a superseding Motor Vehicle Addendum. Such a superseding Motor Vehicle Addendum will not be deemed or construed or to be an amendment to this Agreement. - -------------------------------------------------------------------------------- 2 DEALER'S MANAGEMENT CC has entered into this Agreement relying on the active, substantial and continuing personal participation in the management of DEALER's organization by: NAME POSITION Jeffrey C. Rachor GM/Member ------------------------ ------------------- ------------------------ ------------------- DEALER represents and warrants that at least one of the above-named individuals will be physically present at the DEALER's facility (sometimes referred to as "Dealership Facilities") during most of its operating hours and will manage all of DEALER's business relating to the sale and service of CC products. DEALER shall not change the personnel holding the above described position(s) or the nature and extent of his/her/their management participation without the prior written approval of CC. - -------------------------------------------------------------------------------- 3 DEALER'S CAPITAL STOCK OR PARTNERSHIP INTEREST If DEALER is a corporation or partnership, DEALER represents and agrees that the persons named below own beneficially the capital stock or partnership interest of DEALER in the percentages indicated below. DEALER warrants there will be no change affecting more than 50% of the ownership interest of DEALER, nor will there be any other change in the ownership interest of DEALER which may affect the managerial control of DEALER without CC's prior written approval.
Voting Non-Voting Partnership Active Name Stock Stock Interest Yes/No Jeffrey C. Rachor 5 % % % Yes - ---------------------------- ----------- ---------- ----------- -------- Nelson E. Bowers 40 % % % Yes - ---------------------------- ----------- ---------- ----------- -------- John T. Lupton Trust 50 % % % No - ---------------------------- ----------- ---------- ----------- -------- Frank E. Fowler 5 % % % No - ---------------------------- ----------- ---------- ----------- -------- Total 100.00% % % ----------- ---------- -----------
- -------------------------------------------------------------------------------- 4 SALES LOCALITY DEALER shall have the non-exclusive right, subject to the provisions of this Agreement, to purchase from CC those new specified CC vehicles, vehicle parts, accessories and other CC products for resale at the DEALER's facilities and location described in the Dealership Facilities and Location Addendum, attached hereto and incorporated herein by reference. DEALER will actively and effectively sell and promote the retail sale of CC vehicles, vehicle parts and accessories in DEALER's Sales Locality. As used herein, "Sales Locality" shall mean the area designated in writing to DEALER by CC from time to time as the territory of DEALER's responsibility for the sale of CC vehicles, vehicle parts and accessories, although DEALER is free to sell said products to customers wherever they may be located. Said Sales Locality may be shared with other CC dealers of the same line-make as CC determines to be appropriate. - -------------------------------------------------------------------------------- 5 ADDITIONAL TERMS AND PROVISIONS The additional terms and provisions set forth in the document entitled "Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions" marked "Form 91 (C-P-D)," as may hereafter be amended from time to time, constitute a part of this Agreement with the same force and effect as if set forth at length herein, and the term "this Agreement" includes said additional terms and provisions. - -------------------------------------------------------------------------------- 6 FORMER AGREEMENTS, REPRESENTATIONS OR STATEMENTS This Chrysler Corporation Plymouth Sales and Service Agreement and other documents (or their successors as specifically provided for herein) which are specifically incorporated herein by reference constitute the entire agreement between the parties relating to the purchase by DEALER of those new specified CC vehicles, parts and accessories from CC for resale; and it cancels and supersedes all earlier agreements, written or oral, between CC and DEALER relating to the purchase by DEALER of Plymouth vehicles, parts and accessories, except for (a) amounts owing by CC to DEALER, such as payments for warranty service performed and incentive programs, or (b) amounts owing or which may be determined to be owed, as a result of an audit or investigation, by DEALER to CC due to DEALER's purchase from CC of vehicles, parts, accessories and other goods or services, or (c) amounts DEALER owes to CC, as a result of other extensions of credit by CC to DEALER. No representations or statements, other than those expressly set forth herein or those set forth in the applications for this Agreement submitted to CC by DEALER or DEALER's representatives, are made or relied upon by any party hereto in entering into this Agreement. - -------------------------------------------------------------------------------- 7 WAIVER AND MODIFICATION No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except the filling in of blank spaces and lines) will be valid or binding on CC unless approved in writing by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. - -------------------------------------------------------------------------------- 8 AMENDMENT DEALER and CC recognize that this Agreement does not have an expiration date and will continue in effect unless terminated under the limited circumstances set forth in Paragraph 28. DEALER and CC further recognize that the passage of time, changes in the industry, ways of doing business and other unforeseen circumstances may cause CC to determine that it should amend all Chrysler Corporation Plymouth Sales and Service Agreements. Therefore, CC will have the right to amend this Agreement to the extent that CC deems advisable, provided that CC makes the same amendment in Chrysler Corporation Plymouth Sales and Service Agreements generally. Each such amendment will be issued in a notice sent by certified mail or delivered in person to DEALER and signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. Thirty-five (35) days after mailing or delivery of such notice to DEALER, this Agreement will be deemed amended in the manner and to the extent set forth in the notice. - -------------------------------------------------------------------------------- 9 ARBITRATION Any and all disputes arising out of or in connection with the interpretation, performance or non-performance of this Agreement or any and all disputes arising out of or in connection with transactions in any way related to this Agreement (including, but not limited to, the validity, scope and enforceability of this arbitration provision, or disputes under rights granted pursuant to the statutes of the state in which DEALER is licensed) shall be finally and completely resolved by arbitration pursuant to the arbitration laws of the United States of America as codified in Title 9 of the United States Code, ss.ss.1-14, under the Rules of Commercial Arbitration of the American Arbitration Association (hereinafter referred to as the "Rules") by a majority vote of a panel of three arbitrators. One arbitrator will be selected by DEALER (DEALER's arbitrator). One arbitrator will be selected by CC (CC's arbitrator). These arbitrators must be selected by the respective parties within ten (10) business days after receipt by either DEALER or CC of a written notification from the other party of a decision to arbitrate a dispute pursuant to this Agreement. Should either CC or DEALER fail to select an arbitrator within said ten-day period, the party who so fails to select an arbitrator will have its arbitrator selected by the American Arbitration Association upon the application of the other party. The third arbitrator must be an individual who is familiar with business transactions and be a licensed attorney admitted to the practice of law within the United States of America, or a judge. The third arbitrator will be selected by DEALER's and CC's arbitrators. If said arbitrators cannot agree on a third arbitrator within thirty (30) days from the date of the appointment of the last selected arbitrator, then either DEALER's or CC's arbitrator may apply to the American Arbitration Association to appoint said third arbitrator pursuant to the criteria set forth above. The arbitration panel shall conduct the proceedings pursuant to the then existing Rules. Notwithstanding the foregoing, to the extent any provision of the Rules conflict with any provision of this Paragraph 9, the provisions of this Paragraph 9 will be controlling. CC and DEALER agree to facilitate the arbitration by: (a) each party paying to the American Arbitration Association one-half (1/2) of the required deposit before the proceedings commence; (b) making available to one another and to the arbitration panel, for inspection and photocopying all documents, books and records, if determined by the arbitrator to be relevant to the dispute; (c) making available to one another and to the arbitration panel personnel directly or indirectly under their control, for testimony during hearings and prehearing proceedings if determined by the arbitration panel to be relevant to the dispute; (d) conducting arbitration hearings to the greatest extent possible on consecutive business days; and (e) strictly observing the time periods established by the Rules or by the arbitration panel for the submission of evidence and of briefs. Unless otherwise agreed by CC and DEALER, a stenographic record of the arbitration shall be made and a transcript thereof shall be ordered for each party, with each party paying one-half (1/2) of the total cost of such recording and transcription. The stenographer shall be state-certified, if certification is made by the state, and the party to whom it is most convenient shall be responsible for securing and notifying such stenographer of the time and place of the arbitration hearing(s). If the arbitration provision is invoked when the dispute between the parties is either the legality of terminating this Agreement or of adding a new CC dealer of the same line-make or relocating an existing CC dealer of the same line-make, CC will stay the implementation of the decision to terminate this Agreement or add such new CC dealer or approve the relocation of an existing CC dealer of the same line-make until the decision of the arbitrator has been announced, providing DEALER does not in any way attempt to avoid the obligations of this Paragraph 9, in which case the decision at issue will be immediately implemented. Except as limited hereby, the arbitration panel shall have all powers of law and equity, which it can lawfully assume, necessary to resolve the issues in dispute including, without limiting the generality of the foregoing, making awards of compensatory damages, issuing both prohibitory and mandatory orders in the nature of injunctions and compelling the production of documents and witnesses for pre-arbitration discovery and/or presentation at the arbitration hearing on the merits of the case. The arbitration panel shall not have legal or equitable authority to issue a mandatory or prohibitory order which: (a) extends or has effect beyond the subject matter of this Agreement, or (b) will govern the activities of either party for a period of more than two years; nor shall the arbitration panel have authority to award punitive, consequential or any damages whatsoever beyond or in addition to the compensatory damages allowed to be awarded under this Agreement. The decision of the arbitration panel shall be in written form and shall include findings of fact and conclusions of law. It is the intent and desire of DEALER and CC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and binding, subject to no judicial or administrative review, except on those grounds set forth in 9 USC ss.10 and ss.11. Judgment on the award and/or orders may be entered in any court having jurisdiction over the parties or their assets. In the final award and/or order, the arbitration panel shall divide all costs (other than attorney fees, which shall be borne by the party incurring such fees and other costs specifically provided for herein) incurred in conducting the arbitration in accordance with what the arbitration panel deems just and equitable under the circumstances. The fees of DEALER's arbitrator shall be paid by DEALER. The fees of CC's arbitrator shall be paid by CC. - -------------------------------------------------------------------------------- 10 SIGNATURE This Agreement becomes valid only when signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation and by a duly authorized officer or executive of DEALER if a corporation; or by one of the general partners of DEALER if a partnership; or by DEALER if an individual. IN WITNESS WHEREOF, the parties hereto have signed this Agreement which is finally executed at AUBURN HILLS, Michigan, in triplicate, on APR 04 1996. Cleveland Chry Plym Jeep Eagle LLC dba Cleveland Chrysler Plymouth Jeep Eagle --------------------------------------------- (DEALER Firm Name and D/B/A, if applicable) By /s/ Nelson E. Bowers II ----------------------------------------- (Individual Duly Authorized to Sign) Pres. ----------------------------------------- (Title) CHRYSLER CORPORATION By /s/ ILLEGIBLE ----------------------------------------- National Dealer Placement Manager ----------------------------------------- (Title) EX-10 20 EXHIBIT 10.64 SALES AND SERVICE AGREEMENT CHRYSLER CORPORATION Jeep SALES AND SERVICE AGREEMENT Cleveland Chry Plym Jeep Eagle LLC dba Cleveland Chrysler Plymouth Jeep Eagle (DEALER Firm Name and D/B/A, if applicable) located at 2496 S. Lee Highway Cleveland TN 37311 (STREET) (CITY) (STATE) a(n) Corporation, hereinafter called DEALER, and (INDIVIDUAL, CORPORATION OR PARTNERSHIP) Chrysler Corporation, a Delaware corporation, hereinafter sometimes referred to as "CC", have entered into this Chrysler Corporation Jeep Sales and Service Agreement, hereinafter referred to as "Agreement", the terms of which are as follows: - -------------------------------------------------------------------------------- INTRODUCTION The purpose of the relationship established by this Agreement is to provide a means for the sale and service of specified Jeep vehicles and the sale of CC vehicle parts and accessories in a manner that will maximize customer satisfaction and be of benefit to DEALER and CC. While the following provisions, each of which is material, set forth the undertakings of this relationship, the success of those undertakings rests on a recognition of the mutuality of interests of DEALER and CC, and a spirit of understanding and cooperation by both parties in the day to day performance of their respective functions. As a result of such considerations, CC has entered into this Agreement in reliance upon and has placed its trust in the personal abilities, expertise, knowledge and integrity of DEALER's principal owners and management personnel, which CC anticipates will enable DEALER to perform the personal services contemplated by this Agreement. It is the mutual goal of this relationship to promote the sale and service of specified CC products by maintaining and advancing their excellence and reputation by earning, holding and furthering the public regard for CC and all CC dealers. - -------------------------------------------------------------------------------- 1 PRODUCTS COVERED DEALER has the right to order and purchase from CC and to sell at retail only those specific models of CC vehicles, sometimes referred to as "specified CC vehicles," listed on the Motor Vehicle Addendum, attached hereto and incorporated herein by reference. CC may change the models of CC vehicles listed on the Motor Vehicle Addendum by furnishing DEALER a superseding Motor Vehicle Addendum. Such a superseding Motor Vehicle Addendum will not be deemed or construed or to be an amendment to this Agreement. - -------------------------------------------------------------------------------- 2 DEALER'S MANAGEMENT CC has entered into this Agreement relying on the active, substantial and continuing personal participation in the management of DEALER's organization by: NAME POSITION Jeffrey C. Rachor GM/Member ------------------------ ------------------- ------------------------ ------------------- DEALER represents and warrants that at least one of the above-named individuals will be physically present at the DEALER's facility (sometimes referred to as "Dealership Facilities") during most of its operating hours and will manage all of DEALER's business relating to the sale and service of CC products. DEALER shall not change the personnel holding the above described position(s) or the nature and extent of his/her/their management participation without the prior written approval of CC. - -------------------------------------------------------------------------------- 3 DEALER'S CAPITAL STOCK OR PARTNERSHIP INTEREST If DEALER is a corporation or partnership, DEALER represents and agrees that the persons named below own beneficially the capital stock or partnership interest of DEALER in the percentages indicated below. DEALER warrants there will be no change affecting more than 50% of the ownership interest of DEALER, nor will there be any other change in the ownership interest of DEALER which may affect the managerial control of DEALER without CC's prior written approval.
Voting Non-Voting Partnership Active Name Stock Stock Interest Yes/No Jeffrey C. Rachor 5 % % % Yes - ---------------------------- ----------- ---------- ----------- -------- Nelson E. Bowers 40 % % % Yes - ---------------------------- ----------- ---------- ----------- -------- John T. Lupton Trust 50 % % % No - ---------------------------- ----------- ---------- ----------- -------- Frank E. Fowler 5 % % % No - ---------------------------- ----------- ---------- ----------- -------- % % % - ---------------------------- ----------- ---------- ----------- -------- Total 100.00% % % ----------- ---------- -----------
- -------------------------------------------------------------------------------- 4 SALES LOCALITY DEALER shall have the non-exclusive right, subject to the provisions of this Agreement, to purchase from CC those new specified CC vehicles, vehicle parts, accessories and other CC products for resale at the DEALER's facilities and location described in the Dealership Facilities and Location Addendum, attached hereto and incorporated herein by reference. DEALER will actively and effectively sell and promote the retail sale of CC vehicles, vehicle parts and accessories in DEALER's Sales Locality. As used herein, "Sales Locality" shall mean the area designated in writing to DEALER by CC from time to time as the territory of DEALER's responsibility for the sale of CC vehicles, vehicle parts and accessories, although DEALER is free to sell said products to customers wherever they may be located. Said Sales Locality may be shared with other CC dealers of the same line-make as CC determines to be appropriate. - -------------------------------------------------------------------------------- 5 ADDITIONAL TERMS AND PROVISIONS The additional terms and provisions set forth in the document entitled "Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions" marked "Form 91 (J-E)," as may hereafter be amended from time to time, constitute a part of this Agreement with the same force and effect as if set forth at length herein, and the term "this Agreement" includes said additional terms and provisions. - -------------------------------------------------------------------------------- 6 FORMER AGREEMENTS, REPRESENTATIONS OR STATEMENTS This Chrysler Corporation Jeep Sales and Service Agreement and other documents (or their successors as specifically provided for herein) which are specifically incorporated herein by reference constitute the entire agreement between the parties relating to the purchase by DEALER of those new specified CC vehicles, parts and accessories from CC for resale; and it cancels and supersedes all earlier agreements, written or oral, between CC and DEALER relating to the purchase by DEALER of Jeep vehicles, parts and accessories, except for (a) amounts owing by CC to DEALER, such as payments for warranty service performed and incentive programs, or (b) amounts owing or which may be determined to be owed, as a result of an audit or investigation, by DEALER to CC due to DEALER's purchase from CC of vehicles, parts, accessories and other goods or services, or (c) amounts DEALER owes to CC, as a result of other extensions of credit by CC to DEALER. No representations or statements, other than those expressly set forth herein or those set forth in the applications for this Agreement submitted to CC by DEALER or DEALER's representatives, are made or relied upon by any party hereto in entering into this Agreement. - -------------------------------------------------------------------------------- 7 WAIVER AND MODIFICATION No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except the filling in of blank spaces and lines) will be valid or binding on CC unless approved in writing by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. - -------------------------------------------------------------------------------- 8 AMENDMENT DEALER and CC recognize that this Agreement does not have an expiration date and will continue in effect unless terminated under the limited circumstances set forth in Paragraph 28. DEALER and CC further recognize that the passage of time, changes in the industry, ways of doing business and other unforeseen circumstances may cause CC to determine that it should amend all Chrysler Corporation Jeep Sales and Service Agreements. Therefore, CC will have the right to amend this Agreement to the extent that CC deems advisable, provided that CC makes the same amendment in Chrysler Corporation Jeep Sales and Service Agreements generally. Each such amendment will be issued in a notice sent by certified mail or delivered in person to DEALER and signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. Thirty-five (35) days after mailing or delivery of such notice to DEALER, this Agreement will be deemed amended in the manner and to the extent set forth in the notice. - -------------------------------------------------------------------------------- 9 ARBITRATION Any and all disputes arising out of or in connection with the interpretation, performance or non-performance of this Agreement or any and all disputes arising out of or in connection with transactions in any way related to this Agreement (including, but not limited to, the validity, scope and enforceability of this arbitration provision, or disputes under rights granted pursuant to the statutes of the state in which DEALER is licensed) shall be finally and completely resolved by arbitration pursuant to the arbitration laws of the United States of America as codified in Title 9 of the United States Code, ss.ss.1-14, under the Rules of Commercial Arbitration of the American Arbitration Association (hereinafter referred to as the "Rules") by a majority vote of a panel of three arbitrators. One arbitrator will be selected by DEALER (DEALER's arbitrator). One arbitrator will be selected by CC (CC's arbitrator). These arbitrators must be selected by the respective parties within ten (10) business days after receipt by either DEALER or CC of a written notification from the other party of a decision to arbitrate a dispute pursuant to this Agreement. Should either CC or DEALER fail to select an arbitrator within said ten-day period, the party who so fails to select an arbitrator will have its arbitrator selected by the American Arbitration Association upon the application of the other party. The third arbitrator must be an individual who is familiar with business transactions and be a licensed attorney admitted to the practice of law within the United States of America, or a judge. The third arbitrator will be selected by DEALER's and CC's arbitrators. If said arbitrators cannot agree on a third arbitrator within thirty (30) days from the date of the appointment of the last selected arbitrator, then either DEALER's or CC's arbitrator may apply to the American Arbitration Association to appoint said third arbitrator pursuant to the criteria set forth above. The arbitration panel shall conduct the proceedings pursuant to the then existing Rules. Notwithstanding the foregoing, to the extent any provision of the Rules conflict with any provision of this Paragraph 9, the provisions of this Paragraph 9 will be controlling. CC and DEALER agree to facilitate the arbitration by: (a) each party paying to the American Arbitration Association one-half (1/2) of the required deposit before the proceedings commence; (b) making available to one another and to the arbitration panel, for inspection and photocopying all documents, books and records, if determined by the arbitrator to be relevant to the dispute; (c) making available to one another and to the arbitration panel personnel directly or indirectly under their control, for testimony during hearings and prehearing proceedings if determined by the arbitration panel to be relevant to the dispute; (d) conducting arbitration hearings to the greatest extent possible on consecutive business days; and (e) strictly observing the time periods established by the Rules or by the arbitration panel for the submission of evidence and of briefs. Unless otherwise agreed by CC and DEALER, a stenographic record of the arbitration shall be made and a transcript thereof shall be ordered for each party, with each party paying one-half (1/2) of the total cost of such recording and transcription. The stenographer shall be state-certified, if certification is made by the state, and the party to whom it is most convenient shall be responsible for securing and notifying such stenographer of the time and place of the arbitration hearing(s). If the arbitration provision is invoked when the dispute between the parties is either the legality of terminating this Agreement or of adding a new CC dealer of the same line-make or relocating an existing CC dealer of the same line-make, CC will stay the implementation of the decision to terminate this Agreement or add such new CC dealer or approve the relocation of an existing CC dealer of the same line-make until the decision of the arbitrator has been announced, providing DEALER does not in any way attempt to avoid the obligations of this Paragraph 9, in which case the decision at issue will be immediately implemented. Except as limited hereby, the arbitration panel shall have all powers of law and equity, which it can lawfully assume, necessary to resolve the issues in dispute including, without limiting the generality of the foregoing, making awards of compensatory damages, issuing both prohibitory and mandatory orders in the nature of injunctions and compelling the production of documents and witnesses for pre-arbitration discovery and/or presentation at the arbitration hearing on the merits of the case. The arbitration panel shall not have legal or equitable authority to issue a mandatory or prohibitory order which: (a) extends or has effect beyond the subject matter of this Agreement, or (b) will govern the activities of either party for a period of more than two years; nor shall the arbitration panel have authority to award punitive, consequential or any damages whatsoever beyond or in addition to the compensatory damages allowed to be awarded under this Agreement. The decision of the arbitration panel shall be in written form and shall include findings of fact and conclusions of law. It is the intent and desire of DEALER and CC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and binding, subject to no judicial or administrative review, except on those grounds set forth in 9 USC ss.10 and ss.11. Judgment on the award and/or orders may be entered in any court having jurisdiction over the parties or their assets. In the final award and/or order, the arbitration panel shall divide all costs (other than attorney fees, which shall be borne by the party incurring such fees and other costs specifically provided for herein) incurred in conducting the arbitration in accordance with what the arbitration panel deems just and equitable under the circumstances. The fees of DEALER's arbitrator shall be paid by DEALER. The fees of CC's arbitrator shall be paid by CC. - -------------------------------------------------------------------------------- 10 SIGNATURE This Agreement becomes valid only when signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation and by a duly authorized officer or executive of DEALER if a corporation; or by one of the general partners of DEALER if a partnership; or by DEALER if an individual. IN WITNESS WHEREOF, the parties hereto have signed this Agreement which is finally executed at AUBURN HILLS, Michigan, in triplicate, on APR 04 1996. Cleveland Chry Plym Jeep Eagle LLC dba Cleveland Chrysler Plymouth Jeep Eagle --------------------------------------------- (DEALER Firm Name and D/B/A, if applicable) By: /s/ Nelson E. Bowers II ----------------------------------------- (Individual Duly Authorized to Sign) Pres. ----------------------------------------- (Title) CHRYSLER CORPORATION By: /s/ ILLEGIBLE ----------------------------------------- National Dealer Placement Manager ----------------------------------------- (Title) EX-10 21 EXHIBIT 10.65 SALES AND SERVICE AGREEMENT CHRYSLER CORPORATION Dodge SALES AND SERVICE AGREEMENT Nelson Bowers Dodge, LLC d/b/a Dodge of Chattanooga (DEALER Firm Name and D/B/A, if applicable) located at 402 West Martin Luther King Blvd. Chattanooga TN 37402 (STREET) (CITY) (STATE) a(n) Limited Liability Company hereinafter called DEALER, and (INDIVIDUAL, CORPORATION OR PARTNERSHIP) Chrysler Corporation, a Delaware corporation, hereinafter sometimes referred to as "CC", have entered into this Chrysler Corporation Dodge Sales and Service Agreement, hereinafter referred to as "Agreement", the terms of which are as follows: - -------------------------------------------------------------------------------- INTRODUCTION The purpose of the relationship established by this Agreement is to provide a means for the sale and service of specified Dodge vehicles and the sale of CC vehicle parts and accessories in a manner that will maximize customer satisfaction and be of benefit to DEALER and CC. While the following provisions, each of which is material, set forth the undertakings of this relationship, the success of those undertakings rests on a recognition of the mutuality of interests of DEALER and CC, and a spirit of understanding and cooperation by both parties in the day to day performance of their respective functions. As a result of such considerations, CC has entered into this Agreement in reliance upon and has placed its trust in the personal abilities, expertise, knowledge and integrity of DEALER's principal owners and management personnel, which CC anticipates will enable DEALER to perform the personal services contemplated by this Agreement. It is the mutual goal of this relationship to promote the sale and service of specified CC products by maintaining and advancing their excellence and reputation by earning, holding and furthering the public regard for CC and all CC dealers. - -------------------------------------------------------------------------------- 1 PRODUCTS COVERED DEALER has the right to order and purchase from CC and to sell at retail only those specific models of CC vehicles, sometimes referred to as "specified CC vehicles," listed on the Motor Vehicle Addendum, attached hereto and incorporated herein by reference. CC may change the models of CC vehicles listed on the Motor Vehicle Addendum by furnishing DEALER a superseding Motor Vehicle Addendum. Such a superseding Motor Vehicle Addendum will not be deemed or construed or to be an amendment to this Agreement. - -------------------------------------------------------------------------------- 2 DEALER'S MANAGEMENT CC has entered into this Agreement relying on the active, substantial and continuing personal participation in the management of DEALER's organization by: NAME POSITION Jeffrey C. Rachor General Manager ------------------------ ------------------- ------------------------ ------------------- DEALER represents and warrants that at least one of the above-named individuals will be physically present at the DEALER's facility (sometimes referred to as "Dealership Facilities") during most of its operating hours and will manage all of DEALER's business relating to the sale and service of CC products. DEALER shall not change the personnel holding the above described position(s) or the nature and extent of his/her/their management participation without the prior written approval of CC. - -------------------------------------------------------------------------------- 3 DEALER'S CAPITAL STOCK OR PARTNERSHIP INTEREST If DEALER is a corporation or partnership, DEALER represents and agrees that the persons named below own beneficially the capital stock or partnership interest of DEALER in the percentages indicated below. DEALER warrants there will be no change affecting more than 50% of the ownership interest of DEALER, nor will there be any other change in the ownership interest of DEALER which may affect the managerial control of DEALER without CC's prior written approval.
Voting Non-Voting Partnership Active Name Stock Stock Interest Yes/No Jeffrey C. Rachor 1.00 % % % Yes - ---------------------------- ----------- ---------- ----------- -------- Nelson E. Bowers 49.00 % % % Yes - ---------------------------- ----------- ---------- ----------- -------- John T. Lupton Trust 50.00 % % % No - ---------------------------- ----------- ---------- ----------- -------- % % % - ---------------------------- ----------- ---------- ----------- -------- Total 100.00% % % ----------- ---------- -----------
- -------------------------------------------------------------------------------- 4 SALES LOCALITY DEALER shall have the non-exclusive right, subject to the provisions of this Agreement, to purchase from CC those new specified CC vehicles, vehicle parts, accessories and other CC products for resale at the DEALER's facilities and location described in the Dealership Facilities and Location Addendum, attached hereto and incorporated herein by reference. DEALER will actively and effectively sell and promote the retail sale of CC vehicles, vehicle parts and accessories in DEALER's Sales Locality. As used herein, "Sales Locality" shall mean the area designated in writing to DEALER by CC from time to time as the territory of DEALER's responsibility for the sale of CC vehicles, vehicle parts and accessories, although DEALER is free to sell said products to customers wherever they may be located. Said Sales Locality may be shared with other CC dealers of the same line-make as CC determines to be appropriate. - -------------------------------------------------------------------------------- 5 ADDITIONAL TERMS AND PROVISIONS The additional terms and provisions set forth in the document entitled "Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions" marked "Form 91 (C-P-D)," as may hereafter be amended from time to time, constitute a part of this Agreement with the same force and effect as if set forth at length herein, and the term "this Agreement" includes said additional terms and provisions. - -------------------------------------------------------------------------------- 6 FORMER AGREEMENTS, REPRESENTATIONS OR STATEMENTS This Chrysler Corporation Dodge Sales and Service Agreement and other documents (or their successors as specifically provided for herein) which are specifically incorporated herein by reference constitute the entire agreement between the parties relating to the purchase by DEALER of those new specified CC vehicles, parts and accessories from CC for resale; and it cancels and supersedes all earlier agreements, written or oral, between CC and DEALER relating to the purchase by DEALER of Dodge vehicles, parts and accessories, except for (a) amounts owing by CC to DEALER, such as payments for warranty service performed and incentive programs, or (b) amounts owing or which may be determined to be owed, as a result of an audit or investigation, by DEALER to CC due to DEALER's purchase from CC of vehicles, parts, accessories and other goods or services, or (c) amounts DEALER owes to CC, as a result of other extensions of credit by CC to DEALER. No representations or statements, other than those expressly set forth herein or those set forth in the applications for this Agreement submitted to CC by DEALER or DEALER's representatives, are made or relied upon by any party hereto in entering into this Agreement. - -------------------------------------------------------------------------------- 7 WAIVER AND MODIFICATION No waiver, modification or change of any of the terms of this Agreement or change or erasure of any printed part of this Agreement or addition to it (except the filling in of blank spaces and lines) will be valid or binding on CC unless approved in writing by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. - -------------------------------------------------------------------------------- 8 AMENDMENT DEALER and CC recognize that this Agreement does not have an expiration date and will continue in effect unless terminated under the limited circumstances set forth in Paragraph 28. DEALER and CC further recognize that the passage of time, changes in the industry, ways of doing business and other unforeseen circumstances may cause CC to determine that it should amend all Chrysler Corporation Dodge Sales and Service Agreements. Therefore, CC will have the right to amend this Agreement to the extent that CC deems advisable, provided that CC makes the same amendment in Chrysler Corporation Dodge Sales and Service Agreements generally. Each such amendment will be issued in a notice sent by certified mail or delivered in person to DEALER and signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation. Thirty-five (35) days after mailing or delivery of such notice to DEALER, this Agreement will be deemed amended in the manner and to the extent set forth in the notice. - -------------------------------------------------------------------------------- 9 ARBITRATION Any and all disputes arising out of or in connection with the interpretation, performance or non-performance of this Agreement or any and all disputes arising out of or in connection with transactions in any way related to this Agreement (including, but not limited to, the validity, scope and enforceability of this arbitration provision, or disputes under rights granted pursuant to the statutes of the state in which DEALER is licensed) shall be finally and completely resolved by arbitration pursuant to the arbitration laws of the United States of America as codified in Title 9 of the United States Code, ss.ss.1-14, under the Rules of Commercial Arbitration of the American Arbitration Association (hereinafter referred to as the "Rules") by a majority vote of a panel of three arbitrators. One arbitrator will be selected by DEALER (DEALER's arbitrator). One arbitrator will be selected by CC (CC's arbitrator). These arbitrators must be selected by the respective parties within ten (10) business days after receipt by either DEALER or CC of a written notification from the other party of a decision to arbitrate a dispute pursuant to this Agreement. Should either CC or DEALER fail to select an arbitrator within said ten-day period, the party who so fails to select an arbitrator will have its arbitrator selected by the American Arbitration Association upon the application of the other party. The third arbitrator must be an individual who is familiar with business transactions and be a licensed attorney admitted to the practice of law within the United States of America, or a judge. The third arbitrator will be selected by DEALER's and CC's arbitrators. If said arbitrators cannot agree on a third arbitrator within thirty (30) days from the date of the appointment of the last selected arbitrator, then either DEALER's or CC's arbitrator may apply to the American Arbitration Association to appoint said third arbitrator pursuant to the criteria set forth above. The arbitration panel shall conduct the proceedings pursuant to the then existing Rules. Notwithstanding the foregoing, to the extent any provision of the Rules conflict with any provision of this Paragraph 9, the provisions of this Paragraph 9 will be controlling. CC and DEALER agree to facilitate the arbitration by: (a) each party paying to the American Arbitration Association one-half (1/2) of the required deposit before the proceedings commence; (b) making available to one another and to the arbitration panel, for inspection and photocopying all documents, books and records, if determined by the arbitrator to be relevant to the dispute; (c) making available to one another and to the arbitration panel personnel directly or indirectly under their control, for testimony during hearings and prehearing proceedings if determined by the arbitration panel to be relevant to the dispute; (d) conducting arbitration hearings to the greatest extent possible on consecutive business days; and (e) strictly observing the time periods established by the Rules or by the arbitration panel for the submission of evidence and of briefs. Unless otherwise agreed by CC and DEALER, a stenographic record of the arbitration shall be made and a transcript thereof shall be ordered for each party, with each party paying one-half (1/2) of the total cost of such recording and transcription. The stenographer shall be state-certified, if certification is made by the state, and the party to whom it is most convenient shall be responsible for securing and notifying such stenographer of the time and place of the arbitration hearing(s). If the arbitration provision is invoked when the dispute between the parties is either the legality of terminating this Agreement or of adding a new CC dealer of the same line-make or relocating an existing CC dealer of the same line-make, CC will stay the implementation of the decision to terminate this Agreement or add such new CC dealer or approve the relocation of an existing CC dealer of the same line-make until the decision of the arbitrator has been announced, providing DEALER does not in any way attempt to avoid the obligations of this Paragraph 9, in which case the decision at issue will be immediately implemented. Except as limited hereby, the arbitration panel shall have all powers of law and equity, which it can lawfully assume, necessary to resolve the issues in dispute including, without limiting the generality of the foregoing, making awards of compensatory damages, issuing both prohibitory and mandatory orders in the nature of injunctions and compelling the production of documents and witnesses for pre-arbitration discovery and/or presentation at the arbitration hearing on the merits of the case. The arbitration panel shall not have legal or equitable authority to issue a mandatory or prohibitory order which: (a) extends or has effect beyond the subject matter of this Agreement, or (b) will govern the activities of either party for a period of more than two years; nor shall the arbitration panel have authority to award punitive, consequential or any damages whatsoever beyond or in addition to the compensatory damages allowed to be awarded under this Agreement. The decision of the arbitration panel shall be in written form and shall include findings of fact and conclusions of law. It is the intent and desire of DEALER and CC to hereby and forever renounce and reject any and all recourse to litigation before any judicial or administrative forum and to accept the award of the arbitration panel as final and binding, subject to no judicial or administrative review, except on those grounds set forth in 9 USC ss.10 and ss.11. Judgment on the award and/or orders may be entered in any court having jurisdiction over the parties or their assets. In the final award and/or order, the arbitration panel shall divide all costs (other than attorney fees, which shall be borne by the party incurring such fees and other costs specifically provided for herein) incurred in conducting the arbitration in accordance with what the arbitration panel deems just and equitable under the circumstances. The fees of DEALER's arbitrator shall be paid by DEALER. The fees of CC's arbitrator shall be paid by CC. - -------------------------------------------------------------------------------- 10 SIGNATURE This Agreement becomes valid only when signed by the President or a Vice President or the National Dealer Placement Manager of Chrysler Corporation and by a duly authorized officer or executive of DEALER if a corporation; or by one of the general partners of DEALER if a partnership; or by DEALER if an individual. IN WITNESS WHEREOF, the parties hereto have signed this Agreement which is finally executed at AUBURN HILLS, Michigan, in triplicate, on MAR 05 1997. Nelson Bowers Dodge, LLC dba Dodge of Chattanooga --------------------------------------------- (DEALER Firm Name and D/B/A, if applicable) By: /s/ Nelson E. Bowers II ----------------------------------------- (Individual Duly Authorized to Sign) Chief Manager ----------------------------------------- (Title) CHRYSLER CORPORATION By: /s/ ILLEGIBLE ----------------------------------------- National Dealer Placement Manager ----------------------------------------- (Title) EX-10 22 EXHIBIT 10.66 AUTHORIZED RETAILER AGREEMENT Volvo Cars of North America, Inc. --------------------------------- AUTHORIZED RETAILER AGREEMENT --------------------------------- [LOGO] VOLVO TABLE OF CONTENTS I. BUSINESS RELATIONSHIP The Partners agree that a climate of mutual trust, respect, and shared information is fundamental to the joint pursuit of a shared vision, which is the foundation of this Agreement. 1. TERM OF AGREEMENT ..................................................... 3 2. OWNERSHIP ............................................................. 3 3. MANAGEMENT ............................................................ 4 4. CHANGES IN OWNERSHIP OR MANAGEMENT .................................... 4 5. LOCATION .............................................................. 5 6. FACILITIES ............................................................ 5 7. CAPITALIZATION OF RETAILER ............................................ 6 8. DISPOSITION OF BUSINESS BY RETAILER ................................... 6 9. SUCCESSION OF OWNERSHIP OR MANAGEMENT ................................. 8 10. TERMINATION ........................................................... 9 11. DISPUTE RESOLUTION .................................................... 13 II. VOLVO CUSTOMER OWNERSHIP EXPERIENCE The Partners agree that the highest priority for Retailer and Company is providing a superior ownership experience for Volvo Customers. This will be achieved by providing unique customer value, and by treating Volvo customers and prospective Volvo customers with honesty and integrity. 12. RETAILER BUSINESS PLAN ................................................ 14 13. REVIEW AND UPDATE OF BUSINESS PLAN .................................... 14 14. VEHICLE SALES OR SERVICE IMPROVEMENT PLAN ............................. 14 15. PRODUCT AVAILABILITY .................................................. 15 16. PURCHASE AND DELIVERY ................................................. 15 17. PAYMENTS BY RETAILER .................................................. 16 18. INVENTORY OF COMPANY VEHICLES ......................................... 16 19. DEMONSTRATORS ......................................................... 17 20. BUSINESS HOURS ........................................................ 17 21. PARTS AND ACCESSORIES ................................................. 17 22. WARRANTIES ON COMPANY PRODUCTS ........................................ 17 23. PRE-DELIVERY SERVICE .................................................. 18 24. REPAIR AND MAINTENANCE SERVICE ........................................ 18 25. TRAINING .............................................................. 18 ii III. OPERATING PROVISIONS The Partners agree that the success of Volvo, its name, trademarks and reputation is their joint responsibility. 26. USE OF VOLVO TRADEMARK ................................................ 18 27. DISCONTINUANCE OF RIGHT TO USE TRADEMARK .............................. 19 28. LINES OF CREDIT ....................................................... 20 29. ACCOUNTING AND RECORD KEEPING ......................................... 20 30. RETAILER INFORMATION SYSTEMS .......................................... 20 31. CHANGE IN PRICES ...................................................... 20 32. EXPORT OF COMPANY VEHICLES ............................................ 20 33. FACTORY SUGGESTED PRICE LABELS ........................................ 20 34. INDEMNIFICATION ....................................................... 21 35. COMPLIANCE WITH LEGAL REQUIREMENTS .................................... 21 36. COMPLIANCE WITH CONSUMER PROTECTION LAWS AND REGULATIONS .............. 22 37. TRADE PRACTICES ....................................................... 22 38. REPURCHASE OF COMPANY PRODUCTS BY THE COMPANY ......................... 22 IV. MISCELLANEOUS PROVISIONS 39. LICENSING REQUIREMENTS ................................................ 23 40. INSURANCE ............................................................. 23 41. TAXES ................................................................. 23 42. WAIVER ................................................................ 23 43. AGENCY ................................................................ 23 44. SUBRETAILERS .......................................................... 24 45. ASSIGNMENT OF RIGHTS OR DELEGATION OF DUTIES .......................... 24 46. NOTICE AND SERVICE OF NOTICE .......................................... 24 47. APPLICABLE LAW AND SEVERABILITY ....................................... 24 48. FINANCIAL INFORMATION ................................................. 24 49. ENTIRE AGREEMENT ...................................................... 24 50. NO FRANCHISE FEE OR ADDITIONAL PAYMENTS ............................... 24 51. CAPTIONS .............................................................. 25 52. TIME OF THE ESSENCE ................................................... 25 53. DATE OF PERFORMANCE ................................................... 25 54. RULES OF CONSTRUCTION ................................................. 25 V. DEFINITIONS 55. DEFINITIONS ........................................................... 25 iii AUTHORIZED RETAILER AGREEMENT This Authorized Retailer Agreement ("Agreement") is entered into this 7 day of May 1996, by and between Volvo Cars of North America, Inc., a Delaware corporation with its principal place of business at 7 Volvo Drive, Rockleigh, New Jersey, 07647 ("the Company") and European Motors, LLC, d/b/a Volvo of Chattanooga ("Retailer"), having its address at 5949 Brainerd Road, Chattanooga, Tennesee 37421. This Agreement delineates the rights and responsibilities of the Company and Retailer, who each believe that the goals described in the Preamble to this Agreement can be achieved while providing the Company and Retailer with reasonable profits, and providing Volvo Customers with a superior ownership experience. NOW, THEREFORE, in consideration of the mutual promises and other good and valuable consideration referenced herein, the sufficiency of which is hereby acknowledged, it is mutually agreed by the parties as follows; PREAMBLE A. MISSION The mission of Volvo Cars of North America, Inc., and its Retailer Partners is to maximize the potential of Volvo products, by identifying and fulfilling clearly defined customer needs and demands. This will be achieved by: o Providing an ownership experience regarded as superior in the industry. o Developing and maintaining financially strong and professional Retailers that are either exclusive, or have Volvo products as their primary business. o Developing a superior organization where employees strive for excellence based on individual motivation, and TQM oriented leadership; and o Exploiting Volvo virtues created by leadership in the areas of quality, safety and environmental care. VCNA MISSION STATEMENT January, 1995 B. VISION This Agreement is the very foundation of the partnership between Volvo Cars of North America, Inc. and its Retailers. It has been carefully and diligently constructed by a team of equals, representing both Partners in the spirit of fairness and cooperation. It is upon this foundation we will strive to build a preeminent organization dedicated to fulfilling our joint vision: A seamless manufacturer/retailer commercial entity created and maintained by: o Sharing in risks and rewards. o Building of financial strength. o Common "ownership" of the Volvo brand. o Maximizing the potential of Volvo products and delivering a superior ownership experience. Consistent with our vision, we mutually agree to conduct our respective businesses with the highest level of integrity, thereby creating a strong perception of seamlessness in the eyes of our customers. C. PRINCIPLES OF OUR RELATIONSHIP Both Partners have the right to expect from each other the mutual commitment to and belief in the following Principles: o That the pursuit of the Mission Statement and the Vision is a joint responsibility. o That the overall direction of the development of the name, trademarks and reputation of "Volvo" is a joint responsibility. o That rewards be shared in relation to risks assumed. o That the Volvo brand be further protected and developed. 1 o That people are important. o That unique customer-value be provided. o That disputes be resolved in a fair and equitable manner. o That information be shared timely and accurately. o That honesty and integrity are fundamental to our conduct of business. o That the commitment to and fulfillment of these principles is the foundation upon which the right to represent Volvo is awarded. D. RETAILER PARTICIPATION The strength of this Agreement is the mutuality principle. It has been deliberately constructed to protect the interests of both Partners equally, for it is our mutual interests which make us strong. The Company and Retailer agree that their interests must be aligned to attain these goals and achieve long term success in the automotive market. These interests include, without limitation, the profitable marketing, promoting, selling and servicing of Company Products while building superior levels of customer loyalty and satisfaction with the Company and Retailer. In consideration of Retailers' commitments, and to ensure a mutually satisfactory relationship between Company and its Retailers, the Company has established mechanisms for Retailer participation in the decision-making process on matters significantly affecting Retailer's business. Retailer involvement is provided through six principal mechanisms: the Executive Committee, Regional Operating Teams, Retailer Action Teams, Performance Enhancement Teams, the Market Representation Panel, and the Mediation Panel. A. EXECUTIVE COMMITTEE Guided by the Mission Statement, Vision, and the Principles, the Executive Committee is a Volvo policy team whose primary focus is the future value of our business. Four Retailers participate along with Company executives from various disciplines. Retailer participants must have previously served as members of a Regional Operating Team, are selected by the Executive Committee, and serve for staggered two-year terms. B. REGIONAL OPERATING TEAMS The Regional Operating Teams are comprised of an equal number of Retailers and Company representatives. Regional Operating Teams deal with regional and local business issues in areas such as advertising and market support. C. RETAILER ACTION TEAMS The Executive Committee may establish Retailer Action Teams as necessary, to review certain specific business issues. The Executive Committee will determine the membership of each Retailer Action Team and the scope of its assignment. D. PERFORMANCE ENHANCEMENT TEAMS Performance Enhancement Teams are comprised of 8-14 Retailers and two Company representatives. These Retailer-managed teams focus on best practices sharing and team problem solving. E. MARKET REPRESENTATION PANEL The Market Representation Panel, consisting of three Retailers (one of whom is from the Executive Committee), and three Company representatives (of which one is from the Executive Committee) review and revise the criteria used by the Company for awarding the Retailer Agreement. 2 F. MEDIATION PANEL The Mediation Panel is designed to help resolve certain disputes which may arise between a Retailer and the Company, and is comprised of two Retailers, two Company representatives, and one member chosen by the Mediation Panel. Each of the above committees, teams, and panels represent each Partner's belief in the mutuality principle and commitment to the future of the Volvo brand. I. BUSINESS RELATIONSHIP The Partners agree that a climate of mutual trust, respect, and shared information is fundamental to the joint pursuit of a shared vision, which is the foundation of this Agreement. 1. TERM OF AGREEMENT This Agreement is for a five-year term, beginning on the date it is signed by a Company Officer, unless the parties mutually terminate in writing, or it is terminated as otherwise provided herein. If Retailer is not in material breach of this Agreement when it expires, the Company will, either offer Retailer the then current Authorized Retailer Agreement, or renew or extend this Agreement. The Company agrees to notify Retailer in writing, no later than one (1) year prior to the end of the term of this Agreement, in the event that the Company does not intend to renew or extend this Agreement, or offer Retailer the then current Authorized Retailer Agreement. The term of this Agreement may be extended only by written agreement between the parties, signed by an Officer of the Company. If the parties continue their business relationship after this Agreement expires, the relationship will be on a month-to-month basis only, and all other terms of this Agreement will be applicable. 2. OWNERSHIP A. Principal Owners. This Agreement is in the nature of a personal services contract between the Company and Retailer. The Company enters into this Agreement in express reliance on, and in consideration of, the expertise, reputation, character, integrity, ability, representations and professional and personal qualifications of the Principal Owner(s) listed below. In addition, the Company relies upon the fact that at all times during this Agreement's term, the individuals identified below will remain the Principal Owner(s) of Retailer, and that each is committed to achieving the goals described in the Preamble to this Agreement, and understands and agrees to abide by the terms and conditions of this Agreement:
PERCENTAGE OF NAME RESIDENTIAL ADDRESS OWNERSHIP INTEREST 1. Nelson E. Bowers, II 217 Colmore Circle 99% 2. _____________________ Lookout Mountain, Tennessee 37350 _______________ 3. John T. Lupton Two Union Square 4. _____________________ Chattanooga, Tennessee 37402 _______________
Retailer represents and agrees that the person(s) named as Principal Owner(s) above, and only those person(s), will exercise the ownership, control and/or management of Retailer and that any change in ownership, control or management shall be made only in accordance with, and subject to, the terms and conditions of this Agreement. 3 B. Investors. The following person(s), ("Investor(s)"), also has an ownership interest in Retailer:
PERCENTAGE OF NAME RESIDENTIAL ADDRESS OWNERSHIP INTEREST 1. Same As Section IIA _______________________________________ _______________ 2. _____________________ _______________________________________ _______________ 3. _____________________ _______________________________________ _______________ 4. _____________________ _______________________________________ _______________
Retailer represents and agrees that the person(s) named as investors above will not exercise control and/or management of Retailer's operations. 3. MANAGEMENT The Company and Retailer agree that Retailer's success under this Agreement depends upon dedicated, full time, professional, qualified, on-site management. The Company and Retailer agree that if no Principal Owner identified in Section 2A, either: (i) maintains his or her principal place of business at the Retailer Facility; or (ii) is involved in Retailer Operations on a full time, on-site, day-to-day basis, except in those circumstances when Owner operates more than one Retail Facility in the same Area of Responsibility or Market Area, that full managerial authority shall be granted to the person named below (the "General Manager"), and that this General Manager shall devote his or her personal services on a full time, on-site, day-to-day basis to Retailer's management and operation. The Company enters into this Agreement in reliance on, and in consideration of Retailer's representation that; (i) the General Manager will possess the expertise, reputation, character, integrity, ability, and professional and personal qualifications to achieve the goals and objectives of this Agreement; (ii) he or she is committed to achieving the goals described in the Preamble to this Agreement; and (iii) he or she understands and agrees to a bide by the terms and conditions of this Agreement. Retailer agrees that the General Manager identified in this Section 3 shall have an ownership interest in Retailer of at least twenty percent (20%).
PERCENTAGE OF NAME RESIDENTIAL ADDRESS OWNERSHIP INTEREST - --------------------------------- -------------------------------------- ------------------
4. CHANGES IN OWNERSHIP OR MANAGEMENT Because this Agreement is in the nature of a personal services contract, and the Company has entered into this Agreement in reliance on, and in consideration of, the expertise, reputation, character, integrity, ability, representations and professional and personal qualifications of the Principal Owners, Investors and the General Manager identified in Sections 2 and 3 above, if Retailer desires to make any change in: (i) Retailer's ownership, including, but not limited to, any attempt to conduct a public offering of any of Retailer's shares, regardless of the number or percentage of shares; or (ii) the relative shares among the Principal Owners or other investors referenced in 2B, Retailer agrees to obtain the Company's written approval, which shall not be unreasonably withheld. The Company recognizes that Retailer may wish to make a public offering of Retailer's shares, and that such a proposed offering of Retailer's shares shall not constitute the sole grounds upon which Company may reasonably withhold approval under this Section. Retailer agrees that the Company's knowledge of any change in ownership interest or management of Retailer will not be a waiver of the Company's rights and/or Retailer's obligations under this Section unless the Company has approved the change in writing. 4 5. LOCATION In consideration of the Company entering into this Agreement, Retailer agrees to at all times establish and maintain Retailer Facilities and Operations in accordance with Company Policies, at only the following location(s):
Location 1 Location 2 Location 3 A. New Car Sales 5949 Brainerd Road ______________________ ______________________ & Showroom Chattanooga, Tennessee 37421 ______________________ ______________________ ______________________ ______________________ ______________________ B. Service, 5949 Brainerd Road ______________________ ______________________ Parts & Chattanooga, Tennessee 37421 ______________________ ______________________ Accessories ______________________ ______________________ ______________________ C. Volvo Select 5949 Brainerd Road ______________________ ______________________ Pre Owned Vehicles Chattanooga, Tennessee 37421 ______________________ ______________________ Display ______________________ ______________________ ______________________ D. Administrative Support 5949 Brainerd Road ______________________ ______________________ Activities Chattanooga, Tennessee 37421 ______________________ ______________________ ______________________ ______________________ ______________________
6. FACILITIES Retailer and the Company agree that appropriate Retailer Facilities are necessary to achieve the goals described in the Preamble to this Agreement and to provide Volvo Customers with a superior ownership experience. Retailer agrees to operate its Retailer Facilities in accordance with this Agreement and the then current Retailer Facilities Guide. If Retailer operates multiple sales and/or service facilities, the terms of this Agreement will apply to all Retailer Facilities. A. Location. Retailer will provide Retailer Facilities that: (i) will enable Retailer to perform its responsibilities under this Agreement; (ii) are satisfactory in space, appearance, layout, equipment, and signage; and (ii) are in accordance with the then current Retailer Facilities Guide. Retailer will conduct its Retailer Operations only from the location(s) identified in Section 5. B. Changes and Additions. Retailer will not move, relocate, or substantially change the usage of Retailer Facilities, nor will Retailer, Principal Owner, Investor, or General Manager directly or indirectly establish or operate any other locations or facilities for any of the Retailer Operations (or similar operations) contemplated by this Agreement without the Company's prior written consent, which will not be unreasonably withheld. Retailer agrees that all new Retailer Facilities shall conform to architecture, design and style described in the then current Retailer Facilities Guide. 5 The Company and Retailer agree that any changes in Retailer Facilities will be reflected in a written addendum to this Agreement. Retailer will promptly correct any deficiencies in Retailer's performance of its responsibilities under this Section 6. Retailer acknowledges that the addition and maintenance of another line of vehicles or another automobile dealership operating simultaneously with its Retailer Operations at Retailer Facilities could adversely affect Retailer's sales and service performance with respect to Company Products. Accordingly, Retailer agrees to: (i) notify the Company in writing within ten (10) days of its execution of an agreement or letter of intent to add a new line of vehicles to be sold or serviced at Retailer Facilities; and (ii) obtain the Company's written approval which will not be unreasonably withheld. C. Development of Market Studies. The Company may, from time to time, conduct studies of various geographic areas to evaluate market conditions. These market studies may, where appropriate, evaluate factors including geographical characteristics, consumer shopping patterns, existence of competitive automobile dealerships, sales opportunities and service requirements of the geographic area in which Retailer's Area of Responsibility or Market Area is located, trends in marketing conditions, current and prospective trends in population, income, occupation, and other demographic characteristics which the Company may determine to be relevant. Based upon such studies, the Company will make recommendations concerning the market and Retailer Facilities. The Company will give Retailer prior notice of its intention to conduct a study which includes the geographic area in which Retailer's Area of Responsibility or Market Area is located. Within 30 days of notice, Retailer should provide the Company with all information Retailer believes relevant to the market study. D. Evaluation of Retailer Facilities and Location. The Company will periodically evaluate Retailer's performance of its responsibilities under this Section 6. In making evaluations, the Company will consider: (i) the land and building space Retailer actually dedicates to its performance under this Agreement; (ii) the then current Retailer Facilities Guide; (iii) the appearance, condition and layout of Retailer Facilities; (iv) the ability of Retailer Facilities to satisfy the sales opportunities and service requirements of the Area of Responsibility or Market Area; and (v) other factors that may directly relate to Retailer's performance of its responsibilities under this Agreement. Evaluations prepared pursuant to this Section 6 will be discussed with and provided to Retailer, and Retailer may comment in writing within thirty (30) days of its receipt of an evaluation. 7. CAPITALIZATION OF RETAILER Retailer agrees that its ability to market, promote, sell and service Company Vehicles and provide Volvo customers with a superior ownership experience is dependent in part upon Retailer maintaining adequate working capital to meet its obligations under its Business Plan. The Company will provide Retailer with a Working Capital Guide to assist Retailer in determining its working capital requirements. Retailer agrees that the Company may, upon prior written notice, reasonably modify the Working Capital Guide. 8. DISPOSITION OF BUSINESS BY RETAILER Retailer and the Company agree that to achieve the goals described in the Preamble to this Agreement, each Authorized Retailer shall be owned and operated by parties committed to achieving these same goals. Retailer agrees that this Agreement is in the nature of a personal services contract. While the Company acknowledges that Retailer has the right to sell or otherwise transfer the stock and/or assets of the dealership, Retailer acknowledges and agrees that this right is subject to this Section 8. 6 A. General. The Company recognizes Retailer's opportunity to sell or other wise dispose of all or substantially all of Retailer's assets (including goodwill) related to Retailer's obligations or performance under this Agreement at any time and on such terms and conditions as Retailer may decide to accept. Any transfer or sale of any stock of Retailer, or a transfer and/or sale of a majority of the assets of Retailer to any person or entity will be subject to the prior written approval of the Company. Retailer agrees to provide the Company with all documents reasonably necessary for the Company's evaluation of any transfer of Retailer's stock or assets. Retailer also agrees that the time period for the Company's review and evaluation of any transfer of stock or assets shall not begin until all necessary documents have been submitted to the Company. Subject to the Company's rights in Section 8B below, the Company will not unreasonably withhold consent to enter into a new agreement with a buyer on terms substantially the same as the provisions of this Agreement, or the then current Authorized Retailer Agreement. Retailer agrees that if, in the Company's business judgment, a sale may adversely affect the Company's ability to achieve its goals described in the Preamble to this Agreement, or the ability of the proposed retailer to meet the obligations under the then current Authorized Retailer Agreement, the Company may reasonably withhold approval. B. Right of First Refusal. (i) Request to Transfer. If Retailer submits a written request to transfer stock and/or assets in Retailer as described in this Section 8, the Company shall have the right of first refusal or option to purchase Retailer's stock and/or assets. The Company must notify Retailer of its election to exercise such right within thirty (30) days after receiving Retailer's complete written proposal. If the Company exercises its right of first refusal, this shall supersede any other right that Retailer may have to transfer or otherwise dispose of its stock or assets. The Company may assign its right or option to a third party. (ii) Bona Fide Agreement. If Retailer enters into a bona fide written agreement for the sale of its stock and/or assets, the Company's right under this Section 8 shall be a right of first refusal, enabling the Company to assume the buyer's rights and obligations under such agreement and cancel this Agreement and all rights granted Retailer. Upon the Company's request, Retailer agrees to provide all documents relating to the proposed transfer, including, without limitation, those reflecting any other agreements or understandings between the parties to the transfer agreement. (iii) Non Bona Fide Agreement. If Retailer fails to provide documentation as required in Section 8B(ii), or states in writing that the requested documents do not exist, the Company will conclusively presume that the agreement is not bona fide. If the Company determines that the agreement is not bona fide, the Company will have the option to purchase Retailer's stock and/or assets utilized in Retailer's Operations. The Company may also, but shall not be required to, purchase any of Retailer's real property or leasehold interest related to Retailer's Facilities. (iv) Purchase Price. If Retailer enters into a bona fide written agreement, the Company and Retailer agree that the purchase price and other terms of sale under the right of first refusal will be those described in such agreement and any related documents, unless Retailer and the Company agree to other terms. In the absence of a bona fide written agreement, the purchase price of Retailer's stock and/or assets, excluding new and undamaged parts and accessories, and other essential terms, will be determined by good faith negotiation between the parties. If an agreement cannot be reached, the purchase price and any other essential terms not agreed upon will be determined through binding arbitration conducted by the American Arbitration Association. 7 Each party agrees to pay its own attorneys' fees associated with this arbitration. If the sale involves the sale of real property, Retailer agrees to transfer the real property by warranty deed, in recordable form, conveying marketable title free and clear to the Company. If the sale involves the sale, transfer, or assignment of a leasehold interest, Retailer agrees to sell, transfer, or assign such interest in a method typically undertaken in similar commercial transactions. (v) Assignments. If the Company elects to exercise its rights under this Section 8, Retailer shall transfer or assign to the Company all licenses, authorizations, permits, and other documents typically required in similar commercial transactions, and shall grant all other necessary approvals to conduct Retailer Operations in a manner similar to that immediately prior to the sale. (vi) Successors and Assigns. The Company's rights under this Agreement shall be binding on and enforceable against any assignee or successor in interest of Retailer or any purchaser of Retailer's stock and/or assets, unless the Company has previously approved the successor under Section 9A. C. Outstanding Obligations. Retailer agrees that all outstanding monetary obligations to the Company shall be paid prior to, or at the time of, transfer. 9. SUCCESSION OF OWNERSHIP OR MANAGEMENT A. Successor Addendum. Retailer may apply for a successor addendum designating proposed principal owners and/or owners of a successor retailer to be established if this Agreement expires because of the Principal Owner(s) death or incapacity. The Company may execute the successor addendum if the proposed successor completes, to the Company's satisfaction, the then current selection process to become an Authorized Retailer used by the Company. B. Rights of Heirs. If a Principal Owner(s) or General Manager (with an ownership interest) dies and his or her interest in Retailer's Operations passes directly to any heir who wishes to succeed to such party's interest, the Principal Owner's or General Manager's legal representative must notify the Company within thirty (30) day's of the Principal Owner's or General Manager's death of such heir's or heirs' intent to succeed the Principal Owner's or General Manager's interest. If a Principal Owner(s) or General Manager becomes incapacitated, then the Principal Owner's or General Manager's legal representative must notify the Company within thirty (30) days of the determination of such incapacity and provide the Company with plans, if any, for a successor. The effect of notice of death or incapacity from either the Principal Owner's or General Manager's legal representative will be to suspend any notice of termination provided for in Section 10A (iv). C. Rights of Remaining Owners and Investors. If this Agreement would otherwise terminate because of a Principal Owner's death or incapacity, and Retailer and the Company have not executed a successor addendum, the remaining Principal Owners or Investors, if any, may propose a successor to continue the operations identified in this Agreement. The proposal must be made in writing to the Company at least thirty (30) days prior to the termination of this Agreement. The proposal will be accepted if: (i) it meets the requirements of Section 2 with regard to ownership; (ii) the proposed successor successfully completes the Authorized Retailer selection process; (iii) any proposed owner(s) satisfies applicable Authorized Retailer selection criteria; iv) the proposed successor retailer and/or the 8 proposed general manager are ready, willing and able to comply with the requirements of the then current Authorized Retailer Agreement, and agree to implement the Business Plan; and (v) all of the former Retailer's outstanding monetary obligations to the Company have been satisfied. D. Limitation on Offers. The Company will notify the individual or entity making a proposal under Sections 9A, B, or C in writing of the decision on a proposal under this Section 9 within sixty (60) day's after: (i) Retailer has submitted all applications and information that the Company reasonably requested, and (ii) the proposed retailer has successfully completed the selection process to become an Authorized Retailer. The Company's offer to enter into the then current authorized Retailer agreement under this Section 9 will automatically expire if not accepted by the proposed successor retailer within sixty (60) days after it receives the offer. E. New Successor Addendum. Retailer may cancel an executed successor addendum in writing at any time prior to the death or incapacity of a Principal Owner. The Company may cancel an executed successor addendum only if the proposed Principal Owner(s) no longer meets the selection criteria to become an Authorized Retailer. The parties may execute a superseding successor addendum by agreement. 10. TERMINATION. A. Immediate Termination. This Agreement will continue in force, and will govern all transactions between the Company and Retailer until terminated in accordance with this Section 10. Any termination of this Agreement shall apply to all Retailer Facilities. The Company and Retailer may also terminate this Agreement by mutual written agreement at any time. Retailer may terminate this Agreement at any time, with or without reason, by giving the Company sixty (60) days prior written notice. The Company may terminate this Agreement upon written notice to Retailer if the distribution agreement between the Company and Manufacturer is terminated. Retailer and the Company agree that certain conduct which is within Retailer's control is so contrary to achieving the goals described in the Preamble to this Agreement, and to the spirit, purpose and objectives of this Agreement, that any of the following conduct will constitute a material breach of this Agreement and justify its immediate termination, upon written notice: (i) Change in the control, ownership or management of Retailer as described in Section 4 of this Agreement including, without limitation, an attempted public offering of ownership in Retailer, without the Company's prior written approval; or (ii) Sale, transfer, or assignment by Retailer of this Agreement, or any of the rights granted to it under this Agreement, or any transfer, assignment or delegation by Retailer of any of the responsibilities assigned to a Retailer under this Agreement, without the Company's prior written approval; or (iii) Sale, transfer or assignment by Retailer of any of the stock or substantially all of the assets used by Retailer in its Volvo operations, without the Company's prior written approval; or (iv) Subject to the provisions in Section 9, death or mental incapacity of Retailer (if Retailer is an individual) or any person identified in Section 2 of this Agreement; or (v) Misrepresentation by Retailer concerning Retailer's ownership or management, or any material misrepresentation in the application for this Agreement, or at any time thereafter; or 9 (vi) Undertaking by Retailer or any of its owners to conduct either directly or indirectly, any of Retailer's Operations at locations other than those designated in this Agreement, without the Company's prior written approval; or (vii) Willful misrepresentation by Retailer, or any of its agents or employees, in any claim or application for reimbursement by, or payment from the Company, including, without limitation, warranty claims, goodwill payments, incentives, work performed pursuant to a recall, pre-delivery inspection, or for any other refund, credit, incentive, allowance, discount, reimbursement or payment applied for or received under any Company program; or (viii) Knowing acceptance by Retailer of any payment for any work not performed or contracted for by Retailer in accordance with this Agreement, or any applicable warranty or other Company Policies, service bulletin, procedures or programs the Company may issue; or (ix) Filing by Retailer of a voluntary petition in bankruptcy, or the filing of a petition to have Retailer declared bankrupt, providing the petition is not vacated within thirty (30) days; or any adjudication of Retailer as bankrupt pursuant to an involuntary petition; or any appointment by a court of a temporary or permanent receiver, trustee, or custodian for Retailer, Retailer's assets or Retailer's business who shall not be discharged within thirty (30) days; or execution of any assignment for the benefit of creditors provided that the assignment is not set aside within thirty (30) days; or any material levy under attachment, or by any process of law by which a third party acquires rights in or to the ownership or operation of any Retailer Facility provided that the levy is not vacated within thirty (30) day's; or if Retailer is unable to meet maturing debts on terms agreeable to its creditors; or any dissolution of Retailer; or (x) Use by Retailer of any unfair, misleading, deceptive or fraudulent advertising or business practice in the marketing, sale or servicing of any Company Product or in any program offered by Company; or (xi) Conviction of or entry of a judgment in a court of competent jurisdiction against a Retailer or any person named in Sections 2 or 3, of a felony, or any unfair, misleading, deceptive or fraudulent business practice; or (xii) Failure of Retailer to conduct its sales, service and parts operations during the customary business hours of the trade in Retailer's Area of Responsibility or Market Area for five (5) consecutive business days, unless any failure is caused by contingencies beyond Retailer's reasonable control, including strikes, civil war, riots, fires, floods, earthquakes, or other acts of God, provided that Retailer immediately resumes its customary operation after the cause of the closure or cessation of operation is removed; or (xiii) Refusal or inability by Retailer to pay any amount Retailer owes to the Company within thirty (30) days after the Company demands payment from Retailer; or (xiv) Failure by Retailer to comply with Section 35 of this Agreement; or a (xv) Agreement, combination, understanding or contract by Retailer, whether oral or written, with any other corporation, person, firm or other legal entity for the purpose of unlawfully fixing prices of Company Products, or otherwise violating any law; or (xvi) Failure by Retailer to procure and maintain any license or other governmental authorization necessary to operate as a Volvo Retailer; or (xvii) Importation, distribution or sale of Company Products which are not originally manufactured, designed or intended for use in the United States, without the Company's prior written approval. 10 B. Sixty Day Cure Period Prior to Termination. The Company may also terminate this Agreement upon no less than thirty (30) days prior written notice if Retailer fails to cure within sixty (60) days, to the Company's satisfaction, any other material default in its performance under this Agreement. These material defaults include, without limitation, the following: (i) Any dispute, disagreement, or controversy between or among persons identified in Section 2 of this Agreement which, in the Company's reasonable opinion, adversely affects the ownership, operation, management, or business of Retailer or Company; or (ii) Retention by Retailer of any General Manager, who in the Company's reasonable opinion is not competent, or no longer possesses the requisite qualifications for the position, or who has acted in a manner contrary to the continued best interests of the Company or Retailer; or (iii) Any material modification or change in the use of Retailer's Facilities, including, without limitation, the addition or maintenance of another line of vehicles at Retailer's Facilities without the Company's prior written approval; or (iv) Failure by Retailer to improve, alter, or modify its Retailer Facility to meet the requirements in the Company Facilities Guide or other Company Policies, or which Retailer had agreed or represented to the Company that Retailer would make or do; or (v) Failure by Retailer to maintain and employ in Retailer's business and operations under this Agreement sufficient net working capital and net worth to enable Retailer to satisfy Retailer's responsibility under this Agreement; or (vi) Failure by Retailer to update its Business Plan in accordance with Section 13; or (vii) Failure by Retailer to maintain adequate flooring lines of credit for Company Vehicles; or (viii) Failure by Retailer to maintain an inventory of new Company Vehicles of the latest model in accordance with the objectives agreed to by Retailer and the Company; or (ix) Failure by Retailer to keep available at all times, in excellent condition for demonstration purposes, a representative number and mix of the latest models equipped with the latest accessories offered by the Company; or (x) Failure by Retailer to, at all times, keep in Retailer's Facilities), an inventory of Genuine Volvo Parts and Accessories in quantities that the Company reasonably determines are necessary to meet the current and reasonably anticipated service requirements of Volvo Customers; or (xi) Failure by Retailer to keep records of its business relating to Company Products, or any failure, after reasonable notice to Retailer, to submit Retailer's accounts and records relating to the sale and servicing of Company Products, or allow the Company to inspect its accounts and records; or (xii) Failure by Retailer to furnish the Company, within reasonable time limits specified by the Company, and on forms prescribed by or acceptable to the Company, statements of Retailer's financial condition and operating results; or (xiii) Failure by Retailer to furnish the Company on such forms and at such times as the Company may reasonably require, reports of Retailer's sales and inventory of Company Products and used automobiles; or (xiv) Failure by Retailer to maintain warranty records in accordance with the Company Policies; or (xv) Negligent or willful conduct by Retailer that the Company determines, in a reasonable exercise of its discretion, to be harmful to the reputation of the Company, Company Products, or Marks/Trademarks. 11 C. Failure to Meet Improvement Plan Objectives. If Retailer fails to cure deficiencies identified in the improvement plans within the periods described in Section 14, the Company may terminate this Agreement upon thirty (30) day's prior written notice to Retailer. If Retailer refuses to enter into the applicable improvement plan, the Company may terminate this Agreement in accordance with Section 10A. D. Applicable Notice Provision for Termination. Retailer and the Company acknowledge that under certain state laws, the time period required for notice of termination may vary from those described herein. Retailer and the Company agree that statutory and regulatory time provisions, when greater than those provided above, shall control as applicable. E. Failure to Terminate Shall Not Constitute a Waiver. The Company may terminate this Agreement under any applicable provision which it elects, notwithstanding the existence of any other grounds for termination, or the failure to refer to such other grounds for termination. The Company's failure to specify additional ground(s) for termination in its notice shall not preclude the Company from later establishing, upon notice, that termination is also supported by such additional grounds, without regard to when those additional grounds were discovered. F. Procedure on Termination. Termination of this Agreement shall end Retailer's status as an Authorized Retailer, but shall not affect any liability of either party to the other accruing prior to the date of termination, or arising out of Agreement. Upon termination Retailer agrees to immediately: (i) discontinue the use of any trademarks or trade names made up in whole or in part of any trademark or tradename belonging to the Company or Manufacturer; (ii) remove all signs containing any such trademarks or trade names; and (iii) render unfit for the use originally intended (or to certify to the Company that Retailer will not use for the purpose originally intended) any stationery, printed matter, or advertising containing any such trademarks or trade names. In addition, Retailer will not represent or continue any practices which might make it appear that it is still an authorized Volvo retailer and will permanently discontinue any use of the word Volvo in Retailer's corporate title, firm name or tradename and will immediately take such steps as may be necessary or appropriate in the opinion of the Company to change such corporate title, firm name or tradename to eliminate the word Volvo, all without cost or expense to the Company. Upon termination under Section 10A, all unfilled orders for Company Products will be deemed canceled. Upon termination under Section 10B, the Company will have the option to complete or cancel all unfilled orders for Company Products then pending and will have a similar right to complete or cancel any firm orders given after notice and before termination. Upon termination of this Agreement, Retailer shall transfer to the Company: (i) all orders for sale by Retailer of Company Products then pending with Retailer and all deposits obtained whether in cash or in kind; (ii) all of Retailer's warranty files regarding warranty claims on Company Products; (iii) all lists, files and service records of Volvo Customers; and (iv) all technical or service literature, advertising and other printed material relating to Company Products, including, without limitation, sales instruction manuals, service manuals, and promotional materials. All warranty claims must be closed within thirty (30) days of such termination. After termination, the Company's acceptance of orders from Retailer, Retailer's continuance of sale of Company Products, or the Company's referral of inquiries to Retailer or any business relations either party has with the other will not be construed either as a renewal of this Agreement or a waiver of the termination. If the Company accepts any orders from Retailer after termination, all such transactions will be governed by the terms of this Agreement applicable to such transactions, unless otherwise agreed in writing. 12 11. DISPUTE RESOLUTION Retailer and the Company recognize that certain disputes may arise between them as to application and interpretation of this Agreement, the Company Policies, and the other controlling documents referenced in this Agreement. While understanding that certain federal and state courts and agencies may be available to resolve any disputes, Retailer and the Company agree that it is in their mutual best interests, consistent with achieving the goals described in the Preamble to this Agreement, and in the spirit of this Agreement, to attempt to resolve first through mediation, described below, all disputes arising from a notice of termination as described in Section 10. Each party agrees to pay its own attorney's fees, costs and expenses associated with such mediation. A. Non-Binding Mediation. Prior to initiating any judicial, agency or other administrative proceeding, the Company and Retailer agree to mediate any dispute arising from a notice of termination as described in Section 10. Mediation shall be held at the Company regional office closest to Retailer, or at another mutually agreed upon location, and shall begin within ten (10) days after receipt of notice: (i) invoking this Section 11; and (ii) clearly specifying the nature of the dispute. Mediation shall not be binding unless first agreed to in writing by Retailer and the Company. Any mediation under this Section 11 shall be conducted before a Company/Retailer Mediation Panel (the "Mediation Panel") chosen by the Company and Retailer at least five (5) days before such mediation is scheduled to begin, and shall be governed by the Company's Mediation Guidelines. B. Mediation Panel. The Mediation Panel shall consist of: (i) two members of the Company management, including one from Retailer's region; (ii) two Retailer Mediators, one of which shall be from Retailer's Region, but not by an Authorized Retailer which has an Area of Responsibility in a Market Area contiguous to or in competition with Retailer; and (ii) one member chosen by the members identified in (i) and (ii). Within twenty (20) days of hearing the dispute, the Mediation Panel shall recommend, in writing, a solution to Retailer and the Company. The parties agree that a majority vote of the Mediation Panel shall be deemed to be the final decision of the Mediation Panel. Each party shall have five (5) days to accept or reject the Mediation Panel's solution, in its entirety. C. No Waiver of Rights During Mediation. The Company and Retailer agree that neither party shall waive any rights it may have under any federal or state law during the pendency of any mediation under this Section 11. D. Tolling. Each party agrees that mediation under this Section 11 will toll any applicable statute of limitations during the mediation and solution review periods referenced above. If Retailer is required under any applicable state law to file a letter of protest before the completion of any mediation contemplated hereby, nothing herein shall prohibit Retailer from filing such protest; however, Retailer must continue with the mediation procedures described in this Section 11. E. Cost of Enforcement. If the parties are unable to resolve disputes under this Section 11, and a party elects to initiate administrative proceedings or civil litigation arising from such disputes, the prevailing party shall, in addition to all other available remedies, be entitled to recover all of its reasonable attorneys' fees, court costs and expenses of litigation. 13 II. VOLVO CUSTOMER OWNERSHIP EXPERIENCE The Partners agree that the highest priority for Retailer and Company is providing a superior ownership experience for Volvo Customers. This will be achieved by providing unique customer value, and by treating Volvo Customers and prospective Volvo customers with honesty and integrity. 12. RETAILER BUSINESS PLAN Before entering into this Agreement, Retailer has provided the Company with a Business Plan, signed by all Principal Owners listed in Section 2A of this Agreement, and the General Manager listed in Section 3 of this Agreement. The Business Plan addresses all areas of Retailer's business, including, without limitation: o Retailer's strategy for providing a superior ownership experience for Volvo Customers; o Retailer's strategy for developing Retailer's Area of Responsibility or Market Area; o A detailed description of Retailer's sales objectives and its method of achieving its objectives; o A detailed description of Retailer's service objectives and its method of achieving its objectives; o A detailed description of Retailer's Facilities; o A complete statement of Retailer's ownership and management structure; o A complete statement of Retailer's financial structure, including capitalization and lines of credit; o Retailer's strategy for staffing and personnel development; o Retailer's strategy for advertising, merchandising, and community relations; and o Retailer's strategy for other items as agreed to by Retailer and the Company. Retailer further agrees to develop its Area of Responsibility or Market Area according to its Business Plan, and to fulfill its commitments as described in the Business Plan. 13. REVIEW AND UPDATE OF BUSINESS PLAN Retailer's performance under this Agreement is essential to the effective representation of the Company in the marketing, promotion, sale and service of Company Products and the reputation and goodwill of other Volvo retailers. Retailer agrees to update and submit its written Business Plan to the Company at least annually, or more often if the Company requests. All Business Plan updates shall include Retailer's evaluation of its performance for the previous year, and any proposed modifications to the Business Plan. Retailer and the Company agree that Retailer's performance shall be evaluated based on criteria agreed to in Retailer's Business Plan, or as updated. If Retailer and the Company agree that the changes to the proposed Business Plan, or update are necessary. Retailer will make all necessary modifications, and resubmit the Business Plan, or update, for the Company's review and approval. While Retailer's Business Plan is subject to update and review, the Company will require Retailer to modify Retailer's Facilities only if the Company can show that a material change in marketing conditions warrants modification in Retailer's Facilities, 14. VEHICLE SALES OR SERVICE IMPROVEMENT PLAN If the Company determines that Retailer has failed to meet any material provision of its Business Plan, or as updated, Retailer agrees to enter into a written improvement plan to cure any performance deficiency. The Company agrees that: (i) Retailer will have a minimum of six (6) months from execution of an improvement plan to cure any performance deficiency; and (ii) the Company will provide reasonable assistance as the Company and Retailer agree upon in advance and in writing. 14 15. PRODUCT AVAILABILITY The Company agrees to provide and allocate Company Products among its Retailers on a fair and equitable basis. Retailer agrees that, because Company Products may not be available in sufficient quantities from time to time, the Company, in the exercise of its reasonable business judgment, may determine the manner and method of allocation among the Company's Retailers without any liability to the Company. 16. PURCHASE AND DELIVERY A. Retailer Purchases. (i) Company Vehicles. From time to time the Company will advise Retailer of the number and model lines of Company Vehicle which the Company has available for sale to Retailer and, subject to Section 15, Retailer will have the right to purchase such Company Vehicles. The Company will distribute Company Vehicles to Authorized Retailers in accordance with the Company's written distribution policies and procedures in effect from time to time, and in accordance with this Section 16. (ii) Genuine Volvo Parts and Accessories. Retailer will submit firm orders for Genuine Volvo Parts and Accessories to the Company in such quantity and variety to fulfill Retailer's obligations under this Agreement. Retailer will submit all orders in accordance with Company Policies. The Company may accept orders in whole or in part, and all orders shall be effective only upon acceptance by the Company (but without necessity of any notice of acceptance by the Company to Retailer). Orders for Genuine Volvo Parts and Accessories shall not be cancelable by Retailer after acceptance and shipment by the Company, except as otherwise provided in this Agreement. (iii) Other Products and Services. Retailer may submit firm orders to the Company for other products and services the Company may offer for sale to Retailer from time to time in such quantity and variety to fulfill Retailer's obligations under this Agreement. Retailer will submit all orders in accordance with Company procedures. The Company may accept orders in whole or in part, and all orders shall be effective only upon acceptance by the Company (but without necessity of any notice of acceptance by the Company to Retailer). Orders for other products and services shall not be cancelable by Retailer after acceptance and shipment by the Company, except as otherwise set forth in this Agreement. (iv) Changes in Company Products. The Company may discontinue the supply, or change the design of component materials, of Company Products at any time. The Company will be under no liability to Retailer for any changes and will not be required, as a result of any changes, to make any changes to Company Products previously purchased by Retailer. No change shall be considered a model year change unless so specified by the Company. B. Delays in Delivery. The Company will not be liable for failure or delay in delivery to Retailer of Company Products if the failure or delay is beyond the control, or without the fault or negligence of, the Company. C. Passage of Title. Title to each Company Product Retailer purchases under this Agreement shall pass to Retailer, or to the finance institution designated by it, upon delivery to a carrier for shipment to Retailer, but the Company shall retain a security interest in, and right to repossess, any such Company Product described in Section 16E below. 15 D. Shipment of Company Products. (i) Company Vehicles. The Company may select the mode of transportation, route and point of origin for Company Vehicles shipped to Retailer. Retailer will pay to the Company the applicable destination charges that the Company establishes for Retailer for Company Vehicles delivered to Retailer that are in effect at the time of shipment. The Company will bear the risk of loss and damage to Company Vehicles until delivery to a transport carrier for shipment; however, the Company will, if requested by Retailer in a manner and within the time as the Company shall from time to time specify, prosecute for and on behalf of Retailer, at Retailers expense, claims against the responsible transport carrier for loss of or damage to Company Vehicles during transportation. (ii) Genuine Volvo Parts and Accessories. The Company will ship Genuine Volvo Parts and Accessories to Retailer by whatever means of transportation, by whatever route, and from whatever point the Company may select. The Company will bear the risk of loss and damage to Genuine Volvo Parts and Accessories until delivery to a transport carrier for shipment; however, the Company will, if requested by Retailer in a manner and within the time as the Company shall from time to time specify, prosecute for and on behalf of Retailer, at Retailer's expense, claims against the responsible transport carrier for loss of or damage to Genuine Volvo Parts and Accessories during transportation. E. Security Interest. As security for full payment of all sums Retailer owes to the Company under this Agreement, whether such sums are now, or subsequently become due and owing, Retailer grants to the Company, subject to any prior perfected secured creditor's security interest, a security interest in all inventory, including, without limitation, Company Products and proceeds from sales or insurance, and all liens. Upon any non-payment or default in payment, the Company may accelerate any then existing debt and shall have all applicable rights, including, without limitation, those specified in the Uniform Commercial Code. If the Company requests, Retailer agrees to perfect the Company's security interests. F. Charges for Storage and Diversions. Retailer is responsible for, and will pay all charges, for demurrage, storage and other expenses accruing after shipment to Retailer or to a carrier for transportation to Retailer. If diversions of shipments are made upon Retailer's request, or are made by the Company because of Retailer's failure or refusal to accept shipments of Retailer's orders, Retailer will pay all additional charges and expenses incident to such diversion. 17. PAYMENTS BY RETAILER Payment for Company Products purchased by Retailer shall be made in cash in advance or by other payment methods the Company approves in writing. The Company's receipt of any commercial paper will not constitute payment until collected in full. Retailer will pay all collection costs, including but not limited to, reasonable attorneys' fees, costs and expense of litigation. 18. INVENTORY OF COMPANY VEHICLES Retailer will maintain, and the Company shall supply, a representative inventory of new Company Vehicles of the latest model in accordance with Retailer's Business Plan. Retailer shall store and maintain such new Company Vehicles in accordance with Company Policies. 16 19. DEMONSTRATORS Retailer will keep available at all times, in excellent condition for demonstration purposes, a representative number and mix of the Company Vehicles of each of the latest models equipped with the latest accessories. 20. BUSINESS HOURS Retailer will conduct its Retailer Operations during hours which are reasonable and convenient for customers. All aspects of Retailer Facilities will be open for business during days and hours reasonably necessary to provide a superior customer experience, and consistent with local practice in Retailer's Area of Responsibility or Market Area. 21. PARTS AND ACCESSORIES A. Inventory. Retailer agrees to purchase and maintain at Retailer's Facility, in accordance with Company Policies, a sufficient inventory of Genuine Volvo Parts and Accessories necessary to meet the current and reasonably anticipated requirements of Volvo Customers. B. Warranty Repairs. When performing warranty repairs, or other repairs paid for, or reimbursed, in whole or in part by the Company, Retailer shall only use Genuine Volvo Parts and Accessories. C. Non-Genuine Volvo Parts and Accessories. When performing repairs on any Company Vehicle, other than warranty repairs or repairs paid for, or reimbursed in whole or in part by, the Company, Retailer may sell and install non-Genuine Volvo Parts and Accessories. D. Quality of Parts. If Retailer sells, and/or installs non-Genuine Volvo Parts and Accessories during repairs or service of Company Products under Section 21C, Retailer will not use parts or accessories that do not meet Company standards or that could adversely affect the mechanical operation, safety, integrity or reputation of Company Products. E. Disclosure. If Retailer sells and/or installs non-Genuine Parts and Accessories during repairs or service as described in Section 21C above. Retailer will, prior to repair or installation, conspicuously disclose to the customer in writing on all copies of the customer's repair order and invoice the following: (i) Those parts and accessories which are non-Genuine Volvo Parts and Accessories; and (ii) That non-Genuine Volvo Parts and Accessories are not covered by the Company or Manufacturer warranty. 22. WARRANTIES ON COMPANY PRODUCTS The Company provides a written warranty for the Company Products it markets. The Company and Retailer shall each fulfill promptly their respective obligations under such warranties. Retailer agrees to furnish each retail purchaser or end user of a Company Vehicle purchased from, or delivered by Retailer, excepting used vehicles not covered under the Volvo Select Pre Owned Program, with such form of warranty and maintenance record, owner's manual, and/or other documentation then currently provided by the Company. EXCEPT AS OTHERWISE PROVIDED BY LAW, THE WRITTEN COMPANY WARRANTIES ARE THE ONLY WARRANTIES APPLICABLE TO COMPANY PRODUCTS. EXCEPT FOR ITS LIMITED LIABILITY UNDER SUCH WRITTEN WARRANTIES, THE COMPANY AND MANUFACTURER DO NOT ASSUME ANY OTHER 17 WARRANTY, OBLIGATION OR LIABILITY, RETAILER IS NOT AUTHORIZED TO CREATE OR ASSUME ANY ADDITIONAL WARRANTY OBLIGATION OR LIABILITY ON BEHALF OF THE COMPANY OR MANUFACTURER. ANY SUCH UNAUTHORIZED ASSUMPTION OR CREATION OF OBLIGATIONS WITHOUT THE PRIOR WRITTEN AUTHORIZATION OF THE COMPANY SHALL BE THE SOLE RESPONSIBILITY OF RETAILER. AS TO RETAILER, THE WRITTEN WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. THE COMPANY DISCLAIMS ANY LIABILITY TO RETAILER FOR COMMERCIAL LOSSES BASED ON NEGLIGENCE OR MANUFACTURER'S STRICT LIABILITY OR ANY OTHER THEORY OF RECOVERY. 23. PRE-DELIVERY SERVICE Retailer agrees to inspect, service, condition and prepare each new Company Vehicle before delivery to a customer in accordance with applicable pre-delivery inspection, service and conditioning standards and schedules the Company furnishes from time to time to Retailer, and to perform such other normal service and conditioning work as may be prescribed in the Company Policies. Retailer will maintain adequate pre-delivery service and inspection records, and upon request, Retailer will provide to the Company evidence that it has performed pre-delivery services. 24. REPAIR AND MAINTENANCE SERVICE Retailer agrees to perform: (i) warranty service and repairs; (ii) services included in On Call(R) (or other roadside assistance plan the Company may offer from time to time); (iii) extended contract service repairs; (iv) recall and service campaign repairs; (v) inventory maintenance; and (vi) other maintenance required on Company Products in accordance with the Company's then current recommendations and specifications, regardless of where customer purchased Company Products. Warranty, recall, service campaign and On Call services are provided for the customer's benefit, and Retailer agrees that the customer shall not be obligated to pay for any charges for these services for which Retailer is reimbursed by the Company or a third party designated by the Company. 25. TRAINING Retailer and the Company agree that ongoing training and development of Retailer employees is necessary to provide Volvo Customers with a superior ownership experience, and achieve the goals described in the Preamble to this Agreement. To help accomplish this, the Company agrees to provide or make training programs available to Retailer, and Retailer will require all appropriate employees, as the Company may determine, to participate in such training programs the Company offers. Retailer shall be responsible for reasonable charges and expenses related to such training, unless otherwise advised by the Company. III. OPERATING PROVISIONS The Partners agree that the success of Volvo, its name, trademarks and reputation is their joint responsibility. 26. USE OF VOLVO TRADEMARK Retailer agrees that the Company has been authorized by AB Volvo, Gothenburg, Sweden, to permit Retailer to use the name "Volvo" under the following terms and conditions: A. Ownership of Mark. AB Volvo is the owner of numerous trademarks and trade names: (i) the name "Volvo" is a valid and existing trademark presently owned by AB Volvo and is registered by AB Volvo in the United States Patent and Trademark Office; (ii) AB Volvo presently has the sole right to use such trademarks (except to the extent that it has previously expressly authorized others to do so) and to authorize others to use such trademarks; and (iii) valuable goodwill has accrued to, and is attached to, such trademarks. 18 B. Company Rights. The Company has been granted the right to enforce rights associated with the trademark "Volvo" in the United States. In addition, the Company's rights hereunder shall inure to the benefit of, and are assignable to, any successor to its business. C. Right to Use. During the term of this Agreement, Retailer has been granted the limited, non-assignable, non-exclusive right to use the name "Volvo" in the tradename used in connection with the sale and service of Company Products described in this Agreement. Retailer will not claim or make any attempt to register any corporate or other name or trademark which includes the name "Volvo" in any place or office, but Retailer may, in connection with Retailer's operations under this Agreement and upon prior approval of the Company, register a tradename containing the name "Volvo" where registration of businesses under fictitious names are conducted as required by law. The rights conferred herein will terminate upon termination of this Agreement. D. Alterations. Retailer will not alter any Company Product furnished under this Agreement or change or substitute any of its equipment, nor do anything that will in any way infringe, impeach or lessen the value or validity of the trademarks associated with any Company Product. E. Non-assignability. Retailer's interest in this trademark license is personal and non-assignable. F. Assignability. All rights exercisable by AB Volvo as the owner of the "Volvo" trademark and tradenames shall, in the event of any assignment of such trademarks and tradenames, be fully exercisable by, and inure to the benefit of, the assignee. 27. DISCONTINUANCE OF RIGHT TO USE TRADEMARK A. Immediate Termination. The permission to use the Trademarks granted in Section 26 will terminate automatically if, at any time: (i) Retailer ceases to act as an Authorized Retailer in Company Products; (ii) Retailer sells or attempts to sell non-Company Vehicles or non-Genuine Volvo Parts and Accessories as Company Products; (iii) Retailer assigns or attempts to assign any interest in this Agreement without the written consent of the Company; or (iv) This Agreement expires or is terminated pursuant to Sections 1 or 10. B. Delayed Termination. The Company or AB Volvo, upon thirty (30) days prior written notice to Retailer, may terminate the permission given by Section 26 at any time. C. Discontinue Use. Upon termination of the rights granted by Section 26, Retailer will immediately discontinue the use of the name "Volvo" in Retailer's tradename, and will also immediately discontinue the use of any signs, structures, and forms of advertising based upon Retailer's tradename which include the name "Volvo." Immediately after termination, Retailer will take all necessary and appropriate action to change Retailer's tradename to eliminate the name "Volvo" or any combination, variation, or similar name. Immediately after termination, Retailer shall, at its expense, remove any signage containing or referring to the name "Volvo." 19 28. LINES OF CREDIT During the term of this Agreement, Retailer will maintain a line of credit with a responsible financing institution at a level permitting Retailer to inventory Company Products commensurate with the Business Plan. 29. ACCOUNTING AND RECORD KEEPING A. Accounting. Retailer will keep accurate records of its business relating to the marketing, promoting, selling or servicing of Company Products. Retailer agrees to maintain a uniform accounting system in accordance with Company Policies. B. Inspection. During regular business hours, the Company will have the right to inspect Retailer Facilities and to examine, audit and make and take copies of all records, accounts and supporting data relating to Retailer Operations. Whenever reasonably possible, the Company will provide Retailer with advance notice of an audit or inspection of Retailer Facilities. Retailer may be present at any such audit or inspection. C. Financial Statements. On or before the tenth (10th) day of each month, Retailer will deliver to the Company, in a form prescribed by or acceptable to the Company, accurate statements of the financial condition and operating results of Retailer's Operations with regard to Company Products through the last day of the previous month. Within ninety (90) days after the end of Retailer's fiscal year, Retailer shall provide the Company with financial statements that have been reviewed by an independent Certified Public Accountant, as well as a copy of such accountant's review report. D. Sales and Inventory Reports. Retailer shall furnish to the Company, on forms prescribed by or acceptable to the Company, accurate response of Retailer's sales and inventory of Company Products and Select Pre Owned Vehicles. 30. RETAILER INFORMATION SYSTEMS Retailer agrees to install and maintain, at its expense, electronic data processing equipment and software applications that are compatible with, and supported by, the Company's computer network and business operational strategies, as the Company may determine from time to time. 31. CHANGE IN PRICES Upon ten (10) days prior written notice to Retailer, the Company may change the Retailer Price and the Company's charge for distribution and delivery of any Company Vehicle. Except with regard to any discounts authorized in writing by the Company, the changed price and charge shall be the price and charge in effect, and delivery to Retailer shall be deemed to have been made and the order deemed to have been filled, upon Company's delivery to a transport carrier for delivery to Retailer or its designee. The Company will provide Retailer with price protection for Company Vehicles in accordance with the Company Policies. 32. EXPORT OF COMPANY VEHICLES Retailer is authorized to sell Company Products only to customers located in the United States and agrees to abide by any export policy established by the Company. 33. FACTORY SUGGESTED PRICE LABELS If Retailer finds that any new Vehicle has been delivered to Retailer with an incorrect label, or without a completed label affixed thereto pursuant to the Federal Automobile Information Disclosure Act, 15 U.S.C. Section 1232, as amended (the "Act"), Retailer will immediately notify the Company. If the Company gives written instructions to Retailer with respect to replacing or affixing a label in a manner that conforms with the Act, Retailer agrees to comply with such written instructions. 20 34. INDEMNIFICATION A. Indemnification by the Company. The Company will indemnify and hold Retailer harmless from any and all liability, loss, cost or expense, including, without limitation, reasonable attorneys' fees, resulting from or relating to any legal action against Retailer by third parties concerning bodily injury or property damage arising out of an occurrence caused solely by a defect in the design or manufacture of a Company Product; provided, however, Retailer could not have discovered that defect in the reasonable pre-delivery inspection or servicing of the Company Product. If any legal action identified in this Section 34 is brought against Retailer, and if Retailer promptly notifies the Company in writing of the commencement of the action and cooperates fully in the defense of the action as the Company may reasonably require, the Company agrees to undertake, at its sole expense, the defense of said action on behalf of Retailer when so requested by Retailer, and to indemnify and hold Retailer harmless in the event of an adverse judgment. The Company shall have the right to continue the suit in the name of Retailer if the Company deems such action to be necessary. Should the Company refuse to undertake the defense on behalf of Retailer, Retailer may conduct its own defense and, if the Company is determined to be solely liable, the Company shall be liable for the cost of the defense, including, without limitation, reasonable attorneys' fees, court costs and expenses of litigation, together with any verdict, judgment or settlement paid by Retailer. B. Indemnification by Retailer Retailer shall indemnify the Company and/or Manufacturer (for purposes of this Section 34, individually and collectively referred to as "Indemnified Party(ies)") and hold each of them harmless from any and all liability, loss, cost or expense, including, without limitation reasonable attorneys' fees, court costs and costs of litigation, resulting from or relating to any legal action against Volvo by third parties alleging or concerning: (i) Retailer's failure to comply, in whole or in part, with any obligations assumed by Retailer pursuant to this Agreement; or (ii) Retailer's negligent or improper inspection, repairing or servicing of new or used Company Products; or (iii) Retailer's breach of any contract between Retailer and Retailer's customer or supplier; or (iv) Retailer's unfair, misleading, deceptive or fraudulent trade practices. If any legal action arising out of the causes specified above is brought against any Indemnified Party, and provided that the Indemnified Party promptly notifies Retailer in writing of the commencement of any such action, Retailer agrees to undertake, at its sole expense, the defense of said action on behalf of the Indemnified Party when so requested, and to indemnify and hold the Indemnified Party harmless in the event of an adverse judgment. Should Retailer refuse to undertake the defense on behalf of the Indemnified Party, such party may conduct its own defense and Retailer shall be liable for the cost of such defense, including, without limitation, reasonable attorneys' fees, court costs and costs of litigation, together with any verdict, judgment or settlement paid by the Indemnified Party. C. Joint Defense. Whenever a legal action claims liability on the part of both the Company, as described in Section 34A, and Retailer, as described in Section 34B, each party shall be responsible for its own defense. Any Indemnified Party's or Retailer's responsibility for its own defense pursuant to this Section 34 shall in no way affect their respective obligations to indemnify and hold harmless. 35. COMPLIANCE WITH LEGAL REQUIREMENTS Retailer agrees to pay all taxes and to take all actions required by law, including, without limitation, those actions required to comply with the National Traffic and Motor Vehicle Safety Act of 1966, the Clean Air Act, the Consumer Product Safety Act, the Magnuson-Moss Warranty Act (all as amended from time to time), and any other federal, state or local leg- 21 islation or regulation pertaining to safety, air pollution, noise control, water pollution, handling, transportation, storage and disposal of hazardous and non-hazardous waste and materials, warranties to consumers, the sale of Company Vehicles, or other actions which may be required of automobile retailers or which the Company may reasonably request. 36. COMPLIANCE WITH CONSUMER PROTECTION LAWS AND REGULATIONS Because certain Volvo Customer complaints may have legal significance for, or impose liability upon, Retailer and/or the Company under various "Repair or Replace" or other consumer protection laws and regulations. Retailer agrees to provide the Company with prompt notice of all such complaints. Retailer agrees to take other steps as the Company may reasonably require, including, without limitation, providing notice to Retailer's regional office when a vehicle is brought into Retailer which may become subject to such law or regulation prior to a presumption of liability arising under such law or regulation from the inability to repair or correct a nonconformity or condition of a Vehicle. Retailer hereby agrees to do nothing to affect adversely the Company's rights under such laws and regulations, and recognizes that failure to comply with this Section 36 may result in a chargeback from the Company for monies expended in remedying such complaints which in the reasonable opinion of the Company were caused wholly or predominantly by Retailer. 37. TRADE PRACTICES The Company and Retailer each recognize the importance of dealing with each other in an open and honest manner. In addition, each party understands the importance of treating Volvo Customers and prospective Volvo customers with the utmost respect and honesty. Retailer agrees to conduct its business in a manner which will develop and maintain superior levels of customer loyalty and satisfaction, continually striving to improve Retailer's reputation, the Company, Company Products and the Volvo name, trademarks and service marks. Retailer will not engage in any unfair, deceptive, misleading, unethical, fraudulent or otherwise prohibited practice. Retailer will immediately discontinue any such advertising or practice upon written notice of objection from the Company. Any notice by the Company and discontinuance by Retailer will not prejudice any other rights the Company may have under this Agreement. 38. REPURCHASE OF COMPANY PRODUCTS BY THE COMPANY Within sixty (60) days after termination of this Agreement under Section 10, the Company will repurchase the following: All new, unused, undamaged, standard, current model year Company Vehicles with less than 200 miles which Retailer may own or have an interest in on the date of termination, at a price paid by Retailer to the Company for such Company Vehicles less: (i) any price reduction allowance credited or paid to Retailer (net discounts, allowances or adjustments); and (ii) transportation charges paid by Retailer; All current model year demonstrator vehicles (as defined by the Company) and registered Volvo service loaners which are no more than one year old; All new, unused, standard, current model year Company Vehicles which Retailer may own or has an interest in on the date of termination, which were received by Retailer from the Company in a damaged condition and were not repaired by Retailer to standard condition, at the price specified in this Section 38, but provided that Retailer shall subrogate all claims for the repair of such Company Vehicles to the benefit of the Company; All new, undamaged Genuine Volvo Parts and Accessories offered for sale by the Company to its retailers on the date of termination which Retailer may own or have an interest in on the date of termination, at the then current wholesale price for such Genuine Volvo Parts and Accessories on the date of termination, less: (i) a handling charge of fifteen (15%) percent; and (ii) any charges actually paid by the Company for transportation to the Company; and All special tools, signs, and other special equipment and information which are, because of design, applicable only to Company Products, which Retailer may own or have an interest in on the date of termination and which are in useable and good condition except for reasonable wear and tear, at the price paid by Retailer less: (i) an amount equal to the accrued straight line depreciation on such equipment during Retailer's (assumed) ownership, if such equipment has a useful life of at least five years; and (ii) any charges actually paid by the Company for the transportation of such equipment from Retailer's place of business to the Company's place of 22 business. Retailer will furnish to the Company satisfactory evidence of the date on which Retailer acquired an interest in such equipment, and of the price paid by Retailer. For purposes of this Section 38, Company Vehicles, Genuine Volvo Parts and Accessories, special tools and equipment specified in the four preceding paragraphs are referred to collectively in this Section 38 as "Repurchase Products." As a condition precedent to the Company's obligations under this Section 38 to purchase the Repurchase Products, Retailer shall permit the Company and Company's designee or designees, to enter the Retailer Facility at such time as the Company may reasonably determine, for the purpose of inspecting and/or taking an inventory of all or any part of Retailer's stock of Company Products. In connection with the Company's purchase of the Repurchase Products pursuant to this Section 38: (i) Retailer shall promptly deliver such Repurchase Products to the Company; (ii) Retailer shall comply with any and all applicable laws and requirements which may be necessary or proper to transfer good title to Repurchase Products to the Company, free and clear of any charge, lien, or encumbrance; and (iii) Promptly following Retailer's fulfillment of its obligations under this Section 38, the Company shall pay Retailer for the Repurchase Products acquired by it pursuant to this Section 38 (subject to all rights of set-off for any outstanding debt of Retailer to the Company). IV. MISCELLANEOUS PROVISIONS 39. LICENSING REQUIREMENTS Retailer will procure and maintain any license(s) or other applicable governmental authorization(s) necessary to operate as a new motor vehicle retailer for Company Products. 40. INSURANCE Retailer will acquire and maintain insurance as follows: (i) Worker's Compensation insurance prescribed by law in the state in which Retailer is located, and Employers Liability Insurance, each with a limit of at least $500,000 per occurrence; (ii) Comprehensive general liability insurance in a form approved by the Company with a combined single limit of $1,000,000; (iii) automobile liability insurance in the amount of at least $1,000,000; (iv) an umbrella policy to cover comprehensive general liability and auto insurance in the amount of at least $5,000,000; (v) Casualty insurance insuring Retailer Facilities in an amount, as determined by the Company, necessary to repair any casualty in an expedited manner thus enabling Retailer to continue the sales and service of Company Products; and (vi) any other type of insurance as may be deemed reasonably necessary by the Company. From time to time, the Company reserves the right to modify these insurance requirements and limits in accordance with reasonably accepted industry custom and practice. 41. TAXES Retailer will comply with all applicable laws concerning collection or payment by Retailer of taxes applicable to all transactions by Retailer concerning Company Products, and Retailer shall furnish evidence of compliance to the Company within thirty (30) days after delivery of a written request. 42. WAIVER Failure by either party at any time to require performance by the other party, or to claim a breach of any provision of this Agreement, will not be construed as a waiver of any subsequent breach, nor affect the enforceability of any part of this Agreement, nor prejudice either party as regards to any subsequent action. 43. AGENCY Retailer is an independently operated business entity in which the Company has no ownership interest. This Agreement does not make Retailer the legal representative of the Company, or in any way create the relationship of principal and agent between the Company and Retailer, nor does this Agreement create any fiduciary or employment relationship between Retailer and the Company. Retailer hereby agrees that it will not act or attempt to act, or represent 23 itself directly or by implication, as agent of the Company or in any manner create or attempt to create any obligation on behalf of, or in the name of, the Company. 44. SUBRETAILERS Retailer has no authority to establish an associate retailer or subretailer for Company Products. 45. ASSIGNMENT OF RIGHTS OR DELEGATION OF DUTIES This Agreement is in the nature of a personal services agreement and Retailer has no authority to assign the whole or any part of this Agreement, or any right or interest hereunder, without the prior written consent of an Officer, which shall not be unreasonably withheld. 46. NOTICE AND SERVICE OF NOTICE Notice from Retailer to the Company will be effective only if: (i) signed by the Principal Owner or General Manager; and (ii) directed to the Company President or his authorized designee Notice from the Company shall be effective only if; (i) signed by an Officer; and (ii) directed to a Principal Owner or General Manager at the Retailer's address given on page 1 of this Agreement. Any such notice shall be sent by Certified Mail. Return Receipt Requested or by overnight mail or carrier service. In the case of Certified Mail, notice shall be deemed given upon the earlier of actual receipt or seven (7) days after such notice is sent. In the case of overnight mail or carrier service, notice shall be deemed given upon the next business day after such notice is sent. Notice may be given by facsimile, but only with the written consent of the other party. 47. APPLICABLE LAW AND SEVERABILITY This Agreement will be construed in accordance with New Jersey law with respect to its interpretation and construction, but in all other respects governed by the laws of the state of Retailer's Facilities identified in Section 5. If any provision of this Agreement is declared invalid, unenforceable, or prohibited by the laws of the applicable state, such provision shall be severable from the balance of this Agreement, which will remain in full force and effect. Should the Company determine that any federal or state law or regulation, or any condition referred to in Section 34 or 35 requires a change or changes in any of the provisions of this Agreement, the Company may offer to Retailer an amendment or an amended Agreement embodying such change or changes. If Retailer fails to execute such amendment or amended Agreement and return it to the Company within thirty (30) days after it is delivered to Retailer, the Company may terminate this Agreement by giving notice to Retailer, with termination to be effective upon receipt by Retailer of notice. 48. FINANCIAL INFORMATION Retailer agrees that the Company may provide to, or obtain financial information from, financial institution(s) which have an actual or prospective relationship with Retailer. 49. ENTIRE AGREEMENT This Agreement supersedes all prior agreements between the parties relative to the sale and servicing of Company Products. This Agreement contains the entire, integrated agreement between the parties and any amendment, modification, or waiver of any provision of this Agreement must be in writing and signed by an Officer, and on behalf of Retailer by a person identified in Section 2A. 50. NO FRANCHISE FEE OR ADDITIONAL PAYMENTS Retailer represents and warrants that it has paid no fee, nor has it provided any funds, goods or services to any Company employee or agent in lieu of a fee, as consideration for the Company's entering into this Agreement, and that the sole consideration for the Company's entering into this Agreement was Retailer's Principal Owners' and General Manager's abilities, integrity, assurances of personal services and expressed intention to deal fairly and equitably with the Company and the public and all other promises recited in this Agreement. In addition, Retailer represents and warrants that neither it nor any Principal Owner has received any consideration, except as described in this Agreement, for entering into this Agreement. 24 51. CAPTIONS The captions for the sections of this Agreement are for convenience and reference only and will not be construed to explain, modify, amplify or aid in the interpretation, construction or meaning of the provisions of this Agreement, or be a part of this Agreement. 52. TIME OF THE ESSENCE Time is of the essence with respect to each provision of this Agreement. 53. DATE OF PERFORMANCE If any date for the performance of obligations by any party under this Agreement falls on any day that is not a business day, the date on which such obligation is to be performed will be deemed to be the next business day. 54. RULES OF CONSTRUCTION The following rules shall apply to the construction and interpretation of this Agreement: A. Singular words connote the plural number as well as the singular and vice versa, and the masculine includes the feminine and the neuter. B. All references herein to particular articles, sections, subsections or exhibits are references to articles, sections, subsections or exhibits of this Agreement. C. Each party and its legal counsel have reviewed and revised (or requested revisions of) this Agreement and, therefore, any usual rules of construction requiring that ambiguities are to be resolved against a particular party shall not be applicable in the construction and interpretation of this Agreement. V. DEFINITIONS 55. DEFINITIONS In addition to certain terms defined elsewhere in this Agreement, the following definitions shall apply throughout this Agreement: AREA OF RESPONSIBILITY: The non-exclusive area that the Company designates from time to time as Retailer's primary geographic territory for the marketing, promoting, selling and servicing of Company products. AUTHORIZED RETAILER(S): Retailers authorized by the Company to conduct Retailer Operations in connection with the marketing, promoting, selling and servicing of Company Products pursuant to the then current, duly executed Authorized Retailer Agreement. BUSINESS PLAN: The written business plan, in a form satisfactory to the Company, and any updates thereto, produced by Retailer and provided to the Company, which describes how Retailer will develop and maintain its Volvo business. COMPANY POLICY(IES): All guidelines, regulations, programs, manuals, bulletins, policies, and procedures and subsequent amendments established by the Company from time to time. COMPANY PRODUCTS: Company Vehicles and Genuine Volvo Parts and Accessories that bear the Volvo trademark(s), and special tools, all of which from time to time the Company may offer to Retailer. COMPANY VEHICLES: Volvo passenger cars manufactured by or for Manufacturer, and offered by the Company to Retailer for purchase. GENUINE VOLVO PARTS AND ACCESSORIES: Those parts and accessories, bearing the Marks/Trademarks, manufactured by or for Manufacturer or the Company, and offered for sale to Retailer by the Company. MANUFACTURER: Volvo Car Corporation, Gothenburg, Sweden, and any affiliate or successor in interest. MARKET AREA: The non-exclusive area, encompassing one or more Areas of Responsibility, that the Company designates from time to time as Retailer's primary geographic territory for the marketing, promoting, selling and servicing of Company products. 25 MARK(S)/TRADEMARK(S): Any trademark or service mark that the Company either owns, or is authorized to use and/or license, with rights of enforcement. MEDIATION GUIDELINES: The policies to be followed in mediating a dispute between the Company and Retailer as described in Section 11. MEDIATION PANEL: The panel of Retail Mediators, as described in Section 11. OFFICER: The president or any executive vice president, senior vice president or vice president of the Company. PARTNER(S)(SHIP)(ING): The terms partnership, partner(s) and partnering, as used in this Agreement and the Preamble, shall refer to the cooperative and mutually advantageous relationship that this Agreement is intended to foster between the Company and Retailer. The use of the terms partnership, partner(s) and partnering in this Agreement is not intended to create a legal partnership or joint venture between the parties to this Agreement. The Company and Retailer understand that each party is and shall remain, during the term of this Agreement, a wholly independent entity and that this Agreement does not create a fiduciary or agency relationship between the parties. PRINCIPAL OWNER(S): Those owners of Retailer described in Section 2A. REMAINING OWNER(S): Those owners of Retailer that remain after the death or incapacity of a Principal Owner, as referenced in Section 11. REPURCHASE PRODUCTS: Company Products, described in Section 38. RETAILER: The entity that is authorized to market, promote, sell and service Company Products under this Agreement. RETAILER FACILITY(IES): Retailer's land, buildings, improvements, and fixtures described in Section 6. RETAILER FACILITIES GUIDE: The Company's guide for retail facilities, as such may be issued from time to time. RETAILER MEDIATORS: Retailers selected by the Company and a representative group of Authorized Retailers to serve as mediators in the resolution of a dispute between the Company and a Retailer in accordance with Section 11. RETAILER OPERATIONS: Retailer's business of marketing, promoting, selling and servicing Company Products. VOLVO: A trademark, tradename and service mark of AB Volvo, a Swedish corporation. VOLVO CUSTOMER: A person or entity that has purchased, leased or obtained service for, any Company Product. VOLVO SELECT PRE OWNED VEHICLE: A Volvo vehicle that has been reconditioned by a participating Retailer in accordance with Company Policies. WORKING CAPITAL GUIDE: The guide produced by the Company to assist Retailer in determining, establishing, modifying, and maintaining Retailer's capital necessary to provide a superior ownership experience for Volvo Customers in Retailer's Area of Responsibility or Market Area. This Agreement will not be binding unless it bears the signatures of an Officer on behalf of the Company and of a person named in Section 2A on behalf of Retailer. VOLVO CARS OF NORTH AMERICA, INC. RETAILER European Motors, LLC d/b/a Volvo of Chattanooga By: /s/ Stephen J. Gamble By: /s/ Nelson E. Bowers, II ------------------------------- ------------------------------ Stephen J. Gamble Nelson E. Bowers, II Title: Regional Vice President Title: Cheif Manager ------------------------------- ------------------------------ 26 EX-10 23 EXHIBIT 10.67 SALES AGREEMENT - -------------------------------------------------------------------------------- Sales Agreement VOLVO - -------------------------------------------------------------------------------- VOLVO CARS OF NORTH AMERICA, INC. SALES AGREEMENT This Agreement dated March 24, 1993, is made in triplicate by and between Dyer & Dyer, Inc. - -------------------------------------------------------------------------------- (NAME OF ENTITY) A South Carolina Corporation - -------------------------------------------------------------------------------- (STATE WHETHER AN INDIVIDUAL PARTNERSHIP OR CORPORATION, IF THE LATTER, SHOW NAME OF STATE IN WHICH INCORPORATED) doing business as Dyer & Dyer, Inc. - -------------------------------------------------------------------------------- (TRADE NAME) located at 5260 Peachtree Industrial Boulevard Chamblee - -------------------------------------------------------------------------------- (ADDRESS) (CITY) De Ka1b Georgia 30341 - -------------------------------------------------------------------------------- (COUNTY) (STATE) (ZIP CODE) (hereinafter called "Dealer"), and Volvo Cars of North America, Inc., a Delaware corporation with its principal place of business at Volvo Drive, Rockleigh, New Jersey 07647 (hereinafter called "Distributor"). PREAMBLE The purpose of this Agreement is to provide for the sale and servicing of Company Products at retail by Dealer in Dealer's Area of Responsibility in a manner that will best serve the interest of the retail customer and be of benefit to Dealer and Distributor. Attainment of the purposes of this Agreement requires understanding, cooperation, mutual trust and confidence between the parties. Dealer has entered into this Agreement with confidence in Distributor's integrity and expressed intention to deal fairly with its dealers and the public. Distributor has entered into this Agreement with confidence in Dealer's integrity, ability, and expressed intention to deal fairly with Distributor, other authorized dealers and the public, and in reliance upon Dealer's undertaking to perform and carry out the duties, obligations and responsibilities of an authorized Dealer set forth in this Agreement. The parties recognize that public confidence in Company Products is a valuable component in their objectives and endeavors, and that the development and maintenance of public confidence in Company Products requires them to continuously assure the public of courteous, fair treatment and efficient, dependable service. In order to promote and protect such public confidence, and to promote Company Products, Dealer and Distributor will conduct their businesses ethically and equitably. 1 PARAGRAPH I A. Distributor hereby appoints Dealer as an authorized dealer in Company Products. Dealer hereby accepts such appointment and agrees to perform the duties, obligations and responsibilities of a dealer as herein provided. B. This Agreement supercedes all prior agreements between the parties relative to the sale and servicing of Company Products and will continue until terminated pursuant to Clause 25 hereof. C. This Agreement contains the entire agreement between the parties hereto. Any amendment hereto must be in writing and signed by an Executive Officer of Distributor and a person identified in Paragraph II hereof on behalf of Dealer. D. This Agreement is to be governed by, and construed according to, the laws of the State of New Jersey. If any provision of this Agreement is invalid or unenforceable or prohibited by the laws of the State or place where it is to be performed, such provision is severable from the balance of this Agreement. E. Non-exclusively and in accordance with the terms of this Agreement, Distributor will sell Company Products to Dealer, and Dealer will purchase Company Products from Distributor. F. The parties hereto shall annually review Dealer's Area of Responsibility and determine fair and equitable performance standards for Dealer. G. Dealer will use its best efforts to promote and develop sales and service of Company Products in its Area of Responsibility. H. Distributor recognizes Dealer's special interests and obligations in its Area of Responsibility, as such Area may be designated from time to time in accordance with Clause 1 (E) hereof. Accordingly, if Dealer performs its obligations under Paragraph I (G) hereof, Distributor will not increase the number of authorized dealers for Company Products in Dealer's Area of Responsibility so as to substantially impair Dealer's business in Company Products as it has therefor been conducted except after thirty (30) days prior written notice to Dealer and a written survey showing need therefor, provided that nothing contained in this Agreement shall require or be construed to require Dealer's approval of Distributor's appointment of any authorized dealer. I. Nothing contained in this Agreement limits any person as to the geographic area in which, or the persons to whom, it may sell Company Products. PARAGRAPH II This Agreement has been entered into by Distributor in reliance upon Dealer's representations that: A. The following person(s) is the principal owner(s) of Dealer: Name Home Address Percentage Title of Interest Richard S. Dyer, Jr. 100% President -------------------------------------------------- 9570 Marsh Cove Court -------------------------------------------------- Dunwoody. Georgia 30350 -------------------------------------------------- -------------------------------------------------- B. The following person(s) also has an ownership interest in Dealer: -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- 2 C. The following person(s) has full managerial authority for the operations of Dealer: Name Home Address Title Same as Paragraph II A. -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- D. Except pursuant to Clause 35, any change in the ownership or management of Dealer requires the prior written approval of an Executive Officer of Distributor, which shall not be unreasonably withheld. PARAGRAPH III A. Dealer will establish, staff, equip and maintain a salesroom for Vehicles, facilities for Service Parts sales, service facilities and facilities for used passenger automobile sales in Dealer's Area of Responsibility. Each such facility will comply with reasonable written lay-out, appearance and size standards developed by the parties hereto pursuant to Paragraph I (F) hereof, consistent with promoting the reputation of, and public confidence in, Company Products, and will be sufficient to enable Dealer to satisfy Dealer's sales and service responsibilities hereunder. Dealer will procure and maintain tools, machinery and equipment adequate to meet the normal requirements of owners of Company Products in Dealers' Area of Responsibility. Dealer will operate such facilities throughout the business hours customary in the trade in Dealer's Area of Responsibility. B. This Agreement has been entered into by Distributor in reliance on Dealer's representations that selling and servicing of Company Products will be conducted from the following address(es): (1) Sales: 5260 Peachtree Industrial Boulevard ---------------------------------------- Chamblee, Georgia 30341 -------------------------------------------------- -------------------------------------------------- (2) Service: 5260 Peachtree Industrial Boulevard ---------------------------------------- Chamblee, Georgia 30341 -------------------------------------------------- -------------------------------------------------- Dealer will not move such place or places of business, or establish any additional place or places of business for sales or servicing of Company Products, without the prior written approval of an Executive Officer of Distributor which shall not be unreasonably withheld. PARAGRAPH IV In order to more particularly define the obligations of the parties hereto, it is further agreed as follows: CLAUSE I- A. COMPANY PRODUCTS means Vehicles and Service DEFINITIONS Parts that from time to time may be offered for sale by Distributor to authorized dealers. B. VEHICLES means passenger vehicles bearing the trademark "VOLVO" C. SERVICE PARTS means service parts and accessories supplied or approved by Distributor for Vehicles. D. DATE OF DISPATCH means the time at which Distributor shall deliver products sold hereunder to a carrier for delivery to Dealer or its designee, in accordance with Dealer's instructions. 3 E. AREA OF RESPONSIBILITY means the geographic area designated as such in writing by Distributor from time to time. F. DEALER PRICE means the price to Dealer for Company Products as established by Distributor. G. MANUFACTURER means Aktiebolaget Volvo of Gothenburg, Sweden. CLAUSE 2- A. Distributor has the right, from time to time POLICY during regular business hours to inspect Dealer's salesroom, facilities for service parts sales, service facilities and used passenger automobile outlet. B. Dealer will maintain and employ in Dealer's business and operations under this Agreement such net working capital and net worth as enables Dealer to satisfy Dealer's responsibilities under this Agreement. C. Distributor will provide, and Dealer will participate in, and will make available to its employees, training courses and personnel development programs. D. Dealer will conform to such reasonable written rules and regulations consistent with this Agreement as may, from time to time, be promulgated by Distributor to Dealer. E. Dealer will make reasonable efforts to handle satisfactorily any matters relating to the sale or servicing of Company Products in Dealer's Area of Responsibility. Dealer will report promptly to Distributor each complaint received by Dealer relating to any Company Product which Dealer cannot remedy, together with the name and address of the complainant. F. Dealer warrants that Dealer will procure and maintain any license or other governmental authorization necessary to engage in the businesses contemplated by Paragraph III (A) hereof. CLAUSE 3- A. Distributor will keep Dealer informed of the WARRANTIES ON warranty or warranties applicable to Company COMPANY PRODUCTS Products, and will insure that such warranty or warranties extend to each customer of Dealer upon the sale of a Company Product by Dealer to a customer. Dealer will include such warranty or warranties, in the form and content specified by Distributor, in each agreement for the sale of a Company Product by Dealer, and will furnish a copy of such warranty or warranties to the customer upon delivery of that Company Product. B. Distributor and Dealer each will fulfill promptly their respective obligations under such warranty or warranties. Said obligations are set forth in detail, as are procedures for the administration and payment of warranty claims, in the Volvo Service Policy Manual and the Volvo Parts and Accessories Operations Guide (including any successor publications). Said Publications may be amended by Distributor from time to time, provided that no less than thirty (30) days prior written notice to Dealer will be given in the event of amendment to warranty obligations or procedures. C. Manufacturer and Distributor give no other warranty, express or implied, including any implied warranty of merchantability or fitness, on any Company Product. 4 CLAUSE 4- Dealer will furnish to each retail purchaser of a WARRANTY AND Vehicle from Dealer such form of Warranty and SERVICE RECORD Maintenance Record and/or Operating Instructions AND/OR OPERATING Book, if any, as may then be currently furnished INSTRUCTIONS BOOK by Distributor. CLAUSE 5- A. Dealer expressly recognizes its obligation to "FREE SERVICE use its best efforts to effectively perform COUPON" AND warranty and Free Service Coupon work on Vehicles, WARRANTY WORK whether delivered by Dealer or by another authorized Volvo dealer, in accordance with the provisions of the "Volvo Warranty and Maintenance Record" booklet. Dealer further recognizes that a material and continuing default in its obligations under this Clause constitutes a breach of Dealer's obligations under Paragraph I (G) hereof. B. Dealer authorizes Distributor to charge Dealer's account for such "Free Service Coupon" work on a Vehicle sold by Dealer as may be per- formed by another authorized dealer and to credit Dealer's account for such "Free Service Coupon" work on a Vehicle sold by another authorized dealer as may be performed by Dealer in such amount as may be provided therefor. CLAUSE 6- Dealer expressly recognizes its obligation to use PRE-DELIVERY its best efforts to effectively service and SCHEDULE condition each new Vehicle before delivery in accordance with normal pre-delivery service and conditioning schedules furnished from time to time by Distributor to Dealer, and to perform such other normal service and conditioning work as may be prescribed in any then-current Volvo Service Policy Manual, Notice, or Bulletin, furnished by Distributor. Upon request by Distributor, Dealer will furnish evidence of such performance of such pre-delivery services. Dealer further recognizes that a material and continuing default in its obligations under this Clause constitutes a breach of Dealer's obligations under Paragraph I (G) hereof. CLAUSE 7- Dealer expressly recognizes its obligation to use REPAIR AND its best efforts to effectively perform repair or MAINTENANCE maintenance required on Company Products in SERVICE accordance with Distributor's current recommendations and specifications. Dealer's prices for such services shall always be determined by Dealer in the exercise of its discretion. Dealer further recognizes that a material and continuing default in its obligations under this Clause constitutes a breach of Dealer's obligations under Paragraph I (G) hereof. CLAUSE 8- A. Dealer at all times will keep in Dealer's place SERVICE PARTS of business an inventory of Service Parts of an assortment and in quantities that are necessary to meet the current and reasonably anticipated service requirements of Dealer's customers. B. Dealer will not sell or offer for sale or use in the repair of any Company Product, as a genuine new Volvo Service Part, any part that is not in fact a genuine new Volvo Service Part. CLAUSE 9- A. Dealer will conduct its business in a manner TRADE PRACTICES that will reflect favorably at all times on AND ADVERTISING Distributor, Manufacturer, Company Products and the good name and reputation of the foregoing. B. Dealer will not engage in any deceptive, misleading, or unethical practice or advertising. C. Dealer will forthwith discontinue any advertising upon written notice of objection thereto by Distributor, or upon notice of withdrawal of Distributor's approval thereof. 5 CLAUSE 10- Dealer warrants that Dealer will not exhibit EXHIBITIONS Vehicles without the written consent of Distributor at any Motor Exhibition, Agricultural Show, or the like. CLAUSE 11- A. Dealer will keep records of its business DEALER'S relating to Company Products. From time to time ACCOUNTING AND during regular business hours, and on reasonable REPORTS notice to dealer, Distributor may examine or cause the examination of Dealer's accounts and records relating to the sale and servicing of Company Products. Dealer may be present at such examination. B. Dealer will furnish to Distributor, within reasonable time limits specified by Distributor and on the forms prescribed by Distributor or the reasonable equivalent thereof, statements of the financial condition and operating results of Dealer's business in Company Products. C. Dealer will furnish to Distributor, on such forms and at such times as Distributor may reasonably require, reports of Dealer's sales and stock of Company Products and used automobiles. CLAUSE 12- If Dealer finds that any new Vehicle has been FACTORY SUGGESTED delivered to Dealer with an incorrect label, or PRICE LABELS without a completed label, affixed thereto pursuant to the Federal Automobile Information Disclosure Act, 15 U.S.C. ss.1232, Dealer will notify Distributor of such finding. Thereafter, in the event Distributor gives written instructions to Dealer with respect to correcting or completing the form or content of such label, Dealer warrants that it will comply with such written instructions. CLAUSE 13- Dealer will maintain, during the existence of this LINES OF CREDIT Agreement, a line of credit with a responsible financing institution at a level permitting Dealer to inventory Company Products commensurate with annually set objectives. CLAUSE 14- A. Dealer warrants that Dealer will comply with TAXES all laws dealing with collection or payment by Dealer of taxes applicable to resale transactions by Dealer, and will furnish evidence of compliance to Distributor upon written request. B. As to any Company Products put to a taxable use by Dealer or in fact purchased by Dealer otherwise than for resale, Dealer warrants timely return and payment of all applicable taxes. CLAUSE 15- Payment for each Company Product purchased by PAYMENTS BY DEALER Dealer will be made in cash in advance unless the invoice or Dealer's then current and applicable wholesale payment plan provides otherwise, in which event the terms of the invoice or such plan will govern. Receipt of any commercial paper will not constitute payment until collected in full. Dealer will pay all collection charges. CLAUSE 16- Title to each Company Product purchased by Dealer TITLE under this Agreement will pass to Dealer, or to the finance institution designated by it, upon delivery to the carrier or to Dealer, whichever first occurs, but Distributor will retain a security interest in, and right to repossess, any such Company Product until paid therefor. CLAUSE 17- At Distributor's request, Dealer will submit its FIRM ORDERS firm orders for new Vehicles to be shipped during an Allocation Period, and Dealer's estimated new Vehicle requirements for the succeeding Allocation Period. An Allocation Period shall not exceed eight (8) weeks in duration. 6 CLAUSE 18- A. Distributor will use its best efforts to DELIVERIES fill each of Dealer's firm orders for Company Products in accordance with delivery dates specified by Dealer. B. When allocation of available Company Products is necessary, Distributor will allocate available Company Products on a fair, equitable and nondiscriminatory basis. C. Delivery of standard current model year Vehicles by Distributor pursuant to Dealer's firm orders may be made at any time during the Allocation Period for which Dealer has specified delivery, or during the next Allocation Period. D. After the Allocation Period next following that Allocation Period for which Dealer has specified delivery, any unfilled firm order for standard current model year Vehicles shall continue as such until cancelled by Dealer before the Date of Dispatch. E. Distributor's delivery and Dealer's right to cancel orders for non-standard Vehicles shall be subject to such terms and conditions as may be indicated by Distributor in accepting Dealer's orders for such Vehicles. Distributor may require a non-refundable deposit as a condition precedent to accepting any order for a non-standard vehicle. F. If Dealer fails to accept or refuses any Company Product delivered by Distributor pursuant to this Clause 18, Dealer will pay Distributor all expenses incurred by Distributor in shipping such Company Product to Dealer and in (a) returning it to the point of shipment, or (b) directing it to another destination whichever is the less. CLAUSE 19- Distributor will not be liable in any respect for DELAYS IN failures or delays in deliveries due in whole or DELIVERIES in part to such matters as shortage or curtailment of material, labor, transportation or utility services, or to any labor or production difficulty in Manufacturer's plants or those of its suppliers, or to any cause beyond Distributor's control or without Distributor's fault or negligence. CLAUSE 20- Any claims which Dealer submits to Distributor DEALER must be submitted in writing within such CLAIMS reasonable time as may be specified by Distributor for the submission of such claims. Claims submitted after the expiration of the said time will not be considered or allowed. CLAUSE 21- Dealer will maintain a stock of new Vehicles of STOCK VEHICLES the latest model in accordance with the annual objectives mutually agreed to by Dealer and Distributor. CLAUSE 22- Dealer will keep available at all times, in good DEMONSTRATORS running order and presentable condition for demonstration purposes, an adequate number of Vehicles equipped with accessories of the latest model but not at any time less than two such Vehicles. CLAUSE 23- Distributor reserves for itself and Manufacturer CHANGE IN MODELS the right to discontinue the manufacture or sale AND/OR DESIGNS of any Company Product or to make changes in design, or to add improvements to Company Products at any time, all without notice to Dealer and without incurring any obligation to Dealer either with respect to any Company Product previously ordered or purchased by Dealer or otherwise. 7 CLAUSE 24- Distributor may change at any time and from time CHANGE IN PRICES to time, the Dealer Price and Distributor's charge for distribution and delivery of any Company Product, provided that no less than ten (10) days prior written notice shall be given to Dealer of any change in the Dealer Price of Vehicles as to which a Dealer Price has theretofore existed for the current model year. Except as to such discounts as may be allowed in writing by Distributor, such price and such charge shall be the price and charge in effect, and delivery to Dealer shall be deemed to have been made and the order deemed to have been filled, on the Date of Dispatch. CLAUSE 25- A. This Agreement will continue in full force and TERMINATION OF effect, and will govern all relationships and AGREEMENT transactions between the parties hereto, until terminated pursuant to the provisions of this Clause 25. B. Dealer may terminate this Agreement at any time, without assigning any reason therefor, by giving sixty (60) days prior written notice of termination to Distributor. C. Distributor may terminate this Agreement: 1. Effective upon no less than thirty (30) days prior written notice to Dealer (subject to Paragraph (D) of this Clause 25), in the event that: a. Dealer shall fail to correct any default in performance of its responsibilities under Paragraph I (G) or Clauses 2 (B), 2 (F), 8, 9 (B), ll, 15, 21, 22, or 34 (B) within sixty (60) days after written notice of such default is given to Dealer; or b. Any dispute, disagreement or controversy between or among persons identified in Paragraph II of this Agreement which adversely affects the ownership, operation, management, or business of Dealer arises and is not resolved within sixty (60) days after notice thereof is given to Dealer; or c. Dealer or a person identified in Paragraph II of this Agreement is finally convicted in a court of competent jurisdiction of a crime which adversely affects the operation or business of Dealer or the good name or reputation of Distributor or Company Products; or d. Dealer (if Dealer is an individual) or any person identified in Paragraph II (A) of this Agreement shall suffer death or total physical or mental incapacity; or e. Dealer misrepresents the ownership or management of Dealer either in connection with the application for this Agreement or thereafter; or f. Dealer shall file a voluntary petition in bankruptcy, or shall be adjudicated as a bankrupt pursuant to an involuntary petition, or shall suffer appointment of a temporary or permanent receiver, trustee, or custodian for Dealer or Dealer's business who shall not be discharged within thirty (30) days, or shall make an assignment for the benefit of creditors; or g. An unapproved change is made by Dealer in the ownership or management of Dealer specified by Paragraph II hereof, or in the locations of Dealer businesses for Company Products specified by Paragraph III (B) hereof. 2. After January 1, 1978, effective on no less than one hundred twenty (120) days prior written notice to Dealer in connection with the simultaneous termination of all outstanding Sales Agreements for Company 8 Products as to which Distributor is a party, in connection with Distributor's simultaneous offering to all then-current authorized dealers in Company Products (including Dealer) a new or amended standard form of Sales Agreement. D. Any claim by Dealer that good cause for termination of this Agreement by Distributor does not exist pursuant to Clause 25 (C) (1) hereof may be settled by arbitration upon the request of Dealer. Such request, if made, shall be made in writing by Dealer to the American Arbitration Association, and written notice of such request shall be given by Dealer to Distributor, within thirty (30) days after Distributor's notice of termination under Clause 25 (C) (1) hereof. Such request shall suspend the effective date of termination pending the outcome of the arbitration. 1. Dealer may formally initiate an arbitration under this Clause 25 (D) by filing a written request therefor, together with the appropriate filing fee, at any office of the American Arbitration Association, which shall then become the locale and site of the arbitration proceeding. 2. The arbitration shall be conducted in accordance with the Commercial Rules of the American Arbitration Association and in consonance with the United States Arbitration Act (8 U.S.C. ss.1 et seq.). 3. The arbitration shall be heard by a single impartial arbitrator mutually agreeable to the parties hereto, and selected from a panel of American Arbitration Association Arbitrators. 4. If the arbitrator finds that Distributor has shown that termination of this Agreement would accord with the provisions hereof and the standards set forth in the Automobile Dealers Franchise act, 15 U.S.C. ss.1221-1225 (the "Act"), the termination shall become effective on the date of such finding, Dealer shall pay the fees and expenses of the arbitration, and said termination is expressly recognized by Dealer as having been made by Distributor without breach by Distributor of the Act. Absent such finding by the Arbitrator, Distributor's notice of termination shall be wholly void, and Distributor shall pay the fees and expenses of the Arbitration. CLAUSE 26- A. Termination of this Agreement shall end PROCEDURE ON Dealer's status as an authorized Volvo Dealer, but TERMINATION shall not affect any liability of either party to the other accruing prior to the date of termination, or arising out of this Agreement. B. Upon termination Dealer agrees to immediately discontinue the use of any trademarks or trade names made up in whole or in part of any trademark or trade name belonging to Distributor or Manufacturer; to remove all signs containing any such trademarks or trade names; and to render unfit for the use originally intended (or to certify to Distributor that Dealer will not use for the purpose originally intended) any stationery, printed matter, or advertising containing any such trademarks or trade names. After termination Dealer will not represent, and will not continue any practices which might make it appear, that it is still an authorized Volvo Dealer and will permanently discontinue any use of the word Volvo in Dealer's corporate title, firm name or trade name and will take such steps as may be necessary or appropriate in the opinion of Distributor to change such corporate title, firm name or trade name to eliminate the word Volvo therefrom, all without cost or expense to Distributor. C. On termination under Clause 25 (C) (1) all unfilled orders for Company Products will be cancelled, subject to Clause 18 (E). On termination under 9 Clause 25 (B) Distributor will have the option to complete or cancel all unfilled orders for Company Products then pending and will have a similar right to complete or cancel any firm orders given after notice and before termination. Termination under Clause 25 (C) (2) shall not affect unfilled orders for Company Products then pending. D. After termination acceptance of orders from Dealer by Distributor, or the continuance of the sale by Dealer of Company Products, or the referring of inquiries to Dealer by Distributor or any business relations either party has with the other will not be construed as a renewal of this Agreement nor a waiver of the termination. If Distributor accepts any orders from Dealer after termination all such transactions will be governed, unless the contrary intention appears, by the terms of this Agreement applicable to such transactions. CLAUSE 27- A. Within thirty (30) days after termination of REPURCHASES BY this Agreement under Clause 25 (B) Distributor may DISTRIBUTOR give Dealer written notice of Distributor's exercise of an option granted hereby to repurchase all of the following: 1. All new, unused, undamaged, standard, current model year Vehicles which Dealer may own or have an interest in on the date of notice to Dealer of Distributor's exercise of the aforementioned option, at the price paid by Dealer to Distributor for such Vehicles (a) less any price reduction allowance credited or paid to Dealer (net after discounts, allowances or adjustments), (b) plus transportation charges paid by Dealer; 2. All new, unused, standard, current model year Vehicles which Dealer may own or has an interest in on the date of notice to Dealer of Distributor's exercise of the aforementioned option, which were received by Dealer from Distributor, in a damaged condition and were not repaired by Dealer to standard condition, at the price specified in subparagraph (1) of this Paragraph (A), but provided that Dealer shall subrogate all claims for the repair of such Vehicles to the benefit of Distributor; 3. All new, undamaged Service Parts offered for sale by Distributor to its dealers on the date of termination which Dealer may own or have an interest in on the date of notice to Dealer of Distributor's exercise of the aforementioned option, at the Dealer Price for such Service Parts on the date of termination less a handling charge of ten percent (10 % ) and any charges actually paid by Distributor for the transportation of such Service Parts from Dealer's place of business to Distributor's place of business; and 4. All tools, signs and other special equipment which are, because of design, applicable only to Company Products, which Dealer may own or have an interest in on the date of notice to Dealer of Distributor's exercise of the aforementioned option, and which are in useable and good condition (except for reasonable wear and tear), at the price paid by Dealer therefor less an amount equal to the accrued straight line depreciation on such equipment during Dealer's (assumed) ownership thereof, if such equipment had a useful life of five (5) years, and less any charges actually paid by Distributor for the transportation of such equipment from Dealer's place of business to Distributor's place of business. Dealer will furnish to Distributor satisfactory evidence of the date on which Dealer acquired an interest in such equipment, and of the price paid by Dealer therefor. 5. Vehicles, Service Parts, and equipment specified in the four preceding subparagraphs of this Paragraph (A) are referred to collectively in this Clause 27 as "Repurchase Products." 10 B. Within thirty (30) days after termination of this Agreement under Clauses 25 (C) (1) or 25 (C) (2) (provided in the latter instance that Dealer shall not then be a party to a Sales Agreement with Distributor) Distributor shall repurchase from Dealer, and Dealer shall sell to Distributor, all Repurchase Products which Dealer may own or have an interest in on the effective date of termination, at the prices specified for the particular Repurchase Product by subparagraph (1), (2), (3), or (4) (as the case may be) of Paragraph (A) of this Clause 27. C. In the event that Distributor elects to repurchase Repurchase Products pursuant to Paragraph (A) of this Clause 27, or in the event that Distributor becomes obligated to repurchase Repurchase Products pursuant to Paragraph (B) of this Clause 27, then: 1. Dealer shall promptly deliver such Repurchase Products to Distributor, and 2. Dealer shall comply with any and all applicable laws and requirements which may be necessary or proper to transfer good title to Repurchase Products to Distributor, free and clear of any charge, lien, or encumbrance, and 3. Distributor shall pay Dealer for Repurchase Products acquired by it pursuant to this Clause 27 promptly following Dealer's fulfillment of its obligations under this Clause and Clause 26 (B). CLAUSE 28- Any notice given hereunder shall be deemed given SERVICE OF NOTICE on the seventh day after it has been sent by first class certified mail, return receipt requested, properly enclosed in a wrapper addressed to the party for whom it is intended at such party's address hereinabove set forth. Notices may also be given by personal delivery by Dealer to an Executive Officer of Distributor, or by Distributor to any principal owner named in Paragraph II (A) hereof. Each party will promptly give written notice to the other of any change of address. CLAUSE 29- Failure by either party at any time to require WAIVER performance by the other party or to claim a breach of any provision of this Agreement will not be construed as a waiver of any subsequent breach nor affect the effectiveness of this Agreement, nor any part thereof, nor prejudice either party as regards any subsequent action.. CLAUSE 30- This Agreement does not in any way create the DEALER NOT AGENT relationship of principal and agent between OF DISTRIBUTOR Distributor and Dealer. Dealer warrants that it will not act or attempt to act, or represent itself, directly or by implication, as agent of Distributor or in any manner create or attempt to create any obligation on behalf of or in the name of Distributor. CLAUSE 31- Dealer has no authority to establish an associate SUBDEALERS dealer or subdealer for Company Products. CLAUSE 32- Dealer has no authority to assign the whole or any ASSIGNMENT part of this Agreement, or any right or interest hereunder, without the prior written consent of an Executive Officer of Distributor, which shall not be unreasonably withheld. 11 CLAUSE 33- Distributor recognizes Dealer's right to sell or DISPOSITION OF otherwise dispose of all or substantially all of BUSINESS BY DEALER Dealer's assets related to Dealer's obligations or performance under this Agreement, including Good Will, at any time and on such terms and conditions as Dealer may decide to accept in the exercise of its sole discretion. Distributor shall not unreasonably refuse to enter into a new agreement with the person contracting to so acquire or so acquiring such assets from Dealer, the provisions of which will be substantially the same as the provisions of this Agreement. CLAUSE 34- In connection with this Agreement, Distributor has TRADEMARKS AND been authorized by Manufacturer to permit Dealer TRADE NAMES to use the name "Volvo" under the following terms and conditions, to each of which Dealer agrees: A. During the existence of this Agreement, Dealer may, nonexclusively; use the name "Volvo" in the trade name used in connection with the conduct of Dealer's business under this Agreement. Dealer will not claim or make any attempt to register any corporate or other name or trademark which includes the name "Volvo" in any place or office, but Dealer may, in connection with Dealer's operations under this Agreement register a trade name containing the name "Volvo" where registration of fictitious names under which businesses are conducted is required by law. B. Dealer acknowledges that the name "Volvo" is a valid and existing trademark presently owned by Manufacturer and is registered by Manufacturer in the United States Patent Office, that Manufacturer presently has the sole right to use such trademark (except to the extent that it has previously expressly authorized others to do so) and to authorize others to use such trademark, and that valuable good will has accrued to and is attached to such trademark. C. Dealer will take any action which Distributor shall deem necessary or desirable to permit Distributor or Manufacturer to use, or to license, or to permit others to use, the name "Volvo" in Dealer's Area of Responsibility, including without limitation the use of "Volvo" in the name of any other company. D. Dealer will not alter any Company Product furnished hereunder or change or substitute any of its equipment nor do anything that will in any way infringe, impeach or lessen the validity of the trademarks associated with any Company Product. E. The permission herein granted shall terminate automatically if, at any time: 1. Dealer ceases to act as a dealer in Company Products; or 2. Dealer sells motor vehicles or parts or accessories therefor, other than Company Products, under any name containing the name "Volvo"; or 3. Dealer files a voluntary petition in bankruptcy, or is adjudicated as a bankrupt pursuant to an involuntary petition, or suffers appointment of a temporary or permanent receiver, trustee or custodian for Dealer or Dealer's business who is not discharged within thirty (30) days, or makes an assignment for the benefit of creditors; or 4. Dealer assigns or attempts to assign any interest in this Agreement, or 5. This Sales Agreement expires or is terminated. 12 F. Distributor or Manufacturer, upon thirty (30) days prior written notice to Dealer, may terminate the permissions given by this Clause 34 at any time. G. Upon termination of the permissions given by this Clause 34, Dealer will immediately discontinue the use of the name "Volvo" in Dealer's trade name, and will also immediately discontinue the use of any signs, structures, and forms of advertising based upon Dealer's trade name which include the name "Volvo" As soon as possible after such termination, Dealer will take all necessary and appropriate action to effect a change in Dealer's trade name so that it will no longer contain the name "Volvo" or any combination or variation thereof, or any other name deceptively similar thereto. H. Dealer's interest in this trademark license is personal and non-assignable. I. Distributor's rights hereunder shall inure to the benefit of, and are assignable to, any successor to its business. J. All rights exercisable by Manufacturer as the owner of the trademark "Volvo" shall, in the event of any assignment of such trademark, be fully exercisable by and inure to the benefit of the assignee. CLAUSE 35- Upon termination of this Agreement because of the DEALER'S SUCCESSOR death or incapacity of any principal owner named ON DEATH OR in Paragraph II (A) hereof: INCAPACITY A. Distributor will offer a one-year Interim Sales Agreement for Company Products: 1. to any person previously nominated by notice in writing to Distributor, by such owner as his successor, together with any remaining persons named in Paragraph II (A) or II (B) provided that: a. the nominee has been participating in the management of the dealership for a reasonable period of time and is named in Paragraph II when notice of such termination is given, and b. if more than one person has been nominated, Distributor in its discretion will determine to which nominee or nominees the Interim Sales Agreement will be offered; or 2. if there is no valid nominee, then to the spouse of such owner together with any remaining persons named in Paragraph II (A) or (B) provided that managerial authority for the operation of the dealership will continue to be vested in the persons theretofore named in Paragraph II (C), if any, or in the absence of such persons, in other persons mutually agreeable to such spouse and Distributor. B. Distributor will, within thirty (30) days after it first learned of such death or incapacity, offer to a nominated successor under Clause 35 (A) (1) or to the spouse referred to in Clause 35 (A) (2) the one year Interim Sales Agreement for Company Products provided that: a. Dealer within thirty (30) days of the occurrence of such death or incapacity will have given notice to Distributor of such an occurrence, and b. in the event that the person to whom an Interim Sales Agreement is offered does not accept the same within thirty (30) days the offer will automatically expire. 13 C. The aforementioned Interim Sales Agreement will be the same as Distributor's then standard Sales Agreement for Company Products, except that its duration will be limited to one (1) year, and shall not be subject to renewal. Distributor may, in its discretion, extend the term of any Interim Sales Agreement to facilitate the purchase by others of the former owner's interest in the dealer ship. At the end of any Interim Sales Agreement, Distributor will offer its then standard form of Company Products Sales Agreement to the persons named in Paragraph II (A) of the Interim Sales Agreement, provided that said persons then possess the requisites of an authorized dealer. PARAGRAPH V A. This Agreement in its entirety, consisting of 14 pages, has been read and agreed to by Distributor and Dealer. Notwithstanding anything to the contrary' hereinabove set forth, Distributor has the right to amend, modify, or change its standard Dealer Sales Agreements, including this Agreement, as necessitated by legislation or governmental regulation materially affecting the relationship between Distributor and Dealer existing on the date hereof. B. This Agreement will not be binding unless it bears the signatures of an Executive Officer of Distributor and of a person named in Paragraph II (A) hereof on behalf of Dealer. IN WITNESS WHEREOF the parties hereto have duly executed this Agreement in triplicate as of the day and year first written. Volvo Cars of North America, Inc. Dealer By /s/ William J Hoover By /s/ Richard S. Dyer, Jr. ----------------------------- ---------------------------- William J Hoover Richard S. Dyer, Jr. Title Senior Vice President Title President -------------------------- ------------------------- 14 EX-10 24 EXHIBIT 10.68 DEALER AGREEMENT TOYOTA DEALER AGREEMENT This is an Agreement between Southeast Toyota Distributors, Inc. (DISTRIBUTOR), and Marcus David Corporation (DEALER), a(n) [ ] individual, [ ] partnership, [X] corporation. If a corporation, DEALER is duly incorporated in the State of North Carolina and doing business as Town & Country Toyota. PURPOSES AND OBJECTIVES OF THIS AGREEMENT DISTRIBUTOR sells Toyota Products which are manufactured or approved by Toyota Motor Corporation (FACTORY) and imported and/or sold to DISTRIBUTOR by Toyota Motor Sales, U.S.A., Inc. (IMPORTER). It is of vital importance to DISTRIBUTOR that Toyota Products are sold and serviced in a manner which promotes consumer confidence and satisfaction and leads to increased product acceptance. Accordingly, DISTRIBUTOR has established a network of authorized Toyota dealers, operating at approved locations and pursuant to certain standards, to sell and service Toyota Products. DEALER desires to become one of DISTRIBUTOR's authorized dealers. Based upon the representations and promises of DEALER, set forth herein, DISTRIBUTOR agrees to appoint DEALER as an authorized Toyota dealer and welcomes DEALER to DISTRIBUTOR'S network of authorized dealers of Toyota Products. This Agreement sets forth the rights and responsibilities of DISTRIBUTOR as seller and DEALER as buyer of Toyota Products. DISTRIBUTOR enters into this Agreement in reliance upon DEALER's integrity, ability, assurance of personal services, expressed intention to deal fairly with the consuming public and with DISTRIBUTOR, and promise to adhere to the terms and conditions herein. Likewise, DEALER enters into this Agreement in reliance upon DISTRIBUTOR'S promise to adhere to the terms and conditions herein. DISTRIBUTOR and DEALER shall refrain from conduct which may be detrimental to or adversely reflect upon the reputation of the FACTORY, IMPORTER, DISTRIBUTOR, DEALER or Toyota Products in general. The parties acknowledge that the success of the relationship between DISTRIBUTOR and DEALER depends upon the mutual understanding and cooperation of both DISTRIBUTOR and DEALER. Dealer Code 32112 1 I. RIGHTS GRANTED TO THE DEALER Subject to the terms of this Agreement, DISTRIBUTOR hereby grants DEALER the non-exclusive right: A. To buy and resell the Toyota Products identified in the Toyota Product Addendum hereto which may be periodically revised by IMPORTER; B. To identify itself as an authorized Toyota dealer utilizing approved signage at the location(s) approved herein; C. To use the name Toyota and the Toyota Marks in the advertising, promotion, sale and servicing of Toyota Products in the manner herein provided. DISTRIBUTOR reserves the unrestricted right to sell Toyota Products and to grant the privilege of using the name Toyota or the Toyota Marks to other dealers or entities, wherever they may be located. II. RESPONSIBILITIES ACCEPTED BY THE DEALER DEALER accepts its appointment as an authorized Toyota dealer and agrees to: A. Sell and promote Toyota Products subject to the terms and conditions of this Agreement; B. Service Toyota Products subject to the terms and conditions of this Agreement; C. Establish and maintain satisfactory dealership facilities at the location(s) set forth herein; and D. Make all payments to DISTRIBUTOR when due. III. TERM OF AGREEMENT This Agreement is effective this 6th day of August, 1996 and shall continue for a period of (24) Months , and shall expire on August 5, 1998 unless ended earlier by mutual agreement or terminated as provided herein. This Agreement may not be continued beyond its expiration date except by written consent of DISTRIBUTOR and IMPORTER. 2 IV. OWNERSHIP OF DEALERSHIP This Agreement is a personal service Agreement and has been entered into by DISTRIBUTOR in reliance upon and in consideration of DEALER's representation that only the following named persons are the Owners of DEALER, that such persons will serve in the capacities indicated, and that such persons are committed to achieving the purposes, goals and commitments of this Agreement: OWNERS' PERCENT OF NAMES TITLE OWNERSHIP ----- ----- --------- O. Bruton Smith PRES 80.0% William S. Egan VP GM 20.0% V. MANAGEMENT OF DEALERSHIP DISTRIBUTOR and DEALER agree that the retention of qualified management is of critical importance to satisfy the commitments made by DEALER in this Agreement. DISTRIBUTOR, therefore, enters into this Agreement in reliance upon DEALER's representation that William S. Egan , and no other person, will exercise the function of General Manager, be in complete charge of DEALER'S operations, and will have authority to make all decisions on behalf of DEALER with respect to DEALER'S operations. DEALER further agrees that the General Manager shall devote his or her full efforts to DEALER'S operations. VI. CHANGE IN MANAGEMENT OR OWNERSHIP This is a personal service contract. DISTRIBUTOR has entered into this Agreement because DEALER has represented to DISTRIBUTOR that the Owners and General Manager of DEALER identified herein possess the personal qualifications, skill and commitment necessary to ensure that DEALER will promote, sell and service Toyota Products in the most effective manner, enhance the Toyota image and increase market acceptance of Toyota Products. Because DISTRIBUTOR has entered into this Agreement in reliance upon these representations and DEALER's assurances of the active involvement of such persons in DEALER operations, any change in ownership, no matter what the share or relationship between parties, or any changes in General Manager from the person specified herein, requires the prior written consent of DISTRIBUTOR, which DISTRIBUTOR shall not unreasonably withhold. 3 DEALER agrees that factors which would make DISTRIBUTOR's withholding of consent reasonable would include, without limitation, the failure of a new Owner or General Manager to meet DISTRIBUTOR'S standards with regard to financial capability, experience and success in the automobile dealership business. VII. APPROVED DEALER LOCATIONS In order that DISTRIBUTOR may establish and maintain an effective network of authorized Toyota dealers, DEALER agrees that it shall conduct its Toyota operation only and exclusively in facilities and at locations herein designated and approved by DISTRIBUTOR. DISTRIBUTOR hereby designates and approves the following facilities as the exclusive location(s) for the sale and servicing of Toyota Products and the display of Toyota Marks: New Vehicle Sales and Showroom Used Vehicle Display and Sales ------------------------------ ------------------------------ 9101 South Boulevard 9101 South Boulevard Charlotte, NC 28224 Charlotte, NC 28224 Sales and General Office Body and Paint ------------------------ -------------- Same as above Same as above Parts Service ----- ------- Same as above Same as above Other Facilities ---------------- Storage Same as above DEALER may not, either directly or indirectly, display Toyota Marks or establish or conduct any dealership operations contemplated by this Agreement, including the display, sale and servicing of Toyota Products, at any location or facility other than those approved herein without the prior written consent of DISTRIBUTOR. DEALER may not modify or change the usage or function of any location or facility approved herein or otherwise utilize such locations or facilities for any functions other than the approved function(s) without the prior written consent of DISTRIBUTOR. VIII. PRIMARY MARKET AREA DISTRIBUTOR will assign DEALER a geographic area called a Primary Market Area ("PMA"). The PMA is used by DISTRIBUTOR to evaluate DEALER's performance of its obligations, 4 among other things. DEALER agrees that it has no exclusive right to any such PMA. DISTRIBUTOR may add new dealers, relocate dealers, or adjust DEALER'S PMA as it reasonably determines is necessary. DEALER'S PMA is set forth on the PMA Addendum hereto. Nothing contained in this Agreement, with the exception of Section XIV(B), shall limit or be construed to limit the geographical area in which, or the persons to whom, DEALER may sell or promote the sale of Toyota products. IX. STANDARD PROVISIONS The "Toyota Dealer Agreement Standard Provisions" are incorporated herein and made part of this Agreement as if fully set forth herein. X. ADDITIONAL PROVISIONS In consideration of DISTRIBUTOR'S agreement to appoint DEALER as an authorized Toyota dealer, DEALER further agrees: 1) Dealer agrees to achieve, prior to the expiration of this Agreement and to thereafter maintain throughout the duration of this Agreement, Toyota car and truck penetration in its Primary Market Area that is at least equal to the Region's penetration rate. 2) Dealer agrees to achieve 100 percent car sales efficiency prior to the expiration of this Agreement and to thereafter maintain 100 percent car sales efficiency throughout the duration of this Agreement. 3) Dealer agrees to achieve and maintain, prior to the expiration of this Agreement, a satisfactory customer satisfaction performance, as measured by all applicable standards established by Toyota Motor Sales, U. S. A., Inc., and which are modified from time to time. 4) If, at any time during the term of this Agreement, all of the Additional Provisions set forth above have been attained and maintained for a continuous period of six (6) months and dealer has complied with Distributor's policies concerning truck sales efficiency, profitability, Net Working Capital, debt-to-equity and facility, then Distributor will immediately recommend to Importer that dealer be granted a Six (6) Year Renewal Agreement. 5 XI. EXECUTION OF AGREEMENT Notwithstanding any other provision herein, the parties to this Agreement, DISTRIBUTOR and DEALER, agree that this Agreement shall be valid and binding only if it is signed: A. On behalf of DEALER by a duly authorized person; B. On behalf of DISTRIBUTOR by the President and/or an authorized General Manager, if any, of DISTRIBUTOR, and C. On behalf of IMPORTER, solely in connection with its limited undertaking herein, by President of IMPORTER XII. CERTIFICATION By their signatures hereto, the parties agree that they have read and understand this Agreement, including the Standard Provisions incorporated herein, are committed to its purposes and objectives and agree to abide by all of its terms and conditions. Marcus David Corporation d/b/a Town & Country Toyota ---------------------------------------------------------------------DEALER (Dealer Entity Name) Date: 6/20/96 By: /s/ O. Bruton Smith Pres. ------------ --------------------------- ----------------------- Signature Title Date: By: ------------ --------------------------- ----------------------- Signature Title Southeast Toyota Distributors, Inc. ----------------------------------------------------------------DISTRIBUTOR (Distributor Name Date: 7/3/96 By: /s/ John Williams, Jr. General Manager ------------ --------------------------- ----------------------- Signature Title John Williams, Jr. Date: By: ------------ --------------------------- ----------------------- Signature Title 6 Undertaking by IMPORTER: In the event of termination of this Agreement by virtue of termination or expiration of DISTRIBUTOR's contract with IMPORTER, IMPORTER, through its designee, will offer DEALER a new agreement of no less than one year's duration and containing the terms of the Toyota Dealer Agreement then prescribed by IMPORTER TOYOTA MOTOR SALES, U.S.A., INC. Date: 8/6/96 By: /s/ Y. Ishizaka President ---------------- -------------------------------- ------------------- Y. Ishizaka Signature Title 7 Map CHARLOTTE M - TOWN & COUNTRY TOYOTA PMA Shaded/ZIP codes outlined in Blue [GRAPHIC OMITTED] Map CHARLOTTE M - TOWN & COUNTRY TOYOTA PMA Shaded/ZIP codes outlined in Blue [GRAPHIC OMITTED] Map CHARLOTTE M - TOWN & COUNTRY TOYOTA PMA Shaded/Census Tracts outlined in Black [GRAPHIC OMITTED] DEFINITION: A-ORIGINAL DATE: 07/30/97 PMA 0503100012000001 TOWN & COUNTRY TOYOTA ZIP / ZIP* p28130 28134 28202 28203 28208 28209 28210 28214 28216 28217 p28219 p28220 p28224 28226 p28228 p2823O p28231 p28232 p28233 p28234 p28235 p28236 p28237 p2824 p28242 p28243 p28244 p28246 p28247 p28250 p28255 p2826O p28261 p28265 p28266 p28272 p28274 p28275 28277 p28280 p28281 p28282 p28283 p28284 p28285 p28286 p28287 p28288 p28289 p28290 p28296 p28297 28078(45%) 28105(20%) 28110(2%) 28112(10%) 28173(89%) 28204(40%) 28206(12%) 28207(46%) 28211(35%) 28269(8%) 28273(95%) 28278(10%) 29715(53%) 29720(29%) DEFINTION: A-ORIGINAL DATE: 07/30/96 PMA 0503100012000001 TOWN & COUNTRY TOYOTA Tract / Tract* 37-119-1 2 3 4 5 6 26 27 29.01 29.03 29.04 30.05 30.06 30.07 30.08 30.09 31.02 31.03 31.04 31.05 32.98 33 34 35 36 37 38.03 38.04 38.98 39.01 39.02 40 41 42 43.01 43.02 44 45 46 47 48 49 50 54.01 58.06 58.07 58.08 58.09 58.10 59.01 59.03 60.01 60.02 61 62.02 37-179-210 45-57-111 112 45-91-610.01 TOYOTA DEALER MINIMUM NET WORKING CAPITAL AGREEMENT THIS AGREEMENT, made as of the 13th day of December, by and between MARCUS DAVID CORPORATION DBA TOWN & COUNTRY TOYOTA a(as) ___ Individual ___Partnership _X_ Corporation, located at 9101 SOUTH BLVD. CHARLOTTE NC Dealer Code 32112 (hereinafter called "DEALER") and SOUTHEAST TOYOTA, INC. (hereinafter called "DISTRIBUTOR"). DEALER and DISTRIBUTOR have entered into a Toyota Dealer Agreement dated June 20, 1994 and net working capital requirements have been established in an effort to ensure that there is sufficient capital available for the growth of a dealer. The net working capital requirements are the established minimums. The term "net working capital" shall mean the difference between current assets and current liabilities plus the current portion of long-term debt. DEALER and DISTRIBUTOR mutually agree as follows: 1. That it is considered necessary for the proper operation of DEALER's business that DEALER should have, maintain and actually employ in its business $1,370,635 of net working capital. 2. That as of the 21 ST day of NOVEMBER 1995 ,DEALER meets or exceeds the Net Working Capital requirement as documented on DEALER's OCTOBER 1995 Year-To-Date Financial Statement or Pro Forma dated_________________. OR 3. That as of the _____day of _______ , DEALER is deficient $_________ in Net Working Capital, as documented on DEALER'S _______, Year-To-Date Financial Statement. Dealer is required to remedy the Net Working deficiency as stated in Paragraph 3 above no later than ____________ 4. If, because of changed conditions, it should become necessary to revise the minimum amount of net working capital deemed to be necessary to conduct DEALER's business properly, DISTRIBUTOR shall have the right to revise DEALER's minimum net working capital requirement to be used in dealership's operation and DEALER agrees to meet the new standard within a reasonable period of time. 5. This Agreement is incorporated in and made a part of the aforesaid Toyota Dealer Agreement and any subsequent Toyota Dealer Agreement entered into between DEALER and DISTRIBUTOR. DEALER: DISTRIBUTOR: MARCUS DAVID CORPORATION DBA TOWN & COUNTRY TOYOTA SOUTHEAST TOYOTA, INC. - -------------------------------------------------- ------------------------ DEALER ENTITY NAME DISTRIBUTOR NAME By /s/ [illegible] By /s/ [illegible] ------------------------------ ---------------------- V.P. General Manager ------------------------------ ------------------------ Title Title EX-21 25 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF SONIC AUTOMOTIVE, INC. 1. Town and Country Ford, Inc. State of Incorporation: North Carolina 2. Marcus David Corporation d/b/a Town & Country Toyota State of Incorporation: North Carolina 3. Frontier Oldsmobile-Cadillac, Inc. State of Incorporation: North Carolina 4. Fort Mill Ford, Inc. State of Organization: South Carolina 5. Fort Mill Chrysler-Plymouth-Dodge Inc. State of Incorporation: South Carolina 6. Lone Star Ford, Inc. State of Incorporation: Texas 7. Sonic Dodge, LLC State of Incorporation: North Carolina 8. Sonic Chrysler-Plymouth-Jeep-Eagle, LLC State of Incorporation: North Carolina 9. Sonic Automotive of Nevada, Inc. State of Incorporation: Nevada 10. Sonic Automotive of Tennessee, Inc. State of Incorporation: Tennessee 11. Sonic Automotive -- 6025 International Drive, LLC State of Organization: Tennessee 12. Sonic Automotive of Nashville, LLC State of Organization: Tennessee 13. Sonic Automotive of Chattanooga, LLC State of Organization: Tennessee 14. Town and Country Jaguar, LLC State of Organization: Tennessee 15. Town and Country Chrysler-Plymouth-Jeep, LLC State of Organization: Tennessee 16. Town and Country Dodge of Chattanooga, LLC State of Organization: Tennessee 17. Sonic Automotive -- 2490 South Lee Highway, LLC State of Organization: Tennessee 18. Town and Country Ford of Cleveland, LLC State of Organization: Tennessee 19. Sonic Automotive 5260 Peachtree Industrial Blvd., LLC State of Organization: Georgia 20. Ken Marks Ford, Inc. State of Incorporation: Florida 21. Town and Country Chrysler-Plymouth-Jeep of Rock Hill, Inc. State of Incorporation: South Carolina EX-23 26 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders Sonic Automotive, Inc. We consent to the use in this Amendment No. 7 to the Registration Statement relating to shares of Class A Common Stock of Sonic Automotive, Inc. on Form S-1 of (i) our report dated October 16, 1997 on the combined financial statements of Sonic Automotive, Inc. and Affiliated Companies as of December 31, 1995 and 1996 and for each of the three years in the period ended December 31, 1996; (ii) our report dated August 7, 1997 on the financial statements of Dyer & Dyer, Inc. as of December 31, 1995 and 1996 and for each of the three years in the period ended December 31, 1996; (iii) our report dated August 7, 1997 (October 16, 1997 as to Note 1) on the combined financial statements of Bowers Dealerships and Affiliated Companies as of December 31, 1995 and 1996 and for the years then ended; (iv) our report dated August 7, 1997 (September 29, 1997 as to Note 1) on the combined financial statements of Lake Norman Dodge, Inc. and Affiliated Companies as of and for the year ended December 31, 1996; and (v) our report dated August 26, 1997 (October 15, 1997 as to Note 1) on the financial statements of Ken Marks Ford, Inc. as of and for the year ended April 30, 1997 appearing in the Prospectus, which is a part of this Amendment No. 7 to the Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Charlotte, North Carolina November 5, 1997 EX-99 27 EXHIBIT 99.2 RESERVE SHARE PROGRAM DOCUMENTATION "MERRILL LYNCH COVER LETTER" [LOGO] MERRILL LYNCH October ____, 1997 To Directors, Officers, Employees, Business Associates and Related Persons of Sonic Automotive, Inc.: In connection with the recent filing with the Securities and Exchange Commission of a Registration Statement relating to a proposed offering of shares of Class A Common Stock of Sonic Automotive, Inc. (the "Company"), we are sending you at the request of the Company a copy of the preliminary prospectus included in the registration statement and the enclosed letter of the Company describing the reservation of shares of Common Stock for certain directors, officers, employees, business associates and related persons of the Company, along with certain related materials. If you have any questions regarding the details of the enclosed material or the preliminary prospectus, please contact your present Merrill Lynch Financial Consultant or the Reserved Share Program Hotline at (212) 449-8209 between the hours of 8:00 a.m. and 6:00 p.m. Eastern time, Monday through Friday. Merrill Lynch, Pierce, Fenner & Smith Incorporated "C.E.O.LETTER" Sonic Automotive, Inc. Letterhead October ____, 1997 TO: Directors, Officers, Employees, Business Associates and Related Persons of Sonic Automotive, Inc. A Registration Statement providing for a public offering of shares of Class A Common Stock of Sonic Automotive, Inc. (the "Company") has been filed with the United States Securities and Exchange Commission. The offering will be made through a group of underwriters including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). In the course of its discussions with the underwriters, the Company has arranged to reserve a limited number of shares of the Company's Class A Common Stock for purchase by directors, officers, employees, business associates and related persons of the Company. The purchase price to you will be the same as the offering price to the public, which is presently expected to be between $_______ and $_______ per share. Enclosed for your information is a copy of the preliminary prospectus dated October ____, 1997, which is part of the Registration Statement. No sales of the Class A Common Stock may be made until the Registration Statement has been declared effective by the United States Securities and Exchange Commission and the price per share of the Common Stock has been determined. This is expected to occur on or about October ___, 1997. If, after reading the preliminary prospectus, you have an interest in purchasing shares in the public offering, please complete the enclosed Expression of Interest Form, Participant Information Form and NASD Questionnaire. If you would be purchasing stock through a joint account, the joint account holder must also complete, sign and return the Joint Account Holder Questionnaire attached. All forms must be returned to: Merrill Lynch, Pierce, Fenner & Smith Incorporated, 250 Vesey Street, 14th Floor, New York, New York 10281, Attention: Sonic Automotive, Inc. Reserved Share Program so that they are received no later than October ___, 1997. (You may send completed forms to Merrill Lynch by fax at (800) 825-3705 as long as you send manually executed copies to Merrill Lynch by first class mail on the same day.) DO NOT SEND MONEY NOW. A list of the most commonly asked questions about the Reserved Share Program, along with the answers to those questions, is enclosed. If you have any other questions, please call the Reserved Share Program Hotline at Merrill Lynch at (212) 449-8209 between the hours of 8:00 a.m. and 6:00 p.m. Eastern time, Monday through Friday. You are permitted to reserve shares only for your own personal account and not on behalf of any other person or any business account, although you may choose to "C.E.O.LETTER" purchase jointly with a member of your immediate family. The shares may not be purchased on margin. Given the limited number of shares available, we cannot assure you that you will obtain the number of shares requested. Further, all such reservations and ultimate sales are subject to final clearance under federal and state securities laws and the rules and regulations of the National Association of Securities Dealers, Inc.; it cannot be determined at this time whether such clearances will be obtained. In the event that the aggregate expressions of interest exceed the maximum number of shares reserved for the program, shares of Class A Common Stock will be allocated in a manner to be determined. In addition, certain individuals may be required, as a condition to their purchase of Class A Common Stock, to agree in writing not to offer, sell, or otherwise dispose of their shares for a period of three months after the date of the public offering. Arrangements have been made with Merrill Lynch to handle the sale of the reserved shares. If you complete and return an Expression of Interest Form, Participant Information Form and NASD Questionnaire (and Joint Account Holder Questionnaire, if applicable), a Merrill Lynch Financial Consultant will contact you to assist you in opening a Merrill Lynch brokerage account if you do not currently have one. Purchases of reserved shares may be made only through a brokerage account at Merrill Lynch. While your purchase of shares of the Company's Class A Common Stock will not be subject to normal brokerage commissions, your account at Merrill Lynch will be subject to Merrill Lynch's normal account charges. Merrill Lynch will need all the information requested on the enclosed form, so be certain to complete it in all respects. It is the policy and the practice of Merrill Lynch to afford confidentiality to any information that it receives about a client's financial affairs. Aside from the restrictions on the dissemination and use of proprietary information contained in the federal securities laws, Merrill Lynch has a firm policy that prohibits Merrill Lynch employees from discussing or conveying, even by implication, the affairs of any client with or to other Merrill Lynch employees who are not concerned with the matter. After the Registration Statement is declared effective, and assuming you have been approved by any required regulatory authority to receive shares, you will be orally informed of the purchase price by a representative of Merrill Lynch and asked if you wish to purchase the Class A Common Stock. At that time you may confirm your intention to purchase the number of shares you have previously indicated, confirm your intention to purchase Class A Common Stock but specify a smaller number (subject to a minimum of ___ shares) or decide to purchase no shares at all. If you orally confirm your intention to purchase shares, a copy of the Prospectus, in final form, will be sent to you by Merrill Lynch together with a written confirmation of the sale. UPON YOUR RECEIPT OF WRITTEN CONFIRMATION OF THE PURCHASE YOU WILL HAVE ENTERED INTO A BINDING LEGAL CONTRACT TO PURCHASE THE SHARES, AND YOU MUST PURCHASE AND PAY FOR THEM. Full payment of the purchase price of your shares will be required promptly after you receive such confirmation or at the latest within three (3) business days after effectiveness of the Registration Statement. "C.E.O.LETTER" No offer to buy Class A Common Stock can be accepted and no part of the purchase price can be received by Merrill Lynch until the Registration Statement relating to the Class A Common Stock has become effective under the Securities Act of 1933. ANY SUCH OFFER TO BUY MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT. AN EXPRESSION OF INTEREST IN RESPONSE TO THIS LETTER WILL INVOLVE NO OBLIGATION OR COMMITMENT. The following statement is required to be included in this letter by the rules and regulations of the United States Securities and Exchange Commission: "A Registration Statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective. This letter shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state." The Company does not wish to influence in any way your decision in this matter. This notice is not designed to encourage you to request any shares of Class A Common Stock. It is simply intended to inform you that there is a proposed offering, should you be interested in investing. The purchase of shares of Class A Common Stock involves certain risks which are described in the enclosed preliminary prospectus. Please review the preliminary prospectus carefully and discuss it with your financial advisor, if appropriate. Sincerely, [Chief Executive Officer] "PARTICIPANT INFORMATION FORM" PARTICIPANT INFORMATION FORM RESERVED SHARE PROGRAM FOR SONIC AUTOMOTIVE, INC. PLEASE COMPLETE THE FOLLOWING: (PRINT OR TYPE) Last Name: First Name: Middle Initial: Home Address: City: State: Zip: Telephone (Include Area Code): Business: ( ) Home: ( ) Citizen of What Country? Social Security Number: Have you attained the age of majority in the state in which you reside? Yes No (The age of majority is 18 in all states except for the following: Alabama - 19; Mississippi - 21; Nebraska - 19; and Puerto Rico - 21) Do you have an account with Merrill Lynch, Pierce, Fenner & Smith Incorporated? If yes, Address of Branch: Account Number: Is it a Joint Account? Yes No If yes, what is the name of the joint account holder? Name of Financial Consultant: Financial Consultant #: __ __ __ __ NOTE: If purchases are contemplated to be made through this or any joint account, the Joint Account Holder Questionnaire must be completed and signed by the co-holder of the account. Name of Your Employer: Your Position: If your employer is not Sonic Automotive, Inc. (the "Company"), briefly describe your employer's relationship, or your relationship, with the Company (nature of services provided or goods supplied, frequency of contact, etc.) Signature: Date: "EXPRESSION OF INTEREST FORM" EXPRESSION OF INTEREST FORM RESERVED SHARE PROGRAM FOR SONIC AUTOMOTIVE, INC. Merrill Lynch, Pierce, Fenner & Smith Incorporated World Financial Center, North Tower PIN: 250 Vesey Street, 14th Floor New York, New York 10281 NAME: Attention: Michael Conigliaro / Claire Taggart REF: Ladies and Gentlemen: I am interested in purchasing __________ shares (not less than _______ or more than ______ and in blocks of 10) of Class A Common Stock of Sonic Automotive, Inc. and would like such number of shares to be reserved for me. I acknowledge that: 1. I have received and read my copy of the preliminary prospectus dated October ____ 1997. 2. The number of shares requested is for my own personal account or my joint account with a member of my immediate family and not on behalf of any other person. 3. I am not assured of obtaining any or all of the shares requested and I will be notified of the number of shares, if any, available for purchase by me. 4. No offer to buy any shares can be accepted and no part of the purchase price can be received by Merrill Lynch until the Registration Statement covering the proposed offering has been declared effective by the United States Securities and Exchange Commission and until the shares have been qualified for sale, where required, by the administrative authorities of the jurisdiction in which I reside, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance at or after the effective date of the Registration Statement. This indication of interest involves no obligation or commitment. 5. By signing below, I certify that all the information I have provided on this form is complete and accurate to the best of my knowledge. - --------------------------------- ---------------------------------- (Signature) (Date) - --------------------------------- ---------------------------------- (Print Name) (Employer) IF YOU ARE INTERESTED IN RESERVING SHARES, YOU MUST COMPLETE THIS FORM, THE PARTICIPANT INFORMATION FORM AND THE NASD QUESTIONNAIRE (AND YOUR JOINT ACCOUNT HOLDER, IF ANY, MUST COMPLETE THE JOINT ACCOUNT HOLDER NASD QUESTIONNAIRE) AND RETURN THEM TO MERRILL LYNCH SO THAT THEY ARE RECEIVED NO LATER THAN OCTOBER ___, 1997. "NASD QUESTIONNAIRE" NASD QUESTIONNAIRE Last Name: First Name: Middle Initial: PLEASE ANSWER THE FOLLOWING QUESTIONS IN THE SPACES PROVIDED: (IMPORTANT: YOU MUST ANSWER ALL OF THESE QUESTIONS IN ORDER TO RESERVE SHARES FOR PURCHASE. IF YOU WISH TO PURCHASE SHARES JOINTLY THROUGH A JOINT ACCOUNT, THE OTHER PERSON ON THE ACCOUNT MUST COMPLETE AND SIGN THE JOINT ACCOUNT HOLDER QUESTIONNAIRE ACCOMPANYING THIS FORM.) DEFINITIONS: FOR PURPOSES OF THE FOLLOWING STATEMENTS, CAPITALIZED WORDS HAVE THE FOLLOWING MEANING: IMMEDIATE FAMILY: As used in the statements that follow, the term "Immediate Family" includes a person's parents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children. ASSOCIATED PERSON: As used in the statements that follow, a person is an "Associated Person" of a broker-dealer if he or she is a sole proprietor, partner, officer, director, or branch manager of any broker-dealer in securities, foreign or domestic, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by such a broker-dealer (for example, any employee), whether or not such person is registered or exempt from registration with the National Association of Securities Dealers, Inc. or any other regulatory organization. INSTITUTIONAL TYPE ACCOUNT: As used in the following statements, "Institutional Type Account" generally includes any corporation or other entity which is involved as part of its business in the buying and selling of securities. NOTE: YOU MUST WRITE YOUR NAME AND SOCIAL SECURITY NUMBER IN THE TRACKING BOX ON EACH PAGE OF THIS QUESTIONNAIRE. ----------------------------------- For Tracking Purposes: Last Name: First Name: - - 1 - Social Security #: ----------------------------------- "NASD QUESTIONNAIRE" IF THE FOLLOWING STATEMENTS ARE TRUE, PLEASE PLACE AN "X" ON THE LINE NEXT TO "TRUE". IF THE FOLLOWING STATEMENTS ARE NOT TRUE, PLEASE PLACE AN "X" ON THE LINE NEXT TO "FALSE" AND PROVIDE THE INFORMATION REQUESTED. YOU MUST ANSWER QUESTIONS 1 THROUGH 6. BROKER-DEALER QUESTIONS 1. I am NOT an officer, director, general partner, shareholder, employee or agent of any broker-dealer in securities or otherwise an ASSOCIATED PERSON of any broker-dealer in securities, except for a broker-dealer engaged solely in the purchase or sale of either investment company/variable contracts securities or direct participation program securities. TRUE________ FALSE________ If FALSE, please name the broker-dealer and your position. 2. In addition, I am NOT materially supported directly or indirectly by an IMMEDIATE FAMILY MEMBER or any other person who is an officer, director, general partner, shareholder, employee, agent or ASSOCIATED PERSON of any broker-dealer in securities, except for a broker-dealer engaged solely in the purchase or sale of either investment company/variable contracts securities or direct participation program securities. TRUE________ FALSE________ If FALSE, please name the broker-dealer, the position with such broker-dealer of the person materially supporting you, the relationship of that person to you, and please describe the nature of such support. 3. I am NOT an IMMEDIATE FAMILY MEMBER of an officer, director, general partner, shareholder, employee, agent or ASSOCIATED PERSON of any broker-dealer in securities, except for a broker-dealer engaged solely in the purchase or sale of either investment company/variable contracts securities or direct participation program securities. TRUE________ FALSE________ If FALSE, please name the broker-dealer employing such immediate family member, the position of that person with such broker-dealer, and that person's relationship to you. ----------------------------------- For Tracking Purposes: Last Name: First Name: - - 2 - Social Security #: ----------------------------------- "NASD QUESTIONNAIRE" FINDER/FIDUCIARY QUESTION 4. I am NOT, nor am I supported to a material extent by, a person who is either a finder with respect to the public offering of the Class A Common Stock or a person acting in a fiduciary capacity to Merrill Lynch, Pierce, Fenner & Smith Incorporated, the managing underwriter for the public offering, including attorneys, accountants and financial consultants to, Merrill Lynch, Pierce, Fenner & Smith Incorporated. TRUE________ FALSE________ If FALSE, please name the finder or person acting in a fiduciary capacity, whether the person is a finder or fiduciary, the capacity in which such person is acting, and describe the relationship of that person to you (or indicate that you are such person). INSTITUTIONAL TYPE ACCOUNT QUESTIONS 5. I am NOT, nor am I materially supported by, a senior officer of a bank, savings and loan institution, insurance company, investment company, investment advisory firm or any other INSTITUTIONAL TYPE ACCOUNT. TRUE________ FALSE________ If FALSE, please name the company employing such person, the type of company it is, the employee's position with that company, and describe the relationship of that person to you (or indicate that you are such person). 6. I am NOT a person, nor am I materially supported by any person, who works in the securities department of, or who may influence, or whose activities directly or indirectly involve or are related to, the function of buying or selling securities for any bank, savings and loan institution, insurance company, investment company, investment advisory firm or any other INSTITUTIONAL TYPE ACCOUNT. TRUE________ FALSE________ If FALSE, please name the company employing such person, the type of company it is, the employee's position with that company, and describe the relationship of that person to you (or indicate that you are such person). ----------------------------------- For Tracking Purposes: Last Name: First Name: - - 3 - Social Security #: ----------------------------------- "NASD QUESTIONNAIRE" IF YOU HAVE ANSWERED "FALSE" TO ANY OF THE QUESTIONS ABOVE, PLEASE ANSWER THE FOLLOWING QUESTION: SECURITY BROKERAGE ACCOUNT QUESTION 7. Do you have an account with any broker-dealer in which you have actively traded equity securities in the last 12 months? YES________ NO________ If YES, please name the broker-dealer and describe your trading activity over this period, including the date you purchased or sold equity securities, the name of the issuer of the security, the number of shares purchased or sold, the price per share and the total purchase or sale price. You should include trading activity (other than the purchase of mutual fund shares) in any 401(k) or other retirement account. Please type or print legibly. Attach additional sheets if necessary. Buy/ Price/ Date Broker Sell Issuer Shares Share Total Price Signature Date Print Name ================================================================================ NOTE: YOU MUST SIGN THIS FORM, WHETHER OR NOT YOU HAVE ANSWERED QUESTION 7, ABOVE. ================================================================================ ----------------------------------- For Tracking Purposes: Last Name: First Name: - - 4 - Social Security #: ----------------------------------- "NASD QUESTIONNAIRE" JOINT ACCOUNT HOLDER NASD QUESTIONNAIRE (TO BE COMPLETED BY THE CO-HOLDER OF A JOINT ACCOUNT, IF ANY) IF YOU WOULD BE PURCHASING THE CLASS A COMMON STOCK THROUGH A JOINT ACCOUNT, PLEASE HAVE THE CO-HOLDER OF YOUR JOINT ACCOUNT COMPLETE AND SIGN THIS FORM. Last Name: First Name: Middle Initial: Relationship to Primary Account Holder: PLEASE ANSWER THE FOLLOWING QUESTIONS IN THE SPACES PROVIDED: (IMPORTANT: YOU MUST ANSWER ALL OF THESE QUESTIONS IN ORDER TO RESERVE SHARES FOR PURCHASE.) DEFINITIONS: FOR PURPOSES OF THE FOLLOWING STATEMENTS, CAPITALIZED WORDS HAVE THE FOLLOWING MEANING: IMMEDIATE FAMILY: As used in the statements that follow, the term "Immediate Family" includes a person's parents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children. ASSOCIATED PERSON: As used in the statements that follow, a person is an "Associated Person" of a broker-dealer if he or she is a sole proprietor, partner, officer, director, or branch manager of any broker-dealer in securities, foreign or domestic, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by such a broker-dealer (for example, any employee), whether or not such person is registered or exempt from registration with the National Association of Securities Dealers, Inc. or any other regulatory organization. INSTITUTIONAL TYPE ACCOUNT: As used in the following statements, "Institutional Type Account" generally includes any corporation or other entity which is involved as part of its business in the buying and selling of securities. NOTE: YOU MUST WRITE YOUR NAME AND SOCIAL SECURITY NUMBER IN THE TRACKING BOX ON EACH PAGE OF THIS QUESTIONNAIRE. ----------------------------------- For Tracking Purposes: Last Name: First Name: - - 5 - Social Security #: ----------------------------------- "FREQUENTLY ASKED QUESTIONS" IF THE FOLLOWING STATEMENTS ARE TRUE, PLEASE PLACE AN "X" ON THE LINE NEXT TO "TRUE". IF THE FOLLOWING STATEMENTS ARE NOT TRUE, PLEASE PLACE AN "X" ON THE LINE NEXT TO "FALSE" AND PROVIDE THE INFORMATION REQUESTED. YOU MUST ANSWER QUESTIONS 1 THROUGH 6. BROKER-DEALER QUESTIONS 1. I am NOT an officer, director, general partner, shareholder, employee or agent of any broker-dealer in securities or otherwise an ASSOCIATED PERSON of any broker-dealer in securities, except for a broker-dealer engaged solely in the purchase or sale of either investment company/variable contracts securities or direct participation program securities. TRUE________ FALSE________ If FALSE, please name the broker-dealer and your position. 2. In addition, I am NOT materially supported directly or indirectly by an IMMEDIATE FAMILY MEMBER or any other person who is an officer, director, general partner, shareholder, employee, agent or ASSOCIATED PERSON of any broker-dealer in securities, except for a broker-dealer engaged solely in the purchase or sale of either investment company/variable contracts securities or direct participation program securities. TRUE________ FALSE________ If FALSE, please name the broker-dealer, the position with such broker-dealer of the person materially supporting you, the relationship of that person to you, and please describe the nature of such support. 3. I am NOT an IMMEDIATE FAMILY MEMBER of an officer, director, general partner, shareholder, employee, agent or ASSOCIATED PERSON of any broker-dealer in securities, except for a broker-dealer engaged solely in the purchase or sale of either investment company/variable contracts securities or direct participation program securities. TRUE________ FALSE________ If FALSE, please name the broker-dealer employing such immediate family member, the position of that person with such broker-dealer, and that person's relationship to you. ----------------------------------- For Tracking Purposes: Last Name: First Name: - - 6 - Social Security #: ----------------------------------- "FREQUENTLY ASKED QUESTIONS" FINDER/FIDUCIARY QUESTION 4. I am NOT, nor am I supported to a material extent by, a person who is either a finder with respect to the public offering of the Class A Common Stock or a person acting in a fiduciary capacity to Merrill Lynch, Pierce, Fenner & Smith Incorporated, the managing underwriter for the public offering, including attorneys, accountants and financial consultants to Merrill Lynch, Pierce, Fenner & Smith Incorporated. TRUE________ FALSE________ If FALSE, please name the finder or person acting in a fiduciary capacity, whether the person is a finder or fiduciary, the capacity in which such person is acting, and describe the relationship of that person to you (or indicate that you are such person). INSTITUTIONAL TYPE ACCOUNT QUESTIONS 5. I am NOT, nor am I materially supported by, a senior officer of a bank, savings and loan institution, insurance company, investment company, investment advisory firm or any other INSTITUTIONAL TYPE ACCOUNT. TRUE________ FALSE________ If FALSE, please name the company employing such person, the type of company it is, the employee's position with that company, and describe the relationship of that person to you (or indicate that you are such person). 6. I am NOT a person, nor am I materially supported by any person, who works in the securities department of, or who may influence, or whose activities directly or indirectly involve or are related to, the function of buying or selling securities for any bank, savings and loan institution, insurance company, investment company, investment advisory firm or any other INSTITUTIONAL TYPE ACCOUNT. TRUE________ FALSE________ If FALSE, please name the company employing such person, the type of company it is, the employee's position with that company, and describe the relationship of that person to you (or indicate that you are such person). ----------------------------------- For Tracking Purposes: Last Name: First Name: - - 7 - Social Security #: ----------------------------------- "FREQUENTLY ASKED QUESTIONS" IF YOU HAVE ANSWERED "FALSE" TO ANY OF THE QUESTIONS ABOVE, PLEASE ANSWER THE FOLLOWING QUESTION: SECURITY BROKERAGE ACCOUNT QUESTION 7. Do you have an account with any broker-dealer in which you have actively traded equity securities in the last 12 months? YES________ NO________ If YES, please name the broker-dealer and describe your trading activity over this period, including the date you purchased or sold equity securities, the name of the issuer of the security, the number of shares purchased or sold, the price per share and the total purchase or sale price. You should include trading activity (other than the purchase of mutual fund shares) in any 401(k) or other retirement account. Please type or print legibly. Attach additional sheets if necessary. Buy/ Price/ Date Broker Sell Issuer Shares Share Total Price Signature Date Print Name ================================================================================ NOTE: YOU MUST SIGN THIS FORM, WHETHER OR NOT YOU HAVE ANSWERED QUESTION 7, ABOVE. ================================================================================ ----------------------------------- For Tracking Purposes: Last Name: First Name: - - 8 - Social Security #: ----------------------------------- "FREQUENTLY ASKED QUESTIONS" FREQUENTLY ASKED QUESTIONS REGARDING THE SONIC AUTOMOTIVE, INC. RESERVED SHARE PROGRAM O WHAT FORMS WILL I NEED TO COMPLETE IN ORDER TO PARTICIPATE? There are three forms that everyone will need to complete in order to participate in the Reserved Share Program set up for Sonic Automotive, Inc. (the "Company"); the Expression of Interest Form, the Participant Information Form and the NASD Questionnaire (and Joint Account Holder NASD Questionnaire, if applicable). These forms are included in this package. In addition, some people may need to execute a Lock-up Agreement. O WHAT IS THE EXPRESSION OF INTEREST FORM? The Expression of Interest Form is a non-binding indication of how many shares you intend to purchase in the offering. It is only used to allocate the appropriate number of shares to the Reserved Share Program. No matter how many shares you indicate you may be interested in purchasing, you will not be bound to purchase any shares, or a particular number of shares, until you are notified of the price of the shares and confirm, at that time, the number of shares you wish to purchase. O WHY IS IT IMPORTANT THAT I COMPLETE THE NASD QUESTIONNAIRE? In order to comply with the rules of the NASD, a federal regulatory body, Merrill Lynch is required to gather certain information to determine your eligibility to purchase shares in the Reserved Share Program. It is important that you answer ALL of the questions completely and accurately. Please pay particular attention to the defined terms which will help you in responding to the questions. It is possible that your responses may require that certain steps be taken (including entering into a Lock-Up Agreement) in order for you to be eligible to participate in the Reserved Share Program, or may cause you to be ineligible to participate. O WHAT IS A LOCK-UP AGREEMENT? Under the NASD rules certain individuals associated with banks, insurance companies, broker-dealers or other institutional type accounts may only participate in the Reserved Share Program if they agree not to sell, transfer, assign, pledge or hypothecate any shares purchased for a specified period of time. Depending on your responses to the NASD questions, you may have to sign a Lock-up Agreement for 3 months. O WHEN CAN I SELL MY SHARES PURCHASED THROUGH THE RESERVED SHARE PROGRAM? The shares may be sold or transferred, subject to certain federal regulations governing the sale of shares by officers, directors and affiliates of the Company and subject to the Company's insider trading policies, at any time after their purchase (i.e., after you have paid for them), unless the shares are subject to a Lock-up Agreement. If you sign a Lock-up Agreement, the shares may not be sold or transferred for the term of that agreement. -1- "FREQUENTLY ASKED QUESTIONS" O IS IT NECESSARY TO OPEN A MERRILL LYNCH ACCOUNT TO PURCHASE SHARES IF I HAVE A BROKERAGE ACCOUNT AT ANOTHER FIRM? Yes, the shares must be purchased through Merrill Lynch. However, the shares may later be transferred (after the expiration of any Lock-up Agreement) to your non-Merrill Lynch account without incurring fees for such transfer. O WHAT IF I ALREADY HAVE A MERRILL LYNCH ACCOUNT? You should provide the branch at which your Merrill Lynch account is held, along with your account number and the name of your Financial Consultant, on the Participant Information Form. Your current Financial Consultant will contact you regarding your purchase of shares. O CAN I PURCHASE SHARES THROUGH MY EXISTING MERRILL LYNCH IRA ACCOUNT? Yes. However, if you do not have an existing IRA account at Merrill Lynch, it will be more difficult. The best advice is to talk to your Financial Consultant when you are contacted to see if such a transaction is possible. If you contemplate transferring your current IRA account to Merrill Lynch or liquidating assets currently held in your IRA account to purchase shares in the Reserved Share Program you should speak to your current Merrill Lynch Financial Consultant (if the IRA is held at Merrill Lynch) or the custodian of the account (if the IRA is not held at Merrill Lynch) as soon as possible concerning how and when to transfer the account or liquidate such assets to enable you to purchase the Company's Class A Common Stock. O CAN I PURCHASE SHARES THROUGH MY 401(K) PLAN? No. O CAN I PURCHASE SHARES THROUGH A JOINT ACCOUNT? Yes, subject to the joint account holder completing the Joint Account Holder NASD Questionnaire. As with you, it is possible that the joint account holder's answers may make him or her ineligible to participate in the Reserved Share Program, or may require that a Lock-up Agreement be signed by both of you. Please speak to your Merrill Lynch Financial Consultant if you intend to purchase shares through a joint account. O WILL I BE CHARGED BROKERAGE FEES FOR SETTING UP A NEW ACCOUNT AND PURCHASING SHARES? No. In order to accommodate the purchase of Reserved Shares at a minimal cost, Merrill Lynch has provided a type of account, known as a Delaware Cash Account, which provides no additional services other than the ability to purchase or sell securities. The standard $40.00 fee will not be charged to the holder of a Delaware Cash Account unless the account is maintained for the full calendar year running from January through December, 1998. There are various other types of accounts available, and there is an account maintenance fee payable in respect of each type of account, assuming that you do not close your account. Please consult your Financial Consultant with regard to account types and fee structures. -2- "FREQUENTLY ASKED QUESTIONS" O WILL I BE CHARGED A FEE WHEN I SELL OR TRANSFER MY SHARES? When you sell your shares you will be charged a customary sales commission. There is no fee to transfer the shares to another account. However, if you choose to receive share certificates at a later date there are typically fees involved with physical delivery of the share certificates to you. O WILL I RECEIVE A STOCK CERTIFICATE? Not automatically. If you desire an actual certificate, notify your Merrill Lynch Financial Consultant when your account is set up. Doing this will avoid subsequent charges for certificate delivery. O IF I CONTINUE TO USE THE DESIGNATED FINANCIAL CONSULTANT FOR SUBSEQUENT SECURITIES TRANSACTIONS, WILL MY TRANSACTIONS CONTINUE TO BE FREE OF TRANSACTION CHARGES? No. Transaction costs are only exempted for your purchase in the Reserved Share Program. You will be responsible for all transaction and brokerage fees for any subsequent transactions. O HOW WILL I BE ASSIGNED A MERRILL LYNCH FINANCIAL CONSULTANT? WHEN WILL I BE CONTACTED? A Merrill Lynch Financial Consultant will be selected based on geographic proximity to you to better facilitate ongoing service. You will be contacted by a Merrill Lynch Financial Consultant approximately one week before the expected pricing date. At that time you will be asked for information necessary to open a brokerage account. It takes time to open an account and an account must be opened prior to pricing so an order can be placed. You will be contacted again on the night of pricing or the next morning to be informed of the final price of the shares and to confirm your participation. O WHAT INFORMATION WILL THE MERRILL LYNCH FINANCIAL CONSULTANT ASK ME FOR? The Merrill Lynch Financial Consultant will ask for your social security number, your date of birth, your salary (a regulatory requirement), and your address, among other information, and the same information for your spouse, if applicable, or other joint account holder. O IF I COMPLETE AND TIMELY SUBMIT THE REQUIRED FORMS, BUT A MERRILL LYNCH FINANCIAL CONSULTANT DOES NOT MANAGE TO CONTACT ME PERSONALLY PRIOR TO THE PRICING DATE, WILL MY PURCHASE REQUEST BE HONORED? No. An account can only be established for you after a conversation with a Merrill Lynch Financial Consultant prior to the pricing of the shares, and the purchase of the shares can only be confirmed for you through a follow-up conversation with a Financial Consultant after the pricing of the shares. If the Financial Consultant cannot reach you, your order will be disregarded. IF YOU COMPLETE AND RETURN THE EXPRESSION OF INTEREST FORM AND YOU HAVE NOT BEEN CONTACTED BY A MERRILL LYNCH FINANCIAL CONSULTANT BY OCTOBER ___, 1997 YOU SHOULD CONTACT THE RESERVED SHARE PROGRAM HOTLINE AT (212) 449-8209 BETWEEN THE HOURS OF 8:00 A.M. AND 6:00 P.M. EASTERN TIME, MONDAY THROUGH FRIDAY. -3- "FREQUENTLY ASKED QUESTIONS" O WILL I BE ABLE TO PURCHASE ALL OF THE SHARES I REQUEST ON THE EXPRESSION OF INTEREST FORM? The number of shares you indicate on the Expression of Interest Form is the maximum number of shares which you may purchase. If the total number of shares requested by all participants in the Reserved Share Program exceeds the number of shares available for purchase, an allocation will be made in a manner to be determined. O WHAT WILL THE PRICE OF THE SHARES BE? The purchase price to you will be the offering price to the public, which is presently expected to be between $__ and $__ per share, but which may be higher or lower. You will be contacted by your Merrill Lynch Financial Consultant with the actual price after that price is determined, which is currently expected to occur during the week of October ___, 1997. O WHEN DO I PAY FOR THE SHARES? The full balance will be due no later than the close of business three business days after the opening trade date (which is typically the day of pricing or the day after pricing). Your Merrill Lynch Financial Consultant will telephone you as soon as possible after pricing occurs to confirm the number of shares you wish to purchase and the purchase price. You should make your payment immediately after you know the payment amount. You will be mailed a confirmation of your transaction the day after pricing. O WHAT FORMS OF PAYMENT MAY I USE? You may pay by personal check, wire transfer, certified check or cashier's check. You should review your method of payment with your Merrill Lynch Financial Consultant in advance to ensure timely receipt of your payment. O WHAT HAPPENS IF I AM NOT AVAILABLE WHEN MY MERRILL LYNCH FINANCIAL CONSULTANT CALLS ME AFTER PRICING? You will only be able to purchase shares through the Reserved Share Program if you speak to your Merrill Lynch Financial Consultant after pricing of the offering. If you will not be available at or around the expected pricing date, please make arrangements with your Merrill Lynch Financial Consultant so that you may be contacted. O IF I DECIDE TO PARTICIPATE AFTER THE DEADLINE OF OCTOBER __, 1997 HAS PASSED, WILL I BE ABLE TO? No. The deadline is necessary to give Financial Consultants enough time to set up accounts before the pricing of the shares. The account must be open by this time so that there is a place to credit the shares at the time of pricing. -4- "FREQUENTLY ASKED QUESTIONS" O CAN OTHER PEOPLE, INCLUDING MY RELATIVES AND FRIENDS, BUY SHARES THROUGH THE RESERVED SHARE PROGRAM? No, the Reserved Share Program is limited to those persons invited to participate by the Company. No relatives or other persons (other than members of your immediate family purchasing jointly with you) are eligible to purchase shares. O IF I HAVE FURTHER QUESTIONS WHO SHOULD I CALL? If you have a question prior to the time you are contacted by a Merrill Lynch Financial Consultant, please call the Reserved Share Program Hotline at (212) 449-8209 between the hours of 8:00 a.m. and 6:00 p.m. Eastern time, Monday through Friday. After that time, please contact your Merrill Lynch Financial Consultant. -5- -----END PRIVACY-ENHANCED MESSAGE-----